<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 3, 1996
REGISTRATION NO. 333-______
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
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Pegasus Communications and Media Corporation
(Exact name of registrant as specified in its charter)
----------
<TABLE>
<S> <C> <C>
Delaware 4833 51-0374669
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation of Organization) Classification Code Number) Identification Number)
</TABLE>
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
(610) 341-1801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Marshall W. Pagon, President and Chief Executive Officer
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
(610) 341-1801
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Michael B. Jordan, Esq. Kirk A. Davenport, Esq.
Scott A. Blank, Esq. Latham & Watkins
Drinker Biddle & Reath 885 Third Avenue
1100 Philadelphia National Bank Building Suite 1000
1345 Chestnut Street New York, New York 10022
Philadelphia, Pennsylvania 19107-3496 (212) 906-1200
(215) 988-2700
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective and the
Underwriting Agreement is executed.
---------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] __________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box.
<PAGE>
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
================================================================================================
Title of
Each Class of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered (1) Per Share (2) Offering Price (2) Fee
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock.... $50,000,000 $17,242
=================================================================================================
</TABLE>
- ------
(1) Includes ________ shares of Class A Common Stock that may be sold
pursuant to the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
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.
<PAGE>
PEGASUS COMMUNICATIONS AND MEDIA CORPORATION
CROSS-REFERENCE SHEET
(PURSUANT TO ITEM 501(B) OF REGULATION S-K SHOWING THE LOCATION IN THE
PROSPECTUS OF THE RESPONSES TO THE ITEMS OF PART I OF FORM S-1)
<TABLE>
<CAPTION>
<S> <C> <C>
Registration Statement Item and Heading Location or Caption in Prospectus
------------------------------------------------------ --------------------------------------------------------
1. Forepart of the Registration Statement and Outside Front
Cover Page of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages of Prospectus
Inside Front Cover Page of Prospectus; Outside Back Cover
Page of Prospectus
3. Summary Information, Risk Factors and Ratio of Earnings
to Fixed Charges Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Underwriting
6. Dilution Dilution
7. Selling Security Holders Not applicable
8. Plan of Distribution Underwriting
9. Description of Securities to be Registered Prospectus Summary; Description of Capital Stock
10. Interests of Named Experts and Counsel Legal Matters
11. Information with Respect to the Registrant Outside Front Cover Page of Prospectus; Prospectus Summary;
Risk Factors; The Company; Use of Proceeds; Dividend Policy;
Dilution; Capitalization; Selected Historical and Pro Forma
Combined Financial Data; Pro Forma Combined Financial Data;
Management's Discussion and Analysis of Financial Condition
and Results of Operations; Business; Management and Certain
Transactions; Ownership and Control; Description of
Indebtedness; Description of Capital Stock; Shares Eligible
for Future Sale; Combined Financial Statements
12. Disclosure of Commission Position on Indemnification
for Securities Act Liabilities Not Applicable
</TABLE>
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws of
any such State.
Subject to Completion, dated June 3, 1996
PROSPECTUS
_______ Shares
LOGO Pegasus
Class A Common Stock
----------
All of the shares of Class A Common Stock of Pegasus Communications
Corporation ("Pegasus," and together with its direct and indirect
subsidiaries, the "Company") offered hereby are being offered by the Company.
All of the shares of Class A Common Stock are being offered in the United
States and Canada (the "Offering") by the Underwriters (the "Underwriters").
Prior to this Offering, there has been no public market for the Class A
Common Stock. It is currently anticipated that the initial public offering
price will be between $____ and $____ per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Application has been made to list the Class A Common Stock on
the Nasdaq National Market under the symbol "PGTV."
Upon consummation of this Offering, after giving effect to the
Transactions (as defined) and assuming an initial public offering price of
$____ per share, the Company's issued and outstanding capital stock will
consist of ____ shares of Class A Common Stock and ____ shares of Class B
Common Stock. Holders of Class A Common Stock are entitled to one vote per
share on all matters submitted to a vote of stockholders generally and
holders of Class B Common Stock are entitled to ten votes per share. Both
classes vote together as a single class on all matters except in connection
with certain amendments to the Company's Amended and Restated Certificate of
Incorporation, the authorization or issuance of additional shares of Class B
Common Stock, and as required by Delaware law. See "Description of Capital
Stock." Immediately after this Offering, Marshall W. Pagon, the Company's
President and Chief Executive Officer, by virtue of his beneficial ownership
of all the Class B Common Stock, will generally have the voting power to
determine all matters submitted to the stockholders for approval.
-----------
For a discussion of certain factors that should be considered by
prospective purchasers of the Class A Common Stock offered hereby, see "Risk
Factors," beginning on page 16.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=============================================================================
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
- -----------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share ... $ $ $
- -----------------------------------------------------------------------------
Total(3) .... $ $ $
=============================================================================
</TABLE>
- --------
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $______.
(3) The Company has granted to the Underwriters a 30-day option to purchase
up to _____ additional shares of Class A Common Stock on the same terms
and conditions as set forth above solely to cover over-allotments, if
any. If such options are exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$______, $______ and $______, respectively. See "Underwriting."
---------
The shares of Class A Common Stock offered by this Prospectus are offered
by the Underwriters subject to prior sale, to withdrawal, cancellation or
modification of the offer without notice, to delivery to and acceptance by
the Underwriters and to certain further conditions. It is expected that
delivery of the Class A Common Stock will be made at the offices of Lehman
Brothers Inc., New York, New York, on or about _____________, 1996.
----------
LEHMAN BROTHERS
BT SECURITIES CORPORATION
CIBC WOOD GUNDY SECURITIES CORP.
PAINEWEBBER INCORPORATED
, 1996
<PAGE>
[PICTURES/GRAPHICS]
[THE INSIDE FRONT COVER WILL CONTAIN A MAP OF A PORTION OF THE
UNITED STATES, WITH MARKINGS TO INDICATE
THE LOCATION OF THE COMPANY'S BUSINESSES.]
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED THROUGH THE
NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
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" include Pegasus Communications Corporation ("Pegasus")
together with its direct and indirect subsidiaries. Unless otherwise
indicated, the information in this Prospectus assumes the Underwriters'
over-allotment option is not exercised. The discussion below includes certain
Transactions that, if not already completed, are scheduled to occur
concurrently with or shortly after the consummation of this Offering. The
"Transactions" consist of certain acquisitions (the Portland Acquisition, the
Portland LMA, the DBS Acquisition and the Cable Acquisition), certain
corporate reorganization events (the Parent's contribution of PM&C Class A
Shares to Pegasus, the Management Agreement Acquisition, the Registered
Exchange Offer, the Management Share Exchange, and the Towers Purchase) and
the closing of the New Credit Facility. See "-- Acquisitions and Other
Transactions." This Offering is conditioned upon the consummation of all of
the Transactions except for the Registered Exchange Offer, the Management
Share Exchange and the Cable Acquisition. It is anticipated that the Cable
Acquisition will occur concurrently with or shortly after the consummation of
this Offering. See "Glossary of Defined Terms," which begins on page 14 of
this Prospectus Summary, for definitions of certain terms used in this
Prospectus.
THE COMPANY
The Company is a diversified media and communications company operating in
three business segments: broadcast television ("TV"), direct broadcast
satellite television ("DBS") and cable television ("Cable"). The Company has
grown through the acquisition and operation of media and communications
properties characterized by clearly identifiable "franchises" and significant
operating leverage, which enables increases in revenues to be converted into
disproportionately greater increases in Location Cash Flow. The Company's
business segments are described below.
TV. The Company owns and operates five Fox affiliates in midsize
television markets. The Company has entered into agreements to program
additional television stations, pending certain FCC approvals, in two of
these markets in 1997, which stations the Company anticipates will be
affiliated with the United Paramount Network ("UPN").
DBS. The Company is the largest independent provider of DIRECTV(R)
("DIRECTV") services with an exclusive service territory that includes
approximately 450,000 television households and 50,000 business locations
in rural areas of New York, Connecticut, Massachusetts and New Hampshire.
The Company has recently agreed to acquire the DIRECTV distribution rights
and related assets of the third largest independent provider of DIRECTV
services (the "DBS Acquisition"), whose exclusive territory includes
approximately 370,000 television households and 20,000 business locations
in rural areas of Michigan and Texas. Pro forma for the DBS Acquisition,
the Company will have approximately 16,000 DIRECTV subscribers in
territories that include in excess of 820,000 television households and
70,000 business locations.
Cable. The Company owns and operates cable systems in Puerto Rico and New
England serving approximately 30,000 subscribers. The Company has agreed
to acquire a contiguous cable system in Puerto Rico (the "Cable
Acquisition"), which will be interconnected with the Company's existing
system. Following the Cable Acquisition, the Company's Puerto Rico Cable
system will serve approximately 28,000 subscribers in a franchise area
comprising approximately 111,000 households from a single headend.
After giving effect to the Transactions, the Company would have had pro
forma net revenues and EBITDA of $49.4 million and $14.1 million,
respectively, for the twelve months ended March 31, 1996. The Company's net
revenues and EBITDA have increased at compound annual growth rates of 98% and
84%, respectively, from 1991 to 1995.
3
<PAGE>
The following tables set forth certain information with respect to the
Company's TV, DBS and Cable segments:
TV
<TABLE>
<CAPTION>
Number
Acquisition Station Market of TV Ratings Rank Oversell
Station Date Affiliation Area DMA Households(1) Competitors(2) Prime(3) Access(4) Ratio(5)
- ---------------- -------------- ------------ --------------- ----- ------------- -------------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Stations:
WWLF-56/WILF-53/
WOLF-38(6) ...... May 1993 Fox Northeastern PA 49 553,000 3 3 (tie) 1 166%
WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 3 2 4 122%
WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 4 4 2 125%
WDBD-40 ........ May 1993 Fox Jackson, MS 90 287,000 3 2 (tie) 2 114%
WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3 2 2 100%
Additional Stations:
WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3 N/A N/A N/A
WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3 N/A N/A N/A
</TABLE>
DBS
<TABLE>
<CAPTION>
Homes Average
Not Homes Monthly
Total Passed Passed Penetration Revenue
DIRECTV Homes in by by Total -------------------------------- Per
Territory Territory Cable(8) Cable(9) Subscribers(10) Total Uncabled Cabled Subscriber
----------------- ----------- --------- --------- --------------- ------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owned:
Western New
England ........ 272,917 39,256 233,661 4,372 1.6% 9.5% 0.3% --
New Hampshire ... 158,607 39,834 118,773 2,633 1.7% 5.8% 0.3% --
Martha's Vineyard
and Nantucket .. 19,080 953 18,127 480 2.5% 42.4% 0.4% --
--------- --------- --------------- ------- ---------- -------- ------------
Total .......... 450,604 80,043 370,561 7,485 1.7% 8.1% 0.3% $37.72
--------- --------- --------------- ------- ---------- -------- ------------
To Be Acquired:
Michigan ........ 228,837 58,483 170,354 4,791 2.1% 6.4% 0.6% --
Texas ........... 141,565 51,601 89,964 3,708 2.6% 5.6% 0.9% --
--------- --------- --------------- ------- ---------- -------- ------------
Total .......... 370,402 110,084 260,318 8,499 2.3% 6.1% 0.7% $35.08
--------- --------- --------------- ------- ---------- -------- ------------
Total ......... 821,006 190,127 630,879 15,984 2.0% 6.9% 0.5% $36.34
========= ========= =============== ======= ========== ======== ============
</TABLE>
CABLE
<TABLE>
<CAPTION>
Average
Monthly
Homes in Homes Basic Revenue
Channel Franchise Passed Basic Service per
Cable Systems Capacity Area(11) by Cable(12) Subscribers(13) Penetration(14) Subscriber
------------------- ---------- ----------- ------------ --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Owned:
New England ....... (15) 29,400 28,600 19,200 67% $33.79
Mayaguez .......... 62 38,300 34,000 11,100 33% $33.27
To Be Acquired:
San German ........ 50(16) 72,400 47,700 16,400 34% $31.05
----------- ------------ --------------- --------------- ------------
Total Puerto Rico . 110,700 81,700 27,500 34% $31.46
----------- ------------ --------------- --------------- ------------
Total ........... 140,100 110,300 46,700 42% $32.00
=========== ============ =============== =============== ============
</TABLE>
(footnotes on following page)
4
<PAGE>
- ------
(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 February 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 February 1996.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1995 BIA market data and 1995 Nielsen audience
share data.
(6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain
FCC approvals, the Company intends to separately program WOLF as an
affiliate of UPN.
(7) The Company anticipates programming WWLA pursuant to an LMA as an
affiliate of UPN.
(8) Based on NRTC estimates of primary residences and seasonal residence
data obtained from county offices. Does not include business locations.
Includes approximately 21,640 seasonal residences.
(9) Based on NRTC estimates of primary residences and seasonal residence
data obtained from county offices. Does not include business locations.
Includes approximately 77,890 seasonal residences.
(10) As of May 10, 1996.
(11) Based on information obtained from municipal offices.
(12) 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 April
30, 1996.
(13) 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 April
30, 1996.
(14) Basic subscribers as a percentage of homes passed by cable.
(15) The channel capacities of the New England Cable systems are 36, 50 and
62 and represent 45%, 22% and 33% of the Company's New England Cable
subscribers, respectively. After giving effect to certain system
upgrades which are anticipated to be completed by September 1996, the
36, 50 and 62 channel systems would have represented 23%, 22% and 55% of
the Company's total New England Cable subscribers, respectively.
(16) After giving effect to certain system upgrades which are anticipated to
be completed during the first quarter of 1997, this system will be
capable of delivering 62 channels.
5
<PAGE>
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 through the use of its Incentive Program, which rewards
all 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 can be realized and where
the ratio of required investment to potential Location Cash Flow is low.
TV. The Company's business strategy in broadcast television is to acquire
and operate television stations whose revenues and market shares can be
substantially improved with limited increases in fixed costs. The Company has
focused upon midsize markets because it believes that they have exhibited
consistent and stable increases in local advertising and that television
stations in them have fewer, less aggressive, direct competitors. The Company
seeks to increase the audience ratings of its TV stations in key demographic
segments and to capture a greater share of their markets' advertising revenues
than their share of the local television audience. The Company accomplishes
this by developing aggressive, opportunistic local sales forces and investing
in a cost-effective manner in programming, promotion and technical facilities.
The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction
permits in markets where it currently owns and operates Fox affiliates. The
Company has historically purchased Fox affiliates because (i) Fox affiliates
generally have had lower ratings and revenue shares than stations affiliated
with ABC, CBS and NBC, and, therefore, greater opportunities for improved
performance, and (ii) Fox affiliated stations retain a greater percentage of
their inventory of advertising spots than do affiliates of ABC, CBS and NBC,
thereby enabling these stations to retain a greater share of any increase in
the value of their inventory. The Company is pursuing expansion in its
existing markets through LMAs because second stations can be operated with
limited additional fixed costs (resulting in high incremental operating
margins) and can allow the Company to create more attractive packages for
advertisers and program providers.
DBS. The Company believes that DBS is the lowest cost medium for
delivering high capacity, high quality, digital video, audio and data services
to television households and commercial locations in rural areas and that
DIRECTV offers superior video and audio quality and a substantially greater
variety of programming than is available from other multichannel video
services. DIRECTV initiated service to consumers in 1994 and, as of April 30,
1996, there were approximately 1.5 million DIRECTV subscribers. The
introduction of DIRECTV is widely reported to be one of the most successful
rollouts of a consumer service ever.
As the exclusive provider of DIRECTV services in its purchased
territories, the Company provides a full range of services, including
installation, authorization and financing of equipment for new customers as
well as billing, collections and customer service support for existing
subscribers. The Company's business strategy in DBS is to (i) establish
strong relationships with retailers, (ii) build its own direct sales and
distribution channels, (iii) develop local and regional marketing and
promotion to supplement DIRECTV's national advertising, and (iv) offer
aggressively priced equipment rental, lease and purchase options.
The Company anticipates continued significant growth in subscribers and
operating profitability in DBS through increased penetration of DIRECTV
territories it currently owns and will acquire pursuant to the DBS
Acquisition. The Company's DBS operations achieved positive Location Cash
Flow in 1995, its first full year of operations. The Company's DIRECTV
subscribers currently generate programming revenues of approximately $38 per
month at an average gross margin of 45%. The Company's remaining expenses
consist of marketing costs incurred to build its growing base of subscribers
and overhead costs which are predominantly fixed. As a result, the Company
believes that future increases in its DBS revenues will result in
disproportionately greater increases in Location Cash Flow. For the first
four months of 1996, the Company has been adding DIRECTV subscribers at
approximately twice the rate of the same period in 1995.
6
<PAGE>
The Company also believes that there is an opportunity for additional
growth through the acquisition of DIRECTV territories held by other NRTC
members. NRTC members are the only independent providers of DIRECTV services.
In excess of 250 NRTC members have collectively purchased DIRECTV territories
consisting of approximately 7.8 million television households in
predominantly rural areas of the United States, which are the most likely to
subscribe to DBS services. These territories comprise 8% of United States
television households, but represent between 25% and 30% of DIRECTV's
existing subscriber base. As the largest, and only publicly held, independent
provider of DIRECTV services, the Company believes that it is well positioned
to achieve economies of scale through the acquisition of DIRECTV territories
held by other NRTC members.
Cable. The Company's business strategy in cable is to achieve revenue
growth by (i) adding new subscribers through improved signal quality,
increases in the quality and the quantity of programming, housing growth and
line extensions, and (ii) increasing revenues per subscriber through new
program offerings and rate increases.
The Company believes that significant opportunities exist in Puerto Rico
for growth in revenues and Location Cash Flow from the delivery of
traditional cable services. Cable penetration in Puerto Rico averages 30%
(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.
7
<PAGE>
ACQUISITIONS AND OTHER TRANSACTIONS
Set forth below are a number of transactions, including acquisitions and
corporate reorganization events that, if not already completed, are scheduled
to occur concurrently with or shortly after the consummation of this
Offering. This Offering is conditioned upon the consummation of all of the
Transactions except for the Registered Exchange Offer, the Management Share
Exchange and the Cable Acquisition. The pro forma financial data included in
this Prospectus assume, unless otherwise indicated, the completion of each of
the Transactions, including those whose completion is not a condition to the
completion of this Offering.
COMPLETED ACQUISITIONS
Since January 1, 1996, the Company has acquired the following media and
communications properties:
Television Station WPXT. The Company acquired the principal tangible
assets of television station WPXT, the Fox-affiliated television station
serving the Portland, Maine DMA, and entered into a noncompetition agreement
with its former owner for approximately $12.4 million in cash and $400,000 of
assumed liabilities. Upon the consummation of this Offering, the Company will
have acquired WPXT's license and Fox Affiliation Agreement for additional
total consideration of $1.9 million in cash, $150,000 of Class A Common Stock
and $1.0 million of Class B Common Stock (both valued at the price to the
public in this Offering). These transactions are collectively referred to as
the "Portland Acquisition."
Television Station WTLH. The Company acquired the principal tangible
assets of WTLH, the Fox-affiliated TV station serving the Tallahassee,
Florida DMA (the "Tallahassee Acquisition"), for $5.0 million in cash and
warrants to purchase $1.0 million of the Class A Common Stock at an exercise
price equal to the price to the public in this Offering (the "WTLH
Warrants"). The Company programs this station under an LMA. The Company is
party to an agreement pursuant to which WTLH's FCC license will be assigned
to the Company, subject to FCC approval, on March 1, 1998, or earlier at the
Company's option, for a $3.1 million note payable on March 1, 1998.
Television Station WWLA. Upon the consummation of this Offering, the
Company will have acquired an LMA with the holder of a construction permit
for WWLA, a new TV station licensed to operate UHF channel 35 in the
Portland, Maine DMA (the "Portland LMA"), for $1.0 million of Class A Common
Stock (valued at the price to the public in this Offering). Under the
Portland LMA, the Company will lease facilities and provide programming to
WWLA. Construction of WWLA is expected to be completed in 1997. WWLA's
offices, studio and transmission facilities will be co-located with the
Company's WPXT facilities.
CONCURRENT ACQUISITION
DBS Acquisition. In May 1996, the Company entered into an agreement to
acquire DIRECTV distribution rights for portions of Texas and Michigan and
related assets (the "DBS Acquisition") for total consideration of
approximately $29.8 million. This consideration consists of $9.9 million in
cash and $19.9 million in Class A Common Stock (valued at the price to the
public in this Offering). This Offering is conditioned on completion of the
DBS Acquisition.
PENDING ACQUISITION
Cable Acquisition. In March 1996, the Company entered into an agreement to
acquire 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, for approximately $26.4 million in cash and assumed liabilities.
The Cable Acquisition is subject to the prior approval of the Puerto Rico
Public Service Commission and to conditions typical in acquisitions of this
nature, certain of which are beyond the Company's control. It is anticipated
that the Cable Acquisition will occur concurrently with
8
<PAGE>
or shortly after the consummation of this Offering and that a portion
of the proceeds from this Offering will be used to fund the Cable Acquisition;
however, this Offering is not conditioned upon the consummation of the Cable
Acquisition and there can be no assurance that the Cable Acquisition will be
consummated on the terms described herein or at all. See "Risk Factors --
Acquisitions."
CORPORATE REORGANIZATION AND OTHER TRANSACTIONS
Parent's Contribution of PM&C Class A Shares. The Parent is the holder of
all PM&C Class A Shares. PM&C is the principal subsidiary of the Parent which
now conducts through subsidiaries the Company's current operations as
described in this Prospectus. Concurrently with the consummation of this
Offering, the Parent will contribute all PM&C Class A Shares to Pegasus for ____
shares of Class B Common Stock.
Management Agreement Acquisition. PM&C and its operating subsidiaries are
party to a management agreement (the "Management Agreement") with the
Management Company under which PM&C and its subsidiaries are obligated to pay
the Management Company 5% of their net revenues and reimburse the Management
Company for its accounting department costs. Upon consummation of this
Offering, the Management Agreement together with certain net assets,
including approximately $1.4 million of accrued management fees, will be
transferred to the Company for $_ million of Class B Common Stock (valued
at the price to the public in this Offering) and approximately $1.4 million
in cash (the "Management Agreement Acquisition").
Registered Exchange Offer. Purchasers of the Notes in PM&C's Notes
offering hold all of the PM&C Class B Shares. The Company will offer through
a registered exchange offer (the "Registered Exchange Offer") to exchange all
of the PM&C Class B Shares for an aggregate of shares of Class A Common
Stock.
Management Share Exchange. Certain members of the Company's management hold
shares of Parent Non-Voting Common Stock. It is anticipated that all of these
members will exchange their shares for ______ shares in the aggregate of Class
A Common Stock (the "Management Share Exchange") pursuant to an exchange
offer.
Towers Purchase. An affiliate of the Company operates in the broadcast
tower business. The Company intends to acquire certain tower properties from
this affiliate for $1.4 million in cash concurrently with the consummation of
this Offering.
New Credit Facility. Upon the consummation of this Offering, the Company
will have entered into a $50.0 million or greater credit facility with
one or more commercial lenders (the "New Credit Facility"). Borrowings under
the New Credit Facility are expected to be available for qualifying
acquisitions. See "Description of Indebtedness -- New Credit Facility."
9
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Class A Common Stock offered by the
Company .......................... shares(1)
Common Stock to be outstanding after
the Offering:
Class A Common Stock ........... ______ shares(2)(3)
Class B Common Stock ........... ______ shares(2)(4)
Total Common Stock ............. ______ shares(2)(3)(4)
Voting and conversion rights ...... Holders of Class A Common Stock and Class B Common Stock (collectively, the "Common
Stock") are entitled to one vote per share and ten votes per share, respectively.
Both classes vote together as a single class on all matters except in connection
with certain amendments to the Company's Amended and Restated Certificate of
Incorporation, the authorization or issuance of additional shares of Class B Common
Stock, and as required by Delaware law. Immediately after this Offering, after
giving effect to the Transactions and assuming an initial public offering price
of $____ per share, (i) holders of Class A Common Stock and Class B Common Stock
will have approximately __% and __%, respectively, of the combined voting power
of all outstanding Common Stock, and (ii) Marshall W. Pagon, the Company's President
and Chief Executive Officer, by virtue of his beneficial ownership of all of the
Class B Common Stock, will generally have the voting power to determine the outcome
of all matters submitted to the stockholders for approval. The Class B Common
Stock is convertible into Class A Common Stock on a share for share basis, at
the election of the holder and automatically upon certain transfers of the Class
B Common Stock. See "Description of Capital Stock."
Use of Proceeds ................... The net proceeds to the Company from this Offering (after deducting underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $45.7 million (approximately $52.7 million if the Underwriters'
over-allotment option is exercised in full). Of the $45.7 million, $23.2 million
will be used to fund the Cable Acquisition, $9.9 million for the payment of the
cash portion of the purchase price in the DBS Acquisition, $7.8 million for the
retirement of the Old Credit Facility, $1.9 million as a distribution to the Parent
to make a payment on account of the Portland Acquisition, $1.4 million for the
payment of the cash portion of the purchase price in the Management Agreement
Acquisition, and $1.4 million for the Towers Purchase. The remaining proceeds,
if any, will be used for future expansion and general corporate purposes; however,
a portion of the net proceeds may be used for future acquisitions by the Company.
See "Use of Proceeds."
Nasdaq National Market
Symbol ........................... Application has been made to list the Class A Common Stock on the Nasdaq National
Market under the symbol "PGTV."
</TABLE>
10
<PAGE>
- ------
(1) Excludes up to _____ shares of Class A Common Stock that may be issued upon
the exercise of the over-allotment option granted to the Underwriters.
(2) Assuming an initial public offering price of $_____ per share.
(3) Includes ____ shares to be issued in the DBS Acquisition, ____ shares to
be issued pursuant to the Registered Exchange Offer, ____ shares to be
issued pursuant to the Management Share Exchange, ____ shares to be issued
in connection with the Portland Acquisition and ____ shares to be issued
in connection with the Portland LMA. Excludes ____ shares reserved for
issuance under the Incentive Program and outstanding stock options and
____ shares reserved for issuance upon conversion of the Class B Common
Stock.
(4) Includes ____ shares to be issued in the Management Agreement Acquisition,
____ shares to be issued in the Portland Acquisition, and _____ shares to be
issued to the Parent on account of the Parent's contribution of all of the
outstanding PM&C Class A Shares to Pegasus.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The following table sets forth summary historical and pro forma combined
financial data for the Company. This information should be read in
conjunction with the Combined Financial Statements and the notes thereto,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Selected Historical and Pro Forma Combined Financial Data" and
"Pro Forma Combined Financial Data" included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
(Dollars in thousands)
1991 (1) 1992 1993 (1) 1994 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ...................... $ -- $ -- $10,307 $17,808 $19,973
DBS ..................... -- -- -- 174 1,469
Cable ................... 2,095 5,279 9,134 10,148 10,606
Other ................... 9 40 46 61 100
---------- ---------- ---------- ---------- ---------
Total net revenues .... 2,104 5,319 19,487 28,191 32,148
---------- ---------- ---------- ---------- ---------
Location operating expenses:
TV ...................... -- -- 7,564 12,380 13,933
DBS ..................... -- -- -- 210 1,379
Cable ................... 1,094 2,669 4,655 5,545 5,791
Other ................... 3 12 16 18 38
Incentive compensation (3) . -- 36 192 432 528
Corporate expenses ......... 206 471 1,265 1,506 1,364
Depreciation and
amortization ............ 1,175 2,541 5,978 6,940 8,751
---------- ---------- ---------- ---------- ---------
Income (loss) from
operations .............. (374) (410) (183) 1,160 364
Interest expense ........... (621) (1,255) (4,402) (5,973) (8,817)
Interest income ............ -- -- -- -- 370
Other income (expense), net (21) (21) (220) (65) (44)
Provision (benefit) for
taxes ................... -- -- -- 140 30
Extraordinary gain (loss)
from extinguishment of
debt .................... -- -- -- (633) 10,211
---------- ---------- ---------- ---------- ---------
Net income (loss) .......... $(1,016) $(1,686) $(4,805) $(5,651) $ 2,054
========== ========== ========== ========== =========
Other Data:
Location Cash Flow (4) ..... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007
EBITDA (4) ................. 801 2,131 5,795 8,100 9,115
Capital expenditures ....... 213 681 885 1,264 2,640
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------------------------------------
Pro Pro
Forma Forma
1995 (2) 1995 1996 1996 (2)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ...................... $27,305 $ 3,912 $ 5,026 $ 5,694
DBS ..................... 3,982 239 664 1,572
Cable ................... 16,383 2,537 2,711 4,258
Other ................... 100 19 26 26
--------- ---------- ---------- ----------
Total net revenues .... 47,770 6,707 8,427 11,550
--------- ---------- ---------- ----------
Location operating expenses:
TV ...................... 19,210 3,134 3,696 4,190
DBS ..................... 4,182 278 579 1,445
Cable ................... 8,944 1,445 1,559 2,331
Other ................... 38 7 5 5
Incentive compensation (3) . 528 147 297 297
Corporate expenses ......... 1,364 332 374 374
Depreciation and
amortization ............ 14,657 1,898 2,367 3,727
--------- ---------- ---------- ----------
Income (loss) from
operations .............. (1,153) (534) (450) (819)
Interest expense ........... (8,817) (1,656) (2,901) (2,902)
Interest income ............ 370 -- 101 101
Other expense, net ......... (58) (75) (25) (42)
Provision (benefit) for
taxes ................... 30 141 (169) (169)
Extraordinary gain (loss)
from extinguishment of
debt .................... 10,211 -- -- --
--------- ---------- ---------- ----------
Net income (loss) .......... $ 523 $(2,406) $(3,106) $(3,493)
========= ========== ========== ==========
Other Data:
Location Cash Flow (4) ..... $15,396 $ 1,843 $ 2,588 $ 3,579
EBITDA (4) ................. 13,504 1,364 1,917 2,908
Capital expenditures ....... 3,169 744 931 991
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Twelve Months
Ended March 31,
1996 (2)
---------------
<S> <C>
Net revenues ........ $49,391
Location Cash Flow (4) 16,190
EBITDA (4) .......... 14,106
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31, 1996
--------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 Actual Pro Forma(2)
-------- -------- --------- ---------- --------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
restricted cash .......... $ 949 $ 970 $ 1,498 $ 1,380 $21,856 $ 8,488 $ 6,939
Working capital (deficiency) . 78 (52) (3,844) (23,074) 17,566 5,882 3,558
Total assets ................ 17,306 17,418 76,386 75,394 95,770 100,936 160,683
Total debt (including current) 13,675 15,045 72,127 61,629 82,896 92,026 86,025
Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 103,687 98,460
Total equity (deficiency).... 2,734 1,001 (2,568) 6,942 249 (2,751) 62,223
(footnotes on following page)
</TABLE>
12
<PAGE>
- ------
(1) The Company's operations began in 1991. The 1991 data include the results
of the Massachusetts and New Hampshire Cable systems from June 26, 1991
(with the exception of the North Brookfield, Massachusetts Cable system,
which was acquired in July 1992), the Connecticut Cable system from
August 7, 1991 and the results of Pegasus Towers L.P. ("Towers") from May
21, 1991. The 1993 data include the results of the Mayaguez, Puerto Rico
Cable system from March 1, 1993 and WOLF/WWLF/WILF, WDSI and WDBD from
May 1, 1993.
(2) Pro forma income statement and other data for the year ended December 31,
1995, three months ended March 31, 1996 and the twelve months ended March
31, 1996 give effect to the acquisitions and this Offering as if such
events had occurred at the beginning of such periods. The pro forma
balance sheet data as of March 31, 1996 give effect to the acquisitions
after March 31, 1996 and this Offering as if such events had occurred on
such date. See "Pro Forma Combined Financial Data."
(3) Incentive compensation represents compensation expenses pursuant to the
Incentive Program. The Incentive Program is designed to promote growth in
stockholder value by providing all employees with restricted stock
awards, all in the form of Class A Common Stock, in proportion to annual
increases in Location Cash Flow. The Company has authorized up to
shares of Class A Common Stock in connection with the Incentive Program.
Any further increase in the number of shares authorized will require
stockholder approval. See "Management and Certain Transactions --
Incentive Program"
(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. EBITDA is defined as income (loss) before
(i) extraordinary items, (ii) provision (benefit) for income taxes, (iii)
other (income) expense, (iv) interest (income) expense, and (v)
depreciation and amortization expenses. The difference between Location
Cash Flow and EBITDA is that EBITDA includes incentive compensation and
corporate expenses. Although EBITDA and Location Cash Flow are not
measures of performance under generally accepted accounting principles,
the Company believes that Location Cash Flow and EBITDA are accepted
within the Company's business segments as generally recognized measures
of performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
13
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
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.
DBS Direct broadcast satellite television.
DBS Acquisition The acquisition of DIRECTV distribution rights and related assets for certain
rural areas of Texas and Michigan.
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.
DIRECTV The video, audio and data services provided via satellite by DIRECTV Enterprises,
Inc.
DSS Digital satellite system or DSS(R). DSS(R) is a registered trademark of DIRECTV
Enterprises, Inc.
EBITDA Income (loss) before extraordinary items, provision (benefit) for income
taxes, other (income) expense, interest (income) expense, and depreciation
and amortization expenses.
FCC The Federal Communications Commission.
Fox Fox Broadcasting Company.
Fox Affiliation Agreements The affiliation agreements between WOLF, WDSI, WDBD, WTLH, and WPXT and Fox.
Incentive Program The Company's Restricted Stock Plan together with its 401(k) Plans. See
"Management and Certain Transactions -- Incentive Program."
Indenture The indenture dated July 7, 1995 by and among PM&C, certain of its subsidiaries
and First Union National Bank, as trustee.
LMAs Local marketing agreements, program service agreements or time brokerage
agreements between broadcasters and television station licensees pursuant
to which broadcasters provide programming to and retain the advertising revenues
of such stations in exchange for fees paid to television station licensees.
Location Cash Flow Net revenues less location operating expenses, which consist of programming,
barter programming, general and administrative, technical and operations,
marketing and selling expenses. The difference between Location Cash Flow
and EBITDA is that EBITDA includes incentive compensation and corporate
expenses.
Management Agreement The agreement between PM&C and its operating subsidiaries and the Management
Company to provide management services.
Management Company BDI Associates L.P., an affiliate of the Company.
New Credit Facility The Company's credit facility in the aggregate principal amount of at least
$50.0 million.
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Notes PM&C's 12 1/2 % Series B Senior Subordinated Notes due 2005.
NRTC The National Rural Telecommunications Cooperative, the only entity authorized
to provide DIRECTV services that is independent of DIRECTV Enterprises, Inc.
There are 252 NRTC members that are authorized to provide DIRECTV services
in exclusive territories granted to the NRTC by DIRECTV Enterprises, Inc.
Old Credit Facility The Company's existing $10.0 million revolving credit facility to be retired
concurrently with this Offering.
Parent Pegasus Communications Holdings, Inc., the direct parent of Pegasus.
Parent Non-Voting Stock The Class B Non-Voting Stock of the Parent.
Pegasus Pegasus Communications Corporation, the issuer of the Class A Common Stock
offered hereby.
PM&C Pegasus Media & Communications, Inc., which is currently a direct subsidiary
of the Parent and will become a direct subsidiary of Pegasus upon completion
of this Offering.
PM&C Class A Shares The Class A shares of PM&C held by the Parent, which will be transferred
to Pegasus upon completion of this Offering.
PM&C Class B Shares The Class B shares of PM&C held by purchasers in the Notes offering.
Portland Acquisition The acquisition of WPXT.
Portland LMA The LMA relating to WWLA.
Registered Exchange Offer Pegasus' registered exchange offer to holders of PM&C Class B Shares for _______
shares in the aggregate of Class A Common Stock.
Tallahassee Acquisition The acquisition of the principal tangible assets of WTLH.
Towers Purchase The acquisition of certain tower properties from Towers, an affiliate of
the Company.
Towers Pegasus Towers, L.P.
WDBD Station WDBD-TV in the Jackson, Mississippi DMA.
WDSI Station WDSI-TV in the Chattanooga, Tennessee DMA.
WILF Station WILF-TV in the Northeastern Pennsylvania DMA.
WOLF Station WOLF-TV in the Northeastern Pennsylvania DMA.
WPXT Station WPXT-TV in the Portland, Maine DMA.
WTLH Station WTLH-TV in the Tallahassee, Florida DMA.
WTLH Warrants Warrants to purchase $1.0 million of the Class A Common Stock at an exercise
price equal to the price to the public in this Offering, which were issued
in connection with the Tallahassee Acquisition.
WWLA Station WWLA-TV to be constructed to serve the Portland, Maine DMA.
WWLF Station WWLF-TV in the Northeastern Pennsylvania DMA.
</TABLE>
15
<PAGE>
RISK FACTORS
Many of the statements in this Prospectus are forward-looking in nature
and, accordingly, whether they prove to be accurate is subject to many risks
and uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements in this Prospectus. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and those contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as those discussed elsewhere in this Prospectus.
DEPENDENCE ON FOX NETWORK AFFILIATION
Certain of the Company's TV stations are affiliated with the Fox Network,
which provides the stations with up to 40 hours of programming time per week,
including 15 hours of prime time programming, in return for the broadcasting
of Fox-inserted commercials by the stations during such programming. As a
result, the successful operation of the Company's TV stations is highly
dependent on the Company's relationship with Fox and on Fox's success as a
broadcast network. All of the Company's affiliation agreements with Fox
expire on October 31, 1998. 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 have estimated orbital
lives at least through the year 2007, there can be no assurance as to the
longevity of the satellites or that loss, damage or changes in the satellites
as a result of acts of war, anti-satellite devices, electrostatic storms or
collisions with space debris will not occur and have a material adverse
effect on DIRECTV and the Company's DBS business. Furthermore, the digital
compression technology used by DBS providers is not standardized and is
undergoing rapid change. Since the Company serves as an intermediary for
DIRECTV, the Company would be adversely affected by material adverse changes
in DIRECTV's financial condition, programming, technological capabilities or
services, and such effect could be material to the Company's prospects. There
can also be no assurance that there will be sufficient demand for DIRECTV
services since such demand depends upon consumer acceptance of DBS, the
availability of equipment and related components required to access DIRECTV
services and the competitive pricing of such equipment. See "Business -- DBS"
and "Business -- Competition."
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominately rural
areas of the United States. Pursuant to agreements between Hughes
Communications Galaxy, Inc. ("Hughes," which is affiliated with DIRECTV) and
the NRTC (the "NRTC Agreement") and between the NRTC and participating NRTC
members (the "Member Agreement" and, together with the NRTC Agreement, the
"DBS Agreements"), participating NRTC members acquired the exclusive right to
provide DIRECTV programming services to residential and commercial
subscribers in certain service areas. The DBS Agreements authorize the NRTC
and participating NRTC members to provide all commercial services offered by
Hughes that are transmitted from the frequencies that the FCC has authorized
for DIRECTV's use at its present orbital location for a term running through
the life
16
<PAGE>
of Hughes' current satellites. The NRTC has advised the Company that
the NRTC Agreement also provides the NRTC a right of first refusal to acquire
comparable rights in the event that Hughes elects to launch successor
satellites upon the removal of the present satellites from active service. The
financial terms of any such purchase are likely to be the subject of
negotiations. Any exercise of such right is uncertain and will depend, in
part, on DIRECTV's costs of constructing, launching and placing in service
such successor satellites. The Company is, therefore, unable to predict
whether substantial additional expenditures by the NRTC and its members,
including the Company, will be required in connection with the exercise of
such right of first refusal.
SUBSTANTIAL INDEBTEDNESS AND LEVERAGE
The Company is highly leveraged. As of March 31, 1996, on a pro forma basis
after giving effect to this Offering and the use of the proceeds therefrom and
the Transactions and assuming an initial public offering price of $____ per
share, the Company would have had consolidated indebtedness of $85.8 million,
total stockholders' equity of $62.2 million and, assuming certain conditions
are met, up to an additional $50.0 million available under the New Credit
Facility. For the year ended December 31, 1995, and the three months ended
March 31, 1996, on a pro forma basis after giving effect to this Offering and
the use of the proceeds therefrom and the Transactions, and assuming an
initial public offering price of $______ per share, the Company's earnings would
have been inadequate to cover its fixed charges by $9.7 million and $3.7
million, respectively. The ability of the Company to repay its existing
indebtedness will depend upon future operating performance, which is subject
to the success of the Company's business strategy, prevailing economic
conditions, regulatory matters, levels of interest rates and financial,
business and other factors, many of which are beyond the Company's control.
The current and future debt service obligations of the Company could have
important consequences, including the following: (i) the ability of the
Company to obtain additional financing, (ii) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of the
principal and interest on its indebtedness, thereby reducing funds available
for other purposes, and (iii) the Company will be more vulnerable to adverse
economic conditions than some of its competitors and, thus, may be limited in
its ability to withstand competitive pressures. The agreements with respect to
the Company's indebtedness contain numerous financial and operating covenants,
including, among others, restrictions on the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to pay
dividends and to make certain other payments and investments, and to sell or
otherwise dispose of assets or merge or consolidate with another entity. These
covenants may have the effect of impeding the Company's growth opportunities,
which may affect its cash flow and the value of the Class A Common Stock. The
Company believes that it will have sufficient capital to carry on its business
after the issuance of the Class A Common Stock and will be able to meet its
debts as they mature. However, there can be no assurance that future cash
flows of the Company will be sufficient to meet all of the Company's
obligations and commitments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of Indebtedness."
ACQUISITIONS
The Company plans to pursue additional acquisitions. Since January 1,
1996, the Company has acquired or entered into agreements to acquire a number
of properties, including the Cable Acquisition. The Cable Acquisition is
subject to a number of conditions, certain of which are beyond the Company's
control, and there can be no assurance that the Cable Acquisition will be
completed on the terms described herein and as reflected in the pro forma
financial statements included herein or at all. Furthermore, there can be no
assurance that the anticipated benefits of any of the acquisitions described
herein or future acquisitions will be realized. The process of integrating
acquired operations into the Company's operations may result in unforeseen
operating difficulties, could absorb significant management attention and may
require significant financial resources that would otherwise be available for
the ongoing development or expansion of the Company's existing operations.
Although the Company intends to grow through future acquisitions, no
assurance can be given that such opportunities will be identified by the
Company in the future or that, if identified, the Company will be able to
take advantage of them. Further, 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.
17
<PAGE>
ABILITY TO MANAGE GROWTH
The Company has experienced a period of rapid growth and anticipates
continuing to expand to achieve its business objectives, 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, President and Chief Executive Officer of the Company. See "Management
and Certain Transactions." The loss of Mr. Pagon or other key management
personnel or the failure to recruit and retain personnel could have a
material adverse effect on the Company's business. The Company does not
maintain "key-man" insurance and has not entered into employment agreements
with respect to any such individuals.
COMPETITION IN THE TV, DBS AND CABLE BUSINESSES
Each of the markets in which the Company operates is highly competitive.
Many of the Company's competitors have substantially greater resources than
the Company and may be able to compete more effectively than the Company in
the Company's markets. In addition, the markets in which the Company operates
are in a constant state of change due to technological, economic and
regulatory developments. The Company is unable to predict what forms of
competition will develop in the future, the extent of such competition or its
possible effects on the Company's businesses. For instance, the Company's DBS
business faces competition from other or potential multichannel
programming distributors, including other current DBS operators, 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. 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 currently programs WTLH through an LMA, and
expects to program other stations through the use of such agreements, there
can be no assurance that the 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.
18
<PAGE>
In the 1996 Act, the continued performance of then existing LMAs was
generally grandfathered. Currently, LMAs are not considered attributable
interests under the FCC's multiple ownership rules. However, the FCC is
currently considering proposals which would make LMAs attributable, as they
generally are in the radio broadcasting industry. If the FCC were to adopt a
rulemaking that makes such interests attributable, without modifying its current
prohibitions against the ownership of more than one television station in a
market, the Company could be prohibited from entering into such arrangements
with other stations in markets in which it owns television stations.
CONCENTRATION OF SHARE OWNERSHIP AND VOTING CONTROL BY MARSHALL W. PAGON
The Company's capital stock is divided into two classes with different
voting rights. Holders of Class A Common Stock are entitled to one vote per
share on all matters submitted to a vote of stockholders generally and
holders of Class B Common Stock are entitled to ten votes per share. Both
classes vote together as a single class on all matters except in connection
with certain amendments to the Company's Amended and Restated Certificate of
Incorporation, the authorization or issuance of additional shares of Class B
Common Stock, and except where class voting is required under the Delaware
General Corporation Law. See "Description of Capital Stock." Upon completion
of this Offering, as a result of his beneficial ownership of all the
outstanding voting stock of the sole general partner of a limited partnership
that indirectly controls the Parent and of his control of the only other
holder of Class B Common Stock, Marshall W. Pagon, the President and Chief
Executive Officer of Pegasus, will beneficially own all of the Class B Common
Stock of Pegasus. After giving effect to the greater voting rights attached
to the Class B Common Stock, Mr. Pagon will be able to effectively vote % of
the combined voting power of the outstanding Common Stock and will have
sufficient power (without the consent of the holders of the Class A Common
Stock) to elect the entire Board of Directors of the Company and, in general,
to determine the outcome of matters submitted to the stockholders for
approval. See "Ownership and Control" and "Description of Capital Stock --
Common Stock." Purchasers in this Offering will be acquiring, assuming an
initial public offering price of $____ per share of Class A Common Stock, shares
of Class A Common Stock possessing __% of the total voting power of the Common
Stock.
ABSENCE OF PRIOR PUBLIC MARKET AND VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that an active trading market
will develop or be sustained in the future. The initial public offering price
of the Class A Common Stock has been determined solely by negotiations
between the Company and the representatives of the Underwriters and does not
necessarily reflect the price at which the Class A Common Stock may be sold
in the public market after this Offering. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
There may be significant volatility in the market price of the Class A Common
Stock due to factors that may or may not relate to the Company's performance.
The market price of the Class A Common Stock may be significantly affected by
various factors such as economic forecasts, financial market conditions,
reorganizations and acquisitions and quarterly variations in the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this Offering, assuming an initial public offering price
of $____ per share of Class A Common Stock and after giving effect to the
issuance of shares contemplated by the Transactions, the Company will have
outstanding ____ shares of Class A Common Stock and ____ shares of Class B
Common Stock, all of which shares of Class B Common Stock are convertible into
shares of Class A Common Stock on a share for share basis. Of these shares,
the ____ shares of Class A Common Stock sold in this Offering will be
tradeable without restriction unless they are purchased by affiliates of the
Company. All shares to be received pursuant to the Registered Exchange Offer
will also be tradeable without restriction, except that the terms of the
Registered Exchange Offer are expected to require that each exchanging holder
agrees not to sell, otherwise dispose of or pledge any shares of Class A
Common Stock received in the Registered Exchange Offer for a period of at
least 180 days after the date of this Prospectus
19
<PAGE>
without the prior written consent of Lehman Brothers Inc. The approximately
_____ remaining shares of Class A Common Stock and all of the shares of Class
B Common Stock are "restricted securities" under the Securities Act of 1933,
as amended (the "Securities Act"). These "restricted securities" and any
shares purchased by affiliates of the Company in this Offering may be sold
only if they are registered under the Securities Act or pursuant to an
applicable exemption from the registration requirements of the Securities Act,
including Rule 144 and Rule 701 thereunder. The holders of ______ of the
remaining shares have agreed not to sell, otherwise dispose of or pledge
any shares of the Company's Common Stock or securities convertible into or
exercisable or exchangeable for such Common Stock for 180 days after the date
of this Prospectus without the prior written consent of Lehman Brothers Inc.
No prediction can be made as to the effect, if any, that market sales of such
shares or the availability of such shares for future sale will have on the
market price of shares of Class A Common Stock prevailing from time to time.
Up to an additional _____ and _____ shares of Class A Common Stock are
reserved for issuance under the Incentive Program and outstanding stock
options, respectively. In connection with the DBS Acquisition and the
acquistion of the Portland LMA, holders of the Class A Common Stock have been
granted certain piggyback registration rights in connection with the issuance
of their shares. See "Shares Eligible for Future Sale."
POTENTIAL MINORITY OWNERSHIP OF PM&C CAPITAL STOCK
Upon completion of this Offering, PM&C will be the principal operating
subsidiary of Pegasus with two classes of capital stock outstanding: the PM&C
Class A Shares and the PM&C Class B Shares. Holders of the PM&C Class A
Shares are entitled to ten votes per share, and holders of the PM&C Class B
Shares are entitled to one vote per share. The Parent owns all of the PM&C
Class A Shares, constituting 95% of the capital stock of PM&C and
representing 99.5% of the combined voting power of PM&C, and will transfer
these shares to the Company upon the closing of this Offering. Pegasus has
filed a registration statement with the Securities and Exchange Commission to
commence the Registered Exchange Offer of the PM&C Class B Shares for shares
of Class A Common Stock. Although the Company anticipates that all of the
holders of the PM&C Class B Shares will accept the Registered Exchange Offer,
the possibility remains that some of the PM&C Class B Shares will not be
exchanged and that PM&C will not be a wholly owned subsidiary of the Company.
Furthermore, the pro forma financial data included in this Prospectus assume
that the Registered Exchange Offer has been consummated and that all holders
of the PM&C Class B Shares accepted the offer. If all holders do not accept
this offer, the actual pro forma data would differ from that set forth
herein. In addition, holders of the PM&C Class B Shares have certain
preemptive, tag-along and registration rights which may restrict the Company
from engaging in certain transactions.
DIVIDENDS
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future, other than the distribution to the Parent as
discussed in "Use of Proceeds." Moreover, Pegasus is a holding company, and
its ability to pay dividends is dependent upon the receipt of dividends from
its direct and indirect subsidiaries. The Company is a party to the New
Credit Facility and the Indenture that restrict its ability to pay dividends.
See "Dividend Policy" and "Description of Indebtedness."
POTENTIAL ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation contains,
among other things, provisions authorizing the issuance of "blank check"
preferred stock and two classes of Common Stock with different voting rights.
See "Description of Capital Stock." In addition, the Company is subject to
the provisions of Section 203 of the Delaware General Corporation Law. These
provisions could delay, deter or prevent a merger, consolidation, tender
offer, or other business combination or change of control involving the
Company that some or a majority of the Company's stockholders might consider
to be in their best interests, including tender offers or attempted takeovers
that might otherwise result in such stockholders receiving a premium over the
market price for the Class A Common Stock. In the event of a Change of
Control (as defined in the Indenture), the Company will be required, subject
to certain conditions, to offer to purchase all outstanding Notes at a price
equal to 101% of the principal amount thereof, plus accrued interest to the
date of purchase. In addition, upon such a Change of Control, the Company
will be obligated to prepay all amounts owing under the New Credit Facility
and the commitments thereunder will be reduced to zero. The requirement that
20
<PAGE>
the Company offer to repurchase the Notes and the obligation to prepay the
amounts owing under the New Credit Facility and the reduction of the
commitments thereunder to zero in the event of a Change of Control may have
the effect of deterring a third party from acquiring the Company in a
transaction that would constitute a Change of Control. See "Description of
Indebtedness."
DILUTION
Assuming an initial public offering price of $_____ per share of Class A
Common Stock, purchasers of the Class A Common Stock offered hereby will
realize an immediate and substantial dilution of approximately $_____ and
$_____ in net tangible book value per share of Common Stock of their
investment from the initial public offering price before and after giving
effect to the Transactions, respectively. See "Dilution."
21
<PAGE>
THE COMPANY
GENERAL
The Company is a diversified media and communications company operating in
three business segments: TV, DBS and cable. The Company has grown through the
acquisition and operation of media and communications properties
characterized by clearly identifiable "franchises" and significant operating
leverage, which enables increases in revenues to be converted into
disproportionately greater increases in Location Cash Flow.
Pegasus was incorporated under the laws of the State of Delaware in May
1996. In October 1994, the assets of various affiliates of Pegasus,
principally limited partnerships that owned and operated the Company's TV and
New England Cable operations, were transferred to subsidiaries of PM&C. In
July 1995, the subsidiaries operating the Company's Mayaguez Cable systems
and the Company's New England DBS business became wholly owned subsidiaries
of PM&C. Upon consummation of this Offering, PM&C will become a subsidiary of
Pegasus. Management's principal executive offices are located at Suite 454, 5
Radnor Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087. Its
telephone number is (610) 341-1801.
ACQUISITIONS
Since January 1, 1996, the Parent has entered into agreements and
completed certain transactions in connection with the Portland and
Tallahassee Acquisitions and the Portland LMA. The assets relating to these
transactions were subsequently contributed to the Company. Upon the
consummation of this Offering, the Company will hold all of the assets
acquired by the Parent in the DBS Acquisition and will have all rights of
acquisition with respect to the Cable Acquisition. Set forth below is certain
information relating to these acquisitions.
COMPLETED ACQUISITIONS
Television Station WPXT. The Company acquired the principal tangible
assets of WPXT, the Fox-affiliated television station serving the Portland,
Maine DMA, and entered into a noncompetition agreement with WPXT's prior
owner for consideration totalling $12.4 million in cash and $400,000 of
assumed liabilities. Upon completion of this Offering and subject to any
necessary FCC approvals, the Parent will contribute WPXT's FCC license and
Fox Affiliation Agreement to the Company in exchange for $1.9 million in cash
and $150,000 of Class A Common Stock (valued at the price to the public in
this Offering) to be paid to WPXT's prior owner and $1.0 million of Class B
Common Stock (valued at the price to the public in this Offering) resulting
in an aggregate consideration of $15.8 million for the Portland Acquisition.
Television Station WTLH. In March 1996, the Company acquired substantially
all of the tangible assets of WTLH, the Fox-affiliated TV station serving the
Tallahassee, Florida DMA, for $5.0 million in cash and WTLH Warrants to
purchase $1.0 million of Class A Common Stock (valued at the price to the
public in this Offering). In addition, the Company agreed to purchase WTLH's
FCC licenses, subject to FCC approval, on March 1, 1998, or earlier at the
Company's option, in exchange for notes of a subsidiary of the Company
aggregating $3.1 million, payable on that date, with interest at 10% payable
March 1, 1997 and 1998. Pending acquisition of the FCC licenses, the Company
is entitled to program WTLH and retain its advertising revenues pursuant to
an LMA. The LMA requires the Company to make annual payments of $305,000 and
is terminable upon the assignment of the FCC licenses to the Company.
Television Station WWLA. In May 1996, the Parent acquired the Portland
LMA. As a condition of the completion of this Offering, the Parent will
contribute the Portland LMA to Pegasus in exchange for $1.0 million of Class
A Common Stock (valued at the price to the public in this Offering), which
the Parent will transfer to the seller. Under the Portland LMA, the Company
will lease facilities and provide programming to WWLA, retain all revenues
generated from advertising sales, and make payments of $52,000 per year to
the FCC license holder in addition to reimbursement of certain expenses.
Construction of WWLA is expected to be completed in 1997. WWLA's offices,
studio and transmission facilities will be co-located with the Company's WPXT
facilities.
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<PAGE>
CONCURRENT ACQUISITION
DBS Acquisition. In May 1996, the Parent entered into an agreement with
Harron Communications Corp. ("Harron"), under which the Company will acquire
rights as exclusive provider of DIRECTV services in certain rural areas of
Texas and Michigan and related assets in exchange for $19.9 million of Class A
Common Stock (valued at the price to the public in this Offering) and
approximately $9.9 million in cash. Based upon an assumed initial public
offering price of $_____ per share of Class A Common Stock, after giving
effect to this Offering and the Transactions, Harron would own approximately
_____ shares of the Class A Common Stock and would be deemed to be the
beneficial owner of approximately __% of the outstanding Common Stock. One of
the conditions precedent for the completion of this Offering is the
consummation of the DBS Acquisition. In connection with the DBS Acquisition,
the Parent agreed to nominate a designee of Harron as a member of the
Company's Board of Directors.
PENDING ACQUISITION
Cable Acquisition. In March 1996, the Parent entered into an agreement to
acquire substantially all of the assets of the San German Cable System, which
serves ten communities contiguous to the Company's Mayaguez Cable system, for
approximately $26.4 million in cash and assumed liabilities. The Cable
Acquisition is subject to the prior approval of the Puerto Rico Public
Service Commission and to conditions typical in acquisitions of this nature,
certain of which are beyond the Company's control. It is anticipated that a
portion of the proceeds from this Offering will be used to fund the Cable
Acquisition, which is expected to be consummated concurrently with or shortly
after this Offering. See "Use of Proceeds." Following this acquisition, the
Company plans to interconnect the Mayaguez and San German Cable systems and
operate them from a single headend.
CORPORATE REORGANIZATION AND OTHER TRANSACTIONS
Set forth below is a description of certain of the Transactions that are
scheduled to occur concurrently with or shortly after the consummation of
this Offering. Completion of this Offering is conditioned on all of the
Transactions described below except for the Registered Exchange Offer and the
Management Share Exchange.
PARENT'S CONTRIBUTION OF PM&C CLASS A SHARES
Pegasus is a newly-formed subsidiary of the Parent and has no material
assets or operating history. The Parent's principal subsidiary is PM&C, which
now conducts through subsidiaries the Company's current operations as
described herein. Simultaneously with, and as a condition of, the closing of
this Offering, the Parent will contribute to Pegasus all of its stock in
PM&C, which consists of 161,500 PM&C Class A Shares in exchange for _____shares
of Class B Common Stock.
MANAGEMENT AGREEMENT ACQUISITION
PM&C and its operating subsidiaries are party to the Management Agreement
with the Management Company, under which the Management Company provides
certain management and accounting services and PM&C and its subsidiaries are
obligated to pay the Management Company 5% of their net revenues and
reimburse the Management Company for its accounting department costs. The
Management Company is an affiliate of PM&C and Pegasus and is controlled and
predominantly owned by Marshall W. Pagon, the President and Chief Executive
Officer of PM&C and Pegasus.
Concurrently with the completion of this Offering, the Company will acquire
the Management Agreement together with certain net assets, including
approximately $1.4 million of accrued management fees, from the Management
Company in exchange for the Company's issuance of $_____ million of Class B
Common Stock (valued at the price to the public in this Offering) and
approximately $1.4 million in cash. The Company has received an opinion that
this transaction is fair to the Company from a financial point of view. At the
time that the Management Agreement is transferred, the executive officers and
other employees of the Management Company will become employees of the
Company. See "Management and Certain Transactions -- Management Agreement."
23
<PAGE>
REGISTERED EXCHANGE OFFER
PM&C has outstanding 8,500 PM&C Class B Shares that were issued to
purchasers of the Notes in PM&C's Notes offering. Promptly after the date of
this Prospectus, Pegasus intends to make the Registered Exchange Offer to the
holders of the PM&C Class B Shares to exchange them for ________ shares in the
aggregate of Class A Common Stock.
The exchange ratio of Class A Common Stock to be issued in the Registered
Exchange Offer for PM&C Class B Shares will be determined such that
immediately after giving effect to the Parent's contribution of the PM&C
Class A Shares to Pegasus and the completion of the Registered Exchange Offer
(assuming all holders of PM&C Class B Shares exchange their PM&C Class B
Shares), but before giving effect to the closing of this Offering and the
issuance of additional shares of Common Stock in connection with the
remaining Transactions, the Parent and holders of the PM&C Class B Shares,
respectively, will hold 95% and 5% of the equity of Pegasus and 99.5% and
0.5% of the voting rights of Pegasus' Common Stock, which are the same
proportions in which they now own PM&C.
Holders of PM&C Class B Shares who accept the Registered Exchange Offer
will receive shares of Class A Common Stock that have been registered under
the Securities Act and will be freely tradeable, except that the terms of the
Registered Exchange Offer are expected to require that each exchanging holder
agree not to sell, otherwise dispose of or pledge any shares of Class A
Common Stock received in the Registered Exchange Offer for a period of at
least 180 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc. Holders who do not accept the Registered
Exchange Offer will retain their PM&C Class B Shares, for which there will be
no trading market. For this reason, the Company expects that all holders of
PM&C Class B Shares will accept the Registered Exchange Offer. However, there
can be no assurance that this will be the case, and the completion of this
Offering is not conditioned on any level of acceptances of the Registered
Exchange Offer. Accordingly, it is possible that PM&C will have up to a 5%
minority equity interest outstanding after completion of this Offering, which
minority interest is not reflected in the pro forma financial statements
included in this Prospectus.
MANAGEMENT SHARE EXCHANGE
Certain members of the Company's management hold 5,000 shares of Parent
Non-Voting Stock. It is expected that all shares of the Parent Non-Voting
Stock will be exchanged for _________ shares of Class A Common Stock of Pegasus
pursuant to the Management Share Exchange.
TOWERS PURCHASE
Concurrent with this Offering, the Company will purchase the broadcast
tower assets of Towers, an affiliate of the Company, for cash consideration
of approximately $1.4 million. These assets consist of ownership or leasehold
interests in three tower properties. Towers leases space on all of its towers
to the Company and also leases space to unaffiliated companies. The purchase
price has been determined by an independent appraisal.
NEW CREDIT FACILITY
Upon completion of this Offering, the Company will have entered into the
$50.0 million or greater New Credit Facility with one or more commercial
lenders. See "Description of Indebtedness -- New Credit Facility."
24
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of _______ shares of Class A
Common Stock at an estimated public offering price of $ ______ per share,
after deducting underwriting discounts and commissions and estimated fees and
expenses of this Offering, are estimated to be approximately $45.7 million
(approximately $52.7 million if the Underwriters' over-allotment option is
exercised in full).
The Company intends to use approximately (i) $23.2 million to fund the
Cable Acquisition, (ii) $9.9 million for the payment of the cash portion of
the purchase price in the DBS Acquisition, (iii) $7.8 million for the
retirement of the Old Credit Facility, (iv) $1.9 million as a distribution to
the Parent to make a payment on account of the Portland Acquisition, (v) $1.4
million for the payment of the cash portion of the purchase price of the
Management Agreement Acquisition, and (vi) $1.4 million for the Towers
Purchase. See "Management and Certain Transactions." The remaining net
proceeds, if any, will be used for working capital and general corporate
purposes; however, they may be applied to a future acquisition, although no
such future acquisition is currently contemplated. Pending application of the
net proceeds as set forth above, the Company intends to temporarily invest
the net proceeds in short-term, investment grade securities. If the Cable
Acquisition is not consummated, the Company intends to use the approximately
$23.2 million in net proceeds to fund future acquisitions and for working
capital and general corporate purposes.
Borrowings under the Old Credit Facility bear interest, payable monthly,
at LIBOR or the prime rate (as selected by the Company) plus spreads that
vary with the Company's ratio of total debt to Adjusted Operating Cash Flow
(as defined under the Old Credit Facility). At May 31, 1996, outstanding
balances under the Old Credit Facility totaled $7.8 million. The borrowings
under the Old Credit Facility mature on June 30, 2000, when all outstanding
principal and accrued interest is due and payable. The Company has drawn $1.0
million, $5.0 million and $1.8 million under the Old Credit Facility in
connection with the Portland Acquisition, Tallahassee Acquisition and Cable
Acquisition, respectively. The Old Credit Facility was entered into by the
Company on July 7, 1995.
DIVIDEND POLICY
Pegasus is a newly formed corporation and has not paid any cash dividends
on its Common Stock. The Company currently intends to retain future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future other than the distribution to the Parent
as discussed in "Use of Proceeds." The payment of future dividends, if any,
will depend, among other things, on the Company's results of operations and
financial condition, any restriction in the Company's loan agreements and on
such other factors as the Company's Board of Directors may, in its
discretion, consider relevant. Since Pegasus is a holding company, its
ability to pay dividends is dependent upon the receipt of dividends from its
direct and indirect subsidiaries. PM&C, the Company's only direct subsidiary,
is a party to the New Credit Facility and the Indenture that restrict its
ability to pay dividends. See "Description of Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
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<PAGE>
DILUTION
The net tangible book deficit of the Company at March 31, 1996 was $66.8
million, or $_____ per share of Common Stock. The net tangible book value
(deficit) per share of Common Stock. represents the amount of the Company's
total tangible assets less its total liabilities, divided by the number of
shares of Common Stock outstanding. After giving effect to the Transactions
(assuming an initial public offering price of $ _______ per share of Class A
Common Stock), the pro forma net tangible book deficit of the Company as of
March 31, 1996 would have been $58.4 million, or $_______ per share of Common
Stock. After giving effect to the sale of the_______ shares of Class A Common
Stock offered by the Company in this Offering and the issuance of Common Stock
pursuant to the Transactions (assuming an initial public offering price of
$_______ per share of Class A Common Stock), the pro forma net tangible book
value (deficit) of the Company as of March 31, 1996 would have been $_______
million, or $_______ per share of Common Stock. This represents an immediate
increase in net tangible book value of $_______ per share of Common Stock to
existing stockholders and an immediate dilution in net tangible book value of
$ per share of Common Stock to purchasers of the Class A Common Stock in this
Offering, as shown in the following table.
<TABLE>
<CAPTION>
<S> <C> <C>
Assumed initial public offering price per share .......................... $
Net tangible book deficit per share as of March 31, 1996 ............ $
Increase in net tangible book value per share attributable to new stockholders
purchasing stock in this Offering ................................. $
Pro forma net tangible book value per share after giving effect to the Transactions $
---------
Pro forma net tangible book value per share as of the completion of this Offering
after giving effect to the Transactions ............................ $
---------
Dilution in net tangible book value per share to the purchasers in this Offering
after giving effect to the Transactions ................................ $
=========
The following table sets forth, on a pro forma basis as of March 31, 1996,
(based upon an assumed initial public offering price of $__________ per share).
the differences between the number of shares of Common Stock purchased from
the Company, the aggregate consideration paid, and the average price per
share paid by (i) existing stockholders prior to the consummation of the
Transactions, (ii) persons acquiring Common Stock in the Transactions and
(iii) new stockholders purchasing Class A Common Stock in this Offering.
</TABLE>
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------- ------------------------- Average Price
Number Percent Amount Percent Per Share
---------- ----------- ---------- ----------- -----------------
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Existing stockholders before the Transactions
Persons acquiring Common Stock in the
Transactions ........................... % $7.9 % $
New stockholders purchasing Class A Common
Stock in this Offering .................
---------- ----------- ---------- -----------
Total .................................. 100.0% 100.0%
========== =========== ========== ===========
</TABLE>
26
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1996 and as adjusted to give effect to (i) the sale and issuance by the
Company of _________ shares of Class A Common Stock at an assumed offering
price of $ _________ per share and the application of the proceeds therefrom
as set forth under "Use of Proceeds," and (ii) the issuance of _________
shares of Class A Common Stock and _________ shares of Class B Common Stock
pursuant to the Transactions. See "Use of Proceeds," "Selected Historical and
Pro Forma Combined Financial Data," and "Pro Forma Combined Financial Data."
<TABLE>
<CAPTION>
As of March 31, 1996
----------------------------
Pro Forma
Actual As Adjusted
---------- -------------
(dollars in thousands)
Cash, cash equivalents and restricted cash .................................. $ 8,488 $ 6,789
========== =============
<S> <C> <C>
Long-term debt:
New Credit Facility(1) .................................................... $ -- $ --
Old Credit Facility ....................................................... 6,000 --
12.5% Series B Senior Subordinated Notes due 2005(2) ...................... 81,293 81,293
Capital leases and other .................................................. 4,526 4,526
--------- ----------
Total long-term debt ...................................................... 91,819 85,819
--------- ----------
Stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized; no shares
issued and outstanding ................................................. -- --
Class A Common Stock, $0.01 par value, 30,000,000 shares authorized;
_____ shares issued and outstanding, as adjusted ..................... 2
Class B Common Stock, $0.01 par value, 15,000,000 shares authorized;
_____ shares issued and outstanding, as adjusted ..................... --
Additional paid-in capital ................................................ 7,881
Deficit ................................................................... (81) (81)
Partners' deficit ......................................................... (10,553) (10,553)
--------- -------------
Total stockholders' equity (deficit) ................................... (2,751) 62,223
--------- -------------
Total capitalization ................................................... $ 89,068 $148,042
========= =============
</TABLE>
- ------
(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."
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<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
The selected historical combined financial data for the years ended
December 31, 1992 and 1993 have been derived from the Company's Combined
Financial Statements for such periods, which have been audited by Herbein +
Company, Inc., as indicated in their report included elsewhere herein. The
selected historical combined financial data for the years ended December 31,
1994 and 1995 have been derived from the Company's Combined Financial
Statements for such periods, which have been audited by Coopers & Lybrand
L.L.P., as indicated in their report included elsewhere herein. The selected
historical combined financial data for the year ended December 31, 1991 and
the three months ended March 31, 1995 and 1996 have been derived from
unaudited combined financial information, which in the opinion of the
Company's management, contain all adjustments necessary for a fair
presentation of this information. The selected historical combined financial
data for the three months ended March 31, 1996 should not be regarded as
indicative of the results that may be expected for the entire year. The
information should be read in conjunction with the Combined Financial
Statements and the notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Pro Forma Combined
Financial Data," which are included elsewhere herein.
28
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
(Dollars in thousands, except earnings per share)
1991(1) 1992 1993 (1) 1994 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ....................... $ -- $ -- $10,307 $17,808 $19,973
DBS ...................... -- -- -- 174 1,469
Cable .................... 2,095 5,279 9,134 10,148 10,606
Other .................... 9 40 46 61 100
---------- ---------- ---------- ---------- ---------
Total net revenues ..... 2,104 5,319 19,487 28,191 32,148
---------- ---------- ---------- ---------- ---------
Location operating expenses:
TV ....................... -- -- 7,564 12,380 13,933
DBS ...................... -- -- -- 210 1,379
Cable .................... 1,094 2,669 4,655 5,545 5,791
Other .................... 3 12 16 18 38
Incentive compensation (3) .. -- 36 192 432 528
Corporate expenses .......... 206 471 1,265 1,506 1,364
Depreciation and amortization 1,175 2,541 5,978 6,940 8,751
---------- ---------- ---------- ---------- ---------
Income (loss) from operations (374) (410) (183) 1,160 364
Interest expense ............ (621) (1,255) (4,402) (5,973) (8,817)
Interest income ............. -- -- -- -- 370
Other expense, net .......... (21) (21) (220) (65) (44)
Provision (benefit) for taxes -- -- -- 140 30
Extraordinary gain (loss)
from extinguishment of
debt ..................... -- -- -- (633) 10,211
---------- ---------- ---------- ---------- ---------
Net income (loss) ........... $(1,016) $(1,686) $(4,805) $(5,651) $ 2,054
========== ========== ========== ========== =========
Income (loss) per share:
Loss before extraordinary
item ..................... $
Extraordinary item .......... --
--------
Net income (loss) per share . $
========
Weighted average shares
outstanding ..............
Other Data:
Location Cash Flow (4) ...... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007
EBITDA (4) .................. 801 2,131 5,795 8,100 9,115
Capital expenditures ........ 213 681 885 1,264 2,640
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months
Ended March 31,
------------------------------------
Pro Pro
Forma Forma
1995 (2) 1995 1996 1996 (2)
--------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ....................... 27,305 $ 3,912 $ 5,026 $ 5,694
DBS ...................... 3,982 239 664 1,572
Cable .................... 16,383 2,537 2,711 4,258
Other .................... 100 19 26 26
--------- ---------- ---------- ----------
Total net revenues ..... 47,770 6,707 8,427 11,550
--------- ---------- ---------- ----------
Location operating expenses:
TV ....................... 19,210 3,134 3,696 4,190
DBS ...................... 4,182 278 579 1,445
Cable .................... 8,944 1,445 1,559 2,331
Other .................... 38 7 5 5
Incentive compensation (3) .. 528 147 297 297
Corporate expenses .......... 1,364 332 374 374
Depreciation and amortization 14,657 1,898 2,367 3,727
--------- ---------- ---------- ----------
Income (loss) from operations (1,153) (534) (450) (819)
Interest expense ............ (8,817) (1,656) (2,901) (2,902)
Interest income ............. 370 -- 101 101
Other expense, net .......... (58) (75) (25) (42)
Provision (benefit) for taxes 30 141 (169) (169)
Extraordinary gain (loss)
from extinguishment of
debt ..................... 10,211 -- -- --
--------- ---------- ---------- ----------
Net income (loss) ........... $ 523 $(2,406) $(3,106) $(3,493)
========= ========== ========== ==========
Income (loss) per share:
Loss before extraordinary
item ..................... $ $ $
Extraordinary item .......... -- -- --
--------- ---------- ----------
Net income (loss) per share . $ $ $
========= ========== ==========
Weighted average shares
outstanding ..............
Other Data:
Location Cash Flow (4) ...... $15,396 $ 1,843 $ 2,588 $ 3,579
EBITDA (4) .................. 13,504 1,364 1,917 2,908
Capital expenditures ........ 3,169 744 931 991
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
-------------
Twelve Months
Ended March 31,
1996 (2)
--------------
<S> <C>
Net revenues ................ $ 49,391
Location Cash Flow (4) ...... 16,190
EBITDA (4) .................. 14,106
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of March 31, 1996
--------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 Actual Pro Forma (2)
-------- -------- --------- ---------- ------- --------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
restricted cash .......... $ 949 $ 970 $ 1,498 $ 1,380 $21,856 $ 8,488 $ 6,939
Working capital (deficiency). 78 (52) (3,844) (23,074) 17,566 5,882 3,558
Total assets ................ 17,306 17,418 76,386 75,394 95,770 100,936 160,683
Total debt (including current) 13,675 15,045 72,127 61,629 82,896 92,026 86,025
Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 103,687 98,460
Total equity (deficiency).... 2,734 1,001 (2,568) 6,942 249 (2,751) 62,223
(footnotes on following page)
</TABLE>
29
<PAGE>
- ------
(1) The Company's operations began in 1991. The 1991 data include the results
of the Massachusetts and New Hampshire Cable systems from June 26, 1991
(with the exception of the North Brookfield, Massachusetts Cable system,
which was acquired in July 1992), the Connecticut Cable system from
August 7, 1991 and the results of Towers from May 21, 1991. The 1993 data
include the results of the Mayaguez, Puerto Rico Cable system from March
1, 1993 and WOLF/WWLF/WILF, WDSI and WDBD from May 1, 1993.
(2) Pro forma income statement and other data for the year ended December 31,
1995, three months ended March 31, 1996 and the twelve months ended March
31, 1996 give effect to the acquisitions and this Offering as if such
events had occurred in the beginning of such periods. The pro forma
balance sheet data as of March 31, 1996 give effect to the acquisitions
after March 31, 1996 and this Offering as if such events had occurred on
such date. See "Pro Forma Combined Financial Data."
(3) Incentive compensation represents compensation expenses pursuant to the
Incentive Program. The Incentive Program is designed to promote growth in
stockholder value by providing all employees with restricted stock
awards, all in the form of Class A Common Stock, in proportion to annual
increases in Location Cash Flow. The Company has authorized up to _________
shares of Class A Common Stock in connection with the Incentive Program.
Any further increase in the number of shares authorized will require
stockholder approval. See "Management and Certain Transactions --
Incentive Program"
(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. EBITDA is defined as income (loss) before
(i) extraordinary items, (ii) provisions for income taxes, (iii) other
(income) expense, (iv) interest (income) expense, and (v) depreciation
and amortization expenses. The difference between Location Cash Flow and
EBITDA is that EBITDA includes incentive compensation and corporate
expenses. Although EBITDA and Location Cash Flow are not measures of
performance under generally accepted accounting principles, the Company
believes that Location Cash Flow and EBITDA are accepted within the
Company's business segments as generally recognized measures of
performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
30
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
Pro forma combined income statement and other data for the year ended
December 31, 1995, the three months ended March 31, 1996 and the twelve
months ended March 31, 1996 give effect to (i) the Portland Acquisition, as
of January 29, 1996, (ii) the Tallahassee Acquisition, as of March 8, 1996,
(iii) the DBS Acquisition, which is to close concurrently with the closing of
this Offering, (iv) the Cable Acquisition, which is a pending acquisition,
and (v) this Offering, all as if such events had occurred at the beginning of
each period. The pro forma combined balance sheet as of March 31, 1996 gives
effect to (i) payments in connection with the Portland Acquisition, (ii) the
DBS Acquisition, which is to close concurrently with the closing of this
Offering, (iii) the Cable Acquisition, which is a pending acquisition, and
(iv) this Offering, 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
combined financial information should be read in conjunction with the
Company's Combined Financial Statements and notes thereto, as well as the
financial statements and notes thereto of the acquisitions, included
elsewhere in this Prospectus. The pro forma combined financial data are not
necessarily indicative of the Company's future results of operations. There
can be no assurance whether or when the Cable Acquisition will be
consummated. See "Risk Factors -- Acquisitions."
31
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Acquisitions
---------------------------------------------------
Actual Portland(1) Tallahassee(2) DBS(3) Adjustments
-------- --------- ------------ --------- -----------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................... $19,973 $ 4,409 $2,784 $ -- $ 139(5)
DBS .................................. 1,469 -- -- 2,513 --
Cable ................................ 10,606 -- -- -- --
Other ................................ 100 -- -- -- --
-------- --------- ------------ --------- -----------
Total net revenues .................. 32,148 4,409 2,784 2,513 139
-------- --------- ------------ --------- -----------
Location operating expenses
TV ................................... 13,933 3,441 2,133 -- (186)(6)
(111)(7)
DBS .................................. 1,379 -- -- 3,083 (280) (8)
Cable ................................ 5,791 -- -- -- --
Other ................................ 38 -- -- -- --
Incentive compensation ................. 528 -- -- -- --
Corporate expenses ..................... 1,364 147 40 139 (326)(9)
Depreciation and amortization .......... 8,751 212 107 559 3,271(10)
-------- --------- ------------ --------- -----------
Income (loss) from operations .......... 364 609 504 (1,268) (2,229)
Interest expense ....................... (8,817) (1,138) (163) (631) 241(11)
Interest income ........................ 370 -- -- -- --
Other income (expense), net ............ (44) (542) (64) -- 542(12)
Provision (benefit) for income taxes ... 30 -- 105 -- (105)(13)
-------- --------- ------------ --------- -----------
Income (loss) before extraordinary item (8,157) (1,071) 172 (1,899) (1,341)
Extraordinary gain, net ................ 10,211 -- -- -- --
-------- --------- ------------ --------- -----------
Net income (loss) ...................... $ 2,054 $ (1,071) $ 172 $ (1,899) $ (1,341)
======== ========= ============ ========= ===========
Income (loss) per share:
Loss before extraordinary item .......
Extraordinary item ...................
Net income (loss) per share ..........
Weighted average shares outstanding ....
Other Data:
Location Cash Flow (16) ................ $11,007 $ 968 $ 651 $ (570) $ (716)
EBITDA (16) ............................ 9,115 821 611 (709) 1,042
Capital expenditures ................... 2,640 139 28 58 --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cable Acquisition
------------------------ The Pro
Sub-Total Actual(4) Adjustments Total Offering Forma
--------- --------- ----------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................... $ 27,305 $ -- $ -- $ 27,305 $ -- $27,305
DBS .................................. 3,982 -- -- 3,982 -- 3,982
Cable ................................ 10,606 5,777 -- 16,383 -- 16,383
Other ................................ 100 -- -- 100 -- 100
--------- ------- ----------- -------- --------- --------
Total net revenues .................. 41,993 5,777 -- 47,770 -- 47,770
--------- ------- ----------- -------- --------- --------
Location operating expenses
TV ...................................
19,210 -- -- 19,210 -- 19,210
DBS .................................. 4,182 -- -- 4,182 -- 4,182
Cable ................................ 5,791 3,485 (332)(14) 8,944 -- 8,944
Other ................................ 38 -- -- 38 -- 38
Incentive compensation ................. 528 -- -- 528 -- 528
Corporate expenses ..................... 1,364 -- -- 1,364 -- 1,364
Depreciation and amortization .......... 12,900 501 1,256(10) 14,657 -- 14,657
--------- ------- ----------- -------- --------- --------
Income (loss) from operations .......... (2,020) 1,791 (924) (1,153) -- (1,153)
Interest expense ....................... (10,508) (850) (1,369)(11) (12,727) 3,910(15) (8,817)
Interest income ........................ 370 -- -- 370 -- 370
Other income (expense), net ............ (108) 50 -- (58) -- (58)
Provision (benefit) for income taxes ... 30 (189) 189(13) 30 -- 30
--------- ------- ----------- -------- --------- --------
Income (loss) before extraordinary item (12,296) 1,180 (2,482) (13,598) 3,910 (9,688)
Extraordinary gain, net ................ 10,211 -- -- 10,211 --(17) 10,211
--------- ------- ----------- -------- --------- --------
Net income (loss) ...................... $(2,085) $1,180 $(2,482) $(3,387) $3,910 $ 523
========= ======= =========== ======== ========= ========
Income (loss) per share:
Loss before extraordinary item ....... $ $
Extraordinary item ...................
--------- --------
Net income (loss) per share .......... $ $
========= ========
Weighted average shares outstanding ....
Other Data:
Location Cash Flow (16) ................ $ 12,772 $2,292 $ 332 $15,396 $ -- $15,396
EBITDA (16) ............................ 10,880 2,292 332 13,504 -- 13,504
Capital expenditures ................... 2,865 304 -- 3,169 -- 3,169
</TABLE>
32
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Acquisitions
-------------------------------------------------
Actual Portland(1) Tallahassee(2) DBS(3) Adjustments
-------- --------- ------------ ------- -----------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................ $ 5,026 $ 247 $404 $ -- $ 17(5)
DBS ............................... 664 -- -- 908 --
Cable ............................. 2,711 -- -- -- --
Other ............................. 26 -- -- -- --
-------- --------- ------------ ------- -----------
Total net revenues ............... 8,427 247 404 908 17
-------- --------- ------------ ------- -----------
Location operating expenses
TV ................................ 3,696 294 243 -- (15)(6)
(28)(7)
DBS ............................... 579 -- -- 951 (85)(8)
Cable ............................. 1,559 -- -- -- --
Other ............................. 5 -- -- -- --
Incentive compensation .............. 297 -- -- -- --
Corporate expenses .................. 374 12 21 38 (71)(9)
Depreciation and amortization ....... 2,367 6 11 144 760(10)
-------- --------- ------------ ------- -----------
Income (loss) from operations ....... (450) (65) 129 (225) (544)
Interest expense .................... (2,901) (565) (20) (174) 352(11)
Interest income ..................... 101 -- -- -- --
Other income (expense), net ......... (25) 20 (17) -- (20)(12)
Provision (benefit) for income taxes (169) -- 35 -- (35)(13)
-------- --------- ------------ ------- -----------
Net income (loss) ................... $ (3,106) $ (610) $ 57 $ (399) $ (177)
======== ========= ============ ======= ===========
Net (loss) per share ...............
Weighted average shares outstanding .
Other Data:
Location Cash Flow (16) ............. $ 2,588 $ (47) $161 $ (43) $ 145
EBITDA (16) ......................... 1,917 (59) 140 (81) 216
Capital expenditures ................ 931 -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cable Acquisition
------------------------ The Pro
Sub-Total Actual(4) Adjustments Total Offering Forma
--------- ---------- ----------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................ $ 5,694 $ -- $ -- $ 5,694 $ -- $ 5,694
DBS ............................... 1,572 -- -- 1,572 -- 1,572
Cable ............................. 2,711 1,547 -- 4,258 -- 4,258
Other ............................. 26 -- -- 26 -- 26
--------- ------- ----------- -------- -------- --------
Total net revenues ............... 10,003 1,547 -- 11,550 -- 11,550
--------- ------- ----------- -------- -------- --------
Location operating expenses
TV ................................
4,190 -- -- 4,190 -- 4,190
DBS ............................... 1,445 -- -- 1,445 -- 1,445
Cable ............................. 1,559 855 (83)(14) 2,331 -- 2,331
Other ............................. 5 -- -- 5 -- 5
Incentive compensation .............. 297 -- -- 297 -- 297
Corporate expenses .................. 374 -- -- 374 -- 374
Depreciation and amortization ....... 3,288 154 285(10) 3,727 -- 3,727
--------- ------- ----------- -------- -------- --------
Income (loss) from operations ....... (1,155) 538 (202) (819) -- (819)
Interest expense .................... (3,308) (212) (343)(11) (3,863) 961(15) (2,902)
Interest income ..................... 101 -- -- 101 -- 101
Other income (expense), net ......... (42) -- -- (42) -- (42)
Provision (benefit) for income taxes (169) (60) 60(13) (169) -- (169)
--------- ------- ----------- -------- -------- --------
Net income (loss) ................... $(4,235) $ 386 $ (605) $(4,454) $961(17) $ (3,493)
========= ======= =========== ======== ======== ========
Net (loss) per share ............... $ $
======== ========
Weighted average shares outstanding .
Other Data:
Location Cash Flow (16) ............. $ 2,804 $ 692 $ 83 $ 3,579 $ -- $ 3,579
EBITDA (16) ......................... 2,133 692 83 2,908 -- 2,908
Capital expenditures ................ 931 60 -- 991 -- 991
</TABLE>
33
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED MARCH 31, 1996
<TABLE>
<CAPTION>
Acquisitions
---------------------------------------------------
Actual Portland(1) Tallahassee(2) DBS(3) Adjustments
-------- --------- ------------ --------- -----------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C>
Income Statement Data :
Net revenues
TV ............................... $ 21,087 $ 3,746 $2,600 $ -- $ 118(5)
DBS .............................. 1,894 -- -- 3,113 --
Cable ............................ 10,780 -- -- -- --
Other ............................ 107 -- -- -- --
-------- --------- ------------ --------- -----------
Total net revenues ............ 33,868 3,746 2,600 3,113 118
-------- --------- ------------ --------- -----------
Location operating expenses
TV ............................... 14,495 2,936 1,929 -- (156)(6)
(111)(7)
DBS .............................. 1,680 -- -- 3,701 (335)(8)
Cable ............................ 5,905 -- -- -- --
Other ............................ 36 -- -- -- --
Incentive compensation ............. 678 -- -- -- --
Corporate expenses ................. 1,406 63 24 142 (229)(9)
Depreciation and amortization ...... 9,220 168 102 567 4,405(10)
-------- --------- ------------ --------- -----------
Income (loss) from operations ...... 448 579 545 (1,297) (3,456)
Interest expense ................... (10,061) (1,425) (151) (659) (787)(11)
Interest income .................... 477 -- -- -- --
Other income (expense), net ........ -- (522) (84) -- 556(12)
Provision (benefit) for income taxes (280) -- 118 -- (118) (13)
-------- --------- ------------ --------- -----------
Net income (loss) .................. $ (8,856) $ (1,368) $ 192 $ (1,956) $ (3,569)
======== ========= ============ ========= ===========
Income (loss) per share: ...........
Weighted average shares outstanding..
Other Data:
Location Cash Flow (16) ............ $ 11,752 $ 810 $ 671 $ (588) $ 720
EBITDA (16) ........................ 9,668 747 647 (730) 949
Capital expenditures ............... 2,797 139 22 28 --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Cable Acquisition
----------------------- The Pro
Sub-Total Actual(4) Adjustments Total Offering Forma
--------- -------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data :
Net revenues
TV .............................. $ 27,551 $ -- $ -- $ 27,551 $ -- $ 27,551
DBS .............................. 5,007 -- -- 5,007 -- 5,007
Cable ............................ 10,780 $5,946 -- 16,726 -- 16,726
Other ............................ 107 -- -- 107 -- 107
--------- ------- ----------- --------- --------- ---------
Total net revenues ............ 43,445 5,946 -- 49,391 -- 49,391
--------- ------- ----------- --------- --------- ---------
Location operating expenses
TV ............................... 19,093 -- -- 19,093 -- 19,093
DBS .............................. 5,046 -- -- 5,046 -- 5,046
Cable ............................ 5,905 3,453 (332)(14) 9,026 -- 9,026
Other ............................ 36 -- -- 36 -- 36
Incentive compensation ............. 678 -- -- 678 -- 678
Corporate expenses ................. 1,406 -- -- 1,406 -- 1,406
Depreciation and amortization ...... 14,462 554 1,203(10) 16,219 -- 16,219
--------- ------- ----------- --------- --------- ---------
Income (loss) from operations ...... (3,181) 1,939 (871) (2,113) (2,113)
Interest expense ................... (13,083) (874) (1,345)(11) (15,302) 3,896(15) (11,406)
Interest income .................... 477 -- -- 477 -- 477
Other income (expense), net ........ (50) 50 -- -- -- --
Provision (benefit) for income taxes (280) (249) 249 (13) (280) -- (280)
--------- ------- ----------- --------- --------- ---------
Net income (loss) .................. $(15,557) $1,364 $(2,465) $(16,658) $3,896(17) $(12,762)
========= ======= =========== ========= ========= =========
Income (loss) per share: ........... $ $
========= =========
Weighted average shares outstanding..
Other Data:
Location Cash Flow (16) ............ $ 13,365 $2,493 $ 332 $ 16,190 $ -- $ 16,190
EBITDA (16) ........................ 11,281 2,493 332 14,106 -- 14,106
Capital expenditures ............... 2,986 322 -- 3,308 -- 3,308
</TABLE>
34
<PAGE>
- ------
(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) To reduce the commissions paid by WPXT and WTLH to their national
advertising sales representative to conform to the Company's contract.
(6) To eliminate payroll expense related to staff reductions implemented
upon the consummation of the Portland Acquisition.
(7) 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.
(8) 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 DBS Acquisition.
(9) To eliminate corporate expenses charged by prior owners.
(10) 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.
(11) To record the increase in net interest expense associated with the
borrowings incurred in connection with the acquisitions described above.
(12) 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.
(13) To eliminate net tax benefit in connection with the acquisitions.
(14) To eliminate expense reductions, such as redundant staff, rent,
professional fees and utilities to be implemented in connection with the
Cable Acquisition and interconnection of its Puerto Rico Cable systems.
(15) To remove interest expense on the debts to be retired with the proceeds
of this Offering.
(16) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. EBITDA is defined as income (loss)
before (i) extraordinary items, (ii) provision (benefit) for income taxes,
(iii) other (income) expense, (iv) interest (income) expense, and (v)
depreciation and amortization expenses. The difference between Location
Cash Flow and EBITDA is that EBITDA includes incentive compensation and
corporate expenses. Although EBITDA and Location Cash Flow are not
measures of performance under generally accepted accounting principles,
the Company believes that Location Cash Flow and EBITDA are accepted
within the Company's business segments as generally recognized measures
of performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with
generally accepted accounting principles.
(17) Upon repayment of the Old Credit facility, the Company will incur an
extraordinary expense from the expensing of deferred financing costs of
approximately $__________, which is not included in these pro forma
statements.
35
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 1996
<TABLE>
<CAPTION>
Acquisitions
-------------------------------------------------------
Portland
Actual Portland(1) LMA(2) DBS(3) Sub-Total
----------- ----------- ---------- ---------- -----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets: $ (9,811)
Cash and cash equivalents ........... $ 3,670 $ (3,550) $ -- $ (9,931) 4,819
Restricted cash held in escrow ...... 4,819 -- -- -- 5,195
Accounts receivable, net ............ 5,195 -- -- -- 924
Inventories ......................... 924 -- -- --
Prepaid expenses and other 1,909
current assets ................... 1,909 -- -- -- 21,619
Property and equipment, net ......... 21,595 -- -- 24 95,608
Intangibles ......................... 60,708 4,100 1,000 29,800 2,116
Other assets ........................ 2,116 -- -- -- -----------
----------- ----------- ---------- ---------- $122,379
Total assets ...................... $100,936 $ 550 $1,000 $19,893 ===========
=========== =========== ========== ==========
Liabilities and Equity: $ 5,011
Current liabilities ................. $ 5,611 $ (600) $ -- $ -- 207
Notes payable ....................... 207 -- -- -- 2,689
Accrued interest .................... 2,689 -- -- -- 294
Current portion of long-term debt ... 294 -- -- --
Current portion of program 1,835
liabilities ...................... 1,835 -- -- -- 91,524
Long-term debt ...................... 91,524 -- -- -- 1,449
Long-term program liabilities ....... 1,449 -- -- -- 78
Other long-term liabilities ......... 78 -- -- -- 19,292
Total equity ........................ (2,751) 1,150 1,000 19,893
----------- ----------- ---------- ---------- -----------
Total liabilities and equity ...... $100,936 $ 550 $1,000 $19,893 $122,379
=========== =========== ========== ========== ===========
</TABLE>
<TABLE>
<CAPTION>
Cable The
Acquisition(4) Total Offering(5) Pro Forma
-------------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Assets:
Cash and cash equivalents ........... $ (25,000) $(34,811) $36,931 $ 2,120
Restricted cash held in escrow ...... -- 4,819 -- 4,819
Accounts receivable, net ............ -- 5,195 -- 5,195
Inventories ......................... -- 924 -- 924
Prepaid expenses and other
current assets ................... -- 1,909 -- 1,909
Property and equipment, net ......... 4,665 26,284 -- 26,284
Intangibles ......................... 21,708 117,316 -- 117,316
Other assets ........................ -- 2,116 -- 2,116
-------------- ----------- ----------- -----------
Total assets ...................... $ 1,373 $123,752 $36,931 $160,683
============== =========== =========== ===========
Liabilities and Equity:
Current liabilities ................. $ 1,373 $ 6,384 $ -- $ 6,384
Notes payable ....................... -- 207 -- 207
Accrued interest .................... -- 2,689 -- 2,689
Current portion of long-term debt ... -- 294 -- 294
Current portion of program
liabilities ...................... -- 1,835 -- 1,835
Long-term debt ...................... -- 91,524 (6,000) 85,524
Long-term program liabilities ....... -- 1,449 -- 1,449
Other long-term liabilities ......... -- 78 -- 78
Total equity ........................ -- 19,292 45,750 --
(1,400)
(1,419) 62,223
-------------- ----------- ----------- -----------
Total liabilities and equity ........... $ 1,373 $123,752 $36,931 $160,683
============== =========== =========== ===========
</TABLE>
<PAGE>
- ------
(1) To record the acquisition of the Portland station's FCC licenses and Fox
Affiliation Agreement and the payment to one of the sellers of
approximately $1.7 million on account of the Portland Acquisition, both
of which occurred after March 31, 1996.
(2) To record the acquisition of the Portland LMA.
(3) To record the DBS Acquisition and the preliminary allocation of the
purchase price to the assets acquired.
(4) To record the Cable Acquisition and the preliminary allocation of the
purchase price to the assets acquired.
(5) To record the net proceeds from the issuance of Class A Common Stock and
the intended uses of such proceeds. The use of proceeds below excludes
$1.8 million of indebtedness which was drawn after March 31, 1996 in
order to fund an escrow payment related to the Cable Acquisition. The
actual use of proceeds will therefore include the funding of the
remaining cost of the Cable Acquisition of $23.2 million and the
repayment of indebtedness of $7.8 million.
Gross proceeds from this Offering ............................. $50,000
========
Intended uses of proceeds:
Cash pending Cable Acquisition .............................. 25,000
DBS Acquisition ............................................. 9,931
Repay indebtedness .......................................... 6,000
Pay transaction costs related to this Offering .............. 4,250
Distribution to Parent to make payment on account of Portland
Acquisition .............................................. 1,850
Management Agreement Acquisition ............................ 1,419
Towers Purchase ............................................. 1,400
General corporate purposes .................................. 150
--------
Total uses of proceeds .......................................... $50,000
========
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COMPANY HISTORY
The Company is a diversified media and communications company operating in
three business segments: TV, DBS and Cable. The day-to-day operations of
WDBD, WDSI and the Mayaguez Cable system were managed by the Company prior to
their acquisition by the Company. WOLF was managed by Guyon Turner from its
sign-on in 1985 until its acquisition by the Company. Each of the following
acquisitions was accounted for using the purchase method of accounting with
the exception of the Connecticut portion of the New England Cable systems,
which was accounted for as a pooling of interests. The following table
presents information regarding completed acquisitions, the concurrent
acquisition and the pending acquisition.
<TABLE>
<CAPTION>
Acquisitions
- ------------------------------------------------------------------------------------------------------------------------
Adjusted
Property Date Acquired Consideration(1) Form of Consideration
---------------------------------- -------------- -------------- -----------------------------------------------
(Dollars in millions)
<S> <C> <C> <C> <C>
Completed acquisitions:
New England Cable systems ........ June 1991(2) $16.1(3) $6.0 cash and $10.1 of assumed liabilities, net
Mayaguez, Puerto Rico Cable system . March 1993(4) 12.3(5) $12.3 of assumed liabilities, net
WOLF/WILF/WWLF, WDSI and WDBD .... May 1993(6) 24.2(7) $24.2 of assumed liabilities, net
New England DIRECTV rights ....... June 1993(8) 5.0 $5.0 cash
WPXT ............................. January 1996(9) 15.8 $14.2 cash, $0.4 assumed liabilities,
$0.2 of Class A Common Stock and $1.0
of Class B Common Stock(10)
WTLH ............................. March 1996 8.1 $5.0 cash, $3.1 deferred obligation and the WTLH
Warrants
Portland LMA ..................... May 1996 1.0 $1.0 of Class A Common Stock(10)
Concurrent acquisition:
DBS Acquisition .................. (11) 29.8 $9.9 cash and $19.9 of Class A Common Stock(10)
Pending acquisition:
Cable Acquisition ................ (12) 26.4 $25.0 cash and $1.4 of assumed liabilities, net
</TABLE>
- ------
(1) Adjusted consideration equals total consideration reduced by the amount
of current assets obtained in connection with the acquisition and
discounts realized by the Company and its affiliates on liabilities
assumed in connection with certain of the acquisitions. See footnotes
(3), (5) and (7).
(2) The Connecticut and North Brookfield, Massachusetts Cable systems were
acquired by the Company in August 1991 and July 1992, respectively.
(3) An affiliate of the Company acquired for $6.0 million certain credit
facilities having a face amount of $8.5 million which were assumed by
the Company in connection with these acquisitions and later satisfied in
full by the Company. Proceeds realized by the affiliate were
subsequently used to fund the purchase of New England DIRECTV
rights which the affiliate contributed to the Company.
(4) This Cable system's day-to-day operations have been managed by the
Company's executives since May 1, 1991.
(5) In July 1995, the Company realized a $12.6 million pre-tax gain upon the
extinguishment of certain credit facilities that were assumed by the
Company in connection with this acquisition.
(6) These television stations' day-to-day operations have been managed by
the Company's executives since October 1991.
(7) An affiliate of the Company acquired for $18.5 million certain credit
facilities which were assumed by the Company in connection with these
acquisitions. Immediately subsequent to this transaction, the Company's
indebtedness under these credit facilities of approximately $23.5
million was discharged for approximately $18.5 million of cash and $5.0
million of stock issued to the affiliate.
(8) The Company's rights purchases were initiated in June 1993 and completed
in February 1995. The Company commenced DBS operations in October 1994.
(9) The Company will acquire WPXT's FCC license and Fox Affiliation
Agreement concurrently with the consummation of this Offering.
(10) The number of shares of Common Stock to be issued in connection with
these acquisitions will be based on the price of the Class A Common
Stock to the public in this Offering.
(11) Consummation of the DBS Acquisition and this Offering will occur
concurrently.
(12) This Offering is not conditioned upon consummation of the Cable
Acquisition. The Company anticipates that the Cable Acquisition will
occur concurrently with or shortly after the consummation of this
Offering. See "Risk Factors -- Acquisitions".
37
<PAGE>
RESULTS OF OPERATIONS
TV revenues are derived from the sale of broadcast air time to local and
national advertisers. DBS revenues are derived from monthly customer
subscriptions, pay-per-view services, DSS equipment rentals, leases and
installation charges. Cable revenues are derived from monthly subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping
commissions, advertising time sales and installation charges.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and
promotion expenses, local sales commissions, and ratings and research
expenditures, (iii) technical and operations costs, and (iv) general and
administrative expenses. TV programming expenses include the amortization of
long-term program rights purchases, music license costs and "barter"
programming expenses which represent the value of broadcast air time provided
to television program suppliers in lieu of cash. DBS programming expenses
consist of amounts paid to program suppliers and also include DSS
authorization charges and satellite control fees, each of which is paid on a
per subscriber basis, and DIRECTV royalties which are equal to 5% of program
service revenues. Cable programming expenses consist of amounts paid to
program suppliers on a per subscriber basis.
SUMMARY COMBINED OPERATING RESULTS
<TABLE>
<CAPTION>
Three Months
Year Ended December 31, Ended March 31,
---------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues:
TV ............................. $10,307 $17,808 $19,973 $3,912 $5,026
DBS ............................ -- 174 1,469 239 664
Cable:
Puerto Rico Cable ............ 3,187 3,842 4,007 982 998
New England Cable ............ 5,947 6,306 6,599 1,555 1,713
-------- --------- --------- -------- --------
Total Cable net revenues .... 9,134 10,148 10,606 2,537 2,711
-------- --------- --------- -------- --------
Other .......................... 46 61 100 19 26
--------- --------- --------- -------- --------
Total ..................... 19,487 28,191 32,148 6,707 8,427
========= ========= ========= ======== ========
Location operating expenses:
TV ............................. 7,564 12,380 13,933 3,134 3,696
DBS ............................ -- 210 1,379 278 579
Cable:
Puerto Rico Cable ............ 1,654 2,319 2,450 615 649
New England Cable ............ 3,001 3,226 3,341 830 910
--------- --------- --------- -------- --------
Total Cable location
operating expenses ......... 4,655 5,545 5,791 1,445 1,559
--------- --------- --------- -------- --------
Other .......................... 16 18 38 7 5
--------- --------- --------- -------- --------
Total ..................... 12,235 18,153 21,141 4,864 5,839
========= ========= ========= ======== ========
Location Cash Flow:
TV ............................. 2,744 5,428 6,040 778 1,330
DBS ............................ -- (36) 90 (39) 85
Cable:
Puerto Rico Cable ............ 1,533 1,523 1,557 367 349
New England Cable ............ 2,945 3,080 3,258 725 803
--------- --------- --------- -------- --------
Total Cable Location Cash
Flow ...................... 4,478 4,603 4,815 1,092 1,152
--------- --------- --------- -------- --------
Other .......................... 30 43 62 12 21
--------- --------- --------- -------- ---
Total ..................... $ 7,252 $10,038 $11,007 $1,843 $2,588
========= ========= ========= ======== ========
Other data:
Growth in net revenues ......... 266% 45% 14% 17% 25%
Growth in Location Cash Flow ... 175% 38% 10% 10% 41%
</TABLE>
38
<PAGE>
THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE
MONTHS ENDED MARCH 31, 1995
The Company's net revenues increased by approximately $1.7 million or 25%
for the three months ended March 31, 1996 as compared to the same period in
1995 as a result of (i) a $1.1 million or 28% increase in TV revenues of
which $756,000 or 70% was due to acquisitions made since January 1, 1996 and
$358,000 or 30% was due to ratings growth that the Company was able to
convert into higher revenues, (ii) a $425,000 or 178% increase in revenues
from the increased number of DBS subscribers, (iii) a $16,000 or 2% increase
in Puerto Rico Cable revenues due to subscriber increases, (iv) a $158,000 or
10% increase in New England Cable revenues due primarily to rate increases
implemented in August 1995, and (v) a $7,000 increase in Tower rental income.
The Company's total location operating expenses increased by approximately
$975,000 or 20% for the three months ended March 31, 1996 as compared to the
same period in 1995 as a result of (i) a $562,000 or 18% increase in TV
operating expenses entirely attributable to stations acquired since January
1, 1996, (ii) a $301,000 or 108% increase in operating expenses generated by
the Company's DBS operations due to an increase in programming costs of
$202,000, royalty costs of $23,000, and other DIRECTV costs such as security,
authorization fees and telemetry and tracking charges totaling $76,000, all
of which are payable on a per subscriber basis and attributable to increases
in the number of subscribers, (iii) a $34,000 or 5% increase in Puerto Rico
Cable operating expenses due primarily to converter repairs, (iv) an $80,000
or 10% increase in New England Cable operating expenses due primarily to
increases in programming costs and technical costs associated with various
maintenance projects resulting from severe winter weather, and (v) a $2,000
decrease in Tower administrative expenses.
As a result of these factors, Location Cash Flow increased by
approximately $745,000 or 40% for the three months ended March 31, 1996 as
compared to the same period in 1995 as a result of (i) a $552,000 or 71%
increase in TV Location Cash Flow, (ii) a $124,000 or 318% increase in DBS
Location Cash Flow, (iii) an $18,000 or 5% decrease in Puerto Rico Cable
Location Cash Flow, (iv) a $78,000 or 11% increase in New England Cable
Location Cash Flow, and (v) a $9,000 increase in Tower Location Cash Flow.
As a result of the increase in Location Cash Flow, incentive compensation
increased by approximately $150,000 or 100% for the three months ended March
31, 1996 as compared to the same period in 1995.
Corporate expenses increased by $42,000 or 13% for the three months ended
March 31, 1996 as compared to the same period in 1995 primarily due to the
initiation of public reporting requirements for PM&C.
Depreciation and amortization expense increased by approximately $470,000
or 25% for the three months ended March 31, 1996, as compared to the same
period in 1995, as the Company increased its fixed and intangible assets as a
result of two completed acquisitions during the first quarter of 1996.
As a result of these factors, the loss from operations decreased by
approximately $84,000 for the three months ended March 31, 1996 as compared
to the same period in 1995.
Interest expense increased by approximately $1.2 million or 75% for the
three months ended March 31, 1996 as compared to the same period in 1995 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 loss increased by $699,000 for the three months ended
March 31, 1996 as compared to the same period in 1995 and was the net result
of a decrease in loss from operations of approximately $84,000, an increase
in interest expenses of $1.2 million, an increase in interest income of
$101,000, a decrease in the provision for income taxes of $310,000 and a
decrease in other expenses of $49,000.
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
39
<PAGE>
quarter of 1994, (iii) a $165,000 or 4% increase in Puerto Rico Cable revenues
due primarily to a rate increase implemented in March 1995, (iv) a $293,000 or
5% increase in New England Cable revenues due to an increase in the number of
subscribers and rate increases in the third quarter of 1995, and (v) a $39,000
increase in Tower rental income.
The Company's location operating expenses increased by approximately $3.0
million or 16% in 1995 as compared to 1994 as a result of (i) a $1.6 million
or 13% increase in TV operating expenses primarily due to increases in
programming, sales and promotion expenses, (ii) a $1.2 million increase in
DBS operating expenses primarily due to increases in programming costs which
are payable based on revenues and the number of subscribers, (iii) a $131,000
or 6% increase in Puerto Rico Cable operating expenses due primarily to an
increase in programming costs for existing channels, as well as increases in
the number of Spanish language channels offered by the system, (iv) a
$115,000 or 4% increase in New England Cable operating expenses due primarily
to increases in programming costs, and (v) a $20,000 increase in Tower
administrative expenses.
As a result of these factors, Location Cash Flow increased by
approximately $969,000 or 10% in 1995 as compared to 1994 as a result of (i)
a $612,000 or 11% increase in TV Location Cash Flow, (ii) a $126,000 or 350%
increase in DBS Location Cash Flow, (iii) a $34,000 or 2% increase in Puerto
Rico Cable Location Cash Flow, (iv) a $178,000 or 6% increase in New England
Cable Location Cash Flow, and (v) a $19,000 increase in Tower Location Cash
Flow.
As a result of the increase in Location Cash Flow, incentive compensation
increased by approximately $96,000 or 22% in 1995 as compared to 1994.
Corporate expenses decreased by approximately $142,000 or 9% in 1995 as
compared to 1994 primarily as a result of the transfer of certain functions
from corporate office staff to operating company staff.
Depreciation and amortization expense increased by approximately $1.8
million or 26% in 1995 as compared to 1994 primarily as a result of the
amortization of the Company's DBS rights and deferred financing costs.
As a result of these factors, income from operations decreased by
approximately $796,000 in 1995 as compared to 1994.
Interest expense increased by approximately $2.8 million or 48% in 1995 as
compared to 1994 as a result of the Company's issuance of the Notes on July
7, 1995. A portion of the proceeds from issuance of the Notes was used to
retire floating rate debt on which the effective interest rate was lower than
the 12.5% interest rate under the Notes.
The Company's net income increased by approximately $7.7 million in 1995
as compared to 1994 as a net result of a decrease in income from operations
of approximately $796,000, an increase in interest expense of $2.8 million,
an increase in interest income of $370,000, a decrease in income taxes of
$110,000, a decrease in other expenses of approximately $21,000 and an
increase in extraordinary items of $10.8 million for the reasons described in
"-- Liquidity and Capital Resources."
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company's results for 1994 and 1993 are not directly comparable. The
1994 results include a full year of operations for all the Company's business
segments. The 1993 results include TV operations from May 1, 1993, Puerto
Rico Cable results from March 1, 1993 and full year results for New England
Cable.
The Company's net revenues increased by approximately $8.7 million or 45%
in 1994 as compared to 1993 as a result of (i) a $7.5 million increase or 73%
increase in TV revenues, of which $4.0 million or 53% was due to aquisitions
made in May 1993 and $3.5 million or 47% was due to ratings growth that the
Company was able to convert into higher revenues, (ii) a $174,000 of DBS
revenues generated in 1994, the Company's first year of DBS operations, (iii)
a $655,000 or 21% increase in Puerto Rico Cable revenues, (iv) a $360,000 or
6% increase in New England Cable revenues, and (v) a $15,000 increase in
Tower rental income.
40
<PAGE>
The Company's location operating expenses increased by approximately $5.9
million or 48% in 1994 as compared to 1993 as a result of (i) a $4.8 million
or 64% increase in TV operating expenses, of which $3.4 million or 71% was
due to operating three TV stations for a full year and the remaining $1.4
million or 29% was due to the replacement of free programming such as
infomercials with syndicated programming and sales expense increases of 73%
which are a direct function of the increase in revenues, (ii) $210,000 of DBS
operating expenses incurred in 1994, the Company's first year of DBS
operations, (iii) a $665,000 or 40% increase in Puerto Rico Cable operating
expenses primarily from operating the system for a full year, but also due to
programming cost increases which were not passed on to subscribers due to
rate freezes imposed by the 1992 Cable Act (as defined), (iv) a $225,000 or
8% increase in New England Cable operating expenses, as a result of
subscriber growth and programming cost increases which were not passed on to
subscribers due to rate freezes imposed by the 1992 Cable Act, and (v) a
$2,000 increase in tower administrative expenses.
As a result of these factors, Location Cash Flow increased by $2.8 million
or 38% in 1994 as compared to 1993 as a result of (i) a $2.7 million or 98%
increase in TV Location Cash Flow, (ii) a negative DBS Location Cash Flow of
$36,000 in the Company's first year of DBS operations, (iii) a $10,000 or 1%
decrease in Puerto Rico Cable Location Cash Flow, (iv) a $135,000 or 5%
increase in New England Cable Location Cash Flow, and (v) a $13,000 increase
in Tower Location Cash Flow.
As a result of the increase in Location Cash Flow, incentive compensation
increased by approximately $240,000 or 125% for year ended December 31, 1994
as compared to the same period in 1993.
Corporate expenses increased by approximately $241,000 or 19% in 1994 as
compared to 1993 due primarily to corporate staff additions related to the
Company's 1993 acquisitions.
Depreciation and amortization increased by $962,000 or 16% in 1994 as
compared to 1993 due primarily to the acquisitions described above.
As a result of these factors, income from operations increased by
approximately $1.3 million in 1994 as compared to 1993.
Interest expense increased by approximately $1.6 million or 36% in 1994 as
compared to 1993 primarily as a result of increases in interest charges on
the Company's floating rate debt and the inclusion of a full year of interest
expense in 1994 on the indebtedness assumed by the Company in connection with
the acquisitions of the three television stations and the Mayaguez Cable
system.
Other expenses decreased by approximately $155,000 in 1994 as compared to
1993 as a result of a tax settlement made during 1993 with the Puerto Rico
Treasury Department in connection with withholding taxes on program payments
made by the Puerto Rico Cable system from 1987 through 1993 which was
recorded in other expenses in 1993.
Income taxes increased by approximately $140,000 in 1994 as compared to
1993 due principally to deferred income taxes recorded in connection with the
conversion of certain of the Company's subsidiaries from partnership to
corporate form during 1994.
As a result of certain refinancing transactions that occurred during 1994,
the Company recorded an extraordinary loss of approximately $633,000
representing the write-off of the balance of deferred finance costs related
to the refinanced indebtedness.
As a result of these factors, the Company's net loss increased by
approximately $845,000 in 1994 as compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been the net cash provided
by its TV and Cable operations and credit available under its credit facility.
As of March 31, 1996, the Company's cash on hand was approximately $3.7
million. Additionally, at March 31, 1996, the Company had $4.8 million in a
restricted cash account that is required to be used to pay interest on the
Notes. The Company's primary uses of cash have been debt service obligations,
investments in TV and Cable technical facilities, cable converters, DSS
equipment that is rented or leased to subscribers, and acquisitions.
41
<PAGE>
During the three months ended March 31, 1996, net cash used by operations
was approximately $3.1 million, which together with $12.0 million of cash on
hand and $11.1 million of net cash provided by the Company's financing
activities was used to fund investing activities of $16.4 million. Investment
activities consisted of (i) the Portland and Tallahassee Acquisitions for
approximately $15.0 million, (ii) the purchase of an office facility for
$135,000, (iii) certain start up costs of the Company's DBS business totaling
$236,000, (iv) the purchase of DSS units used as rental and lease units
amounting to $210,000, and (v) maintenance and other capital expenditures
totaling approximately $720,000.
During 1995, net cash provided by operations was approximately $4.8
million, which together with $1.4 million of cash on hand and $11.1 million
of net cash provided by the Company's financing activities, was used to fund
a $12.5 million distribution to the Parent and to fund investment activities
totalling $5.2 million. Investment activities consisted of (i) the final
payment of the deferred purchase price for the Company's New England DBS
rights of approximately $1.9 million, (ii) the purchase of a new WDSI studio
and office facility for $520,000, (iii) the purchase of a LIBOR cap for
$300,000, (iv) the purchase of DSS units used as rental and lease units
amounting to $157,000, and (v) maintenance and other capital expenditures
totaling approximately $2.3 million.
During 1994, net cash provided by operations amounted to $2.8 million,
which together with cash on hand and borrowings of $35.0 million was used to
fund capital expenditures of $1.3 million, to pay a portion of the deferred
purchase price of the DBS rights for $943,000, to repay debt totalling $34.0
million and to fund debt issuance costs of $1.6 million.
During 1993, net cash provided by operations amounted to $1.7 million,
which together with cash received in acquisitions of $804,000 and borrowings
of $15.1 million, was used to fund maintenance and other capital expenditures
of $885,000, to repay debt totalling $15.2 million and to fund debt issuance
costs of $843,000.
The Company completed the $85.0 million Notes offering on July 7,
1995. The Notes were issued pursuant to an Indenture between PM&C and First
Union National Bank, as trustee. The Indenture restricts PM&C's ability to
engage in certain types of transactions including debt incurrence, payment of
dividends, investments in unrestricted subsidiaries and affiliate
transactions. The Notes were sold at a $4.0 million discount. The proceeds
from the Notes offering, together with cash on hand, were used to (i) repay
approximately $38.6 million in loans and other obligations, (ii) repurchase
$25.6 million of notes for approximately $13.0 million, which resulted in a
$10.2 million extraordinary gain net of expenses, (iii) make a $12.5 million
distribution to the Parent, (iv) escrow $9.7 million for the purpose of
paying interest on the Notes, (v) pay $3.3 million in fees and expenses, and
(vi) fund $8.8 million of the cash portion of the purchase price of the
Portland Acquisition.
During July 1995, the Company entered into the Old Credit Facility in the
amount of $10.0 million from which $6.0 million was drawn in connection with
the Portland and Tallahassee Acquisitions in the first quarter of 1996. $1.8
million of the remaining funds available under the Old Credit Facility were
used to fund deposits in connection with the Cable Acquisition.
The Company plans to use part of the net proceeds of this Offering to fund
the Cable Acquisition and the cash portion of the DBS Acquisition. The Company
has also obtained a commitment letter from a lender for the New Credit
Facility, a seven-year, senior collateralized credit facility in the amount of
$50.0 million. The Company intends to close on the New Credit Facility upon or
prior to completion of this Offering. The Company believes that following the
completion of the concurrent and pending acquisitions it will have adequate
resources to meet its working capital, maintenance capital expenditure and
debt service obligations. The Company believes that the net proceeds of this
Offering and the New Credit Facility will give the Company the ability to fund
acquisitions and other capital requirements in the future. However, there can
be no assurance that the future cash flows of the Company will be sufficient
to meet all of the Company's obligations and commitments. See "Risk Factors -
Substantial Indebtedness and Leverage." After giving effect to this Offering,
and provided certain conditions are met, the entire New Credit Facility would
be available to fund qualifying acquisitions.
42
<PAGE>
The Company closely monitors conditions in the capital markets to identify
opportunities for the effective and prudent use of financial leverage. In
financing its future expansion and acquisition requirements, the Company
would expect to avail itself of such opportunities and thereby increase its
indebtedness which could result in increased debt service requirements. The
Company may also issue additional equity to fund its future expansion and
acquisition requirements.
CAPITAL EXPENDITURES
The Company expects to incur capital expenditures in the aggregate of $13.9
million in 1996 and 1997 in comparison to $2.6 million in 1995. With the
exception of recurring renewal and refurbishment expenditures of approximately
$1.6 million per year, these capital expenditures are discretionary and
nonrecurring in nature. The Company believes that substantial opportunities
exist for it to increase Location Cash Flow through implementation of several
significant capital improvement projects. Beyond 1997, the Company expects its
ongoing capital expenditures to consist primarily of renewal and refurbishment
expenditures totalling approximately $1.6 million annually. The Company's
capital expenditure plans for 1996 and 1997 currently include (i) broadcast
television transmitter and tower upgrades of approximately $3.5 million ($1.5
million in the Northeastern Pennsylvania DMA, $1.5 million in the Tallahassee,
Florida DMA, $300,000 in the Jackson, Mississippi DMA, and $200,000 in the
Chattanooga, Tennessee DMA), (ii) construction of technical facilities for
WWLA for approximately $1.5 million, (iii) interconnection of the Puerto Rico
Cable systems for approximately $300,000, (iv) fiber upgrades in the New
England and Puerto Rico Cable systems of approximately $700,000, (v) purchase
of new office locations in Tallahassee, Florida and Winsted, Connecticut,
including fit-out costs aggregating approximately $1.4 million, and (vi) DSS
equipment purchases for lease and rental to the Company's DIRECTV subscribers
of approximately $3.3 million. There can be no assurance that the Company's
capital expenditure plans will not change in the future.
OTHER
The Company's revenues vary throughout the year. As is typical in the
broadcast television industry, the Company's first quarter generally
produces the lowest revenues for the year, and the fourth quarter generally
produces the highest revenues for the year. The Company's operating results
in any period may be affected by the incurrence of advertising and promotion
expenses that do not necessarily produce commensurate revenues in the short-
term until the impact of such advertising and promotion is realized in future
periods.
The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of
the Company's indebtedness bear interest at a fixed rate.
The Company has reviewed the provisions of Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and believes that future
implementation of the above standards will not have a material impact on the
Company.
43
<PAGE>
BUSINESS
GENERAL
The Company is a diversified media and communications company operating in
three business segments: TV, DBS and Cable. The Company has grown through the
acquisition and operation of media and communications properties
characterized by clearly identifiable "franchises" and significant operating
leverage, which enables increases in revenues to be converted into
disproportionately greater increases in Location Cash Flow.
OPERATING AND ACQUISITION STRATEGY
The Company's operating strategy is to generate consistent revenue growth
and to convert this revenue growth into disproportionately greater increases
in Location Cash Flow. The Company seeks to achieve revenue growth (i) in TV
by attracting a dominant share of the viewing of underserved demographic
groups it believes to be attractive to advertisers and by developing
aggressive sales forces capable of "overselling" its stations' share of those
audiences, (ii) in DBS by identifying market segments in which DIRECTV
programming will have strong appeal, developing marketing and promotion
campaigns to increase consumer awareness of and demand for DIRECTV
programming within those market segments and building distribution networks
consisting of consumer electronics and satellite equipment dealers,
programming sales agents and the Company's own direct sales force, and (iii)
in Cable by increasing the number of its subscribers and revenue per
subscriber through improvements in signal reception, the quality and quantity
of its programming, line extensions and rate increases. The Company seeks to
convert increases in revenues into disproportionately greater increases in
Location Cash Flow through the use of the Incentive Program, which rewards
all employees in proportion to annual increases in Location Cash Flow, coupled
with rigorous budgeting and strict cost controls.
The Company's acquisition strategy is to identify media and communications
businesses in which significant increases in Location Cash Flow may be
realized and where the ratio of required investment to potential Location
Cash Flow is low. After giving effect to the Transactions, the Company would
have had pro forma net revenues and EBITDA of $49.4 million and $14.1
million, respectively, for the twelve months ended March 31, 1996. The
Company's net revenues and EBITDA have increased at a compound annual growth
rate of 98% and 84%, respectively, from 1991 to 1995.
TV
BUSINESS STRATEGY
The Company's operating strategy in TV is focused on (i) developing strong
local sales forces and sales management to maximize the value of its stations'
inventory of advertising spots, (ii) improving the stations' programming,
promotion and technical facilities in order to maximize their ratings in a
cost-effective manner and (iii) maintaining strict control over operating
costs while motivating employees through the use of the Company's Incentive
Program which rewards all 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.
44
<PAGE>
The Company utilizes its own market research together with national
audience research from its national advertising sales representative and
program sources to select programming that is consistent with the demographic
appeal of the Fox network, the tastes and lifestyles characteristic of the
Company's markets and the counter-programming opportunities it has
identified. Examples of programs purchased by the Company's stations include
"Home Improvement," "Seinfeld," "The Simpsons," "Mad About You," and
"Frazier" (off-network); "Star Trek: The Next Generation" and "Baywatch"
(syndication); and "Jenny Jones," "Rosie O'Donnell," and various game shows
(first run). In addition, the Company's stations purchase children's programs
to complement the Fox Children's Network's Monday through Saturday programs.
Each of the Company's stations is its market leader in children's viewing
audiences, with popular syndicated programming such as Disney's "Aladdin" and
"Gargoyles" complementing Fox programs such as the "Mighty Morphin Power
Rangers" and "R.L. Stine's Goosebumps," currently the nation's highest-rated
children's program on television.
The Company's acquisition strategy in TV seeks to identify stations in
markets of between 200,000 and 600,000 television households (DMAs 40 to 120)
which have no more than four competitive commercial television stations
licensed to them and which have a stable and diversified economic base. The
Company has focused upon these markets because it believes that they have
exhibited consistent and stable increases in local advertising and that
television stations in them have fewer, less aggressive, direct competitors.
In these markets, the Company seeks television stations whose revenues and
market revenue share can be substantially improved with limited increases in
their fixed costs.
The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction permits
in markets where it currently owns and operates Fox affiliates. The Company
has historically purchased Fox affiliates because (i) Fox affiliates generally
have had lower ratings and revenue shares than stations affiliated with ABC,
CBS and NBC and, therefore, greater opportunities for improved performance,
and (ii) Fox affiliated stations retain a greater share of their inventory of
advertising spots than do stations affiliated with ABC, CBS or NBC, thereby
enabling these stations to retain a greater share of any increase in the value
of their inventory. The Company is pursuing expansion in its existing markets
through LMAs because second stations can be operated with limited additional
fixed costs (resulting in high incremental operating margins) and can allow
the Company to create more attractive packages for advertisers and program
providers.
THE STATIONS
The following table sets forth general information for each of the
Company's stations.
<TABLE>
<CAPTION>
Number Ratings Rank
Acquisition Station Market of TV -------------------- Oversell
Station Date Affiliation Area DMA Households(1) Competitors(2) Prime(3) Access(4) Ratio(5)
- ---------------- ----------- ----------- --------------- ----- ------------- -------------- --------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Existing Stations:
WWLF-56/WILF-53/
WOLF-38(6) .... May 1993 Fox Northeastern PA 49 553,000 3 3 (tie) 1 166%
WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 3 2 4 122%
WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 4 4 2 125%
WDBD-40 ........ May 1993 Fox Jackson, MS 90 287,000 3 2 (tie) 2 114%
WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3 2 2 100%
Additional Stations:
WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3 N/A N/A N/A
WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3 N/A N/A N/A
</TABLE>
- ------
(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 February 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 February 1996.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1995 BIA market data and 1995 Nielsen audience
share data.
(6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain
FCC approvals, the Company intends to separately program WOLF as an
affiliate of UPN.
(7) The Company anticipates programming WWLA pursuant to an LMA as an
affiliate of UPN.
45
<PAGE>
NORTHEASTERN PENNSYLVANIA
Northeastern Pennsylvania is the 49th largest DMA in the United States
comprising 17 counties in Pennsylvania with a total of 553,000 television
households and a population of 1,465,000. In the past, the economy was
primarily based on steel and coal mining, but in recent years has diversified
to emphasize manufacturing, health services and tourism. The area is within a
two-hour drive of both New York City and Philadelphia. In 1995, annual retail
sales in this market totaled approximately $11.4 billion and total television
advertising revenues in the Northeastern Pennsylvania DMA increased 3.5% from
approximately $42.5 million to approximately $44.0 million. Northeastern
Pennsylvania is one of only two DMAs in the country in which all TV stations
licensed to it are UHF. In addition to WOLF, WWLF and WILF, which are
licensed to Scranton, Hazelton and Williamsport, respectively, there are
three commercial stations and one educational station operating in the
Northeastern Pennsylvania DMA. The Northeastern Pennsylvania DMA also has an
allocation for an additional channel, which is not operational.
<TABLE>
<CAPTION>
Northeastern Pennsylvania DMA Statistics
--------------------------------------------------
1992 1993 1994 1995 1996(1)
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Market Revenues (dollars in millions) $ 35.0 $ 37.1 $ 42.5 $ 44.0 --
Market Growth ...................... -- 6.0% 14.6% 3.5% --
Station Revenue Growth ............. -- 10.0% 18.4% 11.9% --
Prime Rank (18-49) ................. 4 4 4 4 3 (tie)
Access Rank (18-49) ................ 4 4 4 3 1
Oversell Ratio ..................... 196% 176% 166% 166% --
</TABLE>
- ------
(1) Prime and access ratings ranks based on Nielson estimates for February 1996.
The Company acquired WOLF and WWLF in May 1993 from a partnership of which
Guyon W. Turner was the managing general partner, and also acquired WILF at
the same time from a partnership unaffiliated with Mr. Turner. Mr. Turner is
a Vice President of Pegasus and Vice President of the subsidiary that
operates the Company's TV stations. He has been employed by the Company since
it acquired WOLF and WWLF. Historically, WOLF, WWLF and WILF have been
commonly programmed with WWLF and WILF operated as satellites of WOLF.
However, the Company believes that it can achieve over the air coverage of
the Northeastern Pennsylvania DMA comparable to that currently provided by
WOLF, WWLF and WILF together by moving WWLF to a tower site occupied by the
other stations in the market and by increasing the authorized power of WILF.
The Company has filed an application with the FCC, which if granted, will
enable the Company to accomplish this objective. This application is
currently pending. If this application is granted by the FCC, the Company
intends to relocate WWLF's transmitter and tower, to increase the power of
WILF and to separately program WOLF as an affiliate of UPN. The continued
ownership of WOLF by the Company following relocation of the WWLF tower may
depend on changes in the FCC's ownership rules. See "-- Licenses, LMAs, DBS
Agreements and Cable Franchises."
PORTLAND, MAINE
Portland is the 79th largest DMA in the United States, comprising 12
counties in Maine and New Hampshire with a total of 344,000 television
households and a population of 902,000. Portland's economy is based on
financial services, lumber, tourism, and its status as a transportation and
distribution gateway for central and northern Maine. In 1995, annual retail
sales in the Portland market totaled approximately $8.9 billion and the total
television revenues in this market increased 4.0% from approximately $40.0
million to approximately $41.6 million. In addition to WPXT, there are three
VHF and three UHF stations operating in the Portland DMA, including one VHF
and two UHF educational stations.
46
<PAGE>
<TABLE>
<CAPTION>
Portland, Maine DMA Statistics
------------------------------------------------
1992 1993 1994 1995 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Market Revenues (dollars in millions) . $ 32.3 $ 34.3 $ 40.0 $ 41.6 --
Market Growth ....................... -- 6.2% 16.6% 4.0% --
Station Revenue Growth .............. -- 9.1% 18.0% 2.0% --
Prime Rank (18-49) .................. 4 4 4 2 2
Access Rank (18-49) ................. 4 4 4 3 4
Oversell Ratio ...................... 140% 144% 139% 122% --
</TABLE>
- ------
(1) Prime and access ratings ranks based on Nielson estimates for February 1996.
In the Portland Acquisition, the Company acquired television station WPXT,
the Fox-affiliated television station serving the Portland DMA. Pursuant to
the Portland LMA, the Company acquired an LMA with the holder of a
construction permit for WWLA, a new TV station licensed to operate UHF channel
35 in the Portland market. Under the Portland LMA, the Company will lease
facilities and provide programming to WWLA, retain all revenues generated from
advertising sales, and make payments of $52,000 per year to the FCC license
holder in addition to reimbursement of certain expenses. Construction of WWLA
is expected to be completed in 1997. WWLA's offices, studio and transmission
facilities will be co-located with WPXT. In April 1996, an application was
filed with the FCC to significantly increase WWLA's authorized power in order
to expand its potential audience coverage. That application is currently
pending before the FCC.
CHATTANOOGA, TENNESSEE
Chattanooga is the 82nd largest DMA in the United States, comprising 18
counties in Tennessee, Georgia, North Carolina and Alabama with a total of
320,000 television households and a population of 842,000. Chattanooga's
economy is based on insurance and financial services in addition to
manufacturing and tourism. In 1995, annual retail sales in the Chattanooga
market totaled approximately $7.1 billion and total television revenues in
this market increased 2.4% from approximately $37.6 million to approximately
$38.5 million. In addition to WDSI, there are three VHF and four UHF stations
operating in the Chattanooga DMA, including one religious and two educational
stations. The Company acquired WDSI in May 1993. From October 1991 through
April 1993, the station was managed by the Company. See "Management and
Certain Transactions."
<TABLE>
<CAPTION>
Chattanooga, Tennessee DMA Statisitics
------------------------------------------------
1992 1993 1994 1995 1996(1)
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Market Revenues (dollars in millions) . $ 29.8 $ 31.0 $ 37.6 $ 38.5 --
Market Growth ....................... -- 4.0% 21.3% 2.4% --
Station Revenue Growth .............. -- 7.7% 38.6% 9.1% --
Prime Rank (18-49) .................. 4 4 4 4 4
Access Rank (18-49) ................. 3 4 4 4 2
Oversell Ratio ...................... 132% 119% 129% 125% --
</TABLE>
- ------
(1) Prime and access ratings ranks based on Nielson estimates for February 1996.
JACKSON, MISSISSIPPI
Jackson is the 90th 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."
47
<PAGE>
<TABLE>
<CAPTION>
Jackson, Mississippi DMA Statistics
--------------------------------------------------
1992 1993 1994 1995 1996(1)
------- ------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Market Revenues (dollars in millions) . $ 26.3 $ 28.4 $ 32.5 $ 36.0 --
Market Growth ....................... -- 8.0% 14.4% 10.8% --
Station Revenue Growth .............. -- 21.8% 17.2% 15.9% --
Prime Rank (18-49) .................. 3 3 3 3 2 (tie)
Access Rank (18-49) ................. 4 4 3 3 2
Oversell Ratio ...................... 132% 119% 125% 114% --
</TABLE>
- ------
(1) Prime and access ratings ranks based on Nielson estimates for February 1996.
TALLAHASSEE, FLORIDA
The Tallahassee DMA is the 116th largest in the United States comprising
18 counties in northern Florida and southern Georgia with a total of 210,000
television households and a population of 578,000. Tallahassee is the state
capital of Florida and its major industries include state and local
government as well as firms providing commercial service to North Florida's
cattle, lumber, tobacco and farming industries. In 1995, annual retail sales
in this market totaled $4.4 billion and total television advertising revenues
increased 5.3% from approximately $18.9 million in 1994 to approximately
$19.9 million. In addition to WTLH, there are two VHF and two UHF television
stations operating in the Tallahassee DMA, including one educational station.
An additional station licensed to Valdosta, Georgia broadcasts from a
transmission facility located in the Albany, Georgia DMA. The Tallahassee DMA
has allocations for three TV stations that are not operational.
<TABLE>
<CAPTION>
Tallahassee, Florida DMA Statistics
----------------------------------------------------------
1992 1993 1994 1995 1996(1)
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Market Revenues (dollars in millions) ... $ 16.6 $ 17.2 $ 18.9 $ 19.9 --
Market Growth ........................... -- 3.6% 9.9% 5.3% --
Station Revenue Growth .................. -- 2.4% 31.7% 8.5% --
Prime Rank (18-49) ...................... 4 3 3 2 2
Access Rank (18-49) ..................... 3 3 2 3 2
Oversell Ratio .......................... 118% 100% 117% 100% --
</TABLE>
- ------
(1) Prime and access ratings ranks based on Nielson estimates for February 1996.
In March 1996, the Company acquired the principal tangible assets of WTLH,
entered into an LMA to operate WTLH and into a separate agreement to acquire
WTLH's FCC license and its Fox Affiliation Agreement, subject to the consent
of the FCC and Fox, respectively, on or before March 31, 1998. WTLH has filed
with the FCC an application which, if granted, will enable the Company to
move WTLH's tower and transmitter facilities to a site approximately ten
miles closer to Tallahassee and to increase its tower height and power. That
application is currently pending before the FCC. The Company anticipates
relocating WTLH's transmitter and tower to this site in 1997 to increase its
audience coverage in the Tallahassee market.
DBS
DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
United States television households in 1994. DIRECTV currently offers in
excess of 175 channels of near laser disc quality video and CD quality audio
programming and transmits via three high-power Ku band satellites, each
containing 16 transponders. As of April 30, 1996, there were over 1.5 million
DIRECTV subscribers. DIRECTV is expected to have over 2.5 million subscribers
by the end of 1996 and approximately ten million subscribers by the year
2000.
The equipment required for reception of DIRECTV services (a DSS unit)
includes an 18-inch satellite antenna, a digital receiver approximately the
size of a standard VCR and a remote control, all of which are used with
standard television sets. Each DSS receiver includes a "smart card" which is
uniquely addressed to it. The smart card, which can be removed from the
receiver, prevents unauthorized reception of DIRECTV services and retains
billing information on pay-per-view usage, which information is sent at
regular intervals from the DSS receiver telephonically to DIRECTV's
authorization and billing system. DSS units also enable
48
<PAGE>
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 TimeWarner and Viacom
satellite programming services, such as multiple channels of HBO and
Showtime, which are not available through DIRECTV but which are generally
complementary to DIRECTV programming.
A license to manufacture DSS units was initially awarded by Hughes to
Thomson Consumer Electronics, Inc., the manufacturer of RCA-branded products
("RCA/Thomson"). This license provided RCA/Thomson with an exclusivity
period, which ended in April 1995, covering the first one million DSS units.
RCA/Thomson's DSS units retail for as low as $399. Hughes awarded a second
license to Sony which provided Sony joint exclusivity with RCA/Thomson until
December 1995. Hughes has awarded additional licenses to Hughes Network
Systems, Toshiba Consumer Electronics, Samsung Electronics America, Inc.,
Sanyo Fisher Corporation, Daewoo Electronics Corporation of America, Uniden
Corporation and Philips Electronics, N.V., whose production and distribution
have commenced or are expected to commence in 1996. At the end of 1995, more
than 20,000 retailers were selling DSS equipment and DIRECTV programming
packages.
In January 1996, DIRECTV entered into a strategic relationship with AT&T
that is designed to accelerate DIRECTV's market penetration. The agreement
calls for AT&T to invest $137.5 million for a 2.5% equity interest in DIRECTV
with rights to purchase up to 30% of DIRECTV based on subscriber acquisition
performance. The agreement gives AT&T an exclusive right to market DIRECTV
services to all residential customers, except in NRTC territories. 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 by the end of 1996.
THE COMPANY'S DBS OPERATIONS
The Company owns, through agreements with the NRTC, the exclusive right to
provide DIRECTV services in certain rural areas of Connecticut,
Massachusetts, New Hampshire and New York. Upon consummation of the DBS
Acquisition, it will also acquire exclusive rights to provide DIRECTV
services in certain rural areas of Michigan and Texas. The Company is the
largest independent provider of DIRECTV services not affiliated with Hughes.
The Company's New England DBS service area encompasses all of its New England
Cable systems except for its systems in central Massachusetts. Its Michigan
DBS service area covers nine counties in the Flint, Saginaw and thumb region
of Michigan, and its Texas DBS service area covers seven counties
approximately 45 miles south of the Dallas/Fort Worth metroplex.
49
<PAGE>
<TABLE>
<CAPTION>
Homes Average
Not Homes Monthly
DIRECTV Total Passed Passed Penetration Revenue
Homes in by by Total ------------------------------- Per
Territory Territory Cable(1) Cable(2) Subscribers(3) Total Uncabled Cabled Subscriber
----------------- ----------- --------- --------- -------------- ------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owned:
Western New
England ........ 272,917 39,256 233,661 4,372 1.6% 9.5% 0.3% --
New Hampshire ... 158,607 39,834 118,773 2,633 1.7% 5.8% 0.3% --
Martha's Vineyard
and Nantucket .. 19,080 953 18,127 480 2.5% 42.4% 0.4% --
----------- --------- --------- -------------- ------- ---------- -------- ------------
Total .......... 450,604 80,043 370,561 7,485 1.7% 8.1% 0.3% $37.72
----------- --------- --------- -------------- ------- ---------- -------- ------------
To Be Acquired:
Michigan ........ 228,837 58,483 170,354 4,791 2.1% 6.4% 0.6% --
Texas ........... 141,565 51,601 89,964 3,708 2.6% 5.6% 0.9% --
----------- --------- --------- -------------- ------- ---------- -------- ------------
Total .......... 370,402 110,084 260,318 8,499 2.3% 6.1% 0.7% $35.08
----------- --------- --------- -------------- ------- ---------- -------- ------------
Total ......... 821,006 190,127 630,879 15,984 2.0% 6.9% 0.5% $36.34
=========== ========= ========= ============== ======= ========== ======== ============
</TABLE>
- ------
(1) Based on NRTC estimates of primary residences and seasonal residence data
obtained from county offices. Does not include business locations.
Includes approximately 21,640 seasonal residences.
(2) Based on NRTC estimates of primary residences and seasonal residence data
obtained from county offices. Does not include business locations.
Includes approximately 77,890 seasonal residences.
(3) As of May 10, 1996.
BUSINESS STRATEGY
As the exclusive provider of DIRECTV services in its purchased territories,
the Company provides a full range of services, including installation,
authorization and financing of equipment for new customers as well as billing,
collections and customer service support for existing subscribers. The
Company's operating strategy in DBS is to (i) establish strong relationships
with retailers, (ii) build its own direct sales and distribution channels,
(iii) develop local and regional marketing and promotion to supplement
DIRECTV's national advertising, and (iv) offer aggressively priced equipment
rental, lease and purchase options.
The Company anticipates continued significant growth in subscribers and
operating profitability in DBS through increased penetration of DIRECTV
territories it currently owns and will acquire pursuant to the DBS
Acquisition. The Company's DBS operations achieved positive Location Cash Flow
in 1995, its first full year of operations. The Company's DIRECTV
subscribers currently generate programming revenues of approximately $38 per
month at an average gross margin of 45%. The Company's remaining expenses
consist of marketing costs incurred to build its growing base of subscribers
and overhead costs which are predominantly fixed. As a result, the Company
believes that future increases in its DBS revenues will result in
disproportionately greater increases in Location Cash Flow. For the first four
months of 1996, the Company has been adding DIRECTV subscribers at
approximately twice the rate of the same period in 1995.
The Company also believes that there is an opportunity for additional
growth through the acquisition of DIRECTV territories held by other NRTC
members. NRTC members are the only independent providers of DIRECTV services.
In excess of 250 NRTC members have collectively purchased DIRECTV territories
consisting of approximately 7.8 million television households in
predominantly rural areas of the United States, which are among the most
likely to subscribe to DBS services. These territories comprise 8% of United
States television households, but represent between 25% and 30% of DIRECTV's
existing subscriber base. As the largest, and only publicly held, independent
provider of DIRECTV services, the Company believes that it is well positioned
to achieve economies of scale through the acquisition of DIRECTV territories
held by other NRTC members.
DIRECTV PROGRAMMING
DIRECTV programming includes (i) cable networks, broadcast networks and
audio services available for purchase in tiers for a monthly subscription,
(ii) premium services available a la carte or in tiers for a monthly
subscription, (iii) sports programming (including regional sports networks
and seasonal college and major professional league sports packages) available
for a yearly, seasonal or monthly subscription and (iv) movies
50
<PAGE>
and events available for purchase on a pay-per-view basis. Satellite and
premium services available a la carte or for a monthly subscription are
priced comparably to cable. Pay-per-view movies are generally $2.99 per
movie. Movies recently released for pay-per-view are available for viewing on
multiple channels at staggered starting times so that a viewer generally
would not have to wait more than 30 minutes to view a particular pay-per-view
movie. The following is a summary of some of the more popular programming
packages currently available from the Company's DIRECTV operations:
Plus DIRECTV: Package of 45 channels (including 29 CD audio channels)
which retails for $14.95 per month and includes a $2.50 coupon for
purchase of pay-per-view movies or events. Plus DIRECTV consists of
channels not typically offered on most cable systems and is intended to
be sold to existing cable subscribers to augment their cable satellite
and basic services.
Economy or Select Choice: Two packages of 19 to 33 channels which retail
for between $16.95 and $19.95 per month and include a $2.50 coupon for
purchase of pay-per-view movies or events. The Economy service is
available only in DIRECTV territories held by NRTC members. Economy and
Select Choice are often offered in conjunction with DSS rental or
leasing options to create a total monthly payment comparable to the
price of cable.
Total Choice: Package of 74 channels (including 29 CD audio channels,
two Disney channels, Encore Multiplex and an in-market regional sports
network) which retails for $29.95 per month and includes a $2.50 coupon
for purchase of pay-per-view movies or events. This is DIRECTV's
flagship package.
DIRECTV Limited: Package comprising Bloomberg Information Television and
the DIRECTV Preview Channel which retails for $4.95 per month and
includes a $2.50 coupon for purchase of pay-per-view movies or events.
This is intended for subscribers who are principally interested in
DIRECTV's pay-per-view movies, sports and events.
Playboy: Adult service available monthly for $9.95 or 12 hours for
$4.99.
Encore Multiplex: Seven theme movie services (Love Stories, Westerns,
Mystery, Action, True Stories, WAM! and Encore) for $5.95 per month
(free with Total Choice).
Networks: ABC (East and West), NBC (East and West), CBS (East and West),
Fox and PBS available individually for $0.99 per month or together for
$4.95 per month. (Available only to subscribers unable to receive
networks over-the-air and who have not subscribed to cable in the last
90 days.)
Sports Choice: Package of 24 channels (including 19 regional networks)
and five general sports networks (the Golf channel, NewSport,
Speedvision, Classic Sports Network and Outdoor Life) for $12.00 per
month on a stand alone basis.
NBA League Pass: Out-of-market NBA games for $149.00 per season.
NHL Center Ice: Out-of-market NHL games for $119.00 per season.
NFL Sunday Ticket: All out-of-market NFL Sunday games for $159.00 per
season.
MLB Extra Innings: Up to 1,000 out-of-market major league baseball games
for $139.00 per season.
DIRECT Ticket: Movies available for pay-per-view from all major
Hollywood studios at $2.99 and special events at a range of $14.99 to
$30.00.
STARZ! Package: Package of 3 channels which include STARZ! (East and
West) and the Independent Film Channel for $5.00 per month.
DISTRIBUTION, MARKETING AND PROMOTION
In general, subscriptions to DIRECTV programming are offered through
commissioned sales representatives who are also authorized by the
manufacturers to sell DSS units. DIRECTV programming is offered (i) directly
through national retailers (such as Sears, Circuit City and Best Buy)
selected by DIRECTV,
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(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
DIRECT, (iv) through members of the NRTC who, like the Company, have
agreements with the NRTC to provide DIRECTV services, and (v) by AT&T, which
has the exclusive right to market, except in NRTC territories, DIRECTV
services to all residential customers. All programming packages currently must
be authorized by the Company in its service areas. See "Business -- Licenses,
LMAs, DBS Agreements, and Cable Franchises."
The Company markets DIRECTV programming services and DSS units in its
distribution area in three separate but overlapping ways. In residential
market segments in which authorized DSS dealers exist, the Company seeks to
develop close, cooperative relationships with these dealers in which the
Company provides marketing, subscriber authorization, installation and
customer service support, but where the purchase, inventory and sale of the
DSS unit is handled by the dealers. In these circumstances, the dealer earns
a profit on the sale of the DSS unit and a commission payable by the Company
from the sale of DIRECTV programming, while the Company may receive a profit
from a subscriber's initial installation and receives the programming service
revenues payable by the subscriber. Many DSS dealers are also authorized to
offer the Company's lease program.
In addition, the Company has developed a network of its own sales agents
("Programming Sales Agents") from among local satellite dealers, utilities,
cable installation companies, retailers and other contract sales people or
organizations. Programming Sales Agents earn commissions on the lease or
sale of DSS units, as well as on the sale of DIRECTV programming.
In residential market segments in which a significant number of potential
subscribers wish to lease DSS units and in all commercial market segments,
the Company utilizes its own telemarketing and direct sales agents to sell
DIRECTV residential and commercial programming packages, to sell or lease DSS
units and to provide subscriber installations. In these instances, the
Company earns a profit from the sale, lease or rental of the DSS unit, from a
subscriber's initial installation and from the programming service revenues
payable by the subscriber.
The Company offers a lease program in which subscribers may lease DSS
units for $15 per month. The initial lease term is 36 months, at the end of
which the subscriber has the option to continue to pay $15 a month for an
additional 12 months to purchase the unit or continue on a month-to-month
basis. Subscribers that lease equipment must also select a monthly
programming package from DIRECTV throughout the term of the lease. Additional
receivers can be leased for an additional $15 per month. Programming
authorizations for additional outlets are $1.95 per month. There is a
one-time charge of $199 for standard installations. The lease program is
available only to subscribers that reside in the Company's service area.
The Company seeks to identify and target market segments within its
service area in which it believes DIRECTV programming services will have
strong appeal. Depending upon their individual circumstances, potential
subscribers may subscribe to DIRECTV services as a source of multichannel
television where no other source currently exists, as a substitute for
existing cable service due to its high price or poor quality or as a source
of programming which is not available via cable but which is purchased as a
supplement to existing cable service. The Company seeks to develop
promotional campaigns, marketing methods and distribution channels designed
specifically for each market segment.
The Company's primary target market consists of residences which are not
passed by cable or which are passed by older cable systems with fewer than 40
channels. The Company estimates that after giving effect to the DBS
Acquisition, its exclusive DIRECTV territories will contain approximately
190,000 television households which are not passed by cable and approximately
380,000 television households which are passed by older cable systems with
fewer than 40 channels. The Company actively markets DIRECTV services as a
primary source of television programming to potential subscribers in this
market segment since the Company believes that it will achieve its largest
percentage penetration in this segment.
The Company also targets potential subscribers who are likely to be
attracted by specific DIRECTV programming services. This market segment
includes (i) residences in which a high percentage of the viewing is devoted
to movie rentals or sports, (ii) residences in which high fidelity audio or
video systems have been
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installed and (iii) commercial locations (such as bars, restaurants, hotels
and private offices) which currently subscribe to pay television or background
music services. The Company estimates that after giving effect to the DBS
Acquisition, its exclusive DIRECTV territories will contain approximately
70,000 commercial locations in its DBS territory.
The Company also targets seasonal residences in which it believes that the
capacity to start and discontinue DIRECTV programming seasonally or at the
end of a rental term has significant appeal. These subscribers are easily
accommodated on short notice without the requirement of a service call
because DIRECTV programming is a fully "addressable" digital service. The
Company estimates that after giving effect to the DBS Acquisition, its
exclusive DIRECTV territories will contain approximately 100,000 seasonal
residences in this market segment.
Additional target markets include apartment buildings, multiple dwelling
units and private housing developments. While DSS units designed specifically
for use in such locations have not yet been introduced commercially,
RCA/Thomson has announced its intention to offer such a product for sale by
the end of 1996.
Finally, DIRECTV has announced its intention to utilize a portion of the
additional capacity from its third satellite and improved compression to
offer, in a joint venture with Microsoft, one or more data services to
residences and businesses in 1997. When this occurs, the Company believes
that additional market segments will develop for data services within its
service area.
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 30% (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.
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THE CABLE SYSTEMS
The following table sets forth general information for the Company's Cable
systems.
<TABLE>
<CAPTION>
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
------------------- ---------- ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Owned:
New England ....... (5) 29,400 28,600 19,200 67% $33.79
Mayaguez .......... 62 38,300 34,000 11,100 33% $33.27
To Be Acquired:
San German ........ 50(6) 72,400 47,700 16,400 34% $31.05
----------- ----------- -------------- -------------- ------------
Total Puerto Rico . 110,700 81,700 27,500 34% $31.46
----------- ----------- -------------- -------------- ------------
Total ........... 140,100 110,300 46,700 42% $32.00
=========== =========== ============== ============== ============
</TABLE>
- ------
(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 April
30, 1996.
(3) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly charge
for a single outlet in the area. This information is as of April 30,
1996.
(4) Basic subscribers as a percentage of homes passed by cable.
(5) The channel capacities of New England Cable systems are 36, 50 and 62 and
represent 45%, 22% and 33% of the Company's New England Cable
subscribers, respectively. After giving effect to certain system upgrades
which are anticipated to be completed by September 1996, the 36, 50 and
62 channel systems would have represented 23%, 22% and 55% of the
Company's total New England Cable subscribers, respectively.
(6) After giving effect to certain system upgrades which are anticipated to
be completed during the first quarter of 1997, this system will be
capable of delivering 62 channels.
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 April 30, 1996, the system passed
approximately 34,000 homes with 260 miles of plant and had 11,100 basic
subscribers, representing a basic penetration rate of 33%. 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. As of April 30, 1996, the system had 16,400
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. Upon completion of the Cable
Acquisition, the Company will serve 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 28,000 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.
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NEW ENGLAND CABLE SYSTEMS
The Company's New England Cable systems consist of seven headends serving
19 towns in Connecticut, Massachusetts and New Hampshire. At April 30, 1996,
these systems had approximately 19,200 basic subscribers. From 1990 to 1995,
these systems experienced compound annual growth rates of 10% in the number
of their subscribers and 37% in Location Cash Flow. This growth has been
principally achieved as a result of line extensions and housing growth. New
England Cable systems historically have had higher than national average
basic penetration rates due to the region's higher household income levels
and poor off air reception. The Company's systems offer addressable
converters to all premium and pay-per-view customers, which allow the Company
to activate these services without the requirement of a service call. The
Massachusetts and New Hampshire systems were acquired in June 1991 (with the
exception of the North Brookfield, Massachusetts Cable system, which was
acquired in July 1992), and the Connecticut system was acquired in August
1991.
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, telephone companies will be allowed to compete
directly with cable operators both inside and outside of their telephone
service areas. An affiliate of Southern New England Telephone Company, which
is the dominant provider of local telephone service in Connecticut, has filed
with local regulators an application for authority 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, EchoStar Communications Corp.
("EchoStar") and PrimeStar Partners ("PrimeStar"). The Company is the
exclusive provider of DIRECTV services to areas encompassing over two-thirds
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
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programming and does not require that its subscribers purchase
receiving equipment in order to begin receiving cable services. DIRECTV,
however, offers significantly expanded service compared to most cable systems.
Additionally, upgrading cable companies' coaxial systems to offer expanded
digital video and audio programming similar to that offered by DIRECTV will be
costly. While local programming is not currently available through DIRECTV
directly, DIRECTV provides programming from affiliates of national broadcast
networks to subscribers who are unable to receive networks over-the-air and
who have not subscribed to cable. DIRECTV faces additional competition from
wireless cable systems such as multichannel multipoint distribution systems
("MMDS") which use microwave frequencies to transmit video programming over-
the-air from a tower to specially equipped homes within the line of sight of
the tower. The Company is unable to predict whether wireless video services,
such as MMDS, will continue to develop in the future or whether such
competition will have a material impact on the operations of the Company.
DIRECTV also faces competition from other providers and potential providers
of DBS services. Of the eight orbital locations within the BSS band allocated
for United States licensees, three orbital positions enable full coverage of
the contiguous United States. The remaining orbital positions are situated to
provide coverage to either the eastern or western United States, but cannot
provide full coverage of the contiguous United States. This provides companies
licensed to the three orbital locations with full coverage a significant
advantage in providing DBS service to the entire United States, as they must
place satellites in service at only one and not two orbital locations. The
orbital location licensed to Hughes and USSB is generally recognized as the
most centrally located for coverage of the contiguous United States; however,
EchoStar has launched, and a joint venture of MCI and News Corp. has announced
its intention to launch, DBS services from the other two orbital locations
with full coverage of the contiguous United States. MCI/News Corp. was the
successful bidder for the transponder slot auctioned by the FCC at 110o west
longitude. MCI/News Corp. announced that it anticipates being operational in
two years.
In addition, two entities, Western Tele-Communications, Inc., a
wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), and another
company, Tele Quest Ventures, L.L.C., have applied for authority from the FCC
to operate earth stations that would be used to communicate with Canadian DBS
satellites that have service coverage of the United States. If such authority
is granted, these entities could enter the United States multichannel
television programming distribution market and compete with DIRECTV.
The Company also competes with PrimeStar, owned primarily by a consortium
of cable companies, including TCI, that currently offers medium-power Ku-band
programming service to customers using dishes approximately three feet in
diameter.
INDUSTRY BACKGROUND
TV
Commercial television began in the United States on a regular basis in the
1940s. Initially, television stations operated only in the larger cities on a
portion of the broadcast spectrum commonly known as the "VHF" band. Additional
television channels were subsequently assigned to cities throughout the
country for use on the "UHF" band. There are 12 channels in the VHF band,
numbered 2 through 13, and 56 channels in the UHF band, numbered 14 through
69. UHF band channels differ from VHF channels in that UHF channels broadcast
at higher frequencies and thus are more affected by terrain and obstructions
to line-of-sight transmission. There are only a limited number of channels
available for broadcasting in any one geographic area, with the license to
operate a station being granted by the FCC.
The majority of commercial television stations in the United States are
affiliated with the major national networks (ABC, CBS, NBC, and Fox). Two
newer networks, UPN and the Warner Brothers Network ("WB"), are affiliated
with many of the remainder. Stations that operate without network
affiliations are commonly referred to as "independent" stations. Each
national network offers its affiliates a wide variety of television programs
in exchange for the right to retain a significant portion of the available
advertising time during its network programs. ABC, CBS and NBC currently
offer more than 12 hours of programming a day on average, which represents
approximately two-thirds of the typical broadcasting day. UPN and WB program
up to six hours per week in prime time. Since its inception in 1986, Fox has
increased the amount of
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programming available to its affiliates. Fox currently provides its affiliates
with six hours of programming a day on average. The Fox network currently
consists of 163 primary affiliates, and Fox programming is available in more
than 94% of the television households in the United States.
Advertising and Ratings
Most television station revenues are derived from the sale of time to
national, regional and local advertisers for commercials which are inserted
in or adjacent to the programming shown on the station. These commercials are
commonly referred to as "spot" advertising. Network-affiliated stations are
required to carry the advertising sold by the network during the network
programming broadcast by the station. This reduces the amount of spot
advertising available for sale by the station. The networks generally
compensate their affiliates for network carriage according to a formula based
on coverage as well as other qualitative factors. Independent stations retain
all of the revenues received from the sale of advertising time.
The advertising sales market consists of national network advertising,
national spot advertising and local spot advertising. An advertiser wishing
to reach a nationwide audience usually purchases advertising time directly
from the major networks, including Fox, or nationwide ad hoc networks (groups
of otherwise unrelated stations that combine to show a particular program or
series of programs). A national advertiser wishing to reach a particular
regional or local audience usually buys advertising time directly from local
stations through national advertising sales representative firms. Local
businesses purchase advertising directly from the stations' local sales
staffs. In addition, television stations derive significant revenues from the
sale of time (usually in the early morning time blocks) for the broadcast of
"infomercials" and other programs supplied by advertiser.
Programming that is not supplied to stations by a network is acquired from
programming syndicators either for cash, in exchange for advertising time
("barter") or a combination of cash and barter. Typically, television
stations acquiring syndicated programs are given the exclusive right to show
the program in the station's market for the number of times and during the
period of time agreed upon by the station and the syndicator. Over the last
several years, there has been an increase in programming available through
barter or a combination of cash and barter and a decrease in cash
transactions in the syndication market.
Nielsen periodically publishes data on estimated audiences for television
stations in all DMAs throughout the United States. The estimates are
expressed in terms of the station's share of the total potential audience in
the market (the station's "rating") and of the audience actually watching
television (the station's "share"). The ratings service provides such data on
the basis of total television households and of selected demographic
groupings in the market. Nielsen uses one of two methods to measure the
station's actual viewership. In larger markets, ratings are determined by a
combination of meters connected directly to selected television sets (the
results of which are reported on a daily basis) and periodic surveys of
television viewing (diaries), while in smaller markets only periodic surveys
are conducted. Generally, ratings for Fox affiliates and independent stations
are lower in diary (non-metered) markets than in metered markets. Most
analysts believe that this is a result of the greater accuracy of measurement
that meters allow.
DBS
The widespread use of satellites for television developed in the 1970s, as
a means to distribute news and entertainment programming to and from
broadcast television stations and to the headends of cable systems. The use
of satellites by cable systems permitted low cost networking of cable
systems, thereby promoting the growth of satellite-delivered pay channel
services (such as HBO and Showtime) and enhanced basic services (such as CNN,
ESPN and C-SPAN).
The DTH satellite market developed as consumers in rural markets without
access to cable or broadcast television programming purchased home satellite
television receive only ("TVRO") products to receive programming directed
towards broadcast television stations and cable headends. The DTH business
has grown as satellite-delivered services have been developed and marketed
specifically for TVRO system owners. Currently, there are estimated to be
approximately 2.3 million TVRO systems authorized to receive DTH programming
in the United States.
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Until recently, most satellite applications for television were within the
C band radio frequencies allocated by the FCC for fixed satellite service
("FSS"). Most TVRO systems are designed to receive the signals of C band
satellites and require antennas ranging from six to 12 feet in diameter.
Newer DTH services may be transmitted using Ku band satellites, the signals
of which can be received with antennas ranging from three to six feet in
diameter.
In the 1980's, the FCC began licensing additional radio spectrum within a
portion of the Ku band for broadcast satellite service ("BSS") and DBS
service. Unlike traditional FSS satellites, BSS satellites are designed
specifically for transmitting television signals directly to consumers. These
satellites have significantly higher effective radiated power, operate at
higher frequencies and are deployed at wider orbital spacing than FSS
satellites. As a result, they allow for reception using antennas as small as
18 inches in diameter.
Pursuant to international agreements governing the use of the radio
spectrum, there are eight orbital positions allocated for use by the United
States within the BSS band with 32 frequencies licensed to each orbital
position. The FCC initially awarded frequencies at these eight orbital
locations to nine companies, including Hughes and USSB. See "Business --
Competition."
Of the eight orbital locations for United States-licensed DBS satellites,
only three enable full coverage of the contiguous United States. The
remaining orbital positions are situated to provide coverage to either the
eastern or western United States, but not to both. The orbital location used
by DIRECTV is one of the three locations with full coverage and is considered
to be the most centrally located. Companies awarded frequencies at the three
locations with full coverage have a significant competitive advantage in
providing nationwide service.
CABLE
A cable system receives television, radio and data signals that are
transmitted to the system's headend site by means of off-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, through coaxial and fiber optic cable,
to customers who pay a fee for this service. Cable systems may also originate
their own television programming and other information services. Cable
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for
a specified term.
The cable industry developed in the United States in the late 1940s and
1950s in response to the needs of residents in predominantly rural and
mountainous areas of the country where the quality of off-air television
reception was inadequate due to factors such as topography and remoteness
from television broadcast towers. In the 1960s and 1970s, cable systems also
developed in small and medium-sized cities and suburban areas that had a
limited availability of clear off-air television station signals. All of
these markets are regarded within the cable industry as "classic" cable
system markets. In the 1980s, cable systems were constructed in large cities
and nearby suburban areas, where good off-air reception from multiple
television stations usually was already available, in order to offer
satellite-delivered channels which were not available via broadcast
television reception.
Cable systems offer customers multiple channels of television entertainment
and information. The selection of programming varies from system to system due
to differences in channel capacity and customer interest. Cable systems
typically offer a "broadcast basic" service consisting of local broadcast
stations, local origination channels and public, educational and governmental
("PEG") access channels and an "enhanced basic service" or satellite service
consisting of satellite delivered non-broadcast cable networks (such as CNN,
MTV, USA, ESPN and TNT) as well as satellite-delivered signals from broadcast
"superstations" (such as WTBS, WGN and WWOR). For an extra monthly charge,
cable systems also generally offer premium television services to their
customers. These services (such as Home Box Office, Showtime, The Disney
Channel and regional sports networks) are satellite-delivered channels
consisting principally of feature films, live sports events, concerts and
other special entertainment features, usually presented without commercial
interruption. In addition to customer revenues from these services, cable
systems generate revenues from additional fees paid by customers for
pay-per-view programming of movies, concerts, sporting and special events and
from the sale of available advertising spots on advertiser-supported
programming and on locally generated
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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 station licenses for
a term of up to eight years. The FCC is currently conducting a rulemaking to
determine whether television license terms should be extended from their
current term of five years to the maximum eight-year term provided by the
1996 Act. While in the vast majority of cases such licenses are renewed by
the FCC, there can be no assurance that the Company's licenses will be
renewed at their expiration dates or that such renewals will be for full
terms. The Company's licenses with respect to TV stations WOLF/WWLF/WILF,
WDSI and WDBD are scheduled to expire on August 1, 1999, August 1, 1997 and
June 1, 1997, respectively. In addition, the licenses with respect to
stations WTLH and WPXT are scheduled to expire on April 1, 1997 and April 1,
1999, respectively. In order for the Company to acquire the licenses for
television stations WTLH and WPXT, the FCC's consent to the assignment of
these licenses to the Company is required. See "Business -- TV."
Fox Affiliation Agreement. Each of the Company's TV stations which are
affiliated with Fox is a party to a substantially identical station
affiliation agreement with Fox (as amended, the "Fox Affiliation
Agreements"). Each Fox Affiliation Agreement provides the Company's
Fox-affiliated stations with the right to broadcast all programs transmitted
by Fox, on behalf of itself and its wholly-owned subsidiary, the Fox
Children's Network, Inc. ("FCN"), which include programming from Fox as well
as from FCN. In exchange, Fox has the right to sell a substantial portion of
the advertising time associated with such programs and to retain the revenue
from the advertising it has sold. The stations are entitled to sell the
remainder of the advertising time and retain the associated advertising
revenue. The stations are also compensated by Fox according to a
ratings-based formula for Fox programming and a share of the programming net
profits of FCN programming, as specified in the Fox Affiliation Agreements.
Each Fox Affiliation Agreement is for a term ending October 31, 1998 and
is 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.
Each Fox Affiliation Agreement provides the Company's Fox-affiliated
stations with all programming which Fox and FCN make available for
broadcasting in the community to which the station is licensed by the FCC.
Fox has committed to supply approximately six hours of programming per day
during specified time periods. Each of the Company's stations have agreed to
broadcast all such Fox programs in their entirety, including all commercial
announcements. In return for a station's full performance of its obligations
under its respective affiliation agreement, Fox will pay such station
compensation determined in accordance with Fox's current, standard,
performance-based station compensation formula.
As part of the agreement with Fox to extend the stations' Fox Affiliation
Agreements until 1998, each of the stations granted Fox the right to
negotiate with the cable operators in their respective markets for
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.
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The Company's Fox Affiliation Agreements have been renewed in the past.
The Company believes that it enjoys good relations with Fox. One of the
closing conditions to the acquisition of WTLH's license is the consent of Fox
to the assignment of the WTLH Fox Affiliation Agreement.
LMAs. Current FCC rules preclude the ownership of more than one television
station in a market, unless such stations are operated as a satellite of a
primary station, initially duplicating the programming of the primary station
for a significant portion of their broadcast day. WWLF and WILF are currently
authorized as satellites of WOLF. In recent years, in a number of markets
across the country, certain television owners have entered into arrangements
to provide the bulk of the broadcast programming on stations owned by other
licensees, and to retain the advertising revenues generated from such
programming.
When operating pursuant to an LMA, while the bulk of the programming is
provided by someone other than the licensee of the station, the station
licensee must retain control of the station for FCC purposes. Thus, the
licensee has the ultimate responsibility for the programming broadcast on the
station and for the station's compliance with all FCC rules, regulations, and
policies. The licensee must retain the right to preempt programming supplied
pursuant to the LMA where the licensee determines, in its sole discretion,
that the programming does not promote the public interest or where the
licensee believes that the substitution of other programming would better
serve the public interest. The licensee must also have the primary
operational control over the transmission facilities of the station.
To the extent that the Company currently programs WTLH through an LMA, and
expects to program other stations through the use of such agreements, there
can be no assurance that the licensee of such stations will not unreasonably
exercise its right to preempt the programming of the Company, or that the
licensees of such stations will continue to maintain the transmission
facilities of the stations in a manner sufficient to broadcast a high quality
signal over the station. As the licensee must also maintain all of the
qualifications necessary to be a licensee of the FCC, and as the principals
of the licensee are not under the control of the Company, there can be no
assurances that these licenses will be maintained by the entities which
currently hold them.
In the 1996 Act, the continued performance of then existing LMAs was
generally grandfathered. Currently, LMAs are not considered attributable
interests under the FCC's multiple ownership rules. However, the FCC is
currently considering proposals which would make LMAs attributable, as they
generally are in the radio broadcasting industry. If the FCC were to adopt a
rulemaking that makes such interests attributable, without modifying its
current prohibitions against the ownership of more than one television station
in a market, the Company could be prohibited from entering into such
arrangements with other stations in markets in which it owns television
stations.
DBS AGREEMENTS
Prior to the launch of the first DIRECTV satellite in 1993, Hughes entered
into various agreements intended to assist it in the introduction of DIRECTV
services, including agreements with RCA/Thomson for the development and
manufacture of DSS units and with USSB for the sale of five transponders on
the first satellite. At this time, Hughes also offered the NRTC and its
members the opportunity to become the exclusive providers of DIRECTV services
in rural areas of the United States in which an NRTC member purchased such a
right. The NRTC is a cooperative organization whose members are engaged in
the distribution of telecommunications and other services in predominantly
rural areas of the United States. Pursuant to the DBS Agreements,
participating NRTC members acquired the exclusive right to provide DIRECTV
programming services to residential and commercial subscribers in certain
service areas. Service areas purchased by participating NRTC members comprise
approximately 7.8 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
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SMAs). In exchange, the NRTC and participating NRTC members paid to DIRECTV a
one-time purchase price. In addition to the purchase price, NRTC members are
required to reimburse DIRECTV for the allocable share of certain common
expenses (such as programming, satellite-specific costs and expenses
associated with the billing and authorization systems) and to remit to DIRECTV
a 5% royalty on subscription revenues.
The DBS Agreements authorize the NRTC and participating NRTC members to
provide all commercial services offered by Hughes that are transmitted from
the frequencies that the FCC has authorized for DIRECTV's use at its present
orbital location for a term running through the life of Hughes' current
satellites. The NRTC has advised the Company that the NRTC Agreement also
provides the NRTC a right of first refusal to acquire comparable rights in
the event that Hughes elects to launch successor satellites upon the removal
of the present satellites from active service. The financial terms of any
such purchase are likely to be the subject of negotiation and the Company is
unable to predict whether substantial additional expenditures of the NRTC
will be required in connection with the exercise of such right of first
refusal. Finally, under a separate agreement with Hughes (the "Dealer
Agreement"), the Company is an authorized agent for sale of DIRECTV
programming services to subscribers outside of its service area on terms
comparable to those of DIRECTV's other authorized sales agents.
The Member Agreement terminates when Hughes removes DIRECTV satellites
from their orbital location, although under the Dealer Agreement the right of
the Company to serve as a DIRECTV sales agent outside of its designated
territories may be terminated upon 60 days' notice by either party. If the
satellites are removed earlier than June 2004, the tenth anniversary of the
commencement of DIRECTV services, the Company will receive a prorated refund
of its original purchase price for the DIRECTV rights. The Member Agreement
may be terminated prior to the expiration of its term as follows: (a) if the
NRTC Agreement is terminated because of a breach by Hughes, the NRTC may
terminate the Member Agreement, but the NRTC will be responsible for paying
to the Company its pro rata portion of any refunds that the NRTC receives
from Hughes, (b) if the Company fails to make any payment due to the NRTC or
otherwise breaches a material obligation of the Member Agreement, the NRTC
may terminate the Member Agreement in addition to exercising other rights and
remedies against the Company and (c) if the NRTC Agreement is terminated
because of a breach by the NRTC, Hughes is obligated to continue to provide
DIRECTV services to the Company (i) by assuming the NRTC's rights and
obligations under the Member Agreement or (ii) under a new agreement
containing substantially the same terms and conditions as the Member
Agreement.
The Company is not permitted under the Member Agreement or the Dealer
Agreement to assign or transfer, directly or indirectly, its rights under
these agreements without the prior written consent of the NRTC and DIRECTV,
which consent cannot be unreasonably withheld.
CABLE FRANCHISES
Cable systems are generally constructed and operated under non-exclusive
franchises granted by state or local governmental authorities. The franchise
agreements may contain many conditions, such as the payment of franchise
fees; time limitations on commencement and completion of construction;
conditions of service, including the number of channels, the carriage of
public, educational and governmental access channels, the carriage of broad
categories of programming agreed to by the cable operator, and the provision
of free service to schools and certain other public institutions; and the
maintenance of insurance and indemnity bonds. Certain provisions of local
franchises are subject to limitations under the 1992 Cable Act.
The Company holds 16 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.
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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 April 30,
1996, after giving effect to the Cable Acquisition.
<TABLE>
<CAPTION>
Number of Basic Percent of Basic
Year of Franchise Expiration Number of Franchises Subscribers Subscribers
- ---------------------------- -------------------- --------------- ----------------
<C> <C> <C> <C> <C>
1996-1998 ................. 1 2,800 6%
1999-2002 ................. 6 11,900 26%
2003 and thereafter ....... 9 32,000 68%
-------------------- --------------- ----------------
Total ................... 16 46,700 100%
</TABLE>
The Company has never had a franchise revoked. All of the franchises of
the systems eligible for renewal have been renewed or extended at or prior to
their stated expirations. The 1992 Cable Act provides, among other things,
for an orderly franchise renewal process in which renewal will not be
unreasonably withheld. In addition, the 1992 Cable Act establishes
comprehensive renewal procedures which require that an incumbent franchisee's
renewal application be assessed on its own merit and not as part of a
comparative process with competing applications. The Company believes that it
has good relations with its franchising authorities.
LEGISLATION AND REGULATION
TV
The ownership, operation and sale of television stations, including those
licensed to subsidiaries of the Company, are subject to the jurisdiction of
the FCC under authority granted it pursuant to the Communications Act. Matters
subject to FCC oversight include, but are not limited to, the assignment of
frequency bands for broadcast television; the approval of a television
station's frequency, location and operating power; the issuance, renewal,
revocation or modification of a television station's FCC license; the approval
of changes in the ownership or control of a television station's licensee; the
regulation of equipment used by television stations; and the adoption and
implementation of regulations and policies concerning the ownership, operation
and employment practices of television stations. The FCC has the power to
impose penalties, including fines or license revocations, upon a licensee of a
television station for violations of the FCC's rules and regulations.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies affecting
broadcast television. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC for further information
concerning the nature and extent of FCC regulation of broadcast television
stations.
License Renewal: Under law in effect prior to the 1996 Act, television
station licenses were granted for a maximum allowable period of five years
and were renewable thereafter for additional five year periods. The 1996 Act,
however, authorizes the FCC to grant television broadcast licenses, and
renewals thereof, for terms of up to eight years. The FCC is currently
conducting a rulemaking to determine if television station licenses will be
extended to the full eight year term. The FCC may revoke or deny licenses,
after a hearing, for serious violations of its regulations. Petitions to deny
renewal of a license may be filed on or before the first day of the last
month of a license term. Generally, however, in the absence of serious
violations of FCC rules or policies, license renewal is expected in the
ordinary course. The 1996 Act prohibits the FCC from considering competing
applications for the frequency used by the renewal applicant if the FCC finds
that the station seeking renewal has served the public interest, convenience
and necessity, that there have been no serious violations by the licensee of
the Communications Act or the rules and regulations of the FCC, and that
there have been no other violations by the licensee of the Communications Act
or the rules and regulations of the FCC that, when taken together, would
constitute a pattern of abuse. The Company's licenses with respect to
television 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.
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Ownership Matters: The Communications Act contains a number of
restrictions on the ownership and control of broadcast licenses. The
Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a broadcast licensee without the prior approval of the
FCC. The Communications Act and the FCC's rules also place limitations on
alien ownership; common ownership of broadcast, cable and newspaper
properties; ownership by those not having the requisite "character"
qualifications and those persons holding "attributable" interests in the
licensee. The 1996 Act and pending FCC rulemakings modify and will modify
many of these requirements. The exact nature of these modifications and their
impact on the Company cannot be predicted.
Alien Ownership Restrictions: The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licenses. Foreign
governments, representatives of foreign governments, non-citizens and
representatives of non-citizens, corporations and partnerships organized
under the laws of a foreign nation are barred from holding broadcast
licenses. Non-citizens, foreign governments, foreign corporations and
representatives of any of the foregoing, collectively, may directly or
indirectly own or vote up to 20% of the capital stock of a broadcast
licensee. In addition, a broadcast license may not be granted to or held by
any corporation that is controlled, directly or indirectly, by any other
corporation more than one-fourth of whose capital stock is owned or voted by
non-citizens or their representatives, by foreign governments or their
representatives, or by non-United States corporations, if the FCC finds that
the public interest will be served by the refusal or the revocation of such
license. The FCC has interpreted this provision of the Communications Act to
require an affirmative public interest finding before a broadcast license may
be granted to or held by any such corporation. To the Company's knowledge,
the Commission has made such a finding in only one case involving a broadcast
licensee. Because of these provisions, Pegasus may be prohibited from having
more than one-fourth of its stock owned or voted directly or indirectly by
non-citizens, foreign governments, foreign corporations or representatives of
any of the foregoing.
Multiple Ownership Rules: FCC rules limit the number of television stations
any one entity can acquire or own. The FCC's television national multiple
ownership rule limits the combined audience of television stations in which an
entity may hold an attributable interest to 35% of total United States
audience reach. The FCC's television multiple ownership local contour overlap
rule generally prohibits ownership of attributable interests by a single
entity in two or more television stations which serve the same geographic
market; however, changes in these rules are under consideration, but the
Company cannot predict the outcome of the proceeding in which such changes are
being considered.
Cross-Ownership Rules: FCC rules have generally prohibited or restricted
the cross-ownership, operation or control of a radio station and a television
station serving the same geographic market, of a television station and a
cable system serving the same geographic market, and of a television station
and a daily newspaper serving the same geographic market. The 1996 Act directs
the FCC to amend its rules to permit ownership of television stations and
cable systems in the same geographic market. The 1996 Act also directs the FCC
to presumptively waive, in the top 50 markets, its prohibition on ownership of
television and radio stations in the same geographic market. Under these
rules, absent waivers, the Company would not be permitted to acquire any daily
newspaper or radio broadcast station in a geographic market in which it now
owns or controls any TV properties. The FCC is currently considering a
rulemaking to change the radio/television cross-ownership restrictions. The
Company cannot predict the outcome of that rulemaking.
Programming and Operation: The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually has
relaxed or eliminated many of the formal procedures it had developed to
promote the broadcast of certain types of programming responsive to the needs
of a station's community of license. However, broadcast station licensees
continue to be required to present programming that is responsive to local
community problems, needs and interests and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming often will be considered by the FCC when it evaluates
license renewal applications, although such complaints may be filed at any
time and generally may be considered by the FCC at any time. Stations also
must follow various rules promulgated under the Communications Act that
regulate, among other things, political advertising, sponsorship
identifications, the advertisements of contests and lotteries, programming
directed to children, obscene and indecent broadcasts and technical
operations, including limits on radio frequency radiation. The
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FCC is currently considering the adoption of standards placing quantitative
requirements on television stations mandating specific amounts of educational
and informational programming directed to children. The 1996 Act also
requires commercial television stations to report on complaints concerning
violent programming in their license renewal applications. In addition, most
broadcast licensees, including the Company's licensees, must develop and
implement affirmative action programs designed to promote equal employment
opportunities and must submit reports to the FCC with respect to these
matters on an annual basis and in connection with a license renewal
application.
Must Carry and Retransmission Consent: The 1992 Cable Act requires each
television broadcaster to make an election to exercise either certain "must
carry" or, alternatively, "retransmission consent" rights in connection with
its carriage by cable systems in the station's local market. If a broadcaster
chooses to exercise its must carry rights, it may demand carriage on a
specified channel on cable systems within its defined market. Must carry
rights are not absolute, and their exercise is dependent on variables such as
the number of activated channels on, and the location and size of, the cable
system and the amount of duplicative programming on a broadcast station. Under
certain circumstances, a cable system may decline carriage of a given station.
If a broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement. The FCC's must carry requirements took
effect on June 2, 1993; however, stations had until June 17, 1993 to make
their must carry/retransmission consent elections. Under the Company's Fox
Affiliation Agreements, the Company appointed Fox as its irrevocable agent to
negotiate such retransmission consents with the major cable operators in the
Company's respective markets. Fox exercised the Company's stations'
retransmission consent rights. Television stations must make a new election
between must carry and retransmission consent rights every three years. The
next required election date is October 1, 1996. Although the Company expects
the current retransmission consent agreements to be renewed upon their
expiration, there can be no assurance that such renewals will be obtained.
In April 1993, the United States District Court for the District of
Columbia upheld the constitutionality of the legislative must carry
provision. This decision was vacated by the United States Supreme Court in
June 1994, and remanded to the District Court for further development of a
factual record. The District Court has again upheld the must carry rules, and
the matter will be considered again by the Supreme Court. The Company cannot
predict the outcome of the case. In the meantime, the must carry provisions
and the FCC's regulations implementing those provisions are in effect.
Pending or Proposed Legislation and FCC Rulemakings: The FCC has proposed
rules for implementing advanced (including high-definition) television
("Atelevision") service in the United States. Implementation of ATV is
intended to improve the technical quality of television. Under certain
circumstances, however, conversion to ATV operations may reduce a station's
coverage area. The FCC is considering an implementation proposal that would
allot a second broadcast channel to each full-power commercial television
station for ATV operation. Under the proposal, stations would be required to
phase in their ATV operations on the second channel over approximately nine
years following adoption of a final table of allotments and to surrender their
present channel six years later. Recently, there has been consideration by the
FCC of shortening further this transition period. In August 1995, the FCC
commenced a further rulemaking proceeding to address ATV transition issues.
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 time brokerage. Certain of these
changes, if adopted, could allow owners of television stations who currently
cannot buy a television station or an additional television station in the
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Company's markets to acquire television properties in such markets. This may
increase competition in such markets, but may also work to the Company's
advantage by permitting it to acquire additional stations in its present
markets and by enhancing the value of the Company's stations by increasing the
number of potential buyers. In addition, the FCC is conducting an inquiry to
consider proposals to increase broadcasters' obligations under its rules
implementing the Children's Television Act of 1990, which requires television
stations to present programming specifically directed to the "educational and
informational" needs of children. The FCC also is conducting a rulemaking
proceeding to consider the adoption of more restrictive standards for the
exposure of the public and workers to potentially harmful radio frequency
radiation emitted by broadcast station transmitting facilities. Other matters
which could affect the Company's broadcast properties include technological
innovations affecting the mass communications industry and technical
allocation matters, including assignment by the FCC of channels for additional
broadcast stations, low-power television stations and wireless cable systems
and their relationship to and competition with full power television service,
as well as possible spectrum fees or other changes imposed on broadcasters for
the use of their channels. The ultimate outcome of these pending proceedings
cannot be predicted at this time.
The FCC has initiated a Notice of Inquiry proceeding seeking comment on
whether the public interest would be served by establishing limits on the
amount of commercial matter broadcast by television stations. No prediction
can be made at this time as to whether the FCC will impose any commercial
limits at the conclusion of its deliberations. The Company is unable to
determine what effect, if any, the imposition of limits on the commercial
matter broadcast by television stations would have upon the Company's
operations.
The FCC recently lifted its financial interest/syndication ("FIN/SYN")
rules that prohibited ABC, CBS and NBC from engaging in syndication for the
sale, licensing, or distribution of television programs for non-network
broadcast exhibition in the United States. Further, these rules prohibited
networks from sharing profits from any syndication and from acquiring any new
financial or proprietary interest in programs of which they were not the sole
producer. The Company cannot predict the effect of the elimination of the
FIN/SYN rules on the Company's ability to acquire desirable programming at
reasonable prices.
The FCC also recently eliminated the prime time access rule ("PTAR"),
effective August 30, 1996. PTAR currently limits a station's ability to
broadcast network programming (including syndicated programming previously
broadcast over a network) during prime time hours. The elimination of PTAR
could increase the amount of network programming broadcast over a station
affiliated with ABC, CBS or NBC. Such elimination also could result in (i) an
increase in the compensation paid by the network (due to the additional prime
time hours during which network programming could be aired by a
network-affiliated station) and (ii) increased competition for syndicated
network programming that previously was unavailable for broadcast by network
affiliates during prime time. For purposes of the prime time access rule, the
FCC defines "network" to include those entities that deliver more than 15
hours of "prime time programming" (a term defined in those rules) to
affiliates reaching 75% of the nation's television homes. Neither Fox nor its
affiliates, including the Company's TV stations, are subject to the prime
time access rule. The Company cannot predict the effect that the repeal many
ultimately have on the market for syndicated programming.
The Congress and the FCC have considered in the past and may consider and
adopt in the future, (i) other changes to existing laws, regulations and
policies or (ii) new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation,
ownership, and profitability of the Company's broadcast stations, result in
the loss of audience share and advertising revenues for these stations or
affect the ability of the Company to acquire additional broadcast stations or
finance such acquisitions.
DBS
Unlike a common carrier, such as a telephone company, or a cable operator,
DBS operators such as DIRECTV are free to set prices and serve customers
according to their business judgment, without rate of return or other
regulation or the obligation not to discriminate among customers. However,
there are laws and regulations that affect DIRECTV and, therefore, affect the
Company. As an operator of a privately owned United States satellite system,
DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with
respect to (i) the licensing of individual satellites (i.e., the requirement
that DIRECTV meet minimum
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financial, legal and technical standards), (ii) avoidance of interference with
radio stations and (iii) compliance with rules that the FCC has established
specifically for DBS satellite licenses. As a distributor of television
programming, DIRECTV is also affected by numerous other laws and regulations,
including in particular the 1992 Cable Act's program access and exclusivity
provisions. In addition to regulating pricing practices and competition within
the cable television industry, the 1992 Cable Act is intended to establish and
support alternative multichannel video distribution services, such as
"wireless" cable and DBS.
State and local authorities in some jurisdictions restrict or prohibit the
use of satellite dishes pursuant to zoning and other regulations. The FCC has
recently adopted new rules that preempt state and local regulations that
affect receive-only satellite dishes that are two meters or less in diameter,
in any area where commercial or industrial uses are generally permitted by
local land use regulation, or that are one meter or less in diameter in any
area. Satellite dishes for the reception of DIRECTV's services are less than
one meter in diameter, and thus the FCC's rules are expected to ease local
regulatory burdens on the use of those dishes.
CABLE
1984 Cable Act and 1992 Cable Act: The Cable Communications Policy Act of
1984 (the "1984 Cable Act") created uniform national standards and guidelines
for the regulation of cable systems. Among other things, the 1984 Cable Act
generally preempted local control over cable rates in most areas. In addition,
the 1984 Cable Act affirmed the right of franchising authorities (state or
local, depending on the practice in individual states) to award one or more
franchises within their jurisdictions. It also prohibited non-grandfathered
cable systems from operating without a franchise in such jurisdictions.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") amended the 1984 Cable Act in many respects and
significantly changed the legislative and regulatory environment in which the
cable industry operates. The 1992 Cable Act allows for a greater degree of
regulation with respect to, among other things, cable system rates for both
basic and certain nonbasic services; programming access and exclusivity
arrangements; access to cable channels by unaffiliated programming services;
leased access terms and conditions; horizontal and vertical ownership of cable
systems; customer service requirements; franchise renewals; television
broadcast signal carriage and retransmission consent; technical standards;
subscriber privacy; consumer protection issues; cable equipment compatibility;
obscene or indecent programming; and cable system requirements that
subscribers subscribe to tiers of service other than basic service as a
condition of purchasing premium services. Additionally, the legislation
encourages competition with existing cable systems by allowing municipalities
to own and operate their own cable systems without having to obtain a
franchise; preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering an
existing cable system's service area; and prohibiting the common ownership of
cable systems and co-located wireless systems known as MMDS and private SMATV.
The 1992 Cable Act also precludes video programmers affiliated with cable
television companies from favoring cable operators over competitors and
requires such programmers to sell their programming to other multichannel
video distributors. This provision may limit the ability of cable program
suppliers to offer exclusive programming arrangements to cable television
companies. The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has adopted many regulations to implement the
provisions of the 1992 Cable Act.
The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate transmission facilities often
used in connection with cable operations.
The Telecommunications Act of 1996: On February 1, 1996, the Congress
passed the 1996 Act. On February 8, 1996, the President signed it into law.
This new law will alter federal, state and local laws and regulations
regarding telecommunications providers and services, including the Company and
the cable television and other telecommunications services provided by the
Company. There are numerous rulemakings to be undertaken by the FCC which will
interpret and implement the provisions of the 1996 Act. It is not possible at
this time to predict the outcome of such rulemakings.
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Cable Rate Regulation. The 1996 Act eliminates cable programming service
tier ("CPST") rate regulation effective March 31, 1999, for all cable
operators. In the interim, CPST rate regulation can be triggered only by a
local unit of government (commonly referred to as local franchising
authorities or "LFA") complaint to the FCC. Since the Company is a small cable
operator within the meaning of the 1996 Act, CPST rate regulation for the
Company ended upon the enactment of the 1996 Act. The Company's status as a
small cable operator may be affected by future acquisitions. The 1996 Act does
not disturb existing rate determinations of the FCC. The Company's basic tier
of cable service ("BST") rates remain subject to LFA regulation under the 1996
Act.
Rate regulation is precluded wherever a cable operator faces "effective
competition." The 1996 Act expands the definition of effective competition to
include any franchise area where a local exchange carrier ("LEC") (or affiliate)
provides video programming services to subscribers by any means other than
through DBS. There is no penetration minimum for the local exchange carrier
to qualify as an effective competitor, but it must provide "comparable"
programming services in the franchise area.
Under the 1996 Act, the Company will be allowed to aggregate, on a
franchise, system, regional or company level, its equipment costs into broad
categories, such as converter boxes, regardless of the varying levels of
functionality of the equipment within each such broad category. The 1996 Act
will allow the Company to average together costs of different types of
converters (including non-addressable, addressable, and digital). The
statutory changes will also facilitate the rationalizing of equipment rates
across jurisdictional boundaries. These favorable cost-aggregation rules do
not apply to the limited equipment used by "BST-only" subscribers.
In June 1995, the FCC adopted rules which provide significant rate relief
for small cable operators, which include operators the size of the Company.
The Company's current rates are below the maximum presumed reasonable under
the FCC's rules for small operators, and the Company may use this new rate
relief to justify current rates, rates already subject to pending rate
proceedings and new rates.
Anti-Buy Through Provisions: In March 1993, the FCC adopted regulations
pursuant to the 1992 Cable Act which require cable systems to permit
customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable system is technically incapable of
doing so. Generally, this exemption from compliance with the statute for
cable systems that do not have such technical capability is available until a
cable system obtains the capability, but not later than December 2002. The
Company's systems have the necessary technical capability and have complied
with this regulation.
Indecent Programming on Leased Access Channels: FCC regulations pursuant
to the 1992 Cable Act permit cable operators to restrict or refuse the
carriage of indecent programming on so-called "leased access" channels, i.e.,
channels the operator must set aside for commercial use by persons
unaffiliated with the operator. Operators were also permitted to prohibit
indecent programming on public access channels. In June 1995, the U.S. Court
of Appeals for the D.C. Circuit upheld these rules.
Scrambling: The 1996 Act requires that upon the request of a cable
subscriber, the cable operator must, free of charge, fully scramble or
otherwise fully block the audio and video programming of each channel
carrying adult programming so that a non-subscriber does not receive it.
Cable operators must also fully scramble or otherwise fully block the
video and audio portion of sexually explicit or other programming that is
indecent on any programming channel that is primarily dedicated to sexually
oriented programming so that a non-subscriber to such channel may not receive
it. Until full scrambling or blocking occurs, cable operators must limit the
carriage of such programming to hours when a significant number of children
are not likely to view the programming. The Company's systems do not
presently have the necessary technical capability to comply with the
scrambling requirement. However, the effective date of these requirements has
been stayed by the United States District Court for Delaware.
Cable Entry Into Telecommunications: The 1996 Act declares that no state
or local laws or regulations may prohibit or have the effect of prohibiting
the ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. The 1996 Act further
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<PAGE>
provides that cable operators and affiliates providing telecommunications
services are not required to obtain a separate franchise from LFAs for such
services. The 1996 Act prohibits LFAs from requiring cable operators to
provide telecommunications service or facilities as a condition of a grant of
a franchise, franchise renewal, or franchise transfer, except that LFAs can
seek "institutional networks" as part of franchise negotiations.
The 1996 Act clarifies that traditional cable franchise fees may only be
based on revenues related to the provision of cable television services.
However, when cable operators provide telecommunications services, LFAs may
require reasonable, competitively neutral compensation for management of the
public rights-of-way.
Interconnection and Other Telecommunications Carrier Obligations: To
facilitate the entry of new telecommunications providers including cable
operators, the 1996 Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks
with other carriers and may not deploy network features and functions that
interfere with interoperability.
Telephone Company Entry Into Cable Television: The 1996 Act allows
telephone companies to compete directly with cable operators by repealing the
telephone company-cable cross-ownership ban and the FCC's video dialtone
regulations. This will allow LECs, including the Bell Operating Companies, to
compete with cable both inside and outside their telephone service areas.
The 1996 Act replaces the FCC's video dialtone rules with an "open video
system" ("OVS") plan by which LECs can provide cable service in their
telephone service area. LECs complying with FCC OVS regulations will receive
relaxed oversight. Only the program access, negative option billing
prohibition, subscriber privacy, Equal Employment Opportunity, PEG, must-carry
and retransmission consent provisions of the Communications Act will apply to
LECs providing OVS. Franchising, rate regulation, consumer service provisions,
leased access and equipment compatibility will not apply. Cable copyright
provisions will apply to programmers using OVS. LFAs may require OVS operators
to pay "franchise fees" only to the extent that the OVS provider or its
affiliates provide cable services over the OVS. OVS operators will be subject
to LFA general right-of-way management regulations. Such fees may not exceed
the franchise fees charged to cable operators in the area, and the OVS
provider may pass through the fees as a separate subscriber bill item.
The 1996 Act requires the FCC to adopt, within six months, regulations
prohibiting an OVS operator from discriminating among programmers, and
ensuring that OVS rates, terms, and conditions for service are reasonable and
nondiscriminatory. Further, the FCC is to adopt regulations prohibiting a
LEC-OVS operator, or its affiliates, from occupying more than one-third of a
system's activated channels when demand for channels exceeds supply, although
there are no numeric limits. The 1996 Act also mandates OVS regulations
governing channel sharing; extending the FCC's sports exclusivity, network
nonduplication, and syndex regulations; and controlling the positioning of
programmers on menus and program guides. The 1996 Act does not require LECs
to use separate subsidiaries to provide incidental inter Local Access and
Transport Area ("interLATA") video or audio programming services to
subscribers or for their own programming ventures.
Cable and Broadcast Television Cross-Ownership: The 1996 Act requires that
the FCC amend its rules to allow a person or entity to own or control a
network of broadcast stations and a cable system. The 1996 Act abolishes the
prohibition of ownership of cable systems and television stations where
service areas overlap.
Signal Carriage: The 1992 Cable Act imposed obligations and restrictions on
cable operator carriage of non-satellite delivered television stations. Under
the must-carry provision of the 1992 Cable Act, a cable operator, subject to
certain restrictions, must carry, upon request by the station, all commercial
television stations with adequate signals which are licensed to the same
market as the cable system. Cable operators are also obligated to carry all
local non-commercial stations. If a non-satellite delivered commercial
broadcast station does not request carriage under the must-carry provisions of
the 1992 Cable Act, a cable operator may not carry that station without that
station's explicit written consent for the cable operator to retransmit its
programming. The Company is carrying all television stations that have made
legitimate requests for carriage. All other television stations are carried
pursuant to written retransmission consent agreements.
Copyright Licensing: Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a blanket license to retransmit
broadcast signals. Bills
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<PAGE>
have been introduced in Congress over the past several years that would
eliminate or modify the cable compulsory license. The 1992 Cable Act's
retransmission consent provisions expressly provide that retransmission
consent agreements between television stations and cable operators do not
obviate the need for cable operators to obtain a copyright license for the
programming carried on each broadcaster's signal.
Electric Utility Entry Into Telecommunications: The 1996 Act provides that
registered utility holding companies and subsidiaries may provide
telecommunications services (including cable) notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and must apply
to the FCC for operating authority. It is anticipated that large utility
holding companies will become significant competitors to both cable
television and other telecommunications providers.
State and Local Regulation: Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local
officials are usually involved in franchisee selection, system design and
construction, safety, consumer relations, billing practices and
community-related programming and services among other matters. Cable systems
generally are operated pursuant to nonexclusive franchises, permits or
licenses granted by a municipality or other state or local government entity.
Franchises generally are granted for fixed terms and in many cases are
terminable if the franchise operator fails to comply with material provisions.
The 1992 Cable Act prohibits the award of exclusive franchises and allows
franchising authorities to exercise greater control over the operation of
franchised cable systems, especially in the area of customer service and rate
regulation. The 1992 Cable Act also allows franchising authorities to operate
their own multichannel video distribution system without having to obtain a
franchise and permits states or LFAs to adopt certain restrictions on the
ownership of cable systems. Moreover, franchising authorities are immunized
from monetary damage awards arising from regulation of cable systems or
decisions made on franchise grants, renewals, transfers and amendments. Under
certain circumstances, LFAs may become certified to regulate basic service
cable rates.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of
the cable system. Cable franchises generally contain provisions governing
fees to be paid to the franchising authority, length of the franchise term,
renewal, sale or transfer of the franchise, territory of the franchise,
design and technical performance of the system, use and occupancy of public
streets and number and types of cable services provided.
Although federal law has established certain procedural safeguards to
protect incumbent cable television franchisees against arbitrary denials of
renewal, the renewal of a franchise cannot be assured unless the franchisee
has met certain statutory standards. Moreover, even if a franchise is
renewed, a franchising authority may impose new and stricter requirements,
such as the upgrading of facilities and equipment or higher franchise fees
(subject, however, to limits set by federal law). To date, however, no
request of the Company for franchise renewals or extensions has been denied.
Despite favorable legislation and good relationships with its franchising
authorities, there can be no assurance that franchises will be renewed or
extended.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable systems, and several states have adopted
legislation subjecting cable systems to the jurisdiction of centralized state
governmental agencies, some that impose regulation similar to that of a
public utility. Attempts in other states to regulate cable systems are
continuing and can be expected to increase. Such proposals and legislation
may be preempted by federal statute and/or FCC regulation. Massachusetts and
Connecticut have adopted state level regulation.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
industry. Other existing federal regulations, copyright licensing and, in
many jurisdictions, state and local franchise requirements currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable systems operate. Neither the outcome of
these proceedings nor the impact upon the cable industry or the Company's
cable systems can be predicted at this time.
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<PAGE>
PROPERTIES
The Company's TV stations own and lease studio, tower, transmitter and
antenna facilities and the Company's Cable systems own and lease studio,
parking, storage, headend, tower, earth station and office facilities in the
localities in which they operate. The Company leases office space in
Marlboro, Massachusetts for its DBS operations. The television transmitter
and antenna sites are generally located so as to provide optimum market
coverage. The cable headend and tower sites are located at strategic points
within the cable system franchise area to support the distribution system.
The Company believes that its facilities are in good operating condition and
are satisfactory for their present and intended uses. The following table
contains certain information describing the general character of the
Company's properties after giving effect to the Transactions:
<TABLE>
<CAPTION>
Expiration of Lease
Location and Type of Property Owned or Leased Approximate Size or Renewal Options
- ----------------------------- ---------------- ----------------- ---------------------
<S> <C> <C> <C>
Corporate Office
Radnor, Pennsylvania (office) Leased 4,848 square feet 11/30/97
TV Stations
Jackson, MS (TV transmitting
equipment) Leased 1,125 foot tower 2/28/04
Jackson, MS (television station and N/A
transmitter building) Lease-Purchase (1) 5,600 square foot building;
900 square foot building
West Mountain, PA (tower and
transmitter) Owned 9.6 acres N/A
916 Oak Street, Scranton, PA
(television
station) Leased 8,600 square feet 4/30/00
Bald Eagle Mountain, PA
(transmitting) Leased 179 foot tower 9/30/07
Nescopec Mountain, PA
(transmitting) Owned 400 foot tower N/A
Williamsport, PA (tower) Owned 40,000 square feet N/A
Chattanooga, TN (transmitting) Owned 577 foot tower N/A
2401 East Main St., Chattanooga, TN
(former television station) Owned 14,800 square feet N/A
1201 East Main St., Chattanooga, TN
(present television station) Owned 16,240 square foot building N/A
2320 Congress Street, Portland, ME on 3.17 acres
(television station) Leased 8,000 square feet 12/31/97
Gray, ME (tower) Owned 18.6 acres N/A
1203 Governor's Square,
Tallahassee, FL
(television station) Leased 5,012 square feet 1/31/97
Leon County, FL (2) 30 acres N/A
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
368 Main Street, Winsted, CT
(office) Owned 4,200 square feet N/A
Charlton, MA (office, headend site) Leased 38,223 square feet 5/9/99
Hinsdale, MA (headend site) Leased 30,590 square feet 2/1/04
Lanesboro, MA (headend site) Leased 62,500 square feet 4/13/97
West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05
Bethlehem, NH (headend site) Leased 1.84 acres 5/1/03
Moultonboro, NH (office) Leased 1,250 square feet 12/31/02
Moultonboro, NH (headend site) Leased 58,789 square feet 6/30/03
Tuftonboro, NH (headend site) Leased 216 square feet 7/1/03
Route #2, Puerto Rico (office) Leased 2,520 square foot building 8/30/98
Mayaguez, Puerto Rico (headend) Leased 530 square foot building 8/30/98
Mayaguez, Puerto Rico (warehouse) Leased 1,750 square foot area monthly
San German, Puerto Rico (headend) Owned 1,200 square feet N/A
San German, Puerto Rico (office) Leased 2,928 square feet 2/1/01
Anasco, Puerto Rico (office) Leased 500 square feet 2/28/99
Anasco, Puerto Rico (headend site) Leased 1,200 square meters 3/24/97
Anasco, Puerto Rico (headend) Owned 59 foot tower N/A
Guanica, Puerto Rico (headend site) Leased 40 foot tower, 121 square meters 2/28/04
Cabo Rojo, Puerto Rico (headend
site) Leased 40 foot tower, 121 square meters 11/10/04
Hormigueros, Puerto Rico
(warehouse) Leased 2,000 square feet monthly
</TABLE>
- ------
(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.
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<PAGE>
EMPLOYEES
At March 15, 1996, the Company had 220 full-time and 15 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 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.
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 totaling $90,000 and $51,000 as of December 31, 1994 for
the Phase One and Phase Two periods, respectively. The Company appealed the
Connecticut DPUC order to the FCC arguing that in ordering refunds, the
Connecticut DPUC misapplied its own and the FCC's cost-of-service standards
by ignoring past precedent, by failing to consider the Company's unique
circumstances and by failing to make appropriate exceptions to
cost-of-service presumptions. The FCC has stayed the Connecticut DPUC orders.
To date, the FCC has not yet issued sufficient rulings to predict how it will
decide the issues raised by the Company on appeal. Although no decision with
respect to the Company's Connecticut DPUC appeal has been reached, in the
event the FCC issues an adverse ruling, the Company expects to make refunds
in kind rather than in cash.
The 1996 Act immediately eliminates rate regulation for CPST for small
cable operators, such as the Company. Pursuant to the 1996 Act, a small cable
operator is one that directly or through an affiliate serves in the aggregate
less than one percent of the subscribers in the United States and is not
affiliated with any entity or entities whose gross annual revenues in the
aggregate exceeds $250,000,000. In June 1995 the FCC released an order
providing rate regulation relief to small cable operators which serve 400,000
or fewer subscribers in any system with 15,000 or fewer subscribers. As a
result of this order, such small cable operators are now eligible to justify
their basic rates based on a four-element rate calculation. If the per
channel rate resulting from this calculation is $1.24 or less, the rate is
presumed reasonable. If the rate is higher than $1.24, the cable operator
bears the burden of justifying the higher rate. The current per channel rate
for each of the Company's Cable systems is substantially less than $1.24.
This new rate regulation option is available regardless of whether the
operator has used another option previously. If a small system is later
acquired by a larger company, the system will continue to have this
regulatory option. In addition, small systems, as defined by this ruling, are
now permitted to use all previously available small system and small operator
relief, which includes the ability to pass through certain headend upgrade
costs, and the ability to enter into alternative rate regulation agreements
with franchising authorities.
Acting pursuant to the FCC's June 1995 order with respect to small cable
systems, in early 1996, the Company filed with the Massachusetts Community
Antenna Television Commission (the "Massachusetts Cable Commission") and the
Connecticut DPUC proposed new rates for the Company's revised basic service
for its Massachusetts and Connecticut cable systems. In March 1996, the
Massachusetts Cable Commission approved the proposed higher rates for the
Massachusetts systems, and those rates went into effect on April 1, 1996. As
of this date, the Connecticut DPUC has not yet acted upon the Company's
filing. On April 1, 1996, the Company put into effect the proposed new rates
for its Connecticut system, subject to possible refund. The new rates are on
a per-channel basis less that the $1.24 presumed-reasonable standard
established by the FCC's June 1995 order.
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<PAGE>
MANAGEMENT AND CERTAIN TRANSACTIONS
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is certain information concerning the executive officers
and directors of Pegasus.
<TABLE>
<CAPTION>
Name Age Position
--------------------- ----- --------------------------------------------------
<S> <C> <C>
Marshall W. Pagon. .. 40 Chairman of the Board, President, Chief Executive Officer
and Treasurer
Robert N. Verdecchio. . 39 Senior Vice President, Chief Financial Officer and
Assistant Secretary
Howard E. Verlin .... 35 Vice President and Secretary
Guyon W. Turner ..... 54 Vice President
Donald W. Weber ..... 59 Director
</TABLE>
Marshall W. Pagon has served as President, Chief Executive Officer and
Chairman of the Board of Pegasus since its incorporation. Mr. Pagon also
serves as Chief Executive Officer and Director of each of Pegasus'
subsidiaries. From 1991 to October 1994, when the assets of various
affiliates of PM&C, principally limited partnerships that owned and operated
the Company's TV and Cable operations, were transferred to PM&C's
subsidiaries, Mr. Pagon or entities controlled or affiliated with Mr. Pagon
served as the general partner of these partnerships and conducted the
business of the Company. Mr. Pagon's background includes over 15 years of
experience in the media and communications industry. In 1987, Mr. Pagon
organized the Management Company to provide management and other services to
companies in the media and communications industry. The Management Company
has provided management and accounting services to PM&C and its subsidiaries.
Robert N. Verdecchio has served as Pegasus' Chief Financial Officer 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.
Howard E. Verlin is a Vice President of Pegasus and is responsible for
operating activities of the Company's cable and DBS subsidiaries, including
supervision of their general managers. Mr. Verlin has served similar
functions with respect to the Company's predecessors in interest and
affiliates since 1987 and has over 14 years of experience in the media and
communications industry.
Guyon W. Turner is a Vice President of Pegasus and is responsible for the
Company's broadcast television subsidiary. From 1984 to 1993, Mr. Turner was
the managing general partner of Scranton TV Partners, Ltd., from which the
Company acquired WOLF and WWLF in 1993. Mr. Turner was also chairman and
director of Empire Radio Partners, Ltd. from March 1991 to December 1993. In
November 1992, Empire filed for protection under Chapter 11 of the Bankruptcy
Code. Mr. Turner's background includes over 15 years of experience in the
media and communications industry.
Donald W. Weber has been a Director of Pegasus since its incorporation and
a director of PM&C since November 1995. Mr. Weber has been the President and
Chief Executive Officer of Viewstar Entertainment Services, Inc., an NRTC
member that distributes DIRECTV services in North Georgia, since August 1993.
From November 1991 through August 1993, Mr. Weber was a private investor and
consultant to various communication companies. Prior to that time, Mr. Weber
was President and Chief Operating Officer of Contel Corporation until its
merger with GTE Corporation in 1991. Mr. Weber is currently a member of the
boards of directors of InterCel, Inc. and Healthdyne Information Enterprises,
Inc. each of which are publicly-traded companies, and serves on the board of
directors of the NRTC.
In connection with the Harron Agreement, the Parent agreed to nominate a
designee of Harron as a member of the Company's Board of Directors. Shortly
after the consummation of this Offering, the Company anticipates having a
Board of Directors consisting of five members, including Mr. Pagon, Mr. Weber
and the Harron nominee.
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<PAGE>
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this Offering, the Company did not have a compensation committee
or any other committee of the Board of Directors performing similar functions
(the "Compensation Committee"). Decisions concerning compensation of
executive officers were made by the Board of Directors, which included Mr.
Pagon, the President and Chief Executive Officer of the Company. Upon
increasing the size of the Board to five members, the Company expects to
establish the Compensation Committee.
COMPENSATION OF DIRECTORS
Under the Company's By-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the Board of
Directors. The Company currently pays its directors who are not employees or
officers of the Company an annual retainer of $5,000 plus $500 for each Board
meeting attended in person and $250 for each Board meeting held by telephone.
The Company also reimburses each director for all reasonable expenses
incurred in traveling to and from the place of each meeting of the Board or
committee of the Board.
As additional remuneration for joining the Board, Mr. Weber was granted in
April 1996 an option to purchase ________ shares of Class A Common Stock at an
exercise price of $_____ per share, the fair market value at the time he was
elected a director. Mr. Weber's option vested upon the date of grant and may
be exercised until November 2000.
MANAGEMENT AGREEMENT
The Management Company performs various management and accounting services
for the Company pursuant to the Management Agreement between the Management
Company and the Company. Mr. Pagon controls and is the majority owner of the
Management Company. Upon the consummation of this Offering, the Management
Agreement will be transferred to the Company, and the employees of the
Management Company will become employees of the Company. In consideration for
the transfer of this agreement together with certain net assets, including
approximately $1.4 million of accrued management fees, the Management Company
will receive $______ million of Class B Common Stock (valued at the price to
the public in this Offering) and approximately $1.4 million in cash. The
Company has received an opinion that this transaction is fair to the Company
from a financial point of view.
Under the Management Agreement, the Management Company provided specified
executive, administrative and management services to PM&C and its operating
subsidiaries. These services included: (i) selection of personnel; (ii)
review, supervision and control of accounting, bookkeeping, recordkeeping,
reporting and revenue collection; (iii) supervision of compliance with legal
and regulatory requirements; and (iv) conduct and control of daily
operational aspects of the Company. In consideration for the services
performed by the Management Company under the Management Agreement, the
Company was charged management fees, which represented 5% of the Company's
net revenues and reimbursements for the Management Company's accounting
department costs. The Management Company's offices are located at 5 Radnor
Corporate Center, Suite 454, Radnor, Pennsylvania 19087.
TOWERS PURCHASE
Simultaneously with the completion of this Offering, the Company will
purchase Towers' assets for total consideration of approximately $1.4
million. Towers is beneficially owned by Marshall W. Pagon. The Towers
Purchase consists of ownership and leasehold interests in three tower
properties. Towers leases space on each of its towers to the Company and also
leases space to unaffiliated companies. The purchase price has been
determined by an independent appraisal.
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<PAGE>
EXECUTIVE COMPENSATION
The salaries of the Company's executive officers have historically been
paid by the Management Company. Upon the closing of this Offering, the
Management Agreement will be transferred to the Company and the salaries of
the Company's executive officers will be paid for by the Company. The
following table summarizes the compensation paid for the last two fiscal
years to the Chief Executive Officer and to each of the Company's most highly
compensated officers whose total annual salary and bonus for the fiscal year
ended December 31, 1995 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation
---------------------------- --------------
Restricted
Other Annual Stock
Name Principal Position Year Salary Compensation Awards
- --------------------- ------------------------------------- ------ ---------- -------------- --------------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon ... President and Chief Executive Officer 1995 $150,000 -- --
1994 $150,000 -- --
Robert N. Verdecchio . Senior Vice President, Chief Financial 1995 $122,083 -- $133,450(3)
Officer and Assistant Secretary 1994 $ 90,000 -- --
Howard E. Verlin .... Vice President, Cable and Satellite 1995 $100,000 -- $ 95,321(3)
Television and Secretary 1994 $ 65,000 -- --
Guyon W. Turner ..... Vice President, Broadcast Television 1995 $130,486 $18,200(2) $ 95,321(3)
1994 $140,364 $20,480(2) --
</TABLE>
- ------
(1) The Company's executive officers have never received any salary or bonus
compensation from the Company. There are no employment agreements between
the Company and its executive officers. The salary amounts presented
above were paid by the Management Company.
(2) Includes $18,000 housing allowance paid by the Company.
(3) Represents grants of the Parent's Non-Voting Common Stock in 1995 (875
shares to Mr. Verdecchio and 625 shares each to Messrs. Verlin and
Turner). Amounts shown in the table are based on a valuation prepared for
the Parent at the time of the grants. One-fourth of the shares vest on
December 31 of each of 1995, 1996, 1997 and 1998. Upon the completion of
this Offering, it is anticipated that all of the Parent's Non-Voting Common
Stock will be exchanged for shares of Class A Common Stock pursuant to
the Management Share Exchange.
INCENTIVE PROGRAM
General
The Incentive Program, which includes the Restricted Stock Plan (as
defined) and the 401(k) Plan (as defined), is designed to promote growth in
stockholder value by providing all employees with restricted stock awards
in the form of Class A Common Stock, in proportion to annual increases in
Location Cash Flow. The Incentive Program 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 _________
shares of Class A Common Stock in connection with the Incentive Program. Any
further increases in the number of shares authorized will require stockholder
approval (subject to adjustment to reflect stock dividends, stock splits,
recapitalizations, and similar changes in the capitalization of Pegasus).
The Company believes that the Incentive Program results in greater
increases in stockholder value than result from conventional stock option
programs, because the Incentive Program creates a clear cause and effect
relationship between initiatives taken to increase Location Cash Flow and the
amount of incentive compensation that results therefrom.
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Although both the Incentive Program and 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 Company's program is
fully tax deductible as compared to conventional stock option grants which
generally are not tax deductible. For accounting purposes, conventional stock
option programs generally do not result in a charge to earnings while
compensation under the Incentive Program does 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 components of the Incentive Program in
terms of a $1 increase in annual Location Cash Flow.
<TABLE>
<CAPTION>
Component Amount
--------------------------------------------------------------------------------------------- -------------
<S> <C>
Stock grants to general managers based on the increase in annual Location Cash Flow
of individual business units ......................................................................... 6 cents
Stock grants to department managers based on the increase in annual Location Cash Flow of
individual business units ............................................................................. 6 cents
Stock grants to corporate managers based on the Company-wide increase in annual Location Cash Flow 8 cents
Stock grants to employees selected for special recognition .............................................. 5 cents
Stock grants to qualified profit sharing plan for the benefit of all employees and allocated pro-rata
based on wages ......................................................................................... 15 cents
--------
Total ............................................................................................... 40 cents
========
</TABLE>
Currently, the Company has seven general managers, 27 department managers
and nine corporate managers.
Restricted Stock Plan
On __________ , 1996, Pegasus adopted the Pegasus Restricted Stock Plan
(the "Restricted Stock Plan" and, together with the 401(k) Plans, the
"Incentive Program"), which was approved by Pegasus' stockholders on
__________ , 1996. Under the Restricted Stock Plan, __________ 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; (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 Internal Revenue Code of 1986, as
amended, or provisions of the Restricted Stock Plan.
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Administration. The Restricted Stock Plan is administered by a Management
Committee (the "Management Committee"). With respect to special recognition
awards made to managers who are officers or directors, the Restricted Stock
Plan will be administered by the Compensation Committee.
Vesting. Restricted Stock Awards vest on the following schedule: 34% after
two years of service with the Company (including years before the Restricted
Stock Plan was established); 67% after three years of service and 100% after
four years of service. A grantee also becomes fully vested in his outstanding
restricted stock award(s) upon death or disability. If a grantee's employment
is terminated for a reason other than death or disability before completing
four years of service, his unvested restricted stock awards will be
forfeited. Restricted stock is held by the Company and cannot be transferred
by the grantee prior to becoming vested. The grantee will, however, be
entitled to vote the restricted stock and receive any dividends of record
prior to vesting.
Duration and Amendment of Restricted Stock Plan. The Restricted Stock Plan
became effective (subject to stockholder approval) on __________ , 1996, and
will terminate on __________ , 2006. The Board of Directors of Pegasus may
amend, suspend or terminate the Restricted Stock Plan, and the Restricted
Stock Plan administrator may amend any outstanding restricted stock awards, at
any time. Nevertheless, certain amendments listed in the Plan require the
approval of holders of a majority of the Common Stock present, or represented,
and entitled to vote at a duly held meeting of the stockholders of Pegasus.
Examples of amendments which require stockholder approval include amendments
that materially increase the benefits accruing to directors and officers, and
amendments that materially increase the number of shares of Class A Common
Stock authorized to be issued to directors and officers under the Restricted
Stock Plan. Further, a grantee must approve the suspension, discontinuance or
amendment of the Restricted Stock Plan or the agreement evidencing his
restricted stock award, if such action would materially impair the rights of
the grantee under any restricted stock award previously granted to him.
Restricted Stock Awards. The following special recognition awards have
been made under the Restricted Stock Plan:
Name and Position Number of Units(1)
-------------------------------------------------------- ------------------
Robert N. Verdecchio, Senior Vice President, Chief
Financial Officer and Assistant Secretary ..............
Howard E. Verlin, Vice President, Cable and
Satellite Television ..................................
Guyon W. Turner, Vice President, Broadcast Television ..
Executive Group
Non-Executive Director Group 0
Non-Executive Officer Employee Group
- ------
(1) Number of shares of Class A Common Stock subject to restricted stock
awards granted to date.
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<PAGE>
Had the Restricted Stock Plan been in effect for the last fiscal year, the
following profit sharing awards would have been made under the Restricted
Stock Plan:
Name and Position Number of Units(1)
-------------------------------------------------------- ------------------
Robert N. Verdecchio, Senior Vice President, Chief
Financial Officer and Assistant Secretary .............
Howard E. Verlin, Vice President, Cable and
Satellite Television ..................................
Guyon W. Turner, Vice President, Broadcast Television ..
Executive Group
Non-Executive Director Group 0
Non-Executive Officer Employee Group
- ------
(1) Number of shares of Class A Common Stock.
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. Effective June 1, 1996, the Company's Puerto Rico subsidiary
adopted the Pegasus Communications Puerto Rico Savings Plan (the "Puerto Rico
401(k) Plan" and, together with the U.S. 401(k) Plan, the "401(k) Plans") for
eligible employees of the Company's Puerto Rico subsidiaries. The U.S. 401(k)
Plan is intended to be qualified under sections 401(a) and 401(k) of the
Internal Revenue Code of 1986, as amended. The Puerto Rico 401(k) Plan is
intended to be qualified under sections 165(a) and 165(e) of the Puerto Rico
Internal Revenue Code of 1994, as amended.
Substantially all Company employees who, as of the enrollment date under
the 401(k) Plans, have completed at least one year of service with the
Company are eligible to participate in one of the 401(k) Plans. Participants
may make salary deferral contributions of 2% to 6% of salary to the 401(k)
Plans.
The Company may make three types of contributions to the 401(k) Plans, each
allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the
last day of the applicable plan year: (i) the Company matches 100% of a
participant's salary deferral contributions to the extent the participant
invested his or her salary deferral contributions in Class A Common Stock at
the time of his or her initial contribution to the 401(k) Plans; (ii) the
Company, in its discretion, may contribute restricted stock to the 401(k)
Plans in an amount equal to 15% 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. Company
matches of employee salary deferral contributions and rollover contributions
are made in the form of Class A Common Stock, or in cash used to purchase
Class A Common Stock. Company contributions to the 401(k) Plans are subject to
limitations under applicable laws and regulations.
All employee contributions to the 401(k) Plans are fully vested at all
times and all Company contributions, if any, vest on the following schedule:
34% after two years of service with the Company (including years before the
401(k) Plans were established); 67% after three years of service and 100%
after four years of service. A participant also becomes fully vested in
Company contributions to the 401(k) Plans upon attaining age 65 or upon his
or her death or disability.
To the extent a participant's account under the 401(k) Plans is invested
in Class A Common Stock (one of eight investment alternatives currently
available under the 401(k) Plans), distributions are made in Class A Common
Stock. As of April 30, 1996, $29,954 of employee contributions are held by
the Trustees of the 401(k) Plans pending the purchase of Class A Common Stock.
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OWNERSHIP AND CONTROL
The following table sets forth certain information with respect to the
beneficial holdings of each director, each of the executive officers named in
the Summary Compensation Table, and all executive officers and directors as a
group, as well as the holdings of each stockholder who was known to Pegasus to
be the beneficial owner, as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), of more than 5% of the
Class A Common Stock and Class B Common Stock and gives effect, based upon an
initial public offering price of $__________ per share, to the Transactions.
Holders of Class A Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders generally, and holders of Class B
Common Stock are entitled to ten votes per share. Shares of Class B Common
Stock are convertible immediately into shares of Class A Common Stock on a
one-for-one basis, and accordingly, holders of Class B Common Stock are deemed
to own the same number of shares of Class A Common Stock. The Parent and
Pegasus Capital, L.P. hold in the aggregate all shares of Class B Common
Stock, representing __________ % of the Common Stock (and __________ % of the
combined voting power of x or voting stock) of Pegasus on a fully diluted
basis. Marshall W. Pagon is deemed to be the beneficial owner of all of the
Class B Common Stock. Upon consummation of this Offering, the outstanding
capital stock of the Parent will consist of 64,119 shares of Class A Voting
Common Stock, all of which will be beneficially owned by Marshall W. Pagon.
<TABLE>
<CAPTION>
Pegasus Class A Pegasus Class A Pegasus Class B
Common Stock Common Stock Common Stock
Beneficially Beneficially Beneficially
Owned Before Owned After Owned Before and After
Offering Offering Offering
------------------- ------------------- ------------------------
Beneficial Owner Shares % Shares % Shares %
- ----------------------------- ---------- ----- ---------- ----- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon(1) ........ 100.0%
Guyon W. Turner ............. -- --
Robert N. Verdecchio ........ -- --
Howard E. Verlin ............ -- --
Donald W. Weber(3)............ -- --
Harron Communications Corp.(4) -- --
70 East Lancaster Avenue
Frazer, PA 19355
Directors and Executive Officers
as a Group (5
persons) ................... 100.0%
</TABLE>
- ------
(1) The address of this person is c/o 5 Radnor Corporate Center, Suite 454,
100 Matsonford Road, Radnor, Pennsylvania 19087.
(2) Pegasus Capital, L.P. holds __________ 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
__________ 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) Consists of __________ shares of Class A Common Stock issuable upon the
exercise of the vested portion of outstanding stock options.
(4) Under the terms of a stockholder's agreement entered into by the Company
in connection with the 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.
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<PAGE>
DESCRIPTION OF INDEBTEDNESS
NOTES
PM&C, which will become the direct subsidiary of Pegasus upon completion
of this Offering, has outstanding $85.0 million in aggregate principal amount
of its 12 1/2 % Series B Senior Subordinated Notes due 2005 (the "Notes").
The Notes are subject to the terms and conditions of an Indenture dated as of
July 7, 1995 among PM&C, certain of its direct and indirect subsidiaries, as
guarantors (the "Guarantors"), and First Union National Bank, as trustee, a
copy of which is filed as an exhibit to the registration statement of which
this Prospectus is a part. The Notes are subject to all of the terms and
conditions of the Indenture. The following summary of the material provisions
of the Indenture does not purport to be complete, and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act of 1939, as amended. All terms defined in the Indenture and not otherwise
defined herein are used below with the meanings set forth in the Indenture.
General. The Notes will mature on July 1, 2005 and bear interest at 12 1/2
% per annum, payable semi-annually on January 1 and July 1 of each year. The
Notes are general unsecured obligations of PM&C and are subordinated in right
of payment to all existing and future Senior Debt of PM&C. The Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis,
jointly and severally, by the Guarantors.
Optional Redemption. The Notes are subject to redemption at any time, at
the option of PM&C, in whole or in part, on or after July 1, 2000 at
redemption prices (plus accrued interest and Liquidated Damages, if any)
starting at 106.25% of principal during the 12-month period beginning July 1,
2000 and declining annually to 100% of principal on July 1, 2003 and
thereafter.
In addition, prior to July 1, 1998, PM&C may redeem up to 33 1/3 % of the
aggregate principal amount of the Notes with the net proceeds of one or more
public offerings of its common equity or the common equity of PM&C's direct
parent, to the extent such proceeds are contributed (within 120 days of any
such offering) to PM&C as common equity, at a price equal to 112.5% of the
principal amount thereof plus accrued interest and Liquidated Damages, if
any, provided that at least 66 2/3% of the original aggregate principal
amount of the Notes remains outstanding thereafter.
Change of Control. Upon the occurrence of a Change of Control, each holder
of the Notes may require the Company to repurchase all or a portion of such
holder's Notes at a purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of repurchase. Generally, a Change of Control,
means the occurrence of any of the following: (i) the disposition of all or
substantially all of PM&C's assets to any person other than Marshall W. Pagon
or his Related Parties, (ii) the adoption of a plan relating to the
liquidation or dissolution of PM&C, (iii) the consummation of any transaction
in which a person becomes the beneficial owner of more of the voting stock of
PM&C than is beneficially owned at such time by Mr. Pagon and his Related
Parties, or (iv) the first day on which a majority of the members of the
Board of Directors of PM&C or the Parent are not Continuing Directors.
Subordination. The Notes are general unsecured obligations of PM&C and are
subordinate to all existing and future Senior Debt of PM&C. The Notes will
rank senior in right of payment to all junior subordinated Indebtedness of
PM&C. The Subsidiary Guarantees are general unsecured obligations of the
Guarantors and are subordinated to the Senior Debt and to the guarantees of
Senior Debt of such Guarantors. The Subsidiary Guarantees rank senior in
right of payment to all junior subordinated Indebtedness of the Guarantors.
Certain Covenants. The Indenture contains a number of covenants
restricting the operations of PM&C, which, among other things, limit the
ability of PM&C to incur additional Indebtedness, pay dividends or make
distributions, sell assets, issue subsidiary stock, restrict distributions
from Subsidiaries, create certain liens, enter into certain consolidations or
mergers and enter into certain transactions with affiliates.
Events of Default. Events of Default under the Indenture include the
following: (i) a default for 30 days in the payment when due of interest on,
or Liquidated Damages with respect to, the Notes; (ii) default in
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<PAGE>
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.
NEW CREDIT FACILITY
The Company has received a commitment letter from a commercial lender for
a $50.0 million seven-year, senior secured revolving credit facility. The
commitment consists of a $40.0 million reducing revolving facility and a
$10.0 million revolving facility. Proceeds of borrowings under the New Credit
Facility may be used for acquisitions in the TV, DBS or Cable businesses and
for general corporate purposes.
Closing under the New Credit Facility is anticipated to occur
simultaneously with, and is conditioned on, among other things, this
Offering. The completion of this Offering is conditioned on the closing of
the New Credit Facility.
All indebtedness under the New Credit Facility will constitute senior
debt. See "Description of Indebtedness -- Notes."
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company (which, in this section, refers
only to Pegasus) consists of (i) 30,000,000 shares of Class A Common Stock,
par value $.01 per share (the "Class A Common Stock"), (ii) 15,000,000 shares
of Class B Common Stock, par value $.01 per share (the "Class B Common Stock"
and, together with the Class A Common Stock, the "Common Stock"), and (iii)
5,000,000 shares of Preferred Stock, par value $.01 per share (the "Preferred
Stock"). Upon the closing of this Offering, __________ shares of Class A
Common Stock and __________ shares of Class B Common Stock will be issued and
outstanding, assuming an initial public offering price of $ __________ per
share. There are currently no shares of Preferred Stock outstanding.
The following summary description relating to the Company's capital stock
sets forth the material terms of the capital stock, but does not purport to
be complete. A description of the Company's capital stock is contained in the
Amended and Restated Certificate of Incorporation, which is filed as an
exhibit to the registration statement of which this Prospectus forms a part.
Reference is made to such exhibit for a detailed description of the
provisions thereof summarized below.
COMMON STOCK
Voting, Dividend and Other Rights. The voting powers, preferences and
relative rights of the Class A Common Stock and the Class B Common Stock are
identical in all respects, except that (i) the holders of Class A Common
Stock are entitled to one vote per share and holders of Class B Common Stock
are entitled to ten votes per share, (ii) stock dividends on Class A Common
Stock may be paid only in shares of Class A Common Stock and stock dividends
on Class B Common Stock may be paid only in shares of Class B Common Stock
and (iii) shares of Class B Common Stock have certain conversion rights and
are subject to certain restrictions on ownership and transfer described below
under "Conversion Rights and Restrictions on Transfer of Class B Common
Stock." Any amendment to the Amended and Restated Certificate of
Incorporation that has any of the following effects will require the approval
of the holders of a majority of the outstanding shares of each of the Class A
Common Stock and Class B Common Stock, voting as separate classes: (i) any
decrease in the voting rights per share of Class A Common Stock or any
increase in the voting rights of Class B Common Stock; (ii) any increase in
the number of shares of Class A Common Stock into which shares of Class B
Common Stock are convertible; (iii) any relaxation on the restrictions on
transfer of the Class B Common Stock; (iv) the authorization or issuance of
additional shares of Class B Common Stock after the completion of this
Offering; or (v) 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. Except as described above or as required
by law, holders of Class A Common Stock and Class B Common Stock vote
together on all matters presented to the stockholders for their vote or
approval, including the election of directors.
After the sale of the Class A Common Stock offered hereby, assuming an
initial public offering price of $__________ per share, the outstanding shares
of Class A Common Stock will equal __________ % of the total Common Stock
outstanding, and the holders of Class B Common Stock will have, after giving
effect to the voting power of all Common Stock, approximately __________ % of
the combined voting power of the Common Stock. The holders of the Class B
Common Stock will, therefore, have the power to elect the entire Board of
Directors of the Company. In particular, Marshall W. Pagon, by virtue of his
beneficial ownership of all of the Class B Common Stock, will have sufficient
voting power to determine the outcome of any matter submitted to the
stockholders for approval (except matters on which the holders of Class A
Common Stock are entitled to vote separately as a class), including the power
to determine the outcome of all corporate transactions.
Each share of Class A Common Stock and Class B Common Stock is entitled to
receive dividends if, as and when declared by the Board of Directors of the
Company out of funds legally available therefor. The Class A Common Stock and
Class B Common Stock share equally, on a share-for-share basis, in any cash
dividends declared by the Board of Directors.
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In the event of a merger or consolidation to which the Company is a party,
each share of Class A Common Stock and Class B Common Stock will be entitled
to receive the same consideration, except that holders of Class B Common
Stock may receive stock with greater voting power in lieu of stock with
lesser voting power received by holders of the Company's Class A Common Stock
in a merger in which the Company is not the surviving corporation.
Stockholders of the Company have no preemptive or other rights to subscribe
for additional shares. Subject to any rights of holders of any Preferred
Stock, all holders of Common Stock, regardless of class, are entitled to share
equally on a share for share basis in any assets available for distribution to
stockholders on liquidation, dissolution or winding up of the Company. No
shares of Common Stock are subject to redemption or a sinking fund. All shares
of Class B Common Stock are, and all shares of Class A Common Stock offered
hereby will be, when so issued or sold, validly issued, fully paid and
nonassessable. In the event of any increase or decrease in the number of
outstanding shares of either Class A Common Stock or Class B Common Stock from
a stock split, combination or consolidation of shares or other capital
reclassification, the Company is required to take parallel action with respect
to the other class so that the number of shares of each class outstanding
immediately following the stock split, combination, consolidation or capital
reclassification bears the same relationship to each other as the number of
shares of each class outstanding before such event.
Conversion Rights and Restrictions on Transfer of Class B Common Stock.
The Class A Common Stock has no conversion rights. Each share of Class B
Common Stock is convertible at the option of the holder at any time and from
time to time into one share of Class A Common Stock.
The Company's Amended and Restated Certificate of Incorporation provides
that any holder of shares of Class B Common Stock desiring to transfer such
shares to a person other than a Permitted Transferee (as defined below) must
present such shares to the Company for conversion into an equal number of
shares of Class A Common Stock upon such transfer. Thereafter, such shares of
Class A Common Stock may be freely transferred to persons other than
Permitted Transferees, subject to applicable securities laws.
Shares of Class B Common Stock may not be transferred except to (i)
Marshall W. Pagon or any "immediate family member" of his; (ii) any trust
(including a voting trust), corporation, partnership or other entity, more
than 50% of the voting equity interests of which are owned directly or
indirectly by (or, in the case of a trust not having voting equity interests
which is more than 50% for the benefit of) and which is controlled by, one or
more persons referred to in this paragraph; or (iii) the estate of any person
referred to in this paragraph until such time as the property of such estate
is distributed in accordance with such person's will or applicable law
(collectively, "Permitted Transferees"). "Immediate family member" means the
spouse or any parent of Marshall W. Pagon, any lineal descendent of a parent
of Marshall W. Pagon and the spouse of any such lineal descendent (parentage
and descent in each case to include adoptive and step relationships). Upon any
sale or transfer of ownership or voting rights to a transferee other than a
Permitted Transferee or if an entity no longer remains a Permitted Transferee,
such shares of Class B Common Stock will automatically convert into an equal
number of shares of Class A Common Stock. Accordingly, no trading market is
expected to develop in the Class B Common Stock and the Class B Common Stock
will not be listed or traded on any exchange or in any market.
Effects of Disproportionate Voting Rights. The disproportionate voting
rights of the Class A Common Stock and Class B Common Stock could have an
adverse effect on the market price of the Class A Common Stock. Such
disproportionate voting rights may make the Company a less attractive target
for a takeover than it otherwise might be, or render more difficult or
discourage a merger proposal, a tender offer or a proxy contest, even if such
actions were favored by stockholders of the Company other than the holders of
the Class B Common Stock. Accordingly, such disproportionate voting rights
may deprive holders of Class A Common Stock of an opportunity to sell their
shares at a premium over prevailing market prices, since takeover bids
frequently involve purchases of stock directly from stockholders at such a
premium price.
PREFERRED STOCK
The Company has authorized 5,000,000 shares of Preferred Stock. No shares
of Preferred Stock have been issued and the Company does not presently
contemplate the issuance of such shares. The Board of Directors is empowered
by the Company's 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
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or series, and may fix and determine the relative rights, preferences and
limitations of each class or series so authorized. Such action could
adversely affect the voting power of the holders of the Common Stock or could
have the effect of discouraging or making difficult any attempt by a person
or group to obtain control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank.
LIMITATION ON DIRECTORS' LIABILITY
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the
corporation, directors must exercise an informed business judgment based on
all material information reasonably available to them. In the absence of the
limitations authorized by the Delaware statute, directors could be
accountable to corporations and their stockholders for monetary damages for
conduct that does not satisfy their duty of care. Although the statute does
not change directors' duty of care, it enables corporations to limit
available relief to equitable remedies such as injunction or rescission.
Pegasus' Amended and Restated Certificate of Incorporation limits the
liability of Pegasus' directors to Pegasus or its stockholders to the fullest
extent permitted by the Delaware statute. Specifically, the directors of
Pegasus will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to Pegasus or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation law or (iv) for any transaction from
which the director derived an improper personal benefit. The inclusion of
this provision in the Amended and Restated Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited Pegasus
and its stockholders.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, assuming an initial public offering price
of $ __________ per share of Class A Common Stock, and after giving effect to
the issuance of __________ shares contemplated by the Transactions, the
Company will have __________ outstanding shares of Class A Common Stock and
__________ shares of Class B Common Stock, all of which shares of Class B
Common Stock are convertible into shares of Class A Common Stock on a share
for share basis. Of these shares, the __________ shares of Class A Common
Stock sold in this Offering will be tradeable without restriction unless they
are purchased by affiliates of the Company. All shares to be received pursuant
to the Registered Exchange Offer will also be tradeable without restriction,
except that the terms of the Registered Exchange Offer are expected to require
that each exchanging holder agrees not to sell, otherwise dispose of or pledge
any shares of the Class A Common Stock received in the Registered Exchange
Offer for a period of at least 180 days after the date of this Prospectus
without the prior written consent of Lehman Brothers Inc. The approximately
__________ remaining shares of Class A Common Stock and all of the shares of
Class B Common Stock are "restricted securities" under the Securities Act.
These "restricted securities" and any shares purchased by affiliates of the
Company in this Offering may be sold only if they are registered under the
Securities Act or pursuant to an applicable exemption from the registration
requirements of the Securities Act, including Rule 144 and Rule 701
thereunder. The holders of the remaining __________ shares have agreed not to
sell, otherwise dispose of or pledge any shares of the Company's Common Stock
or securities convertible into or exercisable or exchangeable for such Common
Stock for 180 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc. All of the Company's directors and executive
officers are subject to the 180-day lock-up.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted shares for at least two years, including
affiliates, may sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the then outstanding Class A Common
Stock ( shares immediately after this Offering) or the average weekly trading
volume in the Class A Common Stock on the Nasdaq during the four calendar
weeks preceding such sale. Sales under Rule 144 are also subject to certain
provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. A person who is
not deemed an affiliate of the Company and who has beneficially owned
restricted shares for three years from the date of acquisition of restricted
securities from the Company or any affiliate is entitled to sell such shares
under Rule 144(k) freely and without restriction or registration under the
Securities Act. As used in Rule 144, affiliates of the Company generally
include its directors, executive officers and persons directly or indirectly
owning 10% or more of the Class A Common Stock. Without consideration of the
lock-up agreements described above, none of the restricted securities would
be available for immediate sale in the public market in reliance on Rule
144(k) or would be available for immediate sale under Rule 144.
The Securities and Exchange Commission (the "Commission") has proposed to
amend the holding period required by Rule 144 to permit sales of "restricted
securities" after one year rather than two years (and two years rather than
three years for non-affiliates who desire to sell such shares under Rule
144(k). If such proposed amendment were enacted, the "restricted securities"
would become freely tradeable (subject to any applicable contractual
restrictions) at correspondingly earlier dates.
Under Rule 701, any employee, officer or director of, or consultant to the
Company who prior to this Offering purchased shares pursuant to a written
compensatory plan or contract and who is not an affiliate of the Company, is
entitled to sell such shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule
144 commencing 90 days after this Offering. Rule 701 also permits affiliates
to sell such shares without having to comply with the Rule 144 holding period
restrictions commencing 90 days after this Offering. As of the date hereof,
approximately __________ and __________ shares of Class A Common Stock would
be eligible for sale under Rule 701 by non-affiliates and affiliates,
respectively.
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 __________
shares of Class A Common Stock at an exercise price of $ __________ per share,
the fair market value at the time he was elected a director. Mr. Weber's
option vested upon issuance and are exercisable until November 2000.
84
<PAGE>
In connection with the acquisition of WTLH, the Parent issued to various
trusts controlled by the sellers of WTLH (the "WTLH Trusts") the WTLH
Warrants to purchase in the aggregate $1,000,000 of Class A Common Stock of
Pegasus at the price to the public in this Offering, commencing on the date
that the registration statement to which this Prospectus relates is declared
effective and ending 120 days after such date. Assuming an initial public
offering price of $ __________ per share of Class A Common Stock, the WTLH
Trusts will have the right to acquire __________ shares of Class A Common
Stock. Such shares will be "restricted securities" within the meaning of
Rule 144.
REGISTRATION RIGHTS
Class A Common Stock. In connection with the DBS Acquisition, the Company
granted certain piggyback registration rights to Harron. These rights expire
upon the Class A Common Stock issued to Harron becoming eligible for sale
under Rule 144 of the Securities Act. Similar rights have been granted to the
holder of the $1.0 million shares of Class A Common Stock issued in connection
with the acquisition of the Portland LMA and the $150,000 shares of Class A
Common Stock issued in connection with the Portland Acquisition.
PM&C Class B Shares. The holders of the PM&C Class B Shares are entitled
to certain demand and piggyback registration rights with respect to the
registration of capital stock by the Parent or PM&C. These rights do not
apply with respect to offerings by Pegasus. Although the Company expects that
all holders of the PM&C Class B Shares will accept the Registered Exchange
Offer, a possibility exists that some holders of the PM&C Class B Shares will
retain their shares. It is likely that once this Offering is completed that
these registration rights will provide little or no practical benefit to
holders of the PM&C Class B Shares who fail to accept the Registered Exchange
Offer. First, it is unlikely that PM&C, once it is a subsidiary of Pegasus,
or the Parent will ever make a public equity offering. Thus, it is unlikely
that holders would have an opportunity to exercise their piggyback
registration rights. Second, the demand registration rights may be exercised
only if the demand registration includes at least 25% of the PM&C Class B
Shares originally issued. If, as the Company anticipates, the holders of more
than 75% of the PM&C Class B Shares accept the Registered Exchange Offer, the
remaining holders of the PM&C Class B Shares will not hold the 25% necessary
to require registration of the PM&C Class B Shares. Third, even if holders of
the PM&C Class B Shares retain more than 25% of their stock after the
Registered Exchange Offer and can initiate a demand registration after July
7, 2000, the date when the demand registration right applies in the absence
of a prior public equity offering by PM&C or the Parent, there is not
expected to be a market for the PM&C Class B Shares.
LOCK-UP AGREEMENT
All of the executive officers and directors of Pegasus, who will be deemed
to beneficially own __________ shares of Class A Common Stock and __________
shares of Class B Common Stock upon consummation of this Offering, have agreed
with the Underwriters not to sell, otherwise dispose of or pledge any shares
of the Common Stock or any securities convertible into or exercisable for such
Common Stock for 180 days after the date of this Prospectus without the prior
written consent of Lehman Brothers Inc. In addition, the terms of the
Registered Exchange Offer are expected to require that each exchanging holder
agree not to sell, otherwise dispose of or pledge any shares of the Class A
Common Stock received in the Registered Exchange Offer for a period of at
least 180 days after the date of this Prospectus without the consent of Lehman
Brothers Inc.
85
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement, the form of which is filed as an exhibit to the
Registration Statement of which this Prospectus forms a part, the
Underwriters named below, for whom Lehman Brothers Inc., BT Securities
Corporation, CIBC Wood Gundy Securities Corp. and PaineWebber Incorporated
are acting as representatives (the "Representatives"), have severally agreed
to purchase from Pegasus, and Pegasus has agreed to sell to each Underwriter,
the aggregate number of shares of Class A Common Stock set forth opposite the
name of each such Underwriter below:
Number
Underwriter of Shares
- ----------- -------------
Lehman Brothers Inc. ................
BT Securities Corporation ...........
CIBC Wood Gundy Securities Corp. ....
PaineWebber Incorporated ............
-------------
Total ..............................
=============
Pegasus has been advised by the Representatives that the Underwriters
propose to offer the shares of Class A Common Stock to the public at the
initial public offering price set forth on the cover page hereof, and to
certain dealers at such initial public offering price less a selling
concession not in excess of $ __________ per share. The Underwriters may
allow, and such dealers may reallow, a concession not in excess of $
__________ per share to certain other Underwriters or to certain other brokers
or dealers. After the initial offering to the public, the offering price and
other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval of certain legal matters by
counsel and to certain other conditions, including the condition that no stop
order suspending the effectiveness of the Registration Statement is in effect
and no proceedings for such purpose are pending or threatened by the
Commission and that there has been no material adverse change or any
development involving a prospective material adverse change in the condition
of the Company from that set forth in the Registration Statement otherwise
than as set forth or contemplated in this Prospectus, and that certain
certificates, opinions and letters have been received from the Company and
its counsel and independent auditors. The Underwriters are obligated to take
and pay for all of the above shares of Class A Common Stock if any such
shares are taken.
Pegasus and the Underwriters have agreed in the Underwriting Agreement to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Pegasus has granted to the Underwriters an option to purchase up to an
additional __________ shares of Class A Common Stock, exercisable solely to
cover over-allotments, at the initial public offering price less the
underwriting discounts and commissions shown on the cover page of this
Prospectus. Such option may be exercised at any time within 30 days after the
date of the Underwriting Agreement. To the extent that the option is
exercised, each Underwriter will be committed to purchase a number of the
additional shares of Class A Common Stock proportionate to such Underwriter's
initial commitment as indicated in the preceding table.
The Representatives of the Underwriters have informed Pegasus that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Stockholders of __________ shares have agreed not to, directly or
indirectly, offer, sell or otherwise dispose of shares of Common Stock of
Pegasus or any securities convertible into, or exercisable or exchangeable for
such Common Stock, with certain limited exceptions, for a period of 180 days
after the date of this Prospectus without the prior written consent of Lehman
Brothers Inc. Pegasus has agreed not to offer, sell, contract to sell or
otherwise issue any shares of Common Stock or other capital stock or any
securities convertible into or exchangeable for, or any rights to acquire,
Common Stock or other capital stock, with certain limited exceptions, prior to
the expiration of 180 days from the date of this Prospectus without
86
<PAGE>
the prior written consent of Lehman Brothers Inc., other than (i) Class A
Common Stock to be issued in this Offering and Common Stock to be issued
pursuant to the Transactions, (ii) stock grants pursuant to the Incentive
Program, and (iii) securities issued as consideration for an acquisition if the
party being issued the securities agrees to similar lock-up provisions or if
the securities issued are "restricted securities" under the Securities Act.
Prior to this Offering, there has been no public market for the Class A
Common Stock. The initial public offering price will be negotiated between
Pegasus and the Representatives. Among the factors to be considered in
determining the initial public offering price of the Class A Common Stock, in
addition to the prevailing market conditions, will be the Company's
historical performance, capital structure, estimates of the business
potential and earnings prospects of the Company, an assessment of the
Company's management and consideration of the above factors in relation to
market values of the companies in related businesses.
Affiliates of certain of the Representatives may be lenders under the New
Credit Facility.
87
<PAGE>
LEGAL MATTERS
Drinker Biddle & Reath, Philadelphia, Pennsylvania, has rendered an
opinion that the shares of Class A Common Stock offered hereby by the
Company, when issued and paid for pursuant to the terms of the Underwriting
Agreement, will be legally issued, fully paid and non-assessable. Michael B.
Jordan, a partner in Drinker Biddle & Reath, is an Assistant Secretary of the
Company. Certain legal matters in connection with this Offering will be
passed upon for the Underwriters by Latham & Watkins, New York, New York.
EXPERTS
The Company's combined balance sheets as of December 31, 1994 and 1995 and
the related combined statements of operations, statements of changes in total
equity and statements of cash flows for each of the two years in the period
ended December 31, 1995 included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The Company's combined statement of operations, statement of changes in
total equity and statement of cash flows for the year ended December 31, 1993
included in this Prospectus, have been included herein in reliance on the
report of Herbein + Company, Inc., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The balance sheets of Portland Broadcasting, Inc. as of September 25, 1994
and September 24, 1995 and the related statements of operations, statements
of deficiency in assets and statements of cash flows for the fiscal years
ended September 26, 1993, September 25, 1994 and September 24, 1995, included
in this Prospectus, have been included herein in reliance on the report of
Ernst & Young LLP, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
The balance sheets of WTLH, Inc. as of December 31, 1994 and 1995 and the
related statements of operations, statements of capital deficiency, and
statements of cash flows for each of the two years in the period ended
December 31, 1995, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The combined balance sheets of the DBS Operations of Harron Communications
Corp. as of December 31, 1994 and 1995 and the related combined statements of
operations, and statements of cash flows for each of the two years in the
period ended December 31, 1995 included in this Prospectus, have been
included herein in reliance on the report of Deloitte & Touche, LLP,
independent accountants, 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, 1994 and 1995
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, 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.
In March 1995, the Company, with the recommendation and approval of the
Company's sole director, selected Coopers & Lybrand L.L.P. to act as
independent accountants for the Company and informed Herbein + Company, Inc.,
the Company's independent accountants since 1990, of its decision. In
connection with its audit for the year ended December 31, 1993 and through
its dismissal in March 1995, there were no disagreements with Herbein +
Company, Inc. on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures. Herbein + Company,
Inc.'s report on the Company's financial statements for the fiscal year ended
December 31, 1993 contained no adverse opinions or disclaimers of opinion and
were not modified or qualified as to uncertainly, audit scope, or accounting
principles.
88
<PAGE>
ADDITIONAL INFORMATION
The Company is not currently subject to the informational requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"). The
Company has filed with the Commission a Registration Statement on Form S-1
under the Securities Act with respect to the registration of the Class A
Common Stock offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, omits certain information contained in the
Registration Statement, and reference is made to the Registration Statement
and the exhibits thereto for further information with respect to the Company
and the Class A Common Stock to which this Prospectus relates. Statements
contained herein concerning the provisions of any contract, agreement or other
document are not necessarily complete, and, in each instance, reference is
made to the copy of such document filed as an exhibit to the Registration
Statement for a more complete description of the matter involved, and each
such statement is qualified in its entirety by such reference. The
Registration Statement, including the exhibits and schedules filed therewith,
may be inspected at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, New York,
New York 10048 and Northwestern Atrium Center, 500 West Madison Street,
Chicago, Illinois 60606. Copies of such materials may be obtained from the
Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates.
As a result of this Offering of the Common Stock, the Company will become
subject to the informational requirements of the Exchange Act. PM&C, the
direct subsidiary of the Company, has been subject to the informational
requirements of the Exchange Act since October 5, 1995. The Company intends
to furnish to its stockholders annual reports containing audited financial
information and furnish quarterly reports containing condensed unaudited
financial information for each of the first three quarters of each fiscal
year.
89
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
INDEX TO COMBINED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Pegasus Communications Corporation
Report of Coopers & Lybrand L.L.P. ..................................................................... F-2
Report of Herbein + Company, Inc. ...................................................................... F-3
Combined Balance Sheets as of December 31, 1994, 1995 and March 31, 1996 (unaudited) ................... F-4
Combined Statements of Operations for the years ended December 31, 1993, 1994, 1995 and three months ended
March 31, 1995 (unaudited) and 1996 (unaudited) ....................................................... F-5
Combined Statements of Changes in Total Equity for the years ended December 31, 1993, 1994, 1995 and March
31, 1996 (unaudited) .................................................................................. F-6
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the three months
ended March 31, 1995 (unaudited) and 1996 (unaudited) ................................................. F-7
Notes to Combined Financial Statements ................................................................. F-8
Portland Broadcasting, Inc. (an acquired entity)
Report of Ernst & Young LLP ............................................................................ F-20
Balance Sheets as of September 25, 1994, September 24, 1995, and December 31, 1995 (unaudited) ......... F-21
Statements of Operations for fiscal year ended September 26, 1993, September 25, 1994, September 24, 1995
and fiscal quarters ended December 25, 1994 (unaudited) and December 31, 1995 (unaudited) ............. F-22
Statements of Deficiency in Assets for the fiscal years ended September 26, 1993, September 25, 1994 and
September 24, 1995 and the fiscal quarter ended December 31, 1995 (unaudited) ......................... F-23
Statements of Cash Flows for fiscal years ended September 26, 1993, September 25, 1994 and September 24,
1995 and fiscal quarter ended December 1994 (unaudited) and 1995 (unaudited) .......................... F-24
Notes to Financial Statements .......................................................................... F-25
WTLH, Inc. (an acquired entity)
Report of Coopers & Lybrand L.L.P. ..................................................................... F-29
Balance Sheets as of December 31, 1994, 1995 and February 29, 1996 (unaudited) ......................... F-30
Statements of Operations for the years ended December 31, 1994, 1995 and for the two months ended February
28, 1995 (unaudited) and February 29, 1996 (unaudited) ................................................ F-31
Statements of Capital Deficiency for the years ended December 31, 1994, 1995 and for the two months ended
February 29, 1996 (unaudited) ......................................................................... F-32
Statements of Cash Flows for the years ended December 31, 1994, 1995 and the two months ended February 28,
1995 (unaudited) and February 29, 1996 (unaudited) .................................................... F-33
Notes to Financial Statements .......................................................................... F-34
DBS Operations of Harron Communications Corp. (a proposed acquisition)
Report of Deloitte & Touche LLP ........................................................................ F-40
Combined Balance Sheets as of December 31, 1995, 1994 and March 31, 1996 (unaudited) ................... F-41
Combined Statements of Operations for years ended December 31, 1995, 1994 and the three months ended
March 31, 1996 and 1995 (unaudited) ................................................................... F-42
Combined Statements of Cash Flows for years ended December 31, 1995, 1994 and the three months ended
March 31, 1996 (unaudited) and 1995 (unaudited) ....................................................... F-43
Notes to Financial Statements .......................................................................... F-44
Dom's Tele Cable, Inc. (a proposed acquisition)
Report of Coopers & Lybrand L.L.P. ..................................................................... F-48
Balance Sheets as of May 31, 1994, 1995 and February 29, 1996 (unaudited) .............................. F-49
Statements of Operations and Deficit for years ended May 31, 1993, 1994, 1995 and for the nine months
ended February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ................................. F-50
Statements of Cash Flows for the years ended May 31, 1993, 1994, 1995 and for the nine months ended
February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ....................................... F-51
Notes to Financial Statements .......................................................................... F-52
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Pegasus Communications Corporation
We have audited the accompanying combined balance sheets of Pegasus
Communications Corporation and affiliates as of December 31, 1994 and 1995,
and the related combined statements of operations, changes in total equity,
and cash flows for each of the two years in the period ended December 31,
1995. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Pegasus
Communications Corporation and affiliates as of December 31, 1994 and 1995,
and the results of its operations and its cash flows for each of the two
years in the period ended December 31, 1995 in conformity with generally
accepted accounting principles.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 31, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Pegasus Communications Corporation
We have audited the accompanying combined statements of operations, changes
in total equity, and cash flows of Pegasus Communications Corporation and
affiliates for the year ended December 31, 1993. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined results of the operations and cash flows
of Pegasus Communications Corporation and affiliates for the year ended
December 31, 1993, in conformity with generally accepted accounting
principles.
/s/ HERBEIN + COMPANY, INC.
HERBEIN + COMPANY, INC.
Reading, Pennsylvania
March 4, 1994
F-3
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------ March 31,
1994 1995 1996
------------- ------------- --------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................. $ 1,380,029 $11,974,747 $ 3,669,456
Restricted cash ........................... -- 9,881,198 4,818,962
Accounts receivable, less allowance for doubtful
accounts at December 31, 1994, 1995 and March
31, 1996 of $348,000, $238,000 and $291,000,
respectively ............................ 4,000,671 4,884,045 5,195,407
Program rights ............................ 1,097,619 931,664 1,299,340
Inventory ................................. 711,581 1,100,899 924,193
Deferred taxes ............................ 77,232 42,440 77,887
Prepaid expenses and other ................ 629,274 329,895 532,137
------------- ------------- --------------
Total current assets .................... 7,896,406 29,144,888 16,517,382
Property and equipment, net .................... 18,047,416 16,571,538 21,594,573
Intangible assets, net ......................... 47,354,826 48,028,410 60,708,046
Program rights ................................. 1,688,866 1,932,680 2,023,381
Deposits and other ............................. 406,168 92,325 92,325
------------- ------------- --------------
Total assets ............................ $75,393,682 $95,769,841 $100,935,707
============= ============= ==============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Notes payable ............................. $ 285,471 $ 316,188 $ 206,988
Current portion of long-term debt ......... 25,578,406 271,934 294,280
Accounts payable .......................... 2,388,974 2,494,738 2,221,067
Accrued interest .......................... -- 5,173,745 2,688,609
Accrued expenses .......................... 1,761,100 2,180,930 3,389,496
Current portion of program rights payable . 956,740 1,141,793 1,835,051
------------- ------------- --------------
Total current liabilities ............... 30,970,691 11,579,328 10,635,491
------------- ------------- --------------
Long-term debt, net ............................ 35,765,495 82,308,195 91,524,257
Program rights payable ......................... 1,499,180 1,421,399 1,449,178
Deferred taxes ................................. 216,694 211,902 77,887
------------- ------------- --------------
Total liabilities ....................... 68,452,060 95,520,824 103,686,813
Commitments and contingent liabilities ......... -- -- --
Total equity (deficiency):
Common stock .............................. 494 1,700 1,700
Additional paid-in capital ................ 16,382,054 7,880,848 7,880,848
Retained earnings (deficit) ............... (3,905,909) 1,825,283 (80,934)
Partners' deficit ......................... (5,535,017) (9,458,814) (10,552,720)
------------- ------------- --------------
Total equity (deficiency) ............... 6,941,622 249,017 (2,751,106)
------------- ------------- --------------
Total liabilities and equity ............ $75,393,682 $95,769,841 $100,935,707
============= ============= ==============
</TABLE>
See accompanying notes to combined financial statements
F-4
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
------------------------------------------------ -------------------------------
1993 1994 1995 1995 1996
-------------- -------------- ------------- -------------- -------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Broadcasting revenue, net of agency
commissions ................ $ 7,572,051 $13,204,148 $14,862,734 $ 2,788,673 $ 3,886,329
Barter programming revenue .... 2,735,500 4,604,200 5,110,662 1,004,360 1,074,665
Basic and satellite service ... 7,537,325 8,455,815 10,002,579 2,236,086 2,864,858
Premium services .............. 1,335,108 1,502,929 1,652,419 389,423 453,650
Other ......................... 307,388 423,998 519,682 288,205 147,110
-------------- -------------- ------------- -------------- -------------
Total revenues ............... 19,487,372 28,191,090 32,148,076 6,706,747 8,426,612
-------------- -------------- ------------- -------------- -------------
Operating expenses:
Barter programming expense .... 2,735,500 4,604,200 5,110,662 1,004,360 1,074,665
Programming ................... 3,139,284 4,094,688 5,475,623 1,288,940 1,663,967
General and administrative .... 2,219,133 3,289,532 3,885,473 865,093 1,257,612
Technical and operations ...... 2,070,896 2,791,885 2,740,670 668,493 798,292
Marketing and selling ......... 2,070,404 3,372,482 3,928,073 1,036,899 1,044,250
Incentive compensation ........ 192,070 432,066 527,663 147,414 296,884
Corporate expenses ............ 1,265,451 1,505,904 1,364,323 331,806 374,157
Depreciation and amortization . 5,977,678 6,940,147 8,751,489 1,897,782 2,367,289
-------------- -------------- ------------- -------------- -------------
Income (loss) from operations . (183,044) 1,160,186 364,100 (534,040) (450,504)
Interest expense .............. (4,043,692) (5,360,729) (8,793,823) (1,655,571) (2,900,671)
Interest expense - related party (358,318) (612,191) (22,759) -- --
Interest income ............... -- -- 370,300 -- 101,251
Other expenses, net ........... (220,319) (65,369) (44,488) (75,480) (25,075)
-------------- -------------- ------------- -------------- -------------
Loss before income taxes and
extraordinary items ........ (4,805,373) (4,878,103) (8,126,670) (2,265,091) (3,274,999)
Provision (benefit) for income
taxes ...................... -- 139,462 30,000 141,000 (169,462)
-------------- -------------- ------------- -------------- -------------
Loss before extraordinary items . (4,805,373) (5,017,565) (8,156,670) (2,406,091) (3,105,537)
Extraordinary gain (loss) from
extinguishment of debt, net . -- (633,267) 10,210,580 -- --
-------------- -------------- ------------- -------------- -------------
Net income (loss) ............. ($ 4,805,373) ($ 5,650,832) $ 2,053,910 ($ 2,406,091) ($ 3,105,537)
============== ============== ============= ============== =============
</TABLE>
See accompanying notes to combined financial statements
F-5
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
COMBINED STATEMENTS OF CHANGES IN TOTAL EQUITY
<TABLE>
<CAPTION>
Common Stock
----------------------- Additional Retained Partners' Total
Number Par Paid-In Earnings Capital Equity
of Shares Value Capital (Deficit) (Deficit) (Deficiency)
----------- -------- -------------- ------------- --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1992 .. $ 157,819 $ 1,000,492 $ 1,158,311
Net loss ....................... (17,447) (4,787,926) (4,805,373)
Distributions to partners ...... (115,290) (115,290)
Issuance of LP interest ........ 1,335,000 1,335,000
----------- -------- -------------- ------------- --------------- --------------
Balances at December 31, 1993 .. 140,372 (2,567,724) (2,427,352)
Net loss ....................... (790,501) (4,860,331) (5,650,832)
Incorporation of partnerships .. 444 $ 444 (3,255,780) 3,228,038 (27,298)
Redemption of minority interest . ($ 49,490) (49,490)
LP interests contribution ...... 1,335,000 (1,335,000)
Conversion of term loans ....... 50 50 15,096,544 15,096,594
----------- -------- -------------- ------------- --------------- --------------
Balances at December 31, 1994 .. 494 494 16,382,054 (3,905,909) (5,535,017) 6,941,622
Net income (loss) .............. 5,731,192 (3,677,282) 2,053,910
Distributions to partners ...... (246,515) (246,515)
Distribution to Parent ......... (12,500,000) (12,500,000)
Exchange of PM&C Class A Shares . 161,500 1,121 (1,121)
Issuance of PM&C Class B Shares . 8,500 85 3,999,915 4,000,000
----------- -------- -------------- ------------- --------------- --------------
Balances at December 31, 1995 .. 170,000 1,700 7,880,848 1,825,283 (9,458,814) 249,017
Net loss ....................... (1,906,217) (1,199,320) (3,105,537)
Contribution by partner ........ 105,414 105,414
-------- -------------- ------------- --------------- --------------
Balances at March 31, 1996
(unaudited) ................... 170,000 $1,700 $ 7,880,848 ($ 80,934) ($10,552,720) ($ 2,751,106)
=========== ======== ============== ============= =============== ==============
</TABLE>
See accompanying notes to combined financial statements
F-6
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31
------------------------------------------------- --------------------------------
1993 1994 1995 1995 1996
-------------- -------------- -------------- -------------- --------------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ..................... ($ 4,805,373) ($ 5,650,832) $ 2,053,910 ($ 2,406,091) ($ 3,105,537)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Extraordinary (gain) loss on
extinguishment of debt, net ...... -- 633,267 (10,210,580) -- --
Depreciation and amortization ...... 5,977,678 6,940,147 8,751,489 1,897,782 2,367,289
Program rights amortization ........ 1,342,194 1,193,559 1,263,190 411,767 344,197
Gain (loss) on disposal of fixed assets (9,344) 30,524 -- (1,000) 97,904
Bad debt expense ................... 96,932 200,039 146,147 38,698 65,170
Deferred income taxes .............. -- 139,462 30,000 141,000 (169,462)
Payments of programming rights ..... (1,278,650) (1,310,294) (1,233,777) (393,830) (351,174)
Interest paid with refinancing of debt (671,803) -- -- -- --
Change in assets and liabilities:
Accounts receivable .............. (853,305) (1,353,448) (815,241) 720,320 738,211
Inventory ........................ -- (711,581) (389,318) (36,990) 176,706
Prepaid expenses and other ....... (133,745) (250,128) 490,636 (5,123) 12,185
Accounts payable & accrued expenses 113,160 844,288 (500,174) 229,842 (788,130)
Accrued interest ................. 1,851,800 2,048,569 5,173,745 248,151 (2,485,136)
Deposits and other ............... 64,133 39,633 5,843 (6,595) 22,989
-------------- -------------- -------------- -------------- --------------
Net cash provided (used) by operating
activities ......................... 1,693,677 2,793,205 4,765,870 837,931 (3,074,788)
Cash flows from investing activities:
Acquisitions ....................... -- -- -- -- (15,007,329)
Capital expenditures ............... (884,950) (1,264,212) (2,640,475) (774,091) (930,625)
Purchase of intangible assets ...... -- (943,238) (2,334,656) (1,887,529) (270,312)
Cash acquired from acquisitions .... 803,908 -- -- -- --
Other .............................. (25,065) (53,648) (250,000) (188,999) (157,500)
-------------- -------------- -------------- -------------- --------------
Net cash used for investing activities . (106,107) (2,261,098) (5,225,131) (2,850,619) (16,365,766)
Cash flows from financing activities:
Proceeds from long-term debt ....... 15,060,000 35,015,000 81,651,373 530,000 106,238
Borrowings on revolving credit facility -- -- 2,591,335 2,591,335 6,000,000
Proceeds from long-term borrowings from
related parties .................. 5,574 26,000 20,000 13,000 --
Repayments on revolving credit
facility ......................... -- -- (2,591,335) -- --
Repayments of long-term debt ....... (15,194,664) (33,991,965) (48,095,692) (20,818) (8,000)
Restricted cash .................... -- -- (9,881,198) -- 5,062,236
Debt issuance costs ................ (843,380) (1,552,539) (3,974,454) -- --
Capital lease repayments ........... (47,347) (154,640) (166,050) (41,887) (25,211)
Distributions to Parent ............ -- -- (12,500,000) -- --
Proceeds from the issuance of PM&C Class
B Shares ......................... -- -- 4,000,000 -- --
-------------- -------------- -------------- -------------- --------------
Net cash provided (used) by financing
activities ....................... (1,019,817) (658,144) 11,053,979 3,071,630 11,135,263
Net increase (decrease) in cash and cash
equivalents ........................... 567,753 (126,037) 10,594,718 1,058,942 (8,305,291)
Cash and cash equivalents, beginning of period 938,313 1,506,066 1,380,029 1,380,029 11,974,747
-------------- -------------- -------------- -------------- --------------
Cash and cash equivalents, end of period . $ 1,506,066 $ 1,380,029 $ 11,974,747 $ 2,438,971 $ 3,669,456
============== ============== ============== ============== ==============
</TABLE>
See accompanying notes to combined financial statements
F-7
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
1. THE COMPANY:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries and affiliates stated below, the "Company"), a Delaware
corporation incorporated in May 1996, is a wholly owned subsidiary of Pegasus
Communications Holdings, Inc. ("PCH" or the "Parent").
Pegasus Media & Communications, Inc. ("PM&C") is a diversified media and
communications company whose subsidiaries consist of Pegasus Broadcast
Television, Inc. ("PBT"), Pegasus Cable Television, Inc. ("PCT"), Pegasus
Broadcast Associates, L.P. ("PBA"), Pegasus Satellite Television, Inc. ("PST")
and MCT Cablevision, Limited Partnership ("MCT"). PBT operates broadcast
television stations affiliated with the Fox Broadcasting Company television
network ("Fox"). PCT, together with its subsidiary, Pegasus Cable Television
of Connecticut, Inc. ("PCT-CT") and MCT operate cable television systems that
provide service to individual and commercial subscribers in New England and
Puerto Rico, respectively. PST provides direct broadcast satellite service to
customers in the New England area. PBA holds a television station license
which simulcasts programming from a station operated by PBT.
On October 31, 1994, the limited partnerships which owned and operated
PCH's broadcast television, cable and satellite operations, restructured and
transferred their assets to the PM&C's subsidiaries, PBT, PCT and PST,
respectively. This reorganization has been accounted for as if a pooling of
interests had occurred.
Pegasus Towers L.P. ("Towers"), an affiliated entity of Pegasus, owns and
operates television and radio transmitting towers located in Pennsylvania and
Tennessee.
Pegasus Communications Management Company ("PCMC"), an affiliated entity of
Pegasus, provides certain management and accounting services to its
affiliates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The combined financial statements include the accounts of Pegasus, PM&C,
PBT, PCT, PST, PBA, MCT, Towers and PCMC. All significant intercompany
transactions and balances have been eliminated.
The 1994 conversion from limited partnerships to corporate form has been
treated as a reorganization of the aforementioned subsidiaries and affiliated
entities, with the assets and liabilities recorded at their historical cost.
The accompanying combined financial statements and notes hereto reflect the
limited partnerships' historical results of operations for the periods prior
to October 31, 1994 and the operations of the Company as a corporation from
that date through December 31, 1994, except for MCT which reflects the
limited partnership's results of operations from the effective date of
acquisition, March 1, 1993.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets
and liabilities and disclosure of contingencies. Actual results could differ
from those estimates.
F-8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
INVENTORIES:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at lower of cost or market on a
first-in, first-out basis.
PROPERTY AND EQUIPMENT:
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets sold, retired, or otherwise disposed of
are removed from the respective accounts, and any resulting gains or losses
are included in the statement of operations. For cable television systems,
initial subscriber installation costs, including material, labor and overhead
costs of the hookup, are capitalized as part of the distribution facilities.
The costs of disconnection and reconnection are charged to expense. Satellite
equipment that is leased to customers is stated at cost. Depreciation is
computed for financial reporting purposes over the estimated useful lives of
the related assets.
INTANGIBLE ASSETS:
Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and
amortized over the lives of the related franchise agreements, while
unsuccessful franchise applications and abandoned franchises are charged to
expense. Financing costs incurred in obtaining long-term financing are
amortized over the term of the applicable loan. Goodwill, broadcast licenses,
network affiliation agreements and other intangible assets ("Intangible
Assets") are reviewed for impairment whenever events or circumstances provide
evidence that suggest that the carrying amounts may not be recoverable. The
Company assesses the recoverability of its Intangible Assets by determining
whether the amortization of the respective Intangible Asset balance can be
recovered through projected undiscounted future cash flows.
Amortization of Intangible Assets is computed using the straight-line
method based upon the following lives:
Broadcast licenses ............... 40 years
Network affiliation agreement .... 40 years
Goodwill ......................... 40 years
Other intangibles ................ 2 to 14 years
REVENUE:
The Company operates in three industry segments: broadcast television
("TV"), cable television ("Cable") and direct broadcast satellite television
("DBS"). The Company recognizes revenue in its TV operations when advertising
spots are broadcasted. The Company recognizes revenue in its Cable and DBS
operations when video and audio services are provided.
PROGRAMMING:
The Company obtains a portion of its programming, including presold
advertisements, through its network affiliation agreement with Fox and also
through independent producers. The Company does not make any direct payments
for this programming. For running network programming, the Company received
payments from Fox, which totaled $60,608, $71,139 and $215,310 in 1993, 1994
and 1995, respectively. For running independent producers' programming, the
Company received no direct payments. Instead, the Company retains a portion
of the available advertisement spots to sell on its own account. Barter
programming revenue and the related expense are recognized when the presold
advertisements are broadcasted. The Company recorded barter programming
revenue and related programming expenses of $2,735,500, $4,604,200 and
$5,110,662 for the years ended December 31, 1993, 1994 and 1995,
respectively. These amounts are presented gross as barter programming revenue
and expense in the accompanying combined statements of operations.
F-9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less. The Company has cash balances in
excess of the federally insured limits at various banks.
RESTRICTED CASH:
The Company had restricted cash held in escrow of $9,881,198 and
$4,818,962 at December 31, 1995 and March 31, 1996, respectively. These funds
may be disbursed from the escrow only to pay interest on its Series B Senior
Subordinated Notes due 2005 (the "Series B Notes").
PROGRAM RIGHTS:
The Company enters into agreements to show motion pictures and syndicated
programs on television. In accordance with the Statements of Financial
Accounting Standards No. 63 ("SFAS No. 63"), only the right and associated
liabilities for those films and programs currently available for showing are
recorded. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period which approximates amortization based on the
estimated number of showings during the contract period. Amortization of
$1,359,117, $1,238,849 and $1,306,768 is included in programming expenses for
the years ended December 31, 1993, 1994 and 1995, respectively. The
obligations arising from the acquisition of film rights are recorded at the
gross amount. Payments for the contracts are made pursuant to the contractual
terms over periods which are generally shorter than the license periods.
The Company has entered into agreements totaling $798,800 as of December
31, 1995, which are not yet available for showing at December 31, 1995, and
accordingly, are not recorded by the Company.
At December 31, 1995, the Company has commitments for future program
rights of $1,141,793, $827,793, $438,947 and $154,659 in 1996, 1997, 1998 and
1999, respectively.
INCOME TAXES:
On October 31, 1994, in conjunction with the incorporation, PBT, PCT, and
PST adopted the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Prior to such date, the
above entities operated as partnerships for federal and state income tax
purposes and, therefore, no provision for income taxes was necessary. MCT is
treated as a partnership for federal and state income tax purposes, but taxed
as a corporation for Puerto Rico income tax purposes. The adoption of SFAS
No. 109 did not have a material impact on the Company's financial position or
results of operations. For the year ended December 31, 1994, income and
deferred taxes are based on the Company's operations from November 1, 1994
through December 31, 1994, excluding (i) MCT, which for Puerto Rico income
tax purposes is taxed as a corporation for the 12 month period ended December
31, 1994, and (ii) PBA and Towers, which are limited partnerships.
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different businesses and
geographic regions. As of December 31, 1994 and 1995, the Company had no
significant concentrations of credit risk.
F-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
3. INTERIM FINANCIAL INFORMATION:
The financial statements as of March 31, 1996 and for the three months
ended March 31, 1995 and 1996 are unaudited. In the opinion of management, all
adjustments, including normal recurring adjustments, necessary for a fair
presentation of the results of operations have been included. Results for the
three months ended March 31, 1996 may not be indicative of the results
expected for the year ending December 31, 1996.
The Company has provided unaudited footnote information for the interim
periods to the extent such information is substantially different from the
audited periods.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Land ................................. $ 153,459 $ 259,459 $ 862,298
Reception and distribution facilities . 22,261,777 22,839,470 22,961,836
Transmitter equipment ................ 7,249,289 7,478,134 10,009,782
Building and improvements ............ 823,428 1,554,743 1,577,225
Equipment, furniture and fixtures .... 938,323 1,333,797 3,751,143
Vehicles ............................. 304,509 571,456 701,042
Other equipment ...................... 655,167 997,352 1,307,050
-------------- -------------- --------------
32,385,952 35,034,411 41,170,376
Accumulated depreciation ............. (14,338,536) (18,462,873) (19,575,803)
-------------- -------------- --------------
Net property and equipment ........... $ 18,047,416 $ 16,571,538 $ 21,594,573
============== ============== ==============
</TABLE>
Depreciation expense amounted to $3,154,394, $4,027,866, $4,140,058,
$1,035,977 and $1,112,930 for the years ended December 31, 1993, 1994, 1995
and for the three months ended March 31, 1995 and 1996, respectively.
5. INTANGIBLES:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Goodwill ............................. $28,490,035 $ 28,490,035 $ 35,980,396
Deferred franchise costs ............. 13,254,985 13,254,985 13,254,985
Broadcast licenses ................... 3,124,461 3,124,461 4,649,461
Network affiliation agreements ....... 1,236,641 1,236,641 2,761,641
Deferred financing costs ............. 1,788,677 3,974,454 3,997,061
DBS rights ........................... 3,130,093 4,832,160 4,832,160
Non-compete agreement ................ -- -- 1,800,000
Organization and other deferred costs . 3,130,926 3,862,021 5,432,737
-------------- -------------- --------------
54,155,818 58,774,757 72,708,441
Accumulated amortization ............. (6,800,992) (10,746,347) (12,000,395)
-------------- -------------- --------------
Net intangible assets .............. $47,354,826 $ 48,028,410 $ 60,708,046
============== ============== ==============
</TABLE>
Amortization expense amounted to $2,823,284, $2,912,281, $4,611,431,
$861,805 and $1,254,359 for the years ended December 31, 1993, 1994, 1995 and
for the three months ended March 31, 1995 and 1996, respectively.
F-11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
6. LONG-TERM DEBT:
Long-term debt consists of the following at:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1994 1995 1996
-------------- -------------- -------------
(unaudited)
<S> <C> <C> <C>
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 $3,706,642 as of December 31, 1995
and March 31, 1996, respectively .............................................. $81,195,454 $81,293,358
Senior term note, due 2001, interest at the Company's option at
either the bank's prime rate, plus an applicable margin or LIBOR,
plus an applicable margin (9.25% at December 31, 1994) ........................ $20,000,000 -- --
Subordinated term loan, due 2003, interest at the Company's option
of either 4%, plus the higher of the bank's prime rate or the
Federal Funds rate plus 1% or the Eurodollar rate, plus 6.5% (12.5%
at December 31, 1994) ......................................................... 15,000,000 -- --
Senior loan payable by MCT, due 1995, interest at prime, plus 2%
(10.5% at December 31, 1994) .................................................. 15,000,000 -- --
Junior loan payable by MCT, due 1995, interest at prime plus 2%
(10.5% at December 31, 1994) .................................................. 10,348,857 -- --
Senior five year revolving credit facility dated July 7, 1995,
interest at the Company's option at either the banks prime rate,
plus an applicable margin or LIBOR, plus an applicable margin
(8.2% at March 31, 1996) ...................................................... -- -- 6,000,000
Mortgage payable, due 2000, interest at 8.75% ................................... -- 517,535 512,923
Other ........................................................................... 995,044 867,140 4,012,256
----------- ----------- -----------
61,343,901 82,580,129 91,818,537
Less current maturities ......................................................... 25,578,406 271,934 294,280
----------- ----------- -----------
Long-term debt .................................................................. $35,765,495 $82,308,195 $91,524,257
=========== =========== ===========
</TABLE>
On July 7, 1995, PM&C entered into a $10 million senior collateralized
five-year revolving credit facility with a bank. There were no funds drawn on
this facility as of December 31, 1995. The amount available under the credit
facility was $4 millon at March 31, 1996.
On October 31, 1994, the Company repaid the outstanding balances under its
senior and junior term loan agreements with a portion of the proceeds from a
$20,000,000 term note agreement ("senior note") and $15,000,000 subordinated
term loan agreement ("subordinated loan") from various banking institutions.
The senior note and subordinated loan were scheduled to mature on December
31, 2001 and September 30, 2003, respectively. Amounts were subsequently
repaid as described below.
On July 7, 1995, the Company sold 85,000 units consisting of $85,000,000
in aggregate amount of 12.5% Series A Senior Subordinated Notes due 2005 (the
"Series A Notes" and, together with the Series B Notes, the "Notes") and
8,500 shares of Class B Common Stock of PM&C (the "Note Offering"). The net
proceeds from the sale were used to (i) repay approximately $38.6 million in
loans and other obligations, (ii) repurchase $26.0 million of notes for
approximately $13.0 million resulting in an extraordinary gain of $10.2
million, net of expenses of $2.8 million, (iii) make a $12.5 million
distribution to PCH, (iv) escrow $9.7 million for the purpose of paying
interest on the Notes, (v) pay $3.3 million in fees and expenses and (vi) to
fund proposed acquisitions.
F-12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt: - (Continued)
On November 14, 1995, the Company exchanged its Series B Notes for the
Series A Notes. The Series B Notes have substantially the same terms and
provisions as the Series A Notes. There was no gain or loss recorded with this
transaction.
The Series B Notes are guaranteed on a full, unconditional, senior
subordinated basis, jointly and severally by each of the wholly owned direct
and indirect subsidiaries of PM&C with the exception of PCT-CT.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
The fair value of the Series B Notes approximates $85 million as of
December 31, 1995. This amount is approximately $3.8 million higher than the
carrying amount reported on the balance sheet at December 31, 1995. Fair
value is estimated based on the quoted market price for the same or similar
instruments.
At December 31, 1995, maturities of long-term debt and capital leases are
as follows:
1996 ........ $ 271,934
1997 ........ 296,771
1998 ........ 211,103
1999 ........ 147,244
2000 ........ 435,515
Thereafter .. 81,217,562
------------
$82,508,129
============
7. LEASES:
The Company leases certain studios, towers, utility pole attachments,
occupancy of underground conduits and headend sites under operating leases.
The Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2007. Rent expense for the years ended December 31,
1993, 1994 and 1995 was $429,304, $464,477 and $503,118, respectively.
The Company leases equipment under long-term leases and has the option to
purchase the equipment for a nominal cost at the termination of the leases.
The related obligations are included in long-term debt. Property and equipment
at December 31 include the following amounts for leases that have been
capitalized:
1994 1995
----------- -----------
Equipment, furniture and fixtures . $ 351,854 $ 375,190
Vehicles ......................... 193,626 196,064
----------- -----------
545,480 571,254
Accumulated depreciation ......... (102,777) (190,500)
----------- -----------
Total Total .................... $ 442,703 $ 380,754
=========== ===========
F-13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
7. Leases: - (Continued)
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1995 are as follows:
Operating Capital
Leases Leases
----------- ----------
1996 ............................................ $160,000 $183,000
1997 ............................................ 131,000 157,000
1998 ............................................ 106,000 88,000
1999 ............................................ 31,000 23,000
2000 ............................................ 9,000 6,000
Thereafter ...................................... 15,000 3,000
----------- ----------
Total minimum payments .......................... $452,000 460,000
----------- ----------
Less: amount representing interest .............. 56,000
----------
Present value of net minimum lease payments including
current maturities of $142,000 ................. $404,000
==========
8. COMMITMENTS AND CONTINGENT LIABILITIES:
LEGAL MATTERS:
The operations of the Company are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities,
including the Connecticut Department of Public Utility Control ("DPUC").
During 1994, the DPUC ordered a reduction in the rates charged by PCT-CT
for its basic cable service tier and equipment charges and refunds for
related overcharges, plus interest, retroactive to September 1, 1993
requiring PCT-CT to issue refunds totaling $141,000. In December 1994, the
Company filed an appeal with the FCC. In March 1995, the FCC granted a stay
of the DPUC's rate reduction and refund order pending the appeal. The FCC has
not ruled on the appeal and the outcome cannot be predicted with any degree
of certainty. The Company believes it will prevail in its appeal. In the
event of an adverse ruling, the Company expects to make refunds in kind
rather than cash.
The Company is currently contesting a claim for unpaid premiums on its
workers' compensation insurance policy assessed by the state insurance fund
of Puerto Rico. Based upon current information available, the Company's
liability related to the claim is estimated to be less than $200,000.
From time to time the Company is also involved with claims that arise in
the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse
effect on the combined operations, cash flows or financial position of the
Company.
9. INCOME TAXES:
Effective October 1, 1994, in conjunction with the incorporation of PBT,
PCT, and PST, the Company, excluding MCT which for Puerto Rico income tax
purposes has been treated as a corporation and Towers and PBA which are
limited partnerships, adopted SFAS No. 109.
F-14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
9. Income Taxes: - (Continued)
The following is a summary of the components of income taxes from operations:
1994 1995
---------- ---------
Federal -- deferred ....... $104,644 $23,000
State and local ........... 34,818 7,000
---------- ---------
Provision for income taxes $139,462 $30,000
========== =========
The deferred income tax assets and liabilities recorded in the combined
balance sheets at December 31, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Assets:
Receivables .................................... $ 77,232 $ 42,440
Excess of tax basis over book basis from tax gain
recognized upon incorporation of subsidiaries . 1,876,128 1,751,053
Loss carryforwards ............................. 745,862 9,478,069
Other .......................................... 739,810 806,312
------------- -------------
Total deferred tax assets ................... 3,439,032 12,077,874
Liabilities:
Excess of book basis over tax basis of property, plant
and equipment ............................... (1,224,527) (1,015,611)
Excess of book basis over tax basis of amortizable
intangible assets ........................... (597,837) (4,277,512)
Total deferred tax liabilities .............. (1,822,364) (5,293,123)
------------- -------------
Net deferred tax assets ........................ 1,616,668 6,784,751
Valuation allowance ............................ (1,756,130) (6,954,213)
------------- -------------
Net deferred tax liabilities ................... $ (139,462) $ (169,462)
============= =============
</TABLE>
The Company has recorded a valuation allowance of $6,954,213 to reflect
the estimated amount of deferred tax assets which may not be realized due to
the expiration of the Company's net operating loss carryforwards and portions
of other deferred tax assets related to prior acquisitions. The valuation
allowance increased primarily as the result of net operating loss
carryforwards generated during 1995 which may not be utilized.
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $9.5 million which are available to offset future taxable
income and expire through 2010.
A reconciliation of the federal statutory rate to the effective tax rate
is as follows:
1994 1995
---------- ----------
U.S. statutory federal income tax rate ............ (34.00%) (34.00%)
Net operating loss attributable to the partnerships . 29.55 --
Foreign net operating income (loss) ............... (18.14) (27.09)
State net operating loss .......................... (.96) --
Valuation allowance ............................... 25.70 61.46
Other ............................................. .72 --
---------- ----------
Effective tax rate ................................ 2.87% .37%
========== ==========
F-15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. RELATED PARTY TRANSACTIONS:
Related party transaction balances at December 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Accrued expenses ...................................... $142,048 $468,327
Notes payable ......................................... 211,728 257,228
Interest expense related to subordinated notes payable . 594,875 --
</TABLE>
At December 31, 1994 and 1995, PCMC had advances payable to an affiliate
for $142,048 and $468,327, respectively. These amounts are included in
accrued expenses.
At December 31, 1994 and 1995, Towers had a demand note payable to an
affiliate, with interest accruing at 8% per annum, for $131,815 and $151,815,
respectively. Total interest expense on the affiliated debt was $10,440 and
$10,901 for the years ended December 31, 1994 and 1995, respectively. Also,
at December 31, 1994 and 1995, PBA had a demand note payable to an affiliate,
with interest accruing at prime plus two percent payable monthly in arrears,
for $79,913 and $105,413, respectively. Total interest expense on the
affiliated debt was $6,876 and $11,858, for the years ended December 31, 1994
and 1995, respectively.
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended December 31, Three months ended March 31,
--------------------------------------------- ----------------------------
1993 1994 1995 1995 1996
------------- ------------- ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Acquisition of subsidiaries ............ $33,804,622
Refinancing of long-term debt .......... 24,074,135
Capital contribution and related reduction
of debt ............................... 7,650,335 $15,069,173
Barter revenue and related expense ..... 2,735,500 4,604,200 $5,110,662 $1,004,360 $1,074,665
Intangible assets and related affiliated debt 2,994,811 -- -- -- --
Acquisition of program rights and assumption
of related program payables ........... -- 1,797,866 1,335,275 296,725 --
Acquisition of plant under capital leases 289,786 168,960 121,373 -- 230,176
Redemption of minority interests and related
receivable ............................ -- 49,490 246,515 -- --
Interest converted to principal ........ -- 867,715 -- -- --
Issuance of put/call agreement ......... -- -- -- -- 3,050,000
</TABLE>
For the years ended December 31, 1993, 1994, 1995 and for the three months
ended March 31, 1995 and 1996, the Company paid cash for interest in the
amount of $3,280,520, $3,757,097, $3,620,931, $989,417 and $5,477,771,
respectively. The Company paid no taxes for the years ended December 31,
1993, 1994, 1995 and for the three months ended March 31, 1995 and 1996.
F-16
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
12. COMMON STOCK:
At December 31, 1994, common stock consists of the following:
PM&C common stock, $1.00 par value; 1,000 shares authorized;
394 issued and outstanding ......................... $394
PST common stock, $1.00 par value; 20,000 shares authorized;
100 issued and outstanding ......................... 100
----
Total common stock ................................ $494
====
At December 31, 1995, common stock consists of the following:
PM&C Class A common stock, $0.01 par value; 230,000 shares
authorized; 161,500 issued and outstanding ....... $1,615
PM&C Class B common stock, $0.01 par value; 20,000 shares
authorized; 8,500 issued and outstanding ......... 85
------
Total common stock .............................. $1,700
======
On July 7, 1995, as part of a plan of reorganization, PM&C agreed to
exchange 161,500 Class A Shares for all of the existing common stock
outstanding of PM&C, all outstanding shares of PST and a 99% limited interest
in PBA. The Company also acquired all of the outstanding interests of MCT for
nominal consideration. Additionally, the Company issued 8,500 Class B Shares
of PM&C on July 7, 1995 in connection with the Note Offering (see footnote
6).
In May 1996, Pegasus was incorporated and authorized with 30,000,000
shares of Class A and 15,000,000 shares of Class B, $0.01 par value common
stock and 5,000,000 shares of Preferred Stock.
13. INDUSTRY SEGMENTS:
The Company operates in three industry segments: broadcast television (TV),
cable television (Cable), and direct broadcast satellite television (DBS). TV
consists of three Fox affiliated television stations, of which one also
simulcasts its signal in Hazelton and Williamsport, Pennsylvania. Cable and
DBS consists of cable television services and direct broadcast satellite
services/equipment, respectively. Information regarding the Company's business
segments in 1993, 1994, and 1995 is as follows:
<TABLE>
<CAPTION>
TV DBS Cable Other Combined
---------- --------- ---------- ------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
1993
Revenues ................. $10,307 $ 9,134 $ 46 $19,487
Operating income (loss) .. 488 (625) (46) (183)
Identifiable assets ...... 34,939 $2,995 38,251 319 76,504
Incentive compensation ... 106 -- 86 -- 192
Corporate expenses ....... 649 -- 612 4 1,265
Depreciation & amortization 1,501 -- 4,405 72 5,978
Capital expenditures ..... 127 -- 691 67 885
1994
Revenues ................. $17,808 $ 174 $10,148 $ 61 $28,191
Operating income (loss) .. 2,057 (103) (769) (25) 1,160
Identifiable assets ...... 36,078 4,438 34,535 343 75,394
Incentive compensation ... 327 -- 105 -- 432
Corporate expenses ....... 860 5 634 7 1,506
Depreciation & amortization 2,184 61 4,632 63 6,940
Capital expenditures ..... 411 57 704 92 1,264
</TABLE>
F-17
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
13. Industry Segments: - (Continued)
<TABLE>
<CAPTION>
TV DBS Cable Other Combined
---------- --------- ---------- ------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
1995
Revenues ................. $19,973 $1,469 $10,606 $100 $32,148
Operating income (loss) .. 2,252 (752) (1,103) (33) 364
Identifiable assets ...... 36,906 5,577 52,934 353 95,770
Incentive compensation ... 415 9 104 -- 528
Corporate expenses ....... 782 114 450 18 1,364
Depreciation & amortization 2,591 719 5,364 77 8,751
Capital expenditures ..... 1,403 216 953 69 2,641
</TABLE>
14. SUBSEQUENT EVENTS:
PEGASUS SAVINGS PLAN
Effective January 1, 1996, the Company adopted the Pegasus Communications
Savings Plan (the "U.S. Plan"). The U.S. Plan is intended to be qualified
under sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended. Substantially all the Company's employees who have completed at
least one year of service are eligible to participate. Participants may make
salary contributions up to 6% of their base salary.
The Company makes employing matching contributions up to 100% of
participant contributions. Company matching contributions vest over a four
year period.
ACQUISITIONS
On January 29, 1996, PCH acquired 100% of the outstanding stock of
Portland Broadcasting, Inc. ("PBI"), a wholly owned subsidiary of Bride
Communications, Inc. ("BCI") which owns the tangible assets of WPXT,
Portland, Maine. PCH immediately transferred the ownership of PBI to the
Company. The aggregate purchase price was approximately $11,700,000 of which
$4,200,000 was allocated to fixed and tangible assets and $7,500,000 to
goodwill. In addition, PCH entered into agreements to acquire BCI which
effectively owns the FCC license of WPXT. The acquisition of BCI is
contingent upon FCC consent and other conditions. The total purchase price of
BCI is estimated to be $3,000,000. The Company programs WPXT under a time
brokerage agreement with BCI.
Effective March 1, 1996, the Company acquired the principal tangible
assets of WTLH, Inc. and certain of its affiliates for approximately
$5,000,000 in cash, except for the FCC license and Fox affiliation agreement.
Additionally, WTLH License Corp., a subsidiary of the Company entered into a
put/call agreement regarding the FCC license and Fox affiliation agreement
with General Management Consultants, Inc. ("GMC"), the licensee of WTLH,
Tallahassee, Florida. As a result of entering into the put/call agreement,
the Company recorded $3,050,000 in intangible assets and long term debt
representing the FCC license and Fox affiliation agreement and the related
contingent liability. The Company programs WTLH under a time brokerage
agreement with GMC.
The aggregate purchase price of WTLH, Inc. and WTLH License Corp. is
approximately $8,050,000 of which $2,150,000 was allocated to fixed and
tangible assets and $5,900,000 to various intangible assets. In addition, the
Company granted the owners of WTLH a warrant to purchase $1,000,000 of stock
at the initial public offering price. The warrant expires 120 days after the
offering commences.
F-18
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
14. Subsequent Events: - (Continued)
On March 21, 1996, the Company entered into a definitive agreement to
acquire all of the assets of Dom's TeleCable, Inc. ("Dom's") for
approximately $25 million in cash and $1.4. million in assumed liabilities.
Dom's operates cable systems serving ten communities contiguous to MCT.
On May 30, 1996, PCH entered into an agreement with Harron Communications
Corp., under which the Company will acquire the rights to provide DIRECTV
programming in certain rural areas of Texas and Michigan and related assets
in exchange for approximately $9.9 million in cash and $19.9 million of the
Company's Class A Common Stock.
The above acquisitions have been or will be accounted for as purchases.
F-19
<PAGE>
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.
/s/ ERNST & YOUNG LLP
Ernst & Young LLP
Pittsburgh, Pennsylvania
October 27, 1995
F-20
<PAGE>
PORTLAND BROADCASTING, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 25, September 24, December 31,
1994 1995 1995
--------------- --------------- --------------
(unaudited)
<S> <C> <C> <C>
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
=============== =============== ==============
</TABLE>
See accompanying notes.
F-21
<PAGE>
PORTLAND BROADCASTING, INC.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Fiscal year ended Fiscal quarters ended
---------------------------------------------------- --------------------------------
September 26, September 25, September 24, December 25, December 31,
1993 1994 1995 1994 1995
--------------- --------------- --------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
(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)
=============== =============== =============== ============== ==============
</TABLE>
See accompanying notes.
F-22
<PAGE>
PORTLAND BROADCASTING, INC.
STATEMENTS OF DEFICIENCY IN ASSETS
<TABLE>
<CAPTION>
Common Retained Deficiency
Stock Deficit in Assets
--------- --------------- ---------------
<S> <C> <C> <C>
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)
========= =============== ===============
</TABLE>
See accompanying notes.
F-23
<PAGE>
PORTLAND BROADCASTING, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Fiscal year ended Fiscal quarter ended
---------------------------------------------------- --------------------------------
September 26, September 25, September 24, December 25, December 31,
1993 1994 1995 1994 1995
--------------- --------------- --------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
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 ................... $ -- $ -- $ -- $ -- $ --
=============== =============== =============== ============== ==============
</TABLE>
See accompanying notes.
F-24
<PAGE>
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 ACCOUNTINGPOLICIES
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
<PAGE>
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:
<TABLE>
<CAPTION>
September 25, September 24,
1994 1995
------------- ------------
<S> <C> <C>
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
=========== ==========
</TABLE>
F-26
<PAGE>
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
<PAGE>
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
<PAGE>
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.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Jacksonville, Florida
March 8, 1996
F-29
<PAGE>
WTLH, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31, February 29,
ASSETS 1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-30
<PAGE>
WTLH, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended Two Months Ended
-------------------------------- --------------------------------
December 31, December 31, February 28, February 29,
1994 1995 1995 1996
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
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
============== ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
WTLH, INC.
STATEMENTS OF CAPITAL DEFICIENCY
<TABLE>
<CAPTION>
Additional Receivable Total
Common Paid-In From Capital
Stock Capital Deficit Affiliate Deficiency
-------- ------------ --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
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)
======== ============ =============== ============= ===============
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
WTLH, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended Two Months Ended
------------------------------- --------------------------------
December 31, December 31, February 28, February 29,
1994 1995 1995 1996
------------- -------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
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
============= ============== ============== ==============
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
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 independent pro-
F-34
<PAGE>
WTLH, Inc.
Notes to Financial Statements - (Continued)
1. Summary of Significant Accounting Policies: - (Continued)
ducers' 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
<PAGE>
WTLH, Inc.
Notes to Financial Statements - (Continued)
3. LONG-TERM DEBT TO AFFILIATES:
The following is a summary of long-term debt to affiliates:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1994 1995 1996
-------------- -------------- ------------
(Unaudited)
<S> <C> <C> <C>
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
============== ============== ============
</TABLE>
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:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1994 1995 1996
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C> <C>
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
========= ========= =========
</TABLE>
F-36
<PAGE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Year Ended Two Months Ended
-------------------------------- --------------------------------
December 31, December 31, February 28, February 29,
1994 1995 1995 1996
-------------- -------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
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 %
============== ============== ============== ==============
</TABLE>
The components of net deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1994 1995 1996
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
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
<PAGE>
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
<PAGE>
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.
/s/ DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 26, 1996
F-40
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND MARCH 31, 1996
<TABLE>
<CAPTION>
December 31,
------------------------------ March 31,
1994 1995 1996
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................... $ 140,311 $ 452,016 $ 311,836
Accounts Receivable, net of allowance for doubtful
accounts of $64,100 in 1995 and 1996 ........ 71,818 485,803 395,713
Inventory ...................................... 766,945 304,335 107,507
------------- ------------- -------------
Total current assets ................... 979,074 1,242,154 815,056
------------- ------------- -------------
PROPERTY AND EQUIPMENT ........................... 14,270 71,777 71,777
Accumulated depreciation ....................... (1,000) (9,565) (13,348)
------------- ------------- -------------
Property and equipment, net ............ 13,270 62,212 58,429
------------- ------------- -------------
FRANCHISE COSTS .................................. 5,399,321 5,590,167 5,590,167
Accumulated amortization ....................... (224,877) (775,423) (915,857)
------------- ------------- -------------
Franchise costs, net ................... 5,174,444 4,814,744 4,674,310
------------- ------------- -------------
TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,547,795
============= ============= =============
LIABILITIES AND DIVISION DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ............................... $ 272,340 $ 49,290 $ 156,150
Accrued expenses (Note 4) ..................... 121,085 504,339 461,079
------------- ------------- -------------
Total current liabilities .............. 393,425 553,629 617,229
------------- ------------- -------------
DUE TO AFFILIATE (Note 8) ........................ 6,708,407 8,399,809 8,163,169
------------- ------------- -------------
Total liabilities ............................ 7,101,832 8,953,438 8,780,398
COMMITMENTS AND CONTINGENCIES
DIVISION DEFICIENCY .............................. (935,044) (2,834,328) (3,232,603)
------------- ------------- -------------
TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,547,795
============= ============= =============
</TABLE>
See notes to combined financial statements.
F-41
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995, AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
-------------------------------- ----------------------------
1994 1995 1995 1996
------------- --------------- ----------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Programming ................ $ 95,488 $ 1,677,581 $ 243,772 $ 723,725
Equipment and other ........ 279,430 835,379 64,693 184,183
------------- --------------- ----------- -------------
374,918 2,512,960 308,465 907,908
------------- --------------- ----------- -------------
COST OF SALES:
Programming ............... 42,464 707,880 103,793 369,897
Equipment and other......... 233,778 901,420 68,141 202,091
------------- --------------- ----------- -------------
276,242 1,609,300 171,934 571,988
------------- --------------- ----------- -------------
GROSS PROFIT ................. 98,676 903,660 136,531 335,920
------------- --------------- ----------- -------------
OPERATING EXPENSES:
Selling .................... 17,382 463,425 32,289 63,959
General and administrative . 199,683 1,009,633 129,408 314,245
Corporate allocation ....... 103,200 139,700 34,900 38,200
Depreciation and amortization 225,877 559,111 136,063 144,217
------------- --------------- ----------- -------------
546,142 2,171,869 332,660 560,621
------------- --------------- ----------- -------------
LOSS FROM OPERATIONS ......... (447,466) (1,268,209) (196,129) (224,701)
INTEREST EXPENSE ............. 487,578 631,075 146,270 173,574
------------- --------------- ----------- -------------
NET LOSS ..................... $ (935,044) $ (1,899,284) $(342,399) $ (398,275)
============= =============== =========== =============
</TABLE>
See notes to combined financial statements.
F-42
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995, AND
THREE MONTHS ENDED MARCH 31, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended Three Months Ended
December 31, March 31,
-------------------------------- ------------------------------
1994 1995 1995 1996
------------- --------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................. $ (935,044) $ (1,899,284) $ (342,399) $ (398,275)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization .......... 225,877 559,111 136,063 144,217
Changes in assets and liabilities:
Accounts receivable .................. (71,818) (413,985) (7,319) 90,090
Inventory ............................ (766,945) 462,610 (110,544) 196,828
Accounts payable ..................... 272,340 (223,050) (134,894) 106,860
Accrued expenses ..................... 121,085 383,254 25,338 (43,260)
------------- --------------- ------------- -------------
Net cash provided by (used in) operating
activities ...................... (1,154,505) (1,131,344) (433,755) 96,460
------------- --------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment ........ (14,270) (57,507) (30,211)
Purchase of franchise rights and other .... (190,846)
------------- --------------- ------------- -------------
Net cash used in investing activities (14,270) (248,353) (30,211)
------------- --------------- ------------- -------------
FINANCING ACTIVITIES -- Advances from (to)
affiliate, net ............................ 1,309,086 1,691,402 453,190 (236,640)
------------- --------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH ............. 140,311 311,705 (10,776) (140,180)
CASH, BEGINNING OF YEAR ..................... 140,311 140,311 452,016
------------- --------------- ------------- -------------
CASH, END OF YEAR ........................... $ 140,311 $ 452,016 $ 129,535 $ 311,836
============= =============== ============= =============
</TABLE>
See notes to combined financial statements.
F-43
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
NOTES TO COMBINED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994 AND 1995
1. PRESENTATION AND NATURE OF BUSINESS
Basis of Presentation -- The DBS Operations of Harron Communications Corp.
(the "Divisions") are comprised of the assets and liabilities of two operating
divisions of Harron Communications Corp. ("Harron") that provide direct
broadcast satellite ("DBS") services. Harron intends to sell these assets
pursuant to an agreement with Pegasus Communications Holdings, Inc. (see Note
9). These divisions have no separate legal existence apart from Harron.
The historical combined financial statements of the DBS Operations of
Harron Communications Corp. do not necessarily reflect the results of
operations or financial position that would have existed if the component DBS
operating divisions were independent companies. Harron provides certain legal,
treasury, accounting, tax, risk management and other corporate services to the
Divisions (see Note 8). There are no significant intercompany transactions or
balances between the component divisions.
Nature of Business -- The Divisions provide direct broadcast satellite
television distribution services and sell the related equipment in rural
territories located in Michigan and Texas franchised by the National Rural
Telecommunications Cooperative ("NRTC") and DIRECTV. While these franchises
are exclusive as they relate to programming provided by DIRECTV, other
programming providers may offer DBS 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
<PAGE>
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 March 31, 1996 and the
combined statements of operations and cash flows for the three months ended
March 31, 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 March 31, 1996 and for the three months ended March 31, 1995 and 1996 have
been made. The combined results of operations for the three months ended March
31, 1996 are not necessarily indicative of operating results for the full
year.
Disclosures About Fair Value of Financial Instruments -- The following
disclosure of the estimated fair value of financial instruments is made in
accordance with SFAS No. 107, Disclosures About Fair Value of Financial
Instruments.
Cash, Accounts Receivable, Accounts Payable, and Accrued Expenses
-- The carrying amounts of these items approximate their fair values as
of December 31, 1994 and 1995 because of their short maturity.
Due to Affiliates -- A reasonable estimate of fair value is not
practicable to obtain because of the related party nature of this item.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated December 31,
Years -------------------------
Useful Life 1994 1995
------------- --------- ---------
Furniture and fixtures . 10 $ 8,550 $19,435
Computer equipment ..... 5 5,720 25,839
Automobiles ............ 3 21,005
Other .................. 3 5,498
--------- ---------
14,270 71,777
Accumulated depreciation . (1,000) (9,565)
--------- ---------
$13,270 $62,212
========= =========
F-45
<PAGE>
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
<PAGE>
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 Division based on management's
estimate of the Divisions' allocable share of such costs.
The Divisions' assets have been pledged as collateral for certain loans of
Harron that have outstanding balances of approximately $188,000,000 at
December 31, 1995.
9. SUBSEQUENT EVENT
On April 4, 1996, Harron entered into a letter of intent with Pegasus
Communications Holdings, Inc. ("Pegasus"). Under this letter, Pegasus and
Harron would simultaneously contribute assets into a newly-formed Delaware
Corporation ("Newco"). Newco would simultaneously undertake an initial public
offering of common stock ("Public Stock"). At the closing of the transaction,
Harron would contribute its DBS operations to Newco in exchange for (a) cash
in the amount of $9,931,347 and (b) the number of shares of Newco common stock
that could be purchased for $19,892,518 at the price at which the Public Stock
is first offered to the public. Although the Divisions believe that this
transaction will be consummated, there can be no assurances that it will occur
at all or on the terms contemplated by the letter of intent.
F-47
<PAGE>
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, 1994 and 1995, and the related statements of operations and
deficit and cash flows for the years ended May 31, 1993, 1994 and 1995. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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, 1994 and 1995, and the results of operations and deficit and its cash
flows for the years ended May 31, 1993, 1994 and 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 10, to the financial statements, the Company has
restated the depreciation expense for the years ended May 31, 1993 and 1994,
to properly reflect the calculation of depreciation expense.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
San Juan, Puerto Rico
April 11, 1996
F-48
<PAGE>
DOM'S TELE CABLE, INC.
BALANCE SHEETS
MAY 31, 1994 AND 1995 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
May 31, May 31, February 29,
1994 1995 1996
------------- ------------- ------------
As Restated Unaudited
ASSETS
<S> <C> <C> <C>
Property, plant, and equipment net of accumulated
depreciation and amortization .............................................. $5,318,673 $5,077,102 $4,800,751
Cash ......................................................................... 91,605 60,648 78,840
Accounts receivable, trade -- net of allowance for doubtful
accounts of $26,900 and $17,749 for May 31, 1994 and 1995,
and $13,953 for February 29, 1996, respectively ............................ 65,254 107,876 28,426
Accounts receivable -- other ................................................. 35,866 0 0
Prepaid expenses ............................................................. 80,691 85,536 133,230
Other assets ................................................................. 11,086 11,086 11,086
Due from related parties ..................................................... 3,626 212 0
Deferred tax asset ........................................................... 184,000 330,200 390,200
----------- ----------- -----------
Total assets ............................................................ $5,790,801 $5,672,660 $5,442,533
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Notes and loans payable ................................................... $7,523,011 $6,079,357 $5,386,098
Accounts payable, trade ................................................... 428,814 695,519 335,391
Accrued expenses .......................................................... 1,062,549 1,124,308 1,028,893
Due to related parties .................................................... 0 0 4,403
Unearned revenues ......................................................... 76,760 53,852 44,490
Income tax payable ........................................................ 0 16,840 0
----------- ----------- -----------
9,091,134 7,969,876 6,799,275
----------- ----------- -----------
Commitments and contingencies ................................................ 286,000 295,002 477,083
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 ....................................................... (3,682,083) (2,687,968) (1,929,575)
----------- ----------- -----------
(3,586,333) (2,592,218) (1,833,825)
----------- ----------- -----------
Total liabilities and stockholders' equity deficiency .................. $ 5,790,801 $5,672,660 $5,442,533
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-49
<PAGE>
DOM'S TELE CABLE, INC.
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED MAY 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1995 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
May 31, May 31, May 31, February 28, February 29,
1993 1994 1995 1995 1996
--------------- --------------- --------------- --------------- --------------
As Restated As Restated Unaudited Unaudited
<S> <C> <C> <C> <C> <C>
Revenues ........................ $ 5,450,450 $ 5,356,652 $ 5,447,228 $ 4,042,325 $ 4,371,747
Operating costs and expenses .... 1,780,323 1,521,390 1,950,762 1,302,168 1,419,986
--------------- --------------- --------------- --------------- --------------
Gross profit ............... 3,670,127 3,835,262 3,496,466 2,740,157 2,951,761
--------------- --------------- --------------- --------------- --------------
Marketing, general, and
administrative expenses .. 1,585,708 1,346,487 1,412,951 1,164,728 1,168,269
Depreciation and amortization 908,484 634,750 491,295 447,967 458,183
--------------- --------------- --------------- --------------- --------------
2,494,192 1,981,237 1,904,246 1,612,695 1,626,452
--------------- --------------- --------------- --------------- --------------
Operating income ................ 1,175,935 1,854,025 1,592,220 1,127,462 1,325,309
Non-operating (income) expenses:
Other ......................... 50,000 -- (50,000) -- --
Interest expense .............. 904,458 753,047 777,461 554,314 626,916
--------------- --------------- --------------- --------------- --------------
Income before income taxes .... 221,477 1,100,978 864,759 573,148 698,393
Benefit for income taxes ...... -- (184,000) (129,356) -- (60,000)
--------------- --------------- --------------- --------------- --------------
Net income ................. 221,477 1,284,978 994,115 573,148 758,393
Deficit at beginning of period .. (5,188,538) (4,967,061) (3,682,083) (3,682,083) (2,687,968)
--------------- --------------- --------------- --------------- --------------
Deficit at end of period ........ $ (4,967,061) $ (3,682,083) $ (2,687,968) $ (3,108,935) $ (1,929,575)
=============== =============== =============== =============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
DOM'S TELE CABLE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED FEBRUARY 28, 1995 AND FEBRUARY 29, 1996
<TABLE>
<CAPTION>
May 31, May 31, May 31, February 29, February 29,
1993 1994 1995 1995 1996
------------- ------------- ------------- -------------- --------------
As Restated As Restated Unaudited Unaudited
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .................................. $ 221,477 $ 1,284,978 $ 994,115 $ 573,148 $ 758,393
------------- ------------- ------------- -------------- --------------
Adjustments to reconcile net income to net cash
provided by operating activities: ...........
Depreciation and amortization ............ 908,484 634,750 491,295 447,967 458,183
Provision for doubtful accounts .......... 108,825 50,595 9,241 109,164 78,579
Changes in assets and liabilities:
(Increase) decrease in accounts
receivables, trade .................. (75,168) (24,781) (51,864) (164,496) 871
(Increase) decrease in accounts receivable,
other ............................... 6,383 (14,743) 35,866 -- --
(Increase) decrease in prepaid expenses . 47,973 (35,218) (4,845) 27,618 (47,694)
(Increase) decrease in other assets .... (750) (3,916) -- 35,866 --
(Increase) decrease in due from related
parties ............................. 43,576 (2,887) 3,414 3,626 212
(Increase) decrease in deferred tax asset -- (184,000) (146,200) -- (60,000)
Increase (decrease) in accounts payable . (236,081) 238,870 266,705 (5,335) (360,128)
Increase (decrease) in accrued expenses . 591,543 (186,870) 61,759 56,516 (95,415)
Increase (decrease) in income tax payable -- -- 16,840 -- (16,840)
Increase (decrease) in unearned revenues . (12,483) (12,483) (22,908) (9,362) (9,362)
Increase (decrease) in due to related
parties ............................. -- -- -- 1,944 4,403
Increase (decrease) in other liabilities . -- -- -- 50,000 --
Increase (decrease) in contingencies ... -- -- 9,002 -- 182,081
------------- ------------- ------------- -------------- --------------
Total adjustments ................... 1,382,302 459,317 668,305 553,508 134,890
------------- ------------- ------------- -------------- --------------
Net cash provided by operating
activities ........................ 1,603,779 1,744,295 1,662,420 1,126,656 893,283
------------- ------------- ------------- -------------- --------------
Cash flows from investing activities:
Capital expenditures ........................ (430,149) (390,172) (249,727) (127,755) (181,832)
------------- ------------- ------------- -------------- --------------
Net cash used in investing activities . (430,149) (390,172) (249,727) (127,755) (181,832)
------------- ------------- ------------- -------------- --------------
Cash flows from financing activities:
Book overdraft .............................. -- -- -- 182,694 --
Payments of notes payable ................... (1,096,468) (1,469,104) (1,443,650) (1,273,200) (708,159)
Proceeds from issuance of loan payable ...... -- 40,000 -- -- 14,900
------------- ------------- ------------- -------------- --------------
Net cash used in financing activities . (1,096,468) (1,429,104) (1,443,650) (1,090,506) (693,259)
------------- ------------- ------------- -------------- --------------
Net increase (decrease) in cash ............... 77,162 (74,981) (30,957) (91,605) 18,192
Cash, beginning of period ..................... 89,424 166,586 91,605 91,605 60,648
------------- ------------- ------------- -------------- --------------
Cash, end of period ........................... $ 166,586 $ 91,605 $ 60,648 $ -- $ 78,840
============= ============= ============= ============== ==============
Supplemental disclosure of cash flows
information:
Cash paid during the period for interest ..... $ 853,085 $ 713,821 $ 805,421 $ 353,401 $ 336,750
============= ============= ============= ============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION, NATURE OF OPERATIONS, AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND NATURE OF OPERATIONS
Dom's Tele Cable, Inc. (the "Company") was incorporated pursuant to the
provisions of the General Corporations Law of the Commonwealth of Puerto Rico
of 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.
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.
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.
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.
During 1993, the Company increased the estimated useful life of the tower
and distribution system to reflect the results of an engineering study of the
depreciation life of the system. The change in the estimated useful life has
the effect of decreasing the Company's depreciation expense by $1,004,188 for
the year ended May 31, 1993.
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
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.
F-52
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. ORGANIZATION, NATURE OF OPERATIONS, 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.
PERVASIVENESS 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.
INTERIM FINANCIAL INFOMATION
The financial statements as of February 29, 1996 and for the nine months
ended February 28, 1995 and February 29, 1996 are unaudited. In the opinion
the management all adjustments, including normal recurring adjustments,
necessary for a fair presentation of the results of operations have been
included. Results for the nine months ended February 29, 1996 may not be
indicative of the results expected for the year ending May 31, 1996.
The Company has provided unaudited footnote information for the interim
periods to the extent such information is substantially different from the
audited periods.
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 agreement with the Puerto Rico Telephone Company
is renewed on a yearly basis. The contract specifies that the Company will
pay $3.00 for the use of each pole. For the nine months ended February 28,
1995 and February 29, 1996 the rental expense amounted to $29,132 and
$35,533, and for the years ended May 31, 1993, 1994, and 1995 the rental
expense amounted to $63,023, $58,334, and $73,063, 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 $32,499 in February 28, 1995 and February 29, 1996, and
$111,542, $137,952, and $54,952 in May 31, 1993, 1994, and 1995,
respectively.
In October 1994, all of the Company's stock was acquired by the majority
stockholder.
F-53
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of:
<TABLE>
<CAPTION>
May 31, May 31, February 29,
1994 1995 1996
------------- ------------- --------------
As Restated Unaudited
<S> <C> <C> <C>
Building ..................................... $ 122,713 $ 122,713 $ 122,713
Tower and distribution ....................... 10,774,373 11,006,704 10,984,362
Furniture and fixtures ....................... 138,398 137,498 141,578
Equipment .................................... 379,308 394,703 417,944
Leasehold improvements ....................... 32,350 32,350 39,279
------------- ------------- --------------
11,447,142 11,693,968 11,705,876
Less accumulated depreciation and amortization . 6,290,957 6,781,354 7,069,613
Land ......................................... 162,488 164,488 164,488
------------- ------------- --------------
Property, plant and equipment, net ........... $ 5,318,673 $ 5,077,102 $ 4,800,751
============= ============= ==============
</TABLE>
5. NOTES AND LOANS PAYABLE
<TABLE>
<CAPTION>
May 31, May 31, February 29,
1994 1995 1996
------------- ------------- --------------
Unaudited
<S> <C> <C> <C>
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 ....................................................................... $1,608,075 $974,315 $392,006
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 ....................................................................... 5,880,091 5,080,020 4,980,020
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 .......................................... 0 25,022 0
Loan payable collateralized by a chattel mortgage on equipment
bearing interest at 9.50% and due in 1998 ..................................... 34,845 0 14,072
---------- ---------- ----------
$7,523,011 $6,079,357 $5,386,098
========== ========== ==========
</TABLE>
F-54
<PAGE>
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,
--------------------
1996 ................................................. $2,453,070
1997 ................................................. 2,933,028
-------------
$5,386,098
=============
The credit agreement between the Company and Philips Credit Corporation
(PCC) dated June 28, 1988, as amended, is comprised of the Term Loan and the
Credit Facility and is collateralized by substantially all of the assets
owned by the Company along with a personal guarantee of the Company's
majority stockholder and the stock owned by the Three-Sixty Corporation and
other stockholders.
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, 1993, 1994, and 1995, the
Company was not in compliance with certain of the restrictive covenants.
The Company is in default on principal payments amounting to approximately
$900,000 on the Credit Facility Loan payable to PCC. Therefore, the lender
may demand repayment of the loan, eventhough no such demand has been made. At
present, the Company's management is under negotiations with PCC to extend
the payment plan up to the date of the liquidation and eventual sale of its
net assets. Principal and interest payments were paid timely during 1993 and
1994.
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
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 at were as follows:
<TABLE>
<CAPTION>
May 31, May 31, May 31, February 29
1993 1994 1995 1996
------------- ------------- ----------- -------------
As Restated As Restated Unaudited
<S> <C> <C> <C> <C>
Net operating loss carryforwards . $ 1,611,300 $ 1,240,372 $ 712,758 $ 712,758
Valuation allowance ............. (1,611,300) (1,056,372) (382,558) (322,558)
------------- ------------- ----------- -------------
$ 0 $ 184,000 $ 330,200 $ 390,200
============= ============= =========== =============
</TABLE>
The comparison of income tax expense at the Puerto Rico statutory rate to
the Company's income tax benefit is as follows:
<TABLE>
<CAPTION>
May 31, May 31, May 31, February 29
1993 1994 1995 1996
------------- ------------- ------------- -------------
As Restated As Restated Unaudited
<S> <C> <C> <C> <C>
Tax at statutory rate ..................... $ 93,020 $ 462,411 $ 363,199 $ 318,525
Adjustment due to:
Benefit of net operating loss carryforwards (86,809) (456,149) (354,255) (317,704)
Change in valuation allowances ....... 0 (184,000) (146,200) (60,000)
Alternative minimum tax .............. 0 0 16,844 0
Others, net .......................... (6,211) (6,262) (8,944) (821)
------------- ------------- ------------- -------------
$ 0 $ (184,000) $ (129,356) $ (60,000)
============= ============= ============= =============
</TABLE>
F-55
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. INCOME TAXES - (Continued)
The Company has net operating loss carryforwards available as a reduction
of future income, if any, as follows:
Expiration Year
1998 ...................................................... $ 951,448
1999 ...................................................... 745,594
------------
$1,697,042
============
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 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 $286,000, $295,002, and $477,083 for May 31, 1993, 1994, and
1995, 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 $286,000, $295,002, and
$477,083 for May 31, 1993, 1994 and 1995, respectively, for royalty fees and
interest for the unexpired filing periods, which is five 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. SUBSEQUENT EVENTS
On October 26, 1995, Philips Credit Corporation sold, assigned, and
transferred all of its rights, title, and interest, in and to the credit
agreement to Lazard Freres & Co., L.L.C.
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 May 31, 1996. Long-term obligations payable to Philips Credit
Corporations, at present, Lazard Freres & Co., L.L.C., 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. PRIOR PERIOD ADJUSTMENT
The Company restated the depreciation expense by $103,191 and $520,329 to
correct the depreciation expense for the years ended May 31, 1993 and 1994,
respectively. The effect was to increase net income for the years ended May
31, 1993 and 1994 by $103,191 and $520,329, respectively.
F-56
<PAGE>
[This inside back cover page will contain logos from Fox, DIRECTV and various
program that the Company does business. Additionally, the inside back cover
will contain promotional pictures of various programs that the Company has the
rights to show.]
<PAGE>
===============================================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representations not contained in this
Prospectus, and, if given or made, such information or representations must
not be relied upon as having been authorized by the Company or any of the
Underwriters. This Prospectus does not constitute an offer to sell or a
solicitation of any offer to buy any securities offered hereby in any
jurisdiction in which such an offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any sale made hereunder shall,
under any circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the date hereof.
------
TABLE OF CONTENTS
Page
--------
Prospectus Summary ............................. 3
Risk Factors ................................... 16
The Company .................................... 22
Use of Proceeds ................................ 25
Dividend Policy ................................ 25
Dilution ....................................... 26
Capitalization ................................. 27
Selected Historical and Pro Forma Combined
Financial Data ................................ 28
Pro Forma Combined Financial Data .............. 31
Management's Discussion and Analysis of Financial
Condition and Results of Operations ........... 37
Business ....................................... 44
Management and Certain Transactions ............ 72
Ownership and Control .......................... 78
Description of Indebtedness .................... 79
Description of Capital Stock ................... 81
Shares Eligible for Future Sale ................ 84
Underwriting ................................... 86
Legal Matters .................................. 88
Experts ........................................ 88
Additional Information ......................... 89
Index to Combined Financial Statements ......... F-1
------
Until __________ , 1996 (25 days after the date of this Prospectus), all
dealers effecting transactions in the Class A Common Stock offered hereby,
whether or not participating in this distribution, may be required to deliver
a Prospectus. This is in addition to the obligations of dealers to deliver a
Prospectus when acting as Underwriters and with respect to their unsold
allotments or subscriptions.
===============================================================================
<PAGE>
===============================================================================
___________ SHARES
LOGO PEGASUS
CLASS A COMMON STOCK
----------
PROSPECTUS
______________, 1996
----------
LEHMAN BROTHERS
BT SECURITIES CORPORATION
CIBC WOOD GUNDY SECURITIES CORP.
PAINEWEBBER INCORPORATED
===============================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses payable by the Registrant in
connection with this Registration Statement. All of such expenses are
estimates, other than the filing and listing fees payable to the Securities
and Exchange Commission and the National Association of Securities Dealers,
Inc.
Filing Fee -- Securities and Exchange Commission ............ $17,242
Filing Fee -- National Association of Securities Dealers, Inc. $ 6,250
Listing Fees -- Nasdaq National Market ...................... *
Fees and Expenses of Accountants ............................ *
Fees and Expenses of Counsel ................................ *
Printing Expenses ........................................... *
Blue Sky Fees and Expenses .................................. *
Miscellaneous Expenses ...................................... *
---------
$
Total ..................................................... *
=========
- ------
* To be supplied
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Amended and Restated Certificate of Incorporation
provides that a director of the Registrant shall have no personal liability
to the Registrant or to its stockholders for monetary damages for breach of
fiduciary duty as a director except to the extent that Section 102(b)(7) (or
any successor provision) of the Delaware General Corporation Law, as amended
form time to time, expressly provides that the liability of a director may
not be eliminated or limited.
Article 6 of the Registrant's By-Laws provides that any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director
or officer of the Registrant, or is or was serving while a director or
officer of the Registrant at the request of the Registrant as a director,
officer, employee, agent, fiduciary or other representative of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall be indemnified by the Registrant against expenses
(including attorneys' fees), judgments, fines, excise taxes and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding to the full extent permissible under
Delaware law. Article 6 also provides that any person who is claiming
indemnification under the Registrant's By-Laws is entitled to advances from
the Registrant for the payment of expenses incurred by such person in the
manner and to the full extent permitted under Delaware law.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Registrant against certain liabilities under the Securities
Act of 1933, as amended. Reference is made to [Section ___] of the form of
Underwriting Agreement which is filed as Exhibit 1.1 hereto.
The Registrant intends to obtain directors' and officers' liability
insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant was incorporated on May 30, 1996. In connection with its
incorporation, the Registrant issued 100 shares of Class B Common Stock to
its parent, Pegasus Communications Holdings, Inc. on May 30, 1996, in
reliance on the exemption from registration set forth in Section 4(2) of the
Securities Act. See "The Company -- Acquisitions" and "The Company --
Corporate Reorganization and Other Transactions" for information concerning
certain issuances (in reliance on the exemption from registration set forth
in Section 4(2) of the Securities Act) of securities that are proposed to be
made concurrently with the completion of the offering to which this
Registration Statement relates.
II-1
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -----------------------
<S> <C>
1.1** Form of Underwriting Agreement.
2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla
Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which
is incorporated herein by reference to Exhibit 2.1 of the Form 10-K for the year ended December 31, 1995
of Pegasus Media & Communications, Inc.).
2.2* Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30, 1996 (including form of
Joinder Agreement, Stockholders' Agreement and Noncompetition Agreement).
3.1* Certificate of Incorporation of Pegasus.
3.2* By-Laws of Pegasus.
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the Guarantors
(as this term is defined in the Indenture), and First Fidelity Bank, National Association, as Trustee,
relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form of Notes and
Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
4.2 Form of Notes (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee (included in Exhibit 4.1 above).
4.4 Revolving Credit Agreement by and among Pegasus Media & Communications, Inc., the Lenders party thereto,
and IBJ Schroder Bank & Trust Company, as Agent (which is incorporated herein by reference to Exhibit
4.4 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
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).
II-2
<PAGE>
Exhibit
Number Description of Document
- ------- -----------------------
10.7 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication
Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television,
L.P. relating to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to
Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-
95042).
10.8 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television,
L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to
Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.9 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating
to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media
& Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.10 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting
Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated
herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement
on Form S-4 (File No. 33-95042).
10.11 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14
to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.12 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the
National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated
herein by reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement
on Form S-4 (File No. 33-95042).
10.13 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993,
between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is
incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042).
10.14 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television,
Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.15 Stock Purchase Agreement dated January 25, 1996, among the Parent, Portland Broadcasting, Inc., HMW, Inc.,
Bride Communications, Inc., John W. Bride, John W. Bride and Christopher McHenry Bride, as amended (the
"Stock Purchase Agreement") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to
Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.16 Amendment to the Stock Purchase Agreement (which is incorporated herein by reference to Exhibit 2 to Pegasus
Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.17 Time Brokerage Agreement dated as of January 28, 1996, between HMW, Inc. and the Parent (which is incorporated
herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29,
1996).
10.18 Asset Purchase Agreement, dated October 13, 1995, among WTLH, Inc. ("WTLH"), General Management Consultants,
Inc. ("GMC"), TV 57 Live-Oak Gainsville, Inc. ("TV-57"), Paul Lansat, Renee Lansat and Pegasus Broadcast
Television, Inc. ("PBT") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.19 Agreement of Sale, dated October 13, 1995, between Lansat Communications Inc. ("LCI") and PBT (which is
incorporated herein by reference to Exhibit B to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
II-3
<PAGE>
Exhibit
Number Description of Document
- -------- -----------------------
10.20 Modification Agreement, dated March 8, 1996, among WTLH, GMC, TV57, LCI, Paul Lansat, Renee Lansat, WTLH
License Corp. ("License Corp.") and the Parent (which is incorporated herein by reference to Exhibit 3
to Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996).
10.21 Put-Call and Security Agreement, dated March 8, 1996, among WTLH, GMC, Paul Lansat, renee Lansat, License
Corp., PBT and the Parent (which is incorporated herein by reference to Exhibit 4 to Pegasus Media &
Communications, Inc.'s Form 8-K dated March 8, 1996).
10.22 Time Brokerage Agreement, dated March 8, 1996, among GMC, WTLH and the Parent (to be assigned to a subsidiary
of Pegasus) (which is incorporated herein by reference to Exhibit 5 to Pegasus Media & Communications,
Inc.'s Form 8-K dated March 8, 1996).
10.23 Noncompetition Agreement, dated March 8, 1996, among Paul Lansat, Renee Lansat, the Parent, PBT and License
Corp. (which is incorporated herein by reference to Exhibit 6 to Pegasus Media & Communications, Inc.'s
Form 8-K dated March 8, 1996).
10.24 Noncompetition Agreement, dated March 8, 1996, among Frank Watson, the Parent, PBT and License Corp. (which
is incorporated herein by reference to Exhibit 7 to Pegasus Media & Communications, Inc.'s Form 8-K dated
March 8, 1996).
10.25 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for
the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao (which
is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated
March 21, 1996).
10.26 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for
the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference to Exhibit
3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996).
10.27** New Credit Facility
10.28** Pegasus Restricted Stock Plan
10.29** Option Agreement for Donald W. Weber
16.1* Letter from Herbein + Company, Inc. relating to change in certifying accountant.
21.1* Subsidiaries of Pegasus.
23.1 Consent of Drinker Biddle & Reath (included in their opinion filed as Exhibits 5.1)
23.2* Consent of Herbein + Company, Inc.
23.3* Consents of Coopers & Lybrand L.L.P.
23.4* Consent of Ernst & Young LLP
23.5* Consent of Deloitte & Touche LLP
24.1* Powers of Attorney (included in Signatures and Powers of Attorney)
27.1* Financial Data Schedule
</TABLE>
- ------
* Filed herewith.
** To be filed by amendment.
(b) Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts
All other schedules of Pegasus for which provision is made in the
applicable accounting regulations of the Commission are not required, are
inapplicable or have been disclosed in the notes to the consolidated
financial statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise,
II-4
<PAGE>
the registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
II-5
<PAGE>
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities
Act of 1933, each post- effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting agreements
certificates in such denominations and registered in such names as required
by the underwriters to permit prompt delivery to each purchaser.
II-6
<PAGE>
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 3rd day of June, 1996.
PEGASUS COMMUNICATIONS AND
MEDIA CORPORATION
By: /s/ Marshall W. Pagon
---------------------------------
Marshall W. Pagon
Chief Executive Officer and
President
Each person whose signature appears below hereby constitutes and appoints
Marshall W. Pagon and Robert N. Verdecchio as his attorneys-in-fact and
agents, with full power and substitution for him in any and all capacities,
to sign any or all amendments or post-effective amendments to this
Registration Statement, or any Registration Statement for the same offering
that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933, as amended, and to file the same, with exhibits
thereto and other documents in connection therewith or in connection with the
registration of the Class A Common Stock under the Securities Exchange Act of
1934, as amended, with the Securities and Exchange Commission, granting unto
each of such attorneys-in-fact the agents full power and authority to do and
perform each and ever act and thing requisite and necessary in connection
with such matters and hereby ratifying and confirming all that each of such
attorneys-in-fact and agents or his substitutes may do or cause to be done by
virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Marshall W. Pagon President, Chief Executive Officer and June 3, 1996
-------------------------------- Chairman of the Board
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, Chief June 3, 1996
-------------------------------- Financial Officer and Assistant
Robert N. Verdecchio Secretary
(Principal Financial and
Accounting Officer)
/s/ Donald W. Weber Director June 3, 1996
--------------------------------
Donald W. Weber
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the combined financial statements of Pegasus
Communications Corporation as of December 31, 1994 and 1995, and for each of
the two years in the period ended December 31, 1995 which financial
statements are included in the Prospectus, we have audited the financial
statement schedule listed in Item 16 herein.
In our opinion, the financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
/s/ COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
May 31, 1996
S-1
<PAGE>
HERBEIN + COMPANY, INC.
To the Board of Directors and Stockholders
Pegasus Communications Corporation
Radnor, Pennsylvania
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audit of the combined financial statements of Pegasus
Communications Corporation for the year ended December 31, 1993, which
financial statements are included in the Form S-1 Registration Statement, we
have audited the financial statement Schedule II -- Valuation and Qualifying
Accounts.
In our opinion, the financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
/s/ HERBEIN + COMPANY, INC.
HERBEIN + COMPANY, INC.
Reading, Pennsylvania
March 4, 1994
S-2
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Additions Additions Balance at
Beginning Charged To Charged To End of
Description of Period Expenses Other Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable
Year 1993 ............ $ 108 $ 156 $245 (a) $ 201 (b) $ 308
Year 1994 ............ $ 308 $ 200 $ -- $ 160 (b) $ 348
Year 1995 ............ $ 348 $ 151 $ -- $ 261 (b) $ 238
Valuation Allowance for
Deferred Tax Assets
Year 1994 ............ $ 0 $1,756 $ -- $ -- $1,756
Year 1995 ............ $1,756 $8,675 $ -- $3,477 $6,954
</TABLE>
(a) Balance at acquisition date.
(b) Amounts written off, net of recoveries.
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -----------------------------------------------------------------------------------------
<S> <C>
2.2 Contribution and Exchange Ageement by and between the Parent and Harron dated as of May 30,
1996 (including form of Joinder Agreement, Stockholders' Agreement and Noncompetition Agreement).
3.1 Certificate of Incorporation of Pegasus.
3.2 By-Laws of Pegasus.
16.1 Letter from Herbein + Company, Inc. relating to change in certifying accountant.
21.1 Subsidiaries of Pegasus.
23.2 Consent of Herbein + Company, Inc.
23.3 Consents of Coopers & Lybrand L.L.P.
23.4 Consent of Ernst & Young LLP
23.5 Consent of Deloitte & Touche LLP
24.1 Powers of Attorney (included in Signatures and Powers of Attorney)
27.1 Financial Data Schedule
</TABLE>
<PAGE>
CONTRIBUTION AND EXCHANGE AGREEMENT
by and between
PEGASUS COMMUNICATIONS HOLDINGS, INC.,
and
HARRON COMMUNICATIONS CORP.
--------------------------------
Dated as of May 30, 1996
--------------------------------
<PAGE>
Table of Contents
ARTICLE I DEFINITIONS.............................................2
1.1 Certain Definitions.............................2
1.2 Other Definitions..............................10
ARTICLE II BASIC TRANSACTION......................................12
2.1 Contribution of Assets. ......................12
2.2 Consideration..................................13
2.3 Operating Adjustment...........................13
2.4 Liabilities....................................15
2.5 Closing........................................15
2.6 Transactions at Closing........................15
ARTICLE III REPRESENTATIONS AND WARRANTIES OF HARRON...............16
3.1 Organization and Qualification.................16
3.2 Authority and Validity.........................17
3.3 No Breach or Violation.........................17
3.4 Consents and Approvals.........................18
3.5 Title to Assets................................18
3.6 Intellectual Property..........................18
3.7 Compliance with Legal Requirements.............19
3.8 Financial Information..........................19
3.9 Events Subsequent to 1995......................20
3.10 Undisclosed Liabilities........................21
3.11 Legal Proceedings..............................21
3.12 Taxes Relating to the Business.................21
3.13 Employees......................................22
3.14 Contracts......................................23
3.15 Books and Records; Accounts Receivable.........25
3.16 Outstanding Rights.............................25
3.17 Insurance......................................25
3.18 Disclosure.....................................27
3.19 Purchase for Investment........................27
3.20 Brokers or Finders.............................28
3.21 Certain Payments...............................28
3.22 Subscribers....................................28
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PEGASUS..............29
4.1 Organization and Qualification.................29
4.2 Authority and Validity.........................29
4.3 No Breach or Violation.........................30
4.4 Consents and Approvals.........................30
4.5 Legal Proceedings..............................31
4.6 Finders and Brokers............................31
i
<PAGE>
ARTICLE V PRE-CLOSING COVENANTS OF HARRON........................31
5.1 Additional Information.........................31
5.2 Exclusivity....................................32
5.3 Continuity and Maintenance of Operations.......32
5.4 Consents and Approvals.........................33
5.5 Registration Statement.........................34
5.6 Collateral Agreements..........................36
5.7 Tax Basis......................................36
5.8 Notification of Certain Matters................36
5.9 Employment.....................................37
ARTICLE VI PRE-CLOSING COVENANTS OF PEGASUS.......................38
6.1 Consents and Approval..........................38
6.2 Collateral Agreements..........................38
ARTICLE VII CONDITIONS PRECEDENT TO OBLIGATIONS OF PEGASUS.........39
7.1 Accuracy of Representations....................39
7.2 Covenants......................................39
7.3 Consents.......................................39
7.4 Delivery of Documents..........................40
7.5 Registration Statement.........................41
7.6 No Material Adverse Change.....................41
7.7 No Litigation..................................41
7.8 Minimum Subscribers............................42
ARTICLE VIII CONDITIONS PRECEDENT TO OBLIGATIONS OF HARRON..........42
8.1 Accuracy of Representations....................42
8.2 Covenants......................................43
8.3 Consents.......................................43
8.4 Delivery of Documents..........................43
8.5 Registration Statement.........................44
8.6 PM&C Stock Contribution........................44
8.7 Litigation.....................................44
ARTICLE IX POST-CLOSING COVENANT'S................................45
9.1 Transition.....................................45
9.2 Transition Arrangement.........................45
9.3 Transfer Taxes.................................45
9.4 1996 NRTC Patronage............................46
ARTICLE X TERMINATION............................................46
10.1 Events of Termination..........................46
10.2 Liabilities in Event of Termination............47
10.3 Procedure Upon Termination.....................47
ii
<PAGE>
ARTICLE XI REMEDIES FOR BREACH OF THIS AGREEMENT..................48
11.1 Survival of Representations and Warranties.....48
11.2 Indemnification Provisions for
Benefit of Pegasus......................48
11.3 Indemnification Provisions for
Benefit of Harron.......................49
11.4 Matters Involving Third Parties................50
11.5 Determination of Adverse Consequences..........52
ARTICLE XII MISCELLANEOUS..........................................52
12.1 Press Releases and Public Announcements........52
12.2 Parties Obligated and Benefited................53
12.3 Notices........................................53
12.4 Attorneys' Fees................................54
12.5 Waiver.........................................54
12.6 Headings.......................................55
12.7 Choice of Law..................................55
12.8 Rights Cumulative..............................55
12.9 Further Actions................................55
12.10 Time of the Essence............................55
12.11 Late Payments..................................56
12.12 Counterparts...................................56
12.13 Entire Agreement...............................56
12.14 Amendments and Waivers.........................56
12.15 Construction...................................57
12.16 Expenses.......................................57
Exhibits
Exhibit 1 Service Areas
Exhibit 2 Joinder Agreement
Exhibit 3 Stockholders' Agreement
Exhibit 4 Noncompetition Agreement
iii
<PAGE>
CONTRIBUTION AND EXCHANGE AGREEMENT
This CONTRIBUTION AND EXCHANGE AGREEMENT ("Agreement") is made as of
the 30th day of May, 1996, by and between PEGASUS COMMUNICATIONS HOLDINGS,
INC. ("Pegasus"), a Delaware corporation, and HARRON COMMUNICATIONS CORP.
("Harron"), a New York corporation. Pegasus and Harron are collectively
referred to herein as the "Parties."
RECITALS:
WHEREAS, Harron is a party to that certain NRTC Distribution
Agreement (as defined below) with the National Rural Telecommunications
Cooperative ("NRTC"), pursuant to which NRTC has granted to Harron the right
to distribute DIRECTV(R) ("DIRECTV") programming offered by DIRECTV, Inc.
("DIRECTV, Inc.") in the zipcode areas of Michigan and Texas identified in
Exhibit 1 ("Service Areas") currently comprising approximately 350,869 primary
residences (including 104,282 homes not presently passed by cable);
WHEREAS, Pegasus is a diversified media and communications holding
company which, through an indirect subsidiary, provides DIRECTV services in
areas of Connecticut, Massachusetts, New Hampshire and New York;
WHEREAS, Pegasus and Harron would like to engage in a transaction
whereby Pegasus would contribute all of the issued and outstanding Class A
Common Stock, representing 95% of the capital stock and 99.5% of the combined
voting power ("PM&C Stock"), of Pegasus Media & Communications, Inc. ("PM&C"),
a Delaware corporation which is a subsidiary of Pegasus, and Harron would
simultaneously contribute the assets of its DIRECTV business, to Pegasus
Communications and Media Corporation ("PCC"), a newly-formed Delaware
corporation, in
1
<PAGE>
exchange for Class B Common Stock (as defined below) of PCC in
the case of Pegasus, and Class A Common Stock (as defined below) of PCC and
cash in the case of Harron;
WHEREAS, the Parties intend that the contributions by the Parties of
property to PCC and the receipt of consideration in exchange therefor be
treated in accordance with Section 351 of the Internal Revenue Code of 1986,
as amended ("Code"); and
WHEREAS, simultaneously with the closing of the transactions
contemplated by this Agreement, PCC would undertake an initial public offering
("IPO") of Class A Common Stock, not including the Class A Common Stock being
issued to Harron, pursuant to a registration statement ("Registration
Statement") that would be filed under the Securities Act of 1933, as amended
and the rules and regulations thereunder ("Securities Act").
NOW, THEREFORE, in consideration of the premises and mutual promises
herein made, and in consideration of the representations, warranties,
covenants and agreements herein contained, and intending to be legally bound
hereby, the Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. The following terms shall, when used in this
Agreement, have the following meanings:
"Accountant" means Coopers & Lybrand.
"Accounts Receivable" mean the accounts receivable
identified in the Books and Records.
"Adverse Consequences" means all actions, suits,
proceedings, hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, assessments, dues,
penalties, fines, interest, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses and fees (including court costs,
settlement
2
<PAGE>
costs, legal, accounting, experts' and other fees, costs and expenses).
"Affiliate" means, with respect to any Person: (i) any
Person directly or indirectly owning, controlling, or holding with power to
vote 10% or more of the outstanding voting securities of such other Person;
(ii) any Person 10% or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held with power to vote, by such
other Person; (iii) any Person directly or indirectly controlling, controlled
by, or under common control with such other Person; and (iv) any officer,
director or partner of such other Person. "Control" for the foregoing purposes
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management and policies of a Person, whether
through the ownership of voting securities or voting interests, by contract or
otherwise.
"Applicable Rate" means a rate per annum equal to the
corporate base rate of interest announced from time to time by Citibank in New
York City, plus 3%.
"Assets" mean all properties, assets, privileges, powers,
rights, interests and claims of every type and description that are owned,
leased, held, used or useful in the Business and in which Harron has any
right, title or interest or in which Harron acquires any right, title or
interest on or before the Closing Date, wherever located, whether known or
unknown, and whether or not now or on the Closing Date on the Books and
Records of Harron, including the Contracts, Books and Records, Personal
Property, Intangibles, Accounts Receivable, Intellectual Property, Inventory
and NRTC Patronage Capital.
"Assumed Liabilities" mean:
(a) Harron's obligations to Subscribers for: (i) Subscriber
deposits held by Harron as of the Closing Date and which are refundable, in
the amount for which Pegasus receives
3
<PAGE>
credit under Section 2.3(a); (ii) Subscriber deferred or prepaid income held
by Harron as of the Closing Date for services to be rendered by the Business
after the Closing Date, in the amount for which Pegasus receives credit under
Section 2.3(a); (iii) the delivery of DIRECTV services to Subscribers of the
Business after the Closing Date;
(b) obligations accruing and relating to periods after the
Closing Date under the NRTC Distribution Agreement; and
(c) the Current Liabilities.
Notwithstanding anything in this Agreement to the contrary, the
Assumed Liabilities shall not include: (i) any Liability of Harron or its
Affiliates for income, transfer, sales, use and other Taxes arising in
connection with the consummation of the transactions contemplated hereby; (ii)
any other Liability of Harron or its Affiliates for Taxes; (iii) any Liability
of Harron for costs and expenses incurred in connection with this Agreement,
the Collateral Agreements or the transactions contemplated hereby or thereby;
(iv) any obligation of Harron under this Agreement or the Collateral
Agreements; (v) any Liability of Harron or its Affiliates for current or
long-term obligations of Harron (including Current Liabilities) except as
otherwise specifically provided in this Agreement; (vi) any Liability of
Harron or its Affiliates to employees or independent contractors of Harron
whether under any contract, Employee Benefit Plan or otherwise; (vii) any
Liability of Harron or its Affiliates relating to civil, criminal and/or
administrative cases, proceedings, hearings or investigations, or awards of
arbitration tribunals; or (viii) any other Liability of Harron or its
Affiliates not specifically included in Assumed Liabilities pursuant to (a),
(b) and (c) above.
"Bank Syndicate" means CoreStates Bank, N.A. and The Chase
Manhattan Bank (National Association).
4
<PAGE>
"Basis" means any past or present fact, situation,
circumstance, status, condition, activity, practice, plan, occurrence, event,
incident, action, failure to act or transaction that forms or could form the
basis for any specified consequence.
"Books and Records" mean all books and records relating
principally to the Business and all portions of or extracts from other Harron
or Harron Affiliate's books and records, which portions or extracts relate
principally to the Business, including purchase and sale order files,
invoices, sales materials and records, customer lists, mailing lists,
personnel files, technical data and records, all correspondence with and
documents pertaining to NRTC, DIRECTV, DSS Systems, subscribers, suppliers,
Governmental Authorities and other third parties, all records evidencing the
accounts receivable and a schedule of accounts receivable aging and all other
financial records.
"Business" means the DIRECTV distribution business conducted
by Harron on the date of this Agreement and through the Closing Date pursuant
to rights granted under the NRTC Distribution Agreement.
"Business Day" means any day other than Saturday, Sunday or
a day on which banking institutions in New York, New York are required or
authorized to be closed.
"Collateral Agreements" mean the Joinder Agreement,
Stockholders' Agreement and Noncompetition Agreement.
"Class A Common Stock" has the meaning assigned to it in the
Joinder Agreement.
"Class B Common Stock" has the meaning assigned to it in the
Joinder Agreement.
"Committed Member Residence" has the meaning assigned to it
in the NRTC Distribution Agreement.
5
<PAGE>
"Confidentiality Agreement" means that certain
Confidentiality Agreement dated April 4, 1996 between Pegasus and Harron.
"Current Liabilities" mean Liabilities from the operations
of the Business incurred in the Ordinary Course which are set forth on the
Current Liabilities Schedule (which exclude any liabilities on account of
Subscriber deposits and deferred or prepaid income).
"Current Liabilities Schedule" means the schedule of Current
Liabilities agreed upon by the Parties at least 15 Business Days prior to
Closing and attached to this Agreement.
"DSS System" means the satellite receiving system for
DIRECTV consisting of an eighteen inch satellite antenna dish, an integrated
receiver decoder and a remote control.
"Employee Benefit Plan" means any: (a) nonqualified deferred
compensation or retirement plan or arrangement that is an Employee Pension
Benefit Plan; (b) qualified defined contribution retirement plan or
arrangement that is an Employee Pension Benefit Plan; (c) qualified defined
benefit retirement plan or arrangement that is an Employee Pension Benefit
Plan (including any Multiemployer Plan); or (d) Employee Welfare Benefit Plan
or material fringe benefit plan or program.
"Employee Pension Benefit Plan" has the meaning set forth in
ERISA Section 3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in
ERISA Section 3(l).
"Encumbrance" means any mortgage, pledge, lien, encumbrance,
charge, security interest, security agreement, conditional sale or other title
retention agreement, limitation, option, assessment, restrictive agreement,
restriction, adverse interest, restriction on transfer or any exception to or
defect in title or other ownership interest (including restrictive covenants,
leases and licenses).
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"ERISA" means the Employee Retirement Income Security Act of
1974, as amended.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
"GAAP" means United States generally accepted accounting
principles as in effect from time to time.
"Government Authority" means: (i) the United States of
America; (ii) any state, commonwealth, territory or possession of the United
States of America and any political subdivision thereof (including counties,
municipalities and the like); (iii) any foreign (as to the United States of
America) sovereign entity and any political subdivision thereof; or (iv) any
agency, authority or instrumentality of any of the foregoing, including any
court, tribunal, department, bureau, commission or board.
"Harron's Accountant" means Deloitte & Touche, L.L.P.
"Harron Credit Facility" means that certain Note Purchase
Agreement dated February 15, 1990 between Harron and the Insurance Syndicate,
and that certain Credit Agreement dated December 23, 1992 among Harron, the
Bank Syndicate and the other banks party thereto, as amended from time to
time.
"HCG" means Hughes Communications Galaxy, Inc., an affiliate
of DIRECTV, Inc.
"Insurance Syndicate" means Connecticut General Life
Insurance Company, Life Insurance Company of North America and Aetna Life
Insurance Company.
"Intangibles" mean all accounts, notes and other
receivables, claims, deposits, prepayments, refunds, causes of action, choses
in action, rights of recovery, rights of set-off, rights of recoupment and
other intangible assets owned, used or held for use in the Business.
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"Intellectual Property" means all of the following that are
owned, used or held solely for use in the Business: (i) trademarks, service
marks, trade dress, logos, trade names and corporate names, together with all
translations, adaptations, derivations and combinations thereof (but
specifically excluding the name "Harron," or any variation thereof and
Harron's logo) and including all goodwill associated therewith, and all
applications, registrations and renewals in connection therewith; (ii) all
copyrightable works, all copyrights and all applications, registrations and
renewals in connection therewith; (iii) trade secrets and confidential
business information (including ideas, research and development, know-how,
formulas, compositions, manufacturing and production processes and techniques,
technical data, designs, drawings, specifications, customer and supplier
lists, pricing and cost information and business and marketing plans and
proposals); (iv) all computer software (including data and related
documentation); (v) all other proprietary rights; and (vi) all copies and
tangible embodiments thereof (in whatever form or medium).
"Inventory" means the DSS Systems and other equipment owned
by Harron for sale, lease or rent to or use by Subscribers.
"Legal Requirement" means any statute, ordinance, law, rule,
regulation, code, plan, injunction, judgment, order, decree, ruling, charge or
other requirement, standard or procedure enacted, adopted or applied by any
Governmental Authority, including judicial decisions applying common law or
interpreting any other Legal Requirement.
"Letter of Intent" means that certain Letter of Intent dated
April 4, 1996 between Pegasus and Harron.
"Liability" means any liability (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and whether due or
to become due), including any liability for Taxes.
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"Multiemployer Plan" has the meaning set forth in ERISA
Section 3(37).
"NRTC Distribution Agreement" means any contract,
commitment, agreement, instrument or other document pursuant to which NRTC
and/or HCG and/or any of their Affiliates has granted Harron rights relating
to the marketing and distribution of DIRECTV, including those certain
NRTC/Member Agreements for Marketing and Distribution of DBS Services between
NRTC and Harron, as amended and supplemented (Contract Numbers 1053 and 1077).
"NRTC Patronage Capital" means any equity interest in NRTC
allocated to Harron.
"Ordinary Course" means the ordinary course of business
consistent with past custom and practice (including with respect to quantity
and frequency).
"Permit" means any license, permit, consent, approval,
registration, authorization, qualification or similar right granted by a
Governmental Authority.
"Person" means any natural person, corporation, partnership,
trust, unincorporated organization, association, limited liability company,
Governmental Authority or other entity.
"Personal Property" means the personal property of Harron
identified on Schedule 1.1.
"Registered Class A Common Stock" means Class A Common Stock
that is registered pursuant to the Registration Statement and offered to the
public in the IPO.
"Representative" means any director, officer, employee,
agent, consultant, adviser or other representative of a Person, including
legal counsel, accountants and financial advisors.
"SEC" means Securities and Exchange Commission.
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"Subscriber" means any active DIRECTV subscriber account of
the Business, excluding the account of any subscriber who resides outside the
Service Areas or is not otherwise a Committed Member Residence.
"Subsidiary" means any corporation, limited liability
company or partnership whose voting interests are, directly or indirectly, 80
percent or more owned by Harron.
"Tax" means any federal, state, local or foreign income,
gross receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental, customs duties, capital
stock, franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales, use,
transfer, registration, value added, alternative or add-on minimum, estimated
or other tax of any kind whatsoever, including any interest, penalties, fees,
deficiencies, assessments, additions or other charges of any nature with
respect thereto, whether disputed or not.
"Tax Return" means any return, declaration, report, claim
for refund or information return or statement relating to Taxes, including any
schedule or attachment thereto, and including any amendment thereof.
"Termination Date" means September 30, 1996 or a mutually
agreeable earlier date.
"Underwriters" mean the underwriters of the IPO.
"Unregistered Class A Common Stock" means Class A Common
Stock that has not been registered pursuant to the Registration Statement and
is subject to certain restrictions on resale and distribution under the
Securities Act.
1.2 Other Definitions. The following terms shall, when used in this
Agreement, have the meanings assigned to such terms in the Sections indicated.
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Term Section
"Accountant's Report".................................................2.3(b)
"Adjusted Accountant's Report"........................................2.3(b)
"Agreement".........................................................Preamble
"Audited Financial Statements"...........................................3.8
"Cash Consideration"..................................................2.2(a)
"Closing"................................................................2.5
"Closing Date"...........................................................2.5
"Code"..............................................................Recitals
"Consideration"..........................................................2.2
"Contracts".............................................................3.15
"Current Liabilities Adjustment".........................................2.4
"DIRECTV"...........................................................Recitals
"DIRECTV, Inc.".....................................................Recitals
"Final Adjustments Report"............................................2.3(b)
"Financial Statements"...................................................3.8
"Harron"............................................................Preamble
"HSR Act"................................................................3.4
"IPO"...............................................................Recitals
"Joinder Agreement"...................................................5.6(a)
"Lease"..................................................................9.2
"Noncompetition Agreement"............................................5.6(c)
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"NRTC"..............................................................Recitals
"Objection Period"....................................................2.3(b)
"Operating Adjustment"................................................2.3(a)
"Parties"...........................................................Preamble
"PCC"...............................................................Recitals
"PCC's Charter"..........................................................1.1
"Pegasus"...........................................................Preamble
"PM&C"..............................................................Recitals
"PM&C Stock"........................................................Recitals
"Registration Statement"............................................Recitals
"Second Objection Period".............................................2.3(b)
"Securities Act"....................................................Recitals
"Service Areas".....................................................Recitals
"Stock Consideration".................................................2.2(b)
"Stockholders' Agreement..............................................5.6(b)
"Stub Period Financial Statements"....................................5.5(b)
"Survival Period".......................................................11.1
"Transfer"...............................................................5.2
ARTICLE II
BASIC TRANSACTION
2.1 Contribution of Assets. Subject to the terms and conditions of
this Agreement, Harron agrees to contribute, transfer, assign, convey and
deliver to PCC at Closing, all of Harron's
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right, title and interest in, to and under the Assets, free and clear of all
Encumbrances, for the consideration set forth in Section 2.2 below.
2.2 Consideration. In exchange for Harron's contribution of the
Assets to PCC, Pegasus shall cause PCC to pay to Harron the following
consideration ("Consideration"):
(a) Cash in an amount equal to $9,931,347 minus the amount
of the Current Liabilities ("Cash Consideration"), subject to the Operating
Adjustment.
(b) The number of shares of Unregistered Class A Common
Stock that could be purchased for $19,892,518 at the price at which the
Registered Class A Common Stock is first sold to the public in the IPO ("Stock
Consideration").
2.3 Operating Adjustment.
(a) The Cash Consideration shall be adjusted as follows
("Operating Adjustment") in accordance with the procedures set forth in
Section 2.3(b):
i. Adjustments on a pro rata basis as of the
Closing Date shall be made for all expenses prepaid and deposits made by
Harron, all as determined in accordance with GAAP consistently applied, and to
reflect the principle that all such expenses and deposits attributable to the
Business for the period prior to the Closing Date are for the account of
Harron, and all such expenses and deposits attributable to the Business for
the period on and after the Closing Date are for the account of PCC.
ii. All Subscriber deposits which have not been
applied or refunded as of the Closing Date shall be retained by Harron and
shall constitute a corresponding decrease in the Cash Consideration credited
to the account of PCC.
iii. The difference between accounts receivable
and deferred or prepaid income as of the Closing Date shall constitute (x) if
a positive number, a corresponding increase
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in the Cash Consideration credited to the account of Harron or (y) if a
negative number, a corresponding decrease in the Cash Consideration credited
to the account of PCC.
(b) Within 45 days after Closing, Pegasus shall deliver to
Harron a report (the "Final Adjustments Report"), showing in detail the final
determination of any Operating Adjustment owed to Harron or PCC, together with
any documents substantiating the adjustment set forth in the Final Adjustments
Report. Pegasus shall provide Harron with reasonable access to all records
that Pegasus has in its possession and that are necessary for Harron to
evaluate the Final Adjustments Report. Within 10 days after receipt of the
Final Adjustments Report ("Objection Period"), Harron shall give Pegasus
written notice of Harron's objections, if any, to the Final Adjustments
Report. In the event that Harron notifies Pegasus of objections to the Final
Adjustments Report within the Objection Period, the Parties shall immediately
instruct the Accountant to make a determination ("Accountant's Report") of the
Operating Adjustment within 20 days after delivery of such instructions,
whereupon the Accountant shall deliver the Accountant's Report to the Parties.
Within 10 days after receipt of the Accountant's Report ("Second Objection
Period"), Harron shall give Pegasus written notice of Harron's objections, if
any, to the Accountant's Report. In the event that Harron notifies Pegasus of
objections to the Accountant's Report, the Parties shall instruct the
Accountant to deliberate with Harron's Accountant and make a final and binding
determination of the Operating Adjustment acceptable to Harron's Accountant
("Adjusted Accountant's Report"). Within 10 days after (x) the Accountant
delivers the Adjusted Accountant's Report to the Parties, (y) expiration of
the Second Objection Period without notice of objections from Harron or (z)
expiration of the Objection Period without notice of objections from Harron,
as applicable, Pegasus shall cause PCC to pay to Harron cash in an amount
equal to any Operating Adjustment owed to
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Harron, or Harron shall pay to PCC cash in an amount equal to any Operating
Adjustment owed to PCC.
2.4 Liabilities. Subject to the terms and conditions of this
Agreement, Pegasus shall cause PCC to assume and become responsible for all of
the Assumed Liabilities at Closing. The Parties agree that neither Pegasus,
nor PCC, nor any of their Affiliates shall assume, nor shall it be deemed to
have assumed, nor shall it pay, perform, discharge or be liable in any manner
whatsoever for, nor shall it have any responsibility with respect to any
obligation or Liability of the Business or Harron or Harron's Affiliates not
included within the definition of Assumed Liabilities.
2.5 Closing. The Closing of the transactions contemplated by this
Agreement and the Collateral Agreements ("Closing") shall take place at the
offices of counsel to the IPO's underwriters, or at such other location as the
parties may agree, upon the satisfaction or waiver of the conditions precedent
to the obligations of the Parties hereunder set forth in Articles VII and VIII
(other than those conditions with respect to actions the respective Parties
will take at the Closing), or such other date as the Parties may mutually
determine ("Closing Date"); provided, however, that the Closing Date shall be
not later than the Termination Date.
2.6 Transactions at Closing. At the Closing:
(a) Harron shall:
i. contribute, transfer, convey, assign and
deliver the Assets to PCC, free and clear of any Encumbrances other than the
Assumed Liabilities;
ii. deliver to Pegasus and PCC such documents,
instruments and certificates as are required by this Agreement to be delivered
by Harron.
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(b) Pegasus shall cause PCC to deliver to Harron:
i. one or more certificates registered in the name
of Harron and/or one or more of its Subsidiaries representing the Stock
Consideration, free and clear of any Encumbrances other than imposed by the
Stockholders' Agreement and by law;
ii. the Cash Consideration by wire transfer of
immediately available funds to such account or accounts as Harron shall
designate to Pegasus prior to the Closing; and
iii. such documents, instruments and certificates
as are required by this Agreement to be delivered by Pegasus and PCC.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF HARRON
Harron hereby represents and warrants to Pegasus that the statements
contained in Article III are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout Article III).
3.1 Organization and Qualification. Harron is a corporation duly
organized, validly existing and in good standing under the laws of the State
of New York, with all requisite power and authority to own, lease and use the
Assets as they are currently owned, leased and used and to conduct the
Business as it is currently conducted. Harron is duly qualified or licensed to
do business and in good standing in each jurisdiction in which the character
of the properties owned, leased or used by it or the nature of the activities
conducted by it make such qualification necessary, except any such
jurisdiction where the failure to be so qualified or licensed would not have a
material adverse effect on Harron, the Assets or the Business or on the
validity, binding effect or enforceability of this Agreement.
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3.2 Authority and Validity. Harron has all requisite power and
authority to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement and the Collateral
Agreements. The execution and delivery by Harron of, the performance by Harron
of its obligations under, and the consummation by Harron of the transactions
contemplated by, this Agreement and the Collateral Agreements have been duly
authorized by all requisite corporate action of Harron. This Agreement has
been duly executed and delivered by Harron and is the legal, valid, and
binding obligation of Harron, enforceable against Harron in accordance with
its terms. Upon the execution and delivery of the Collateral Agreements by
Harron, the Collateral Agreements will be the legal, valid and binding
obligations of Harron, enforceable against Harron in accordance with their
respective terms.
3.3 No Breach or Violation. Subject to obtaining the consents,
approvals, authorizations, and orders of and making the registrations or
filings with or giving notices to Governmental Authorities and Persons recited
in the exception to Section 3.4, the execution, delivery and performance by
Harron of this Agreement and the Collateral Agreements, and the consummation
of the transactions contemplated hereby and thereby in accordance with the
terms and conditions hereof and thereof, do not and will not conflict with,
constitute a violation or breach of, constitute a default or give rise to any
right of termination or acceleration of any right or obligation of Harron
under, or result in the creation or imposition of any Encumbrance upon the
Assets or the Business by reason of the terms of (i) the certificate of
incorporation, by-laws or other charter or organizational document of Harron,
(ii) any material contract, agreement, lease, indenture or other instrument to
which Harron is a party or by or to which Harron or the Assets may be bound or
subject, (iii) any order, judgment, injunction, award or decree of any
arbitrator or Governmental Authority or any statute, law, rule or regulation
applicable to Harron or (iv) any Permit of Harron,
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which in the case of (ii), (iii) or (iv) above would have a material adverse
effect on the Assets or the Business or the ability of Harron to perform its
obligations under this Agreement or any Collateral Document.
3.4 Consents and Approvals. Except (i) as required under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the
rules and regulations thereunder (the "HSR Act"), (ii) as required under the
NRTC Distribution Agreement, (iii) for the consent of Harron's lenders
required under the Harron Credit Facility, and (iv) as set forth in Schedule
3.4 hereto, no consent, approval, authorization or order of, registration or
filing with, or notice to, any Governmental Authority or any other Person is
necessary to be obtained, made or given by Harron in connection with the
execution, delivery and performance by Harron of this Agreement or any
Collateral Agreement or for the consummation by Harron of the transactions
contemplated hereby or thereby.
3.5 Title to Assets. Harron has exclusive, good and marketable title
to the Assets, free and clear of any and all Encumbrances of any kind and
nature.
3.6 Intellectual Property.
(a) Harron owns or has the right to use, pursuant to
license, sublicense, agreement or permission, all Intellectual Property used
in the operation of the Business as currently conducted and as currently
proposed to be conducted, all of which Intellectual Property is identified on
Schedule 3.6(a). Each item of Intellectual Property owned or used by Harron in
the Business immediately prior to the Closing hereunder will be owned or
available for use by PCC on identical terms and conditions immediately
subsequent to the Closing hereunder. Harron has taken all necessary and
desirable action to maintain and protect each item of Intellectual Property
that it owns or uses in connection with the Business.
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(b) To the best of Harron's knowledge, Harron in its
operation of the Business has not interfered with, infringed upon,
misappropriated or otherwise come into conflict with, and the operation of the
Business as currently conducted does not violate or infringe upon, any
Intellectual Property rights of third parties, and Harron has never received
any charge, complaint, claim, demand or notice alleging any such interference,
infringement, misappropriation or violation (including any claim that Harron
must license or refrain from using any Intellectual Property rights of any
third party). To the best knowledge of Harron, no third party has interfered
with, infringed upon, appropriated or otherwise come into conflict with any
Intellectual Property rights of Harron.
3.7 Compliance with Legal Requirements. To the best of Harron's
knowledge, Harron has operated the Business in compliance in all material
respects with all Legal Requirements. No action, suit, proceeding, hearing,
investigation, charge, complaint, claim, demand or notice has been filed,
commenced or, to the best of Harron's knowledge, threatened against Harron
alleging any failure to so comply and there is no Basis for any claim that
such a failure to comply exists.
3.8 Financial Information. Harron has delivered to Pegasus the
following financial statements ("Financial Statements"): (i) audited balance
sheets, statements of operations, statements of changes in investment and
statements of cash flows for the Business as of and for the fiscal years ended
December 31, 1994 and 1995 ("Audited Financial Statements"); and (ii)
internally prepared statements of operations for the Business for each month
of fiscal years ended December 31, 1994 and 1995 and for January, February and
March of fiscal year ending December 31, 1996. The Financial Statements
(including the notes thereto) have been prepared in accordance with GAAP
applied on a consistent basis throughout the periods covered thereby and
present fairly the financial position, results of operations and cash flows of
the Business as of the dates and for the periods
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indicated, subject in the case of the unaudited Financial Statements only to
normal year-end adjustments (none of which will be material in amount) and the
omission of footnotes.
3.9 Events Subsequent to 1995. Except as set forth on Schedule 3.9,
since fiscal year ended December 31, 1995: (i) Harron has not sold, leased,
transferred or assigned any assets of the Business, tangible or intangible
except in the Ordinary Course; (ii) Harron has not entered into any agreement,
contract, lease or license (or series of related agreements, contracts, leases
and licenses) relating to the Business and involving more than $1,000 or
outside the Ordinary Course; (iii) no third party has accelerated, terminated,
modified or canceled any material agreement, contract, lease or license (or
series of related agreements, contracts, leases and licenses) relating to the
Business; (iv) Harron has not imposed or permitted the imposition of any
Encumbrance upon any assets of the Business, tangible or intangible; (v)
Harron has not made any capital investment in, any loan to, or any acquisition
of the securities or assets of, any other Person (or series of related capital
investments, loans or acquisitions) relating to the Business; (vi) Harron has
not issued any note, bond or other debt security or created, incurred, assumed
or guaranteed any indebtedness for borrowed money or capitalized lease
obligations relating to the Business; (vii) Harron has not delayed or
postponed the payment of accounts payable and other Liabilities relating to
the Business and outside the Ordinary Course; (viii) Harron has not canceled,
compromised, waived or released any right or claim (or series of related
rights and claims) relating to the Business and involving more than $1,000 or
outside the Ordinary Course; (ix) Harron has not granted any license or
sublicense of any rights under or with respect to any Intellectual Property
used or useful in the Business; (x) there has not been any other material
occurrence, event, incident, action, failure to act or transaction outside the
Ordinary Course involving the Business except that is generally known in the
industry; and (xi) Harron has not committed to any of the foregoing. Since the
fiscal
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year ended December 31, 1995, there has been no material adverse change in,
and no event has occurred which is likely, individually or in the aggregate,
to result in any material adverse change in, the operations, assets, prospects
or condition (financial or otherwise) of the Business except that is generally
known in the industry.
3.10 Undisclosed Liabilities. To the best of Harron's knowledge,
Harron does not have any Liability relating to the Business and there is no
Basis for any present or future action, suit, proceeding, hearing,
investigation, charge, complaint, claim or demand against Harron giving rise
to any Liability relating to the Business except for: (i) Liabilities set
forth on the face of the fiscal year ended 1995 balance sheet in the Audited
Financial Statements (rather than in any notes thereto); and (ii) Liabilities
set forth in the unaudited Financial Statements for the month of March 1996
that have arisen after fiscal year ended December 31, 1995 in the Ordinary
Course (none of which results from, arises out of, relates to, is in the
nature of, or was caused by any breach of contract, breach of warranty, tort,
infringement or violation of any Legal Requirement).
3.11 Legal Proceedings. Except as set forth on Schedule 3.11, there
are no outstanding judgments or orders against or otherwise affecting the
Business or the Assets. There is no action, suit, complaint, proceeding or
investigation, judicial, administrative or otherwise, that is pending or
threatened and which, if adversely determined, might materially and adversely
affect the Business or the Assets or which challenges the validity or
propriety of any of the transactions contemplated by this Agreement or the
Collateral Documents. To the best of Harron's knowledge, there is no Basis
upon which any such action, suit, proceeding or investigation could be brought
or initiated.
3.12 Taxes Relating to the Business. Harron has duly and timely filed
in proper form all Tax Returns for all Taxes relating to the Business required
to be filed with the appropriate
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Governmental Authority. All Taxes due and payable by Harron (or claimed to be
due and payable) relating to the Business have been paid (regardless whether
Tax Returns relating to such Taxes have been duly and timely filed or if
filed, regardless whether such Tax Returns are deficient), except such amounts
as are being contested diligently and in good faith and are not in the
aggregate material and for which Harron has adequately reserved on the Audited
Financial Statements. There are no pending Tax audits, claims or proceedings
relating to the Assets or the Business and income therefrom.
3.13 Employees.
(a) Schedule 3.13 contains a complete and correct list of
names and positions of all employees of Harron engaged principally in the
Business and their current hourly wages or monthly salaries and other
compensation. No Affiliate of Harron has any material financial interest,
direct or indirect, in any supplier or other outside business which has
engaged in business transactions with the Business.
(b) Harron has complied with all Legal Requirements relating
to the employment of labor for the Business, including ERISA, continuation
coverage requirements with respect to group health plans, and those relating
to wages, hours, collective bargaining, unemployment compensation, worker's
compensation, equal employment opportunity, age and disability discrimination,
immigration control and the payment and withholding of social security and
other Taxes, and the Business is not liable for any arrearages of wages or any
Taxes for failure to comply with any of the foregoing.
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(c) With respect to employees who provide services to
the Business:
i. Harron is not a Party to or is bound by any
collective bargaining agreement, and has not experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes.
ii. Harron has not committed any unfair labor
practices.
iii. Harron has not recognized or agreed to
recognize and is not required to recognize any union or other collective
bargaining unit.
iv. No union or other collective bargaining unit
has been certified as representing any of Harron's employees, nor has Harron
received any requests from any party for recognition as a representative of
employees for collective bargaining purposes.
v. To Harron's best knowledge, no employees are
engaged in any organizing activity with respect to any labor organization.
vi. Harron has no employment agreements of any
kind, oral or written, express or implied, that would require Pegasus or any
Affiliate of Pegasus to employ any Person after the Closing Date.
3.14 Contracts. Schedule 3.14 contains a true, correct and complete
list of each contract agreement or commitment, whether written or oral,
relating principally to the Business ("Contracts"), including:
i. the NRTC Distribution Agreement;
ii. any agreement (or group of related agreements)
for the lease or rental of personal property to or from any Person (including
any form of lease or rental agreements for DSS Systems accompanied by an
itemized list of the Subscribers who are parties to such agreements and the
expiration dates of such agreements);
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iii. any agreement (or group of related
agreements) for the purchase or sale of supplies, products or other personal
property, or for the furnishing or receipt of services (including any forms of
agreement or purchase order relating to the sale of DSS Systems or the sale of
DIRECTV services) but excluding the agreement among Harron and its Affiliates
relating to the allocation of corporate overhead;
iv. any agreement concerning a partnership or
joint venture;
v. any agreement (or group of related agreements)
under which Harron has created, incurred, assumed or guaranteed any
indebtedness for borrowed money, or any capitalized lease obligation, or under
which Harron has imposed an Encumbrance (excluding the Harron Credit
Facility);
vi. any agreement concerning confidentiality or
noncompetition;
vii. any agreement involving any officer, director
or shareholder of Harron;
viii. any agreement for the employment of any
individual on a full-time, part-time, consulting or other basis;
ix. any agreement relating to the services of
sales representatives, agents and other independent contractors (including
agreements relating to the installation of DSS Systems);
x. any agreement under which Harron has advanced
or loaned any amount to any employees or any of Harron's current or former
directors, officers or shareholders;
xi. any agreement under which the consequences of
a default or termination could have a material adverse effect on the financial
condition, operations, results of operations or future prospects of the
Business;
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xii. any other agreement (or group of related
agreements) the performance of which involves consideration in excess of
$1,000.
Harron has delivered to Pegasus a correct and complete copy
of each written agreement listed on Schedule 3.14 and a written summary
setting forth the terms and conditions of each oral agreement listed therein.
With respect to each such agreement: (A) the agreement is legal, valid,
binding, enforceable and in full force and effect; (B) the agreement will
continue to be legal, valid, binding, enforceable and in full force and effect
on identical terms following the consummation of the transactions contemplated
hereby; (C) no party is in breach or default, and no event has occurred which
with notice or lapse of time would constitute a breach or default, or permit
termination, modification or acceleration, under the agreement; and (D) no
party has repudiated any provision of the agreement.
3.15 Books and Records; Accounts Receivable. Schedule 3.15 briefly
identifies and describes all of the Books and Records. The Books and Records
accurately and fairly represent the Business and its results of operations in
all material respects. All Accounts Receivable and Inventory of the Business
are reflected properly on such Books and Records. The Accounts Receivable are
valid receivables subject to no setoffs or counterclaims and are current and
collectible, and will be collected in accordance with their terms at their
recorded amounts.
3.16 Outstanding Rights. Except for this Agreement, there is no
agreement to which Harron is a party or is otherwise bound relating to the
direct or indirect sale of all or substantially all the Assets, the direct or
indirect transfer of the Business or a merger or consolidation of Harron with
or into any entity or the sale of all or the controlling portion of Harron's
capital stock.
3.17 Insurance. Schedule 3.17 sets forth the following information
with respect to each insurance policy relating to the Business (including
policies providing property, casualty, liability
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and workers' compensation coverage and bond and surety arrangements) to which
Harron has been a party, a named insured, or otherwise the beneficiary of
coverage at any time:
i. the name, address, and telephone number of the
agent;
ii. the name of the insurer, the name of the
policyholder and the name of each covered insured;
iii. the policy number and the period of coverage;
iv. the scope (including an indication of whether
the coverage was on a claims made, occurrence or other basis) and amount
(including a description of how deductibles and ceilings are calculated and
operate) of coverage; and
v. a description of any retroactive premium
adjustments or other loss-sharing arrangements.
With respect to each such insurance policy: (A) the policy
is legal, valid, binding, enforceable, and in full force and effect; (B) to
the best of Harron's knowledge, neither Harron nor any other party to the
policy is in breach or default (including with respect to the payment of
premiums or the giving of notices), and no event has occurred which, with
notice or the lapse of time, would constitute such a breach or default, or
permit termination, modification or acceleration, under the policy; and (C) to
the best of Harron's knowledge, no party to the policy has repudiated any
provision thereof. The Business and the Assets have been covered since the
beginning of Business operations in scope and amount customary and reasonable
for such a business and in the case of workers' compensation coverage, in
scope and amount required by applicable Legal Requirements. Schedule 3.17
describes any self-insurance arrangements (other than medical coverage)
affecting the Assets or the Business. Schedule 3.17 also sets forth each
insurance claim (other than medical claims) made or loss incurred relating to
the Business pursuant to property,
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casualty, liability, workers' compensation and bond and surety policies and,
except as indicated therein, no such claim is outstanding.
3.18 Disclosure. No representation or warranty of Harron in this
Agreement or the Collateral Agreements and no statement in any certificate,
report, instrument, list or other document furnished or to be furnished by
Harron pursuant to this Agreement or the Collateral Agreements or in
connection with the transactions contemplated hereby or thereby, contained,
contains or will contain on the date such agreement, certificate, report,
instrument, list or other document was or is delivered, any untrue statement
of a material fact, or omitted, omits or will omit on such date to state any
material fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading, nor will any such
representation or warranty or statement contain on the Closing Date any untrue
statement of a material fact or omit on the Closing Date to state any material
fact necessary in order to make the statements made, in light of the
circumstances under which they were made, not misleading. There is no fact
known to Harron and not disclosed in this Agreement that is not applicable to
or known by Pegasus and the other NRTC members providing DIRECTV services and
which fact materially or adversely affects or may in the future materially or
adversely affect, the Business or the Assets.
3.19 Purchase for Investment. Harron acknowledges that Pegasus has
provided Harron and its advisors with access to the books, records, facilities
and personnel of PCC and its direct and indirect subsidiaries in order for
Harron to investigate the business, affairs and properties of PCC and make an
informed business decision about entering into this Agreement. Harron
represents that it is an "accredited investor," as such term is defined in
Rule 501 of Regulation D under the Securities Act, and that it is acquiring
the Stock Consideration for its own account for investment
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and not with a view to the resale or distribution of, and agrees that it will
not sell or transfer, the Stock Consideration in violation of the Securities
Act or the Stockholders' Agreement.
3.20 Brokers or Finders. Except as otherwise disclosed in writing by
Harron to Pegasus on or before the date hereof, no broker or finder has acted
directly or indirectly for Harron in connection with the transactions
contemplated by this Agreement and the Collateral Agreements, and Harron has
incurred no obligation to pay any brokerage or finder's fee or other
commission in connection therewith.
3.21 Certain Payments. Neither Harron nor any Representative of
Harron has directly or indirectly, on behalf of or for the purpose of
assisting the Business, made any contribution, gift, bribe, rebate, payoff,
influence payment, kickback, or other similar payments to any Person, private
or public, regardless of form, whether in money, property or services, to
obtain favorable treatment in securing business, to pay for favorable
treatment for business secured, to obtain special concessions or for special
concessions already obtained, or in violation of any Legal Requirement, nor
has any such person established or maintained any fund or asset that has not
been recorded in the Books and Records.
3.22 Subscribers. Harron has never intentionally solicited, nor has
Harron intentionally encouraged any Harron Representative or any other Person
to solicit, nor has Harron employed any scheme or device for the purpose of
encouraging, nor has Harron encouraged any Harron Representative or any other
Person to employ any scheme or device for the purpose of encouraging, Persons
residing outside the Service Areas or Persons who would not be deemed
Committed Member Residences to become subscribers of the DIRECTV service
offered by the Business.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PEGASUS
Pegasus represents and warrants to Harron that the statements
contained in this Article IV are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Article IV).
4.1 Organization and Qualification. Pegasus is a corporation duly
organized, validly existing and in good standing under the laws of the State
of Delaware, with all requisite power and authority to own, lease and use its
assets and to conduct its business as it is currently conducted. Pegasus is
duly qualified or licensed to do business in and is in good standing in each
jurisdiction in which the character of the properties owned, leased or used by
it or the nature of the activities conducted by it makes such qualification
necessary, except any such jurisdiction where the failure to be so qualified
or licensed and in good standing would not have a material adverse effect on
Pegasus or on the validity, binding effect or enforceability of this
Agreement.
4.2 Authority and Validity. Pegasus has all requisite power and
authority to execute and deliver, to perform its obligations under, and to
consummate the transactions contemplated by, this Agreement and the Collateral
Agreements. The execution and delivery by Pegasus of, the performance by
Pegasus of its obligations under, and the consummation by Pegasus of the
transactions contemplated by, this Agreement and the Collateral Agreements
have been duly authorized by all requisite corporate action of Pegasus. This
Agreement has been duly executed and delivered by Pegasus and is the legal,
valid and binding obligation of Pegasus, enforceable against Pegasus in
accordance with its terms. Upon execution and delivery of the Collateral
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Agreements by Pegasus, the Collateral Agreements will be the legal, valid and
binding obligations of Pegasus, enforceable against Pegasus in accordance with
their respective terms.
4.3 No Breach or Violation. Subject to obtaining the consents,
approvals, authorizations, and orders of and making the registrations or
filings with or giving notices to Governmental Authorities and Persons recited
in the exception to Section 4.4, the execution, delivery and performance by
Pegasus of this Agreement and the Collateral Agreements and the consummation
of the transactions contemplated hereby and thereby in accordance with the
terms and conditions hereof and thereof, do not and will not conflict with,
constitute a violation or breach of, constitute a default or give rise to any
right of termination or acceleration of any right or obligation of Pegasus
under, or result in the creation or imposition of any Encumbrance upon the
property of Pegasus by reason of the terms of (i) the certificate of
incorporation, by-laws or other charter or organizational document of Pegasus,
(ii) any material contract, agreement, lease, indenture or other instrument to
which Pegasus is a party or by or to which Pegasus or its property may be
bound or subject, (iii) any order, judgment, injunction, award or decree of
any arbitrator or Governmental Authority or any statute, law, rule or
regulation applicable to Pegasus or (iv) any Permit of Pegasus, which in the
case of (ii), (iii) or (iv) above would have a material adverse effect on the
business or financial condition of Pegasus as a whole or the ability of
Pegasus to perform its obligations under this Agreement or any Collateral
Agreement.
4.4 Consents and Approvals. Except (i) as required under the HSR Act,
(ii) as required under the NRTC Distribution Agreement, (iii) as required
under the Securities Act and the Exchange Act, and (iv) as set forth in
Schedule 4.4 hereto, no consent, approval, authorization or order of,
registration or filing with, or notice to, any Governmental Authority or any
other Person is necessary to be obtained, made or given by Pegasus in
connection with the execution, delivery
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and performance by Pegasus of this Agreement or any Collateral Agreements or
for the consummation by Pegasus of the transactions contemplated hereby and
thereby.
4.5 Legal Proceedings. There is no action, suit, proceeding or
investigation, judicial, administrative or otherwise, that is pending or, to
the best knowledge of Pegasus, threatened against Pegasus and that challenges
the validity or propriety of, or may prevent or delay, any of the transactions
contemplated by this Agreement or the Collateral Agreements.
4.6 Finders and Brokers. Except as otherwise disclosed in writing by
Pegasus to Harron on or before the date hereof, no broker or finder has acted
directly or indirectly for Pegasus in connection with the transactions
contemplated by this Agreement and the Collateral Agreements, and Pegasus has
incurred no obligation to pay any brokerage or finder's fee or other
commission in connection therewith.
ARTICLE V
PRE-CLOSING COVENANTS OF HARRON
Harron covenants and agrees, from and after the execution and
delivery of this Agreement to and including the Closing Date (except if
another time period is specified below), as follows:
5.1 Additional Information. Harron shall provide to Pegasus and its
Representatives (i) full and free access to all of the Assets and (ii) such
financial, operating and other documents, data and information relating to the
Business and the Assets as Pegasus may reasonably request. Harron shall take
all action necessary to enable Pegasus and its Representatives to discuss the
Assets and Business with Harron's executives, employees, independent
accountants, and counsel who provide services to the Business. Notwithstanding
any investigation that Pegasus may conduct of the Business and the Assets,
Pegasus may fully rely on Harron's representations, warranties, covenants and
indemnities set forth in this Agreement, the Collateral Agreements and any
documents,
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instruments or certificates delivered thereunder, which will not be waived or
affected by or as a result of such investigation.
5.2 Exclusivity. Harron shall not: (i) solicit, initiate or encourage
the submission of any proposal or offer from any Person relating to the direct
or indirect acquisition of any of the Assets by means of any extraordinary
transaction, including a reorganization involving the Assets ("Transfer"); or
(ii) participate in any discussions or negotiations regarding, furnish any
information with respect to, assist or participate in or facilitate in any
other manner any effort or attempt by any Person to do or seek a Transfer.
Harron shall provide to Pegasus copies of any written proposals, offers or
inquiries with respect to the sale, disposition or other transfer of the
Assets received by Harron after the execution of the Letter of Intent.
5.3 Continuity and Maintenance of Operations.
(a) Harron shall: (i) use its best efforts to comply with
all Legal Requirements relating to the Business; (ii) fulfill all of its
obligations under and maintain in full force and effect all Contracts,
including the NRTC Distribution Agreement, and shall not, without the prior
written consent of Pegasus, alter, modify or amend any of the foregoing; (iii)
use its best efforts consistent with past practice, in consultation with
Pegasus and its Affiliates, to promote the financial success of the Business
and promptly notify Pegasus of any material change in the prospects or
condition (financial or otherwise) of the Business; and (iv) use its best
efforts consistent with past practice to promote, develop and preserve its
relationships with the NRTC, DSS retailers, participating cooperatives and its
present employees as well as the goodwill of its suppliers, customers and
others having business relations with it, and promptly notify Pegasus of any
material change in its relationship with any such Person. Without limiting the
generality of the foregoing, Harron shall maintain the Assets in good order,
condition and repair, shall maintain insurance relating to the
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Business as in effect on the date of this Agreement and shall keep and
maintain all of the Books and Records in the Ordinary Course. Other than in
the Ordinary Course, Harron shall not itself pay or credit in any way any
Subscriber accounts receivable prior to the Closing Date, and shall not permit
any of its agents or employees, or any officers, directors or shareholders of
Harron, to do so either. Harron shall continue to enforce its procedures for
disconnection and discontinuance of service to Subscribers whose accounts are
delinquent in accordance with those procedures in effect on the date of this
Agreement.
(b) Harron shall not, without the prior written consent of
Pegasus: (i) change the rates charged for the Economy Basic programming
package or deviate from DIRECTV national programming packages or rates; (ii)
sell, lease, transfer, convey or assign any of the Assets (or enter into any
contract to do any of the foregoing) or permit the creation of any Encumbrance
on any of the Assets; (iii) permit the amendment or cancellation of the NRTC
Distribution Agreement or any other Contract; or (iv) enter into any contract,
commitment or agreement or incur any indebtedness or other liability or
obligation of any kind relating to the Business involving an expenditure in
excess of $1,000;
(c) Harron shall not take or omit to take any action that
would cause Harron to be in breach of any of its representations or warranties
in this Agreement.
5.4 Consents and Approvals.
(a) Within three Business Days after the date hereof, Harron
shall use its best efforts to obtain any necessary consent of its lenders
required under the Harron Credit Facility in connection with the execution,
delivery and performance by Harron of this Agreement and any Collateral
Agreement. Prior to the filing of the Registration Statement with the
Securities and Exchange Commission, Harron shall deliver to Pegasus a letter
signed by an executive officer of
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Harron to the effect that (i) the Insurance Syndicate has indicated that it
will consent to the transactions contemplated by this Agreement or such
consent is not required under the Harron Credit Facility and (ii) the Bank
Syndicate has indicated that it will consent to the transactions contemplated
by this Agreement and will recommend that other banks party to the Harron
Credit Facility consent thereto.
(b) As soon as practicable after execution of this
Agreement, Harron shall use its best efforts to obtain any other necessary
consent, approval, authorization or order of, make any registration or filing
with or give any notice to, any Governmental Authority or Person as is
required to be obtained, made or given by Harron to consummate the
transactions contemplated by this Agreement and the Collateral Agreements,
including, without limitation: (i) filings required by the HSR Act; (ii)
consents required under the NRTC Agreement; and (iii) any authorizations,
consents, approvals, actions, filings or notices set forth in Schedule 3.4.
(c) Harron shall cooperate with Pegasus in providing such
information and reasonable assistance as may be required in connection with
the obligations of Pegasus under Section 6.1.
5.5 Registration Statement.
(a) Harron shall, promptly after execution of this
Agreement, provide such information and documents to Pegasus and its
Affiliates concerning the Business as may be reasonably required or
appropriate for inclusion in the Registration Statement and any other filing,
notification or report required to be made by Pegasus or any Affiliate under
the Securities Act or the Exchange Act; and shall cause its counsel and
independent accountants to cooperate with Pegasus and its Affiliates and their
counsel and independent accountants in the preparation of the Registration
Statement and such other filings, notifications and reports (including
delivery of the
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consent of Harron's independent accountants to the inclusion in the
Registration Statement of such accountant's report accompanying the Audited
Financial Statements). Harron shall, and shall cause its counsel and
independent accountants to, cooperate with and provide information and
documents reasonably requested by the Underwriters and Underwriters' counsel
in connection with the IPO (including the delivery of the comfort letter of
independent accountants required by Section 5.5(b)). Harron represents and
warrants to Pegasus that all information and documents provided by Harron for
inclusion in the Registration Statement and any other filing, notification or
report required to be made by Pegasus or any Affiliate under the Securities
Act or the Exchange Act will not contain any untrue statement of material fact
or omit to state any material fact necessary in order to make the statements
made therein, in light of the circumstances under which they were made, not
misleading.
(b) Not later than May 20, 1996, Harron shall deliver to
Pegasus unaudited balance sheets, statements of operations, statements of
changes in investment and statements of cash flows for the Business as of and
for the three month periods ended March 31, 1995 and 1996 (in comparative
format), to be included in the Registration Statement ("Stub Period Financial
Statements"). The Stub Period Financial Statements shall be prepared in
accordance with GAAP on a basis consistent with the Audited Financial
Statements. Harron shall use its best efforts to cause its independent
accountants to deliver to the Underwriters a comfort letter acceptable to the
Underwriters and Underwriters' counsel with respect to the Stub Period
Financial Statements.
(c) As soon as practicable after each month end, Harron
shall deliver to Pegasus Harron's internally prepared monthly statements of
operations for the Business for the period April 1996 through the Closing
Date.
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5.6 Collateral Agreements. On the Closing Date:
(a) Harron shall execute and deliver the Joinder Agreement
substantially in the form attached hereto as Exhibit 2 ("Joinder Agreement");
(b) Harron shall execute and deliver the Stockholders'
Agreement substantially in the form attached hereto as Exhibit 3
("Stockholders Agreement"); and
(c) Harron shall execute and deliver the Noncompetition
Agreement substantially in the form attached hereto as Exhibit 4
("Noncompetition Agreement").
5.7 Tax Basis. Prior to Closing, Harron shall deliver to Pegasus a
statement certified as true and correct by the Chief Financial Officer of
Harron, setting forth (i) Harron's tax basis in the Assets and (ii) the gain
that will be recognized by Harron upon Closing on account of the Cash
Consideration, accompanied by such supporting documentation as Pegasus may
reasonably request, including Harron's determination on an asset by asset
basis of gain that will be recognized.
5.8 Notification of Certain Matters. Harron shall promptly provide to
Pegasus copies of any notices from or correspondence from and to the NRTC or
DIRECTV, Inc. or any Affiliates of DIRECTV, Inc. Harron shall also promptly
notify Pegasus of any fact, event, circumstance or action that, if known on
the date of this Agreement, would have been required to be disclosed to
Pegasus pursuant to this Agreement or the existence or occurrence of which
would cause any of Harron's representations or warranties under this Agreement
not to be correct and/or complete. In addition, Harron shall give prompt
written notice to Pegasus of any material adverse development causing a breach
of any of Harron's representations and warranties in Article III. No
disclosure by Harron pursuant to this Section 5.8, however, shall be deemed to
amend or supplement this Agreement or to prevent or cure any
misrepresentation, breach of warranty, or breach of covenant by Harron.
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5.9 Employment.
(a) Harron acknowledges that PCC will offer employment to
the individuals identified on Schedule 5.9 and agrees that any such individual
who accepts such offer shall be transferred to and become an employee of PCC
effective as of the Closing ("Transferred Employee"). Harron further agrees
that neither PCC nor any Affiliate of PCC shall have any obligation to offer
employment to any other employee of Harron or to continue the employment of
any Transferred Employee following the Closing. Harron shall be solely
responsible for all liabilities and obligations, including any severance pay,
accrued salary, vacation pay and any benefits or other obligations, created or
owing as a consequence of any employee's termination of employment with Harron
or prior employment with Harron (whether by agreement, policy or by law).
(b) The benefits under any Employee Pension Benefit Plan
maintained by Harron which have accrued to any Transferred Employee as of the
Closing Date shall be frozen as of the Closing Date, and no further benefits
shall accrue under any such Employee Pension Benefit Plan with respect to such
Transferred Employee.
(c) All claims of any Transferred Employee for health care
and other welfare benefits incurred through the day prior to Closing shall be
the responsibility of Harron's plans and all such claims of any Transferred
Employee incurred at or after the Closing shall be the responsibility of PCC's
plans to the extent that any such Transferred Employee is eligible to
participate in PCC's plans. Harron shall remain responsible for any worker's
compensation claim of any Transferred Employee that relates to an injury
sustained prior to the Closing.
(d) Harron shall be responsible for all health continuation
coverage requirements of the Code and ERISA relating to Transferred Employees
for all periods prior to the Closing. PCC shall be responsible for all health
continuation coverage requirements of the Code and ERISA relating to
Transferred Employees for all periods subsequent to the Closing.
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ARTICLE VI
PRE-CLOSING COVENANTS OF PEGASUS
Pegasus covenants and agrees as follows:
6.1 Consents and Approval.
(a) As soon as practicable after execution of this
Agreement, Pegasus shall, and shall cause PCC, to use its best efforts to
obtain any necessary consent, approval, authorization or order of, make any
registration or filing with or give notice to, any Governmental Authority or
Person as is required to be obtained, made or given by Pegasus and PCC to
consummate the transactions contemplated by this Agreement and the Collateral
Agreements, including without limitation: (i) filings required by the HSR Act;
(ii) consents required under the NRTC Agreement; and (iii) any authorizations,
consents, approvals, actions, filings or notices set forth in Schedule 4.4.
Notwithstanding anything in this Section 6.1 to the contrary, Pegasus shall
not be required to agree to any amendments, modifications or changes in, the
waiver of any terms or conditions of, or the imposition of any condition to
the transfer to Pegasus of, the NRTC Distribution Agreement in order to obtain
the consents required under the NRTC Distribution Agreement.
(b) Pegasus shall cooperate with Harron in providing such
information and reasonable assistance as may be required in connection with
Harron's obligations under Section 5.4(a) and (b).
6.2 Collateral Agreements. On the Closing Date:
(a) Pegasus shall, and shall cause PCC to, execute and
deliver the Joinder Agreement.
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(b) Pegasus shall, and shall cause PCC to, execute and
deliver the Stockholders' Agreement.
(c) Pegasus shall, and shall cause PCC to, execute and
deliver the Noncompetition Agreement.
ARTICLE VII
CONDITIONS PRECEDENT TO OBLIGATIONS OF PEGASUS
All obligations of Pegasus under this Agreement shall be subject to
the fulfillment at or prior to Closing of each of the following conditions, it
being understood that Pegasus may, in its sole discretion, to the extent
permitted by applicable Legal Requirements, waive any or all of such
conditions in whole or in part:
7.1 Accuracy of Representations. All representations and warranties
of Harron contained in this Agreement, the Collateral Agreements and any other
document, instrument or certificate delivered by Harron at or prior to Closing
shall be, if specifically qualified by materiality, true in all respects and,
if not so qualified, shall be true in all material respects, in each case on
and as of the Closing Date with the same effect as if made on and as of the
Closing Date. Harron shall have delivered to Pegasus a certificate dated the
Closing Date to the foregoing effect.
7.2 Covenants. Harron shall, in all material respects, have performed
and complied with each of the covenants, obligations, conditions and
agreements contained in this Agreement that are to be performed or complied
with by it at or prior to Closing. Harron shall have delivered to Pegasus a
certificate dated the Closing Date to the foregoing effect.
7.3 Consents.
(a) All consents, approvals, authorizations and orders
required to be obtained from, and all registrations, filings and notices
required to be made with or given to, any
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Governmental Authority or Person as provided in Sections 5.4(a) and (b) shall
have been duly obtained, made or given, as the case may be, and shall be in
full force and effect, and any waiting period required by Applicable Law or
any Governmental Authority in connection with such transactions (including,
without limitation, pursuant to the HSR Act) shall have expired or have been
earlier terminated, unless the failure to obtain, make or give any such
consent, approval, authorization, order, registration, filing or notice, or to
allow any such waiting period to expire or terminate would not have a material
adverse effect on the Assets or the Business or the ability of Harron to
consummate the transactions contemplated by this Agreement and the Collateral
Agreements.
(b) Notwithstanding the foregoing, this condition precedent
shall not have been satisfied if any consent, approval, authorization or order
obtained in connection with the transactions contemplated by this Agreement
and the Collateral Agreements has been conditioned upon the amendment,
modification, cancellation or termination of, or waiver of any term or
condition of, any contract, commitment or agreement, or imposes upon PCC any
condition or requirement not now imposed upon Harron.
(c) Pegasus shall have been furnished with appropriate
evidence, reasonably satisfactory to it and its counsel, of the granting of
such consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
paragraph (a) above.
7.4 Delivery of Documents. Harron shall have executed and delivered
to Pegasus the following documents:
i. Joinder Agreement.
ii. Stockholders' Agreement.
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iii. Noncompetition Agreement.
iv. Bill of Sale and Assignment.
v. Opinion of Lamb Windle & McErlane, P.C.,
counsel to Harron, dated the Closing Date, addressed to Pegasus, in form and
substance reasonably satisfactory to Pegasus and its counsel.
vi. Such other documents and instruments as
Pegasus may reasonably request: (A) to evidence the contribution, assignment,
conveyance and transfer to PCC of all of Harron's right, title and interest
in, to and under the Assets; (B) to evidence the accuracy of Harron's
representations and warranties under this Agreement, the Collateral Agreements
and any documents, instruments or certificates required to be delivered
thereunder; (C) to evidence the performance by Harron of, or the compliance by
Harron with, any covenant, obligation, condition and agreement to be performed
or complied with by Harron under this Agreement and the Collateral Agreements;
or (D) to otherwise facilitate the consummation or performance of any of the
transactions contemplated by this Agreement and the Collateral Agreements.
7.5 Registration Statement. The Registration Statement shall have
been declared effective by the SEC, no stop order suspending the effectiveness
of the Registration Statement shall have been issued and PCC shall have
completed the IPO.
7.6 No Material Adverse Change. There shall have been no material
adverse change in the Assets or in the condition (financial or otherwise) of
the Business since the date hereof.
7.7 No Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority and no Legal Requirement
shall have been enacted, promulgated or issued or deemed applicable to any of
the transactions contemplated by this Agreement by any Governmental Authority,
that would: (i) prohibit or adversely affect PCC's
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ownership or operation of all or a material portion of the Business or the
Assets or otherwise materially impair the ability of Pegasus and PCC to
realize the benefits of the transactions contemplated by this Agreement and
the Collateral Agreements; (ii) compel PCC to dispose of or hold separate all
or a material portion of the Business or the Assets as a result of any of the
transactions contemplated by this Agreement and the Collateral Agreements;
(iii) prevent or make illegal the consummation of any transactions
contemplated by this Agreement and the Collateral Agreements; or (iv) cause
any of the transactions contemplated by this Agreement and the Collateral
Agreements to be rescinded following consummation.
7.8 Minimum Subscribers. As of the Closing Date, the Business shall
have total Subscribers of not less than 7,500, as evidenced by such Harron
documentation as Pegasus may request.
ARTICLE VIII
CONDITIONS PRECEDENT TO OBLIGATIONS OF HARRON
All obligations of Harron under this Agreement shall be subject to
the fulfillment at or prior to Closing of the following conditions, it being
understood that Harron may, in its sole discretion, to the extent permitted by
applicable Legal Requirements, waive any or all of such conditions in whole or
in part.
8.1 Accuracy of Representations. All representations and warranties
of Pegasus and PCC contained in this Agreement and the Collateral Agreements
shall be, if specifically qualified by materiality, true and correct in all
respects and, if not so qualified, shall be true and correct in all material
respects, in each case on and as of the Closing Date with the same effect as
if made on and as of the Closing Date. Pegasus and PCC shall have delivered to
Harron a certificate dated the Closing Date to the foregoing effect.
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8.2 Covenants. Pegasus shall, in all material respects, have
performed and complied with each obligation, agreement, covenant and condition
contained in this Agreement and the Collateral Agreements and required by this
Agreement and the Collateral Agreements to be performed or complied with by
Pegasus at or prior to Closing. Pegasus shall have delivered to Harron a
certificate dated the Closing Date to the foregoing effect.
8.3 Consents. All consents, approvals, authorizations and orders
required to be obtained from, and all registrations, filings and notices
required to be made with or given to, any Governmental Authority or Person as
provided in Section 6.1(a) shall have been duly obtained, made or given, as
the case may be, and shall be in full force and effect, and any waiting period
required by applicable law or any Governmental Authority in connection with
such transactions (including, without limitation, pursuant to the HSR Act)
shall have expired or have been earlier terminated, unless the failure to
obtain, make or give any such consent, approval, authorization, order,
registration, filing or notice, or to allow any such waiting period to expire
or terminate would not have a material adverse effect on the Assets or the
ability of Pegasus to consummate the transactions contemplated by this
Agreement and the Collateral Agreements. Harron shall have been furnished with
the appropriate evidence, reasonably satisfactory to it and its counsel, of
the granting of such consents, approvals, authorizations and orders, the
making of such registrations and filings and the giving of such notices.
8.4 Delivery of Documents. Pegasus shall have executed and delivered,
and shall have caused PCC to execute and deliver, to Harron the following
documents:
i. Joinder Agreement.
ii. Stockholders' Agreement.
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iii. Opinions of Lodge & Company and/or Drinker
Biddle & Reath, counsel to Pegasus and PCC, dated the Closing Date, addressed
to Harron, in form and substance reasonably satisfactory to Harron and its
counsel.
iv. Such other documents and instruments as Harron
may reasonably request: (A) to evidence assumption of the Assumed Liabilities;
(B) to evidence the accuracy of the representations and warranties of Pegasus
under this Agreement and the Collateral Agreements and any documents,
instruments or certificates required to be delivered thereunder; (C) to
evidence the performance by Pegasus of, or the compliance by Pegasus with, any
covenant, obligation, condition and agreement to be performed or complied with
by Pegasus under this Agreement and the Collateral Agreements; or (D) to
otherwise facilitate the consummation or performance of any of the
transactions contemplated by this Agreement and the Collateral Agreements.
8.5 Registration Statement. The Registration Statement shall have
been declared effective by the SEC, no stop order suspending the effectiveness
of the Registration Statement shall have been issued, and PCC shall have
completed the IPO.
8.6 PM&C Stock Contribution. Pegasus shall have contributed the PM&C
Stock to PCC.
8.7 Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority and no Legal Requirement
shall have been enacted, promulgated or issued or deemed applicable to any of
the transactions contemplated by this Agreement and the Collateral Agreements
by any Governmental Authority, that would: (i) prevent consummation of any of
the transactions contemplated by this Agreement and the Collateral Agreements;
or (ii) cause any of the transactions contemplated by this Agreement and the
Collateral Agreements to be rescinded following consummation.
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ARTICLE IX
POST-CLOSING COVENANT'S
The Parties agree as follows with respect to the period following
Closing:
9.1 Transition. Harron shall not take any action that is designed or
intended to have the effect of discouraging any lessor, licensor, Subscriber,
supplier or other business associate of Harron or the Business from
maintaining the same business relationships with PCC after Closing as it
maintained with Harron prior to Closing. Harron shall refer all Subscriber
inquiries relating to the Business to Pegasus from and after Closing.
9.2 Transition Arrangement. Pegasus may elect to cause PCC to lease
and make use of, by giving notice to Harron at Closing, and upon such election
Harron shall lease and make available to PCC, the following: (i) the office
space presently used by Harron to operate the Business, as described on
Schedule 9.2; (ii) the equipment presently shared by the Business and other
Harron businesses, which is identified on Schedule 9.2; and (iii) the services
of Ellen S. McGathy, who presently serves as Business manager ("Transition
Arrangement"). The Transition Arrangement shall commence on the Closing Date
and terminate on the 150th day after the Closing Date, unless earlier
terminated by PCC upon prior written notice to Harron. In consideration for
the Transition Arrangement, Pegasus shall cause PCC to pay to Harron $100 per
month during the term of the Transition Arrangement.
9.3 Transfer Taxes. Harron and Pegasus shall each pay one-half of any
sales, use, transfer, excise, documentary or license taxes or fees imposed by
any Governmental Authority with respect to the transfer of any of the Assets
pursuant to this Agreement and the Collateral Agreements.
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9.4 1996 NRTC Patronage. The Parties agree that the NRTC's 1996
patronage allocation on account of the NRTC Distribution Agreement shall be
apportioned as follows:
(a) Any cash shall be apportioned pro rata between Harron
and Pegasus based on the number of calendar days in 1996 that each Party owns
right, title and interest in and to the NRTC Distribution Agreement.
(b) Pegasus shall be entitled to all NRTC Patronage Capital.
ARTICLE X
TERMINATION
10.1 Events of Termination. This Agreement may be terminated and the
transactions contemplated by this Agreement may be abandoned at any time prior
to Closing as provided below or elsewhere in this Agreement and the Collateral
Agreements:
(a) Pegasus and Harron may terminate this Agreement by
mutual written consent at any time prior to Closing.
(b) Pegasus may terminate this Agreement by giving written
notice to Harron at any time prior to Closing:
i. if Harron has breached any material
representation, warranty or covenant contained in this Agreement in any
material respect, Pegasus has notified Harron of the breach, and the breach
has continued without cure for a period of 30 days after the notice of breach;
or
ii. if Closing shall not have occurred on or
before the Termination Date by reason of the failure of any condition
precedent under Article VII (unless the failure results primarily from Pegasus
itself breaching any representation, warranty or covenant contained in this
Agreement).
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(c) Harron may terminate this Agreement by giving written
notice to Pegasus at any time prior to Closing:
i. if Pegasus has breached any material
representation, warranty or covenant contained in this Agreement in any
material respect, Harron has notified Pegasus of the breach, and the breach
has continued without cure for a period of 30 days after the notice of breach;
or
ii. if Closing shall not have occurred on or
before the Termination Date by reason of the failure of any condition
precedent under Article VIII hereof (unless the failure results primarily from
Harron itself breaching any representation, warranty or covenant contained in
this Agreement).
10.2 Liabilities in Event of Termination. The termination of this
Agreement will in no way limit any obligation or liability of any Party based
on or arising from a breach or default by such Party with respect to any of
its representations, warranties, covenants or agreements contained in this
Agreement.
10.3 Procedure Upon Termination. If this Agreement is terminated by
Pegasus or Harron pursuant to this Article X, notice of such termination shall
promptly be given by the terminating Party to the other Party.
ARTICLE XI
REMEDIES FOR BREACH OF THIS AGREEMENT
11.1 Survival of Representations and Warranties. All of the
representations and warranties of Pegasus and Harron contained in this
Agreement, the Collateral Agreements and other documents, instruments and
certifications required to be delivered hereunder and thereunder shall survive
Closing (even if the damaged Party knew or had reason to know of any
misrepresentation
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or breach of warranty at the time of Closing) and continue in full force and
effect for a period of three years thereafter. The period of survival of the
representations and warranties prescribed by this Section 11.1 is referred to
as the "Survival Period." The liabilities of Pegasus and Harron under their
respective representations and warranties will expire as of the expiration of
the Survival Period; provided, however, that such expiration will not include,
extend or apply to any representation or warranty, the breach of which has
been asserted by Pegasus in a written notice to Harron before such expiration
or about which Harron has given Pegasus written notice before such expiration
indicating that facts or conditions exist that, with the passage of time or
otherwise, can reasonably be expected to result in a breach (and describing
such potential breach in reasonable detail). The covenants and agreements of
Pegasus and Harron in this Agreement, the Collateral Agreements and in the
other documents, instruments and certificates required to be delivered by
Harron or Pegasus hereunder and thereunder shall survive Closing and shall
continue in full force and effect as provided in Section 11.2(b) and Section
11.3(b).
11.2 Indemnification Provisions for Benefit of Pegasus.
(a) If Harron breaches (or if any third party alleges facts
that, if true, would mean Harron has breached) any of its representations and
warranties contained in this Agreement or the Collateral Agreements and if
Pegasus makes a written claim for indemnification against Harron within the
Survival Period, then Harron shall indemnify, defend and hold harmless Pegasus
and its Affiliates and the shareholders, directors, officers, employees,
agents, successors and assigns of any of such Persons, from and against any
Adverse Consequences that any such Person may suffer through and after the
date of the claim for indemnification (including any Adverse Consequences that
any such Person may suffer after the end of the Survival Period) resulting
from, arising out of, relating to or caused by the breach (or the alleged
breach).
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(b) Harron agrees to indemnify Pegasus and its Affiliates,
and the shareholders, directors, officers, employees, agents, successors and
assigns of any of such Persons, from and against the entirety of any Adverse
Consequences that any such Person may suffer resulting from, arising out of,
relating to, in the nature of, or caused by any of the following: (i) any
breach of any covenant, agreement or obligation of Harron contained in this
Agreement or the Collateral Agreements; (ii) any act or omission of Harron
with respect to, or any event or circumstance related to, the ownership or
operation of the Assets or the conduct of the Business, which act, omission,
event or circumstance occurred or existed prior to or at the Closing Date,
without regard to whether a claim with respect to such matter is asserted
before or after the Closing Date; (iii) any Liability of Harron or the
Business that is not an Assumed Liability; (iv) any Liability of Pegasus
arising by operation of law as a consequence of the Closing (including under
any bulk transfer law of any jurisdiction or under any common law doctrine of
de facto merger or successor liability or under any fraudulent conveyance law
of any jurisdiction) that is not an Assumed Liability; and (v) any Liability
for Taxes attributable to the use, ownership or operation of the Assets by
Harron or the Business relating to periods prior to Closing. Harron's
obligations under this Section 11.2(b) shall expire at the end of three years
after the Closing Date.
11.3 Indemnification Provisions for Benefit of Harron.
(a) If Pegasus breaches (or if any third party alleges facts
that, if true, would mean that Pegasus has breached) any of its
representations and warranties contained in this Agreement or the Collateral
Agreements and if Harron makes a written claim for indemnification against
Pegasus within the Survival Period, then Pegasus shall indemnify, defend and
hold harmless Harron and its Affiliates and the shareholders, directors,
officers, employees, agents, successors and assigns of any of such Persons,
from and against any Adverse Consequences that any such
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Person may suffer through and after the date of the claim for indemnification
(including any Adverse Consequences that Harron may suffer after the end of
the Survival Period) resulting from, arising out of, relating to or caused by
the breach (or the alleged breach).
(b) Pegasus agrees to indemnify Harron and its Affiliates,
and the shareholders, directors, officers, employees, agents, successors and
assigns of any of such Persons, against the entirety of any Adverse
Consequences that any such Person may suffer resulting from, arising out of,
relating to, in the nature of, or caused by any of the following: (i) any
breach of any covenant, agreement or obligation of Pegasus or PCC contained in
this Agreement or the Collateral Agreements; (ii) any act or omission of
Pegasus or PCC with respect to, or any event or circumstance related to, the
ownership or operation of the Assets or the conduct of the Business, which
act, omission, event or circumstance occurred after the Closing Date; (iii)
any Assumed Liability after the Closing Date; and (iv) any Liability for Taxes
attributable to the use, ownership or operation of the Assets or the
transferred Business by PCC relating to periods after the Closing Date. The
obligations of Pegasus under this Section 11.3(b) shall expire at the end of
three years after the Closing Date.
(c) Notwithstanding anything in this Agreement to the
contrary, the failure of PCC to file a Registration Statement with the SEC or
the failure of the Registration Statement to become effective in a timely
manner or at all shall not be deemed a breach by Pegasus of Section 6.1 or any
other provision of this Agreement.
11.4 Matters Involving Third Parties.
(a) If any third party shall notify either Pegasus or Harron
(the "Indemnified Party") with respect to any matter (a "Third Party Claim")
that may give rise to a claim for indemnification against the other (the
"Indemnifying Party") under this Article XI, then the
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Indemnified Party shall promptly notify the Indemnifying Party thereof in
writing; provided, however, that no delay on the part of the Indemnified Party
in notifying any Indemnifying Party shall relieve the Indemnifying Party from
any obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(b) Any Indemnifying Party shall have the right to defend
the Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as: (i) the
Indemnifying Party notifies the Indemnified Party in writing within 15 days
after the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Adverse Consequences the Indemnified Party may suffer
resulting from, arising out of, relating to, in the nature of or caused by the
Third Party Claim; (ii) the Indemnifying Party provides the Indemnified Party
with evidence acceptable to the Indemnified Party that the Indemnifying Party
will have the financial resources to defend against the Third Party Claim and
fulfill its indemnification obligations hereunder; (iii) the Third Party Claim
involves only money damages and does not seek an injunction or other equitable
relief; (iv) settlement of, or an adverse judgment with respect to, the Third
Party Claim is not, in the good faith judgment of the Indemnified Party,
likely to establish a precedential custom or practice adverse to the
continuing business interests of the Indemnified Party; and (v) the
Indemnifying Party conducts the defense of the Third Party Claim actively and
diligently.
(c) So long as the Indemnifying Party is conducting the
defense of the Third Party Claim in accordance with Section 11.4(b) above: (i)
the Indemnified Party may retain separate co-counsel at its sole cost and
expense and participate in the defense of the Third Party Claim; (ii) the
Indemnified Party shall not consent to the entry of any judgment or enter into
any settlement
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with respect to the Third Party Claim without the prior written consent of the
Indemnifying Party (not to be withheld unreasonably); and (iii) the
Indemnifying Party shall not consent to the entry of any judgment or enter
into any settlement with respect to the Third Party Claim without the prior
written consent of the Indemnified Party (not to be withheld unreasonably).
(d) If any of the conditions in Section 11.4(b) above is not
or no longer satisfied, however: (i) the Indemnified Party may defend against,
and consent to the entry of any judgment or enter into any settlement with
respect to, the Third Party Claim in any manner it reasonably may deem
appropriate (and the Indemnified Party need not consult with, or obtain any
consent from, any Indemnifying Party in connection therewith); (ii) the
Indemnifying Party shall reimburse the Indemnified Party promptly and
periodically for the costs of defending against the Third Party Claim
(including attorneys' fees and expenses); and (iii) the Indemnifying Party
shall remain responsible for any Adverse Consequences the Indemnified Party
may suffer resulting from, arising out of, relating to, in the nature of or
caused by the Third Party Claim to the fullest extent provided in this Article
XI.
11.5 Determination of Adverse Consequences. Pegasus and Harron shall
take into account the time cost of money (using the Applicable Rate as the
discount rate) in determining Adverse Consequences for purposes of this
Article XI. All indemnification payments under this Article XI shall be deemed
adjustments to the Consideration.
ARTICLE XII
MISCELLANEOUS
12.1 Press Releases and Public Announcements. No party shall issue
any press release or make any public announcement relating to the subject
matter of this Agreement or the Collateral Agreements prior to Closing without
the prior written approval of the other Party; provided,
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however, that any Party may make any public disclosure it believes in good
faith is required by applicable law (in which case the disclosing Party shall
use its best efforts to advise the other Party prior to making the
disclosure).
12.2 Parties Obligated and Benefited. This Agreement shall be binding
upon the Parties and their respective assigns and successors in interest and
shall inure solely to the benefit of the Parties and their respective assigns
and successors in interest, and no other Person shall be entitled to any of
the benefits conferred by this Agreement. Without the prior written consent of
the other Party, no Party may assign this Agreement or the Collateral
Agreements or any of its rights or interests or delegate any of its duties
under this Agreements or the Collateral Agreements.
12.3 Notices. Any notices and other communications required or
permitted hereunder shall be in writing and shall be effective upon delivery
by hand or upon receipt if sent by certified or registered mail (postage
prepaid and return receipt requested) or by a nationally recognized overnight
courier service (appropriately marked for overnight delivery) or upon
transmission if sent by telex or facsimile (with request for immediate
confirmation of receipt in a manner customary for communications of such
respective type and with physical delivery of the communication being made by
one or the other means specified in this Section 12.3 as promptly as
practicable thereafter). Notices shall be addressed as follows:
(a) If to Pegasus, to:
Pegasus Communications Holdings, Inc.
5 Radnor Corporate Center
100 Matsonford Road, Suite 454
Radnor, PA 19087
Attn: Mr. Marshall W. Pagon
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with a copy to:
Lodge & Company
The Widener Building
One South Penn Square
Philadelphia, PA 19107
Attn: Ted S. Lodge, Esquire
(b) If to Harron, to:
Harron Communications Corp.
70 East Lancaster Avenue
P.O. Box 3022
Frazer, PA 19355
Attn: John F. Quigley, III
with a copy to:
Lamb Windle & McErlane, P.C.
24 East Market Street
Box 565
West Chester, PA 19381-0565
Attn: James J. McEntee, III, Esquire
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section 12.3.
12.4 Attorneys' Fees. In the event of any action or suit based upon
or arising out of any alleged breach by any Party of any representation,
warranty, covenant or agreement contained in this Agreement or the Collateral
Agreements, the prevailing Party shall be entitled to recover reasonable
attorneys' fees and other costs of such action or suit from the other Party.
12.5 Waiver. This Agreement or any of its provisions may not be
waived except in writing. The failure of any Party to enforce any right
arising under this Agreement on one or more occasions will not operate as a
waiver of that or any other right on that or any other occasion.
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12.6 Headings. The Article and Section headings of this Agreement are
for convenience only and shall not constitute a part of this Agreement or in
any way affect the meaning or interpretation thereof.
12.7 Choice of Law. This Agreement and the rights of the Parties
under it shall be governed by and construed in all respects in accordance with
the laws of the Commonwealth of Pennsylvania, without giving effect to any
choice of law provision or rule (whether of the Commonwealth of Pennsylvania
or any other jurisdiction that would cause the application of the laws of any
jurisdiction other than the Commonwealth of Pennsylvania).
12.8 Rights Cumulative. All rights and remedies of each of the
Parties under this Agreement shall be cumulative, and the exercise of one or
more rights or remedies shall not preclude the exercise of any other right or
remedy available under this Agreement or applicable law.
12.9 Further Actions. Harron and Pegasus shall execute and deliver to
the other, from time to time at or after Closing, for no additional
consideration and at no additional cost to the requesting Party, such further
assignments, certificates, instruments, records, or other documents,
assurances or things as may be reasonably necessary to give full effect to
this Agreement and to allow each Party fully to enjoy and exercise the rights
accorded and acquired by it under this Agreement.
12.10 Time of the Essence. Time is of the essence under this
Agreement. If the last day permitted for the giving of any notice or the
performance of any act required or permitted under this Agreement falls on a
day which is not a Business Day, the time for the giving of such notice or the
performance of such act shall be extended to the next succeeding Business Day.
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12.11 Late Payments. If either Party fails to pay the other any
amounts when due under this Agreement, the amounts due will bear interest from
the due date to the date of payment at the Applicable Rate.
12.12 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.13 Entire Agreement. This Agreement (including the Exhibits (other
than the Stockholders' Agreement), Schedules and any other documents,
instruments and certificates referred to herein (other than the Stockholders'
Agreement), which are incorporated in and constitute a part of this Agreement)
and the Confidentiality Agreement contain the entire agreement of the Parties
and supersede all prior oral or written agreements, understandings and
representations to the extent that they relate in any way to the subject
matter hereof, including the Letter of Intent (except for paragraph 10 thereof
which shall remain in full force and effect).
12.14 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by
Harron and Pegasus (and PCC on and after Closing). No waiver by any Party of
any default, misrepresentation or breach of warranty or covenant hereunder,
whether intentional or not, shall be deemed to extend to any prior or
subsequent default, misrepresentation or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
12.15 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this
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Agreement. Any reference to any federal, state, local, or foreign statute or
law shall be deemed also to refer to all rules and regulations promulgated
thereunder, unless the context requires otherwise. The word "including" shall
mean "including without limitation." Nothing in the Schedules shall be deemed
adequate to disclose an exception to a representation or warranty made herein
unless the Schedule identifies the exception with particularity and describes
the relevant facts in detail. Without limiting the generality of the
foregoing, the mere listing (or inclusion of a copy) of a document or other
item shall not be deemed adequate to disclose an exception to a representation
or warranty made herein (unless the representation or warranty has to do with
the existence of the document or other item itself). The Parties intend that
each representation, warranty and covenant contained herein shall have
independent significance. If any Party has breached any representation,
warranty or covenant contained herein in any respect, the fact that there
exists another representation, warranty or covenant relating to the same
subject matter (regardless of the relative levels of specificity) which the
Party has not breached shall not detract from or mitigate the fact that the
Party is in breach of the first representation, warranty or covenant.
12.16 Expenses. Each Party shall bear its own costs and expenses
(including legal fees and expenses and accountants' fees and expenses)
incurred in connection with the negotiation of this Agreement, the performance
of its obligations and the consummation of the transactions contemplated
hereby; provided, however, that each party shall pay one-half of the filing
fee required under the HSR Act.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By: /s/ Howard E. Verlin
------------------------------------------
Howard E. Verlin, Vice President
HARRON COMMUNICATIONS CORP.
By: /s/ Paul Harron
------------------------------------------
Paul Harron, Chief Executive Officer
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EXHIBIT 2
JOINDER AGREEMENT
by and among
PEGASUS COMMUNICATIONS HOLDINGS, INC.
PEGASUS COMMUNICATIONS AND MEDIA CORPORATION
and
HARRON COMMUNICATIONS CORP.
----------------------------------
Dated as of ________, 1996
----------------------------------
<PAGE>
JOINDER AGREEMENT
This JOINDER AGREEMENT ("Agreement") is made as of the ____ day of
________, 1996, by and among Pegasus Communications Holdings, Inc. ("Pegasus"),
a Delaware corporation, and its subsidiary, Pegasus Communications and Media
Corporation ("PCC"), a Delaware corporation, and Harron Communications Corp.
("Harron"), a New York corporation.
RECITALS:
WHEREAS, Pegasus and Harron have entered into that certain Contribution
and Exchange Agreement dated as of the ___ day of May, 1996 ("Contribution
Agreement"); and
WHEREAS, the Contribution Agreement provides that Pegasus and Harron
shall, and Pegasus shall cause PCC to, execute and deliver this Agreement
pursuant to which PCC will become a party to the Contribution Agreement on and
subject to the terms and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises, mutual promises,
representations, warranties, covenants and agreements contained herein and in
the Contribution Agreement, and intending to be legally bound hereby, Pegasus,
PCC and Harron agree as follows:
ARTICLE I
DEFINITIONS
1.1 Defined Terms in Contribution Agreement. Capitalized terms used
herein and not defined in Section 1.2 or elsewhere in this Agreement shall have
the respective meanings assigned to them in the Contribution Agreement.
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1.2 Additional Defined Terms.
(a) The following terms shall, when used in this Agreement,
have the following meanings:
"Class A Common Stock" has the meaning assigned to it in PCC's
Charter.
"Class B Common Stock" has the meaning assigned to it in PCC's
Charter.
"Preferred Stock" has the meaning assigned to it in PCC's
Charter.
(b) The following terms shall, when used in this Agreement,
have the meanings assigned to such terms in the Sections indicated:
Terms Section
"Contribution Agreement".......................................Recitals
"Harron".......................................................Preamble
"PCC"..........................................................Preamble
"PCC's By-Laws"..................................................3.1(b)
"PCC's Charter"..................................................3.1(b)
"Pegasus"......................................................Preamble
ARTICLE II
JOINDER
Except as specifically provided in this Article II and in Article III
of this Agreement, PCC hereby agrees to become a party to the Contribution
Agreement and to be bound by all the terms and conditions of the Contribution
Agreement as though it were an original party thereto and were included in the
definition of "Pegasus" as used thereunder; provided, however, that any
undertaking of Pegasus in the Contribution Agreement to "cause PCC" to take any
action shall be construed to mean that Pegasus shall "cause PCC to, and PCC
shall" undertake such action.
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ARTICLE III
REPRESENTATIONS AND WARRANTIES
Article IV of the Contribution Agreement shall not be construed to
include PCC in the definition of "Pegasus" as used in that Article IV. Rather,
PCC hereby makes the following separate and distinct representations and
warranties to Harron as of the Closing Date, which representations and
warranties of PCC shall be deemed to supplement and amend the Contribution
Agreement as of the Closing Date.
3.1 Organization and Qualification.
(a) PCC is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware, with all requisite
power and authority to own, lease and use its assets and to conduct its business
as it is currently conducted. PCC is duly qualified or licensed to do business
in and is in good standing in each jurisdiction in which the character of the
properties owned, leased or used by it or the nature of the activities conducted
by it makes such qualification necessary, except any such jurisdiction where the
failure to be so qualified or licensed and in good standing would not have a
material adverse effect on PCC or on the validity, binding effect or
enforceability of this Agreement.
(b) Attached hereto as Exhibit 1 is a complete and correct
copy of PCC's Certificate of Incorporation as amended ("PCC's Charter") and
attached hereto as Exhibit 2 is a complete and correct copy of PCC's By-Laws
("PCC's By-Laws").
3.2 Authority and Validity. PCC has all requisite power and authority
to execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, the Collateral Agreements. The execution and
delivery by PCC of, the performance by PCC of its obligations under, and the
consummation by PCC of the transactions contemplated by, the Collateral
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Agreements have been duly authorized by all requisite corporate action of PCC.
The Collateral Agreements have been duly executed and delivered by PCC and are
the legal, valid and binding obligations of PCC, enforceable against PCC in
accordance with their respective terms.
3.3 Outstanding Capital Stock.
(a) The authorized capital stock of PCC consists of the
following:
i. _____ shares of Class A Common Stock, ___ shares of which
are issued and outstanding.
ii. _____ shares of Class B Common Stock, ___ shares of which
are issued and outstanding.
iii. ___ shares of Preferred Stock, no shares of which are
issued and outstanding.
(b) The Stock Consideration is validly issued, fully paid and
non-assessable.
(c) Except as set forth in Schedule 3.3(c), there is no
outstanding right, subscription, warrant, call, preemptive right, option or
other agreement to purchase or otherwise receive from Pegasus or PCC any of the
outstanding, authorized and unissued or treasury shares of the capital stock of
PCC.
3.4 Subsidiaries. PCC owns of record all of the PM&C Stock, free and
clear of all Encumbrances, with no defects of title, except as set forth in
Schedule 3.4.
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3.5 No Breach or Violation. Subject to obtaining the consents,
approvals, authorizations, and orders of, and making the registrations or
filings with, or giving notices to Governmental Authorities and Persons recited
in the exception to Section 3.6, the execution, delivery and performance by PCC
of the Collateral Agreements do not conflict with, constitute a violation or
breach of, constitute a default or give rise to any right of termination or
acceleration of any right or obligation of PCC under, or result in the creation
or imposition of any Encumbrance upon the property of PCC by reason of the terms
of (i) PCC's Charter, PCC's By-Laws or any other organizational document of PCC,
(ii) any material contract, agreement, lease, indenture or other instrument to
which PCC is a party or by or to which PCC or its property may be bound or
subject, (iii) any order, judgment, injunction, award or decree of any
arbitrator or Governmental Authority or any statute, law, rule or regulation
applicable to PCC or (iv) any Permit of PCC, which in the case of (ii), (iii) or
(iv) above would have a material adverse effect on the business or financial
condition of PCC as a whole or the ability of PCC to perform its obligations
under any Collateral Agreement.
3.6 Consents and Approvals. Except (i) as required under the HSR Act,
(ii) as required under the NRTC Distribution Agreement, (iii) as required under
the Securities Act and the Exchange Act, and (iv) as set forth in Schedule 4.4
of the Contribution Agreement, no consent, approval, authorization or order of,
registration or filing with, or notice to, any Governmental Authority or any
other Person is necessary to be obtained, made or given by PCC in connection
with the execution, delivery and/or performance by PCC of any Collateral
Agreements.
3.7 Legal Proceedings. There is no action, suit, proceeding or
investigation, judicial, administrative or otherwise, that is pending or, to the
best knowledge of PCC, threatened against PCC and that challenges the validity
or propriety of, or may prevent or delay, any of the transactions contemplated
by the Contribution Agreement and the Collateral Agreements.
3.8 Finders and Brokers. Except as otherwise disclosed in writing by
Pegasus to Harron on or before the date hereof, no broker or finder has acted
directly or indirectly for PCC in connection with the transactions contemplated
by the Contribution Agreement and the Collateral Agreements, and PCC has
incurred no obligation to pay any brokerage or finder's fee or other commission
in connection therewith.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By: ____________________________________
Marshall W. Pagon, Chief Executive Officer
PEGASUS COMMUNICATIONS AND MEDIA
CORPORATION
By: ____________________________________
Marshall W. Pagon, Chief Executive Officer
HARRON COMMUNICATIONS CORP.
By: ____________________________________
Paul Harron, Chief Executive Officer
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EXHIBIT 3
STOCKHOLDERS' AGREEMENT
by and among
PEGASUS COMMUNICATIONS HOLDINGS, INC.
PEGASUS COMMUNICATIONS AND MEDIA CORPORATION
and
HARRON COMMUNICATIONS CORP.
----------------------------------
Dated as of ________, 1996
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<PAGE>
STOCKHOLDERS' AGREEMENT
This STOCKHOLDERS' AGREEMENT ("Agreement") is made as of the ____ day
of _______, 1996, by and among Pegasus Communications Holdings, Inc.
("Pegasus"), a Delaware corporation, Pegasus Communications and Media
Corporation ("PCC"), a Delaware corporation, and Harron Communications Corp.
("Harron"), a New York corporation. Pegasus, PCC and Harron are collectively
referred to herein as the "Parties."
RECITALS:
WHEREAS, Harron is receiving shares of Class A Common Stock, par value
$.01 per share, of PCC ("Shares") in partial exchange for its contribution of
certain assets to PCC pursuant to the terms and conditions of that certain
Contribution and Exchange Agreement dated as of May ___, 1996 between Pegasus
and Harron and that certain Joinder Agreement dated as of even date herewith
among the Parties (the Contribution and Exchange Agreement together with the
Joinder Agreement being referred to herein as the "Contribution Agreement"); and
WHEREAS, it is a condition precedent to the obligations of the Parties
under the Contribution Agreement that the Parties shall have entered into this
Agreement.
NOW, THEREFORE, in consideration of the premises, mutual promises,
representations, warranties, covenants and agreements contained herein and in
the Contribution Agreement, and intending to be legally bound hereby, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. The following terms shall, when used in this
Agreement, have the following meanings:
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"Affiliate" means, with respect to any Person: (i) any Person
directly or indirectly owning, controlling, or holding with power to vote 10% or
more of the outstanding voting securities of such other Person; (ii) any Person
10% or more of whose outstanding voting securities are directly or indirectly
owned, controlled, or held with power to vote, by such other Person; (iii) any
Person directly or indirectly controlling, controlled by, or under common
control with such other Person; and (iv) any officer, director or partner of
such other Person. "Control" for the foregoing purposes shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of a Person, whether through the
ownership of voting securities or voting interests, by contract or otherwise.
"Class A Common Stock" means the Class A Common Stock of PCC.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Class A and Class B Common Stock of
PCC.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder.
"Holder" means Harron or any subsequent holder of Registrable
Securities.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization,
government or any agency or political subdivision thereof or any other entity.
"Prospectus" shall mean the Prospectus included in any
Registration Statement, as amended or supplemented by any prospectus supplement
with respect to the terms of the offering of any portion of the Registrable
Securities covered by such Registration Statement and all other amendments and
supplements to the Prospectus, including post-effective amendments, and all
material incorporated by reference in such Prospectus.
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"Registrable Securities" mean the Shares, but with respect to
any Share, only until such time as such Share (i) has been effectively
registered under the Securities Act and disposed of in accordance with the
Registration Statement covering it or (ii) may be sold to the public pursuant to
Rule 144 under the Securities Act (or any similar provision then in force) and
the legend referred to in Section 5.2 has been removed or the Company has
authorized the removal thereof from the certificate representing such Share.
"Registration Statement" means any registration statement of
PCC filed pursuant to the Securities Act and which covers any of the Registrable
Securities pursuant to the provisions of this Agreement, including the
Prospectus amendments and supplements to such Registration Statement, including
post-effective amendments, and all exhibits and all material incorporated by
reference in such Registration Statement.
"Securities Act" means the Securities Act of 1933, as amended,
and the rules and regulations thereunder.
"Subject Securities" mean Class A Common Stock or securities
convertible into or exchangeable for, or options to purchase, Class A Common
Stock.
"Subsidiary" means any corporation, limited liability company
or partnership whose voting interests are, directly or indirectly, 80 percent or
more owned by Harron.
1.2 Other Definitions. The following terms shall, when used in this
Agreement, have the meanings assigned such terms in the Sections indicated:
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Term Section
"Agreement"..........................................................Preamble
"Contribution Agreement" ...........................................Recitals
"First Offer Acceptance Period".....................................Article V
"First Offer Notice"................................................Article V
"First Offer Sale Price"............................................Article V
"First Offer Shares"................................................Article V
"Harron".............................................................Preamble
"Harron Nominee"...................................................Article II
"PCC"................................................................Preamble
"Pegasus"............................................................Preamble
"Registration"............................................................3.1
"Shares".............................................................Recitals
ARTICLE II
GOVERNANCE
Immediately upon Closing and thereafter at each annual meeting of
stockholders until the later to occur of the second anniversary of the date
hereof or the date that Harron and its Subsidiaries own less than 10 percent (on
a fully diluted basis) of the outstanding shares of Common Stock, Pegasus shall
cause PCC to elect one director designated by Harron ("Harron Nominee") for
election to PCC's Board of Directors, provided that such Harron Nominee shall be
reasonably acceptable to Pegasus.
ARTICLE III
PIGGYBACK REGISTRATION RIGHTS
3.1 Right to Piggyback. Whenever PCC proposes to register any Subject
Securities under the Securities Act and the registration form to be used may be
used for the registration of the Registrable Securities (other than a
registration statement on form S-4 or S-8 or any similar successor forms)
("Registration"), PCC shall give written notice to all Holders at least 20 days
prior to the anticipated filing date, of its intention to effect such a
Registration, which notice will specify (to the extent known to PCC) the
proposed offering price, the kind and number of securities proposed to be
registered, the distribution arrangements and such other information that at the
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time would be appropriate to include in such notice, and shall, subject to
Section 3.2, include in such Registration, all Registrable Securities with
respect to which PCC has received written requests for inclusion therein within
10 days after the effectiveness of the PCC's notice; provided, however, that if,
at any time after giving written notice of its intention to register any
securities and prior to the effective date of the Registration Statement filed
in connection with such securities, PCC shall determine for any reason not to
register or to delay registration of such securities, PCC may, at its election,
give written notice of such determination to each Holder and, thereupon, (i) in
the case of a determination not to register, PCC shall be relieved of its
obligation to register any Registrable Securities under this Section 3.1 in
connection with such Registration and (ii) in the case of a determination to
delay Registration, PCC shall be permitted to delay registering any Registrable
Securities under this Section 3.1 during the period that the Registration of
such other securities is delayed. PCC further agrees to supplement or amend a
Registration Statement if required by applicable laws, rules or regulations or
by the instructions applicable to the registration form used by PCC for such
Registration Statement. Except as may otherwise be provided in this Agreement,
Registrable Securities with respect to which such request for registration has
been received shall be registered by PCC and offered to the public in a
Registration pursuant to this Article III on the terms and conditions at least
as favorable as those applicable to the registration of Subject Securities to be
sold by PCC.
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3.2 Priority of Registrations. If the managing underwriter or
underwriters, if any, advise the Holders in writing that in its or their
reasonable opinion or, in the case of a Registration not being underwritten, PCC
shall reasonably determine (and notify the Holders requesting registration of
such determination) that the number or kind of securities proposed to be sold in
such Registration (including Registrable Securities to be included pursuant to
Section 3.1 above) will adversely affect the success of such offering or will
affect the price at which the securities of PCC will be sold therein, PCC shall
include in such Registration only the number of securities, if any, which, in
the opinion of such underwriter or underwriters, or PCC, as the case may be, can
be sold, in the following order of priority: (i) first, the shares of Subject
Securities PCC proposes to sell and (ii) second, the Registrable Securities
requested to be included in such registration by the Holders or any other Person
or entity granted similar registration rights before or after the date hereof.
To the extent that the privilege of including Registrable Securities in any
Registration must be allocated pursuant to this Section 3.2, the allocation
shall be made pro rata based on the number of securities that each such
participant shall have requested to be included therein.
3.3 Registration Procedures. With respect to any Registration, PCC
shall, subject to Section 3.2 above, as expeditiously as practicable:
(a) prepare and file with the Commission a Registration
Statement or Registration Statements relating to the applicable Registration on
any appropriate form under the Securities Act, which form shall be available for
the sale of the Registrable Securities in accordance with the intended method or
methods of distribution thereof;
(b) prepare and file with the Commission such amendments and
post-effective amendments to the Registration Statement as may be necessary to
keep each Registration Statement effective for the applicable period of
distribution contemplated in the Registration Statement, or such shorter period
which will terminate when all Registrable Securities covered by such
Registration Statement have been sold; cause each Prospectus to be supplemented
by any required Prospectus supplement, and as so supplemented to be filed
pursuant to Rule 424 under the Securities Act; and comply with the provisions of
the Securities Act with respect to the disposition of all securities covered by
such Registration Statement during the applicable period in accordance with the
intended method or methods of distribution by the sellers thereof set forth in
such Registration Statement or supplement to the Prospectus;
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(c) notify the Holders of Registrable Securities included in
the Registration promptly, and (if requested by any such person or entity)
confirm such advice in writing, (i) when the Prospectus or any Prospectus
supplement or post-effective amendment has been filed, and, with respect to the
Registration Statement or any post-effective amendment, when the same has become
effective, (ii) of any request by the Commission for amendments or supplements
to the Registration Statement or the Prospectus or for additional information,
(iii) of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any proceedings
for that purpose, (iv) of the receipt by PCC of any notification with respect to
the suspension of the qualification of the Registrable Securities for sale in
any jurisdiction or the initiation or threat of any proceeding for such purpose;
and (v) of the happening of any event which makes any statement made in the
Registration Statement, the Prospectus or any document incorporated therein by
reference untrue or which requires the making of any changes in the Registration
Statement, the Prospectus or any document incorporated therein by reference in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading;
(d) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of the Registration Statement;
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(e) furnish to each selling Holder of Registrable Securities,
without charge, at least one copy of the Registration Statement and any
amendment thereto, including financial statements and schedules, and all
documents incorporated therein by reference;
(f) deliver to each selling Holder of Registrable Securities
as many copies of the Prospectus (including each preliminary prospectus) and any
amendment or supplement thereto as such selling Holder of Registrable Securities
may reasonably request;
(g) prior to any public offering of Registrable Securities,
register or qualify such Registrable Securities for offer and sale under the
securities or "blue sky" laws of such jurisdictions as the selling Holders of
Registrable Securities reasonably request in writing, considering the amount of
Registrable Securities proposed to be sold in each such jurisdiction, and do any
and all other acts or things necessary or advisable to enable the disposition in
such jurisdictions of the Registrable Securities covered by the Registration
Statement; provided, however, that the Registrant shall not be required to
qualify generally to do business in any jurisdiction where it is not then so
qualified or to take any action that would subject it to general service of
process in any such jurisdiction where it is not then so subject;
(h) use its best efforts to cause the Registrable Securities
covered by the applicable Registration Statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable the seller or sellers thereof, if any, to consummate the disposition
of such Registrable Securities;
(i) upon the occurrence of any event contemplated by Section
3.3(c)(v), prepare a supplement or post-effective amendment to the Registration
Statement or the related Prospectus or any document incorporated therein by
reference or file any other required document; provided that PCC may elect to
suspend or abandon the Registration in such event;
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(j) cause all Registrable Securities covered by any
Registration Statement to be listed on each securities exchange on which similar
securities issued by PCC are then listed; and
(k) provide a CUSIP number for all Registrable Securities, not
later than the effective date of the applicable Registration Statement.
PCC may require that each selling Holder of Registrable Securities
furnish to PCC such information regarding the proposed distribution of such
securities as PCC may from time to time reasonably request in writing.
Each selling Holder of Registrable Securities agrees that upon receipt
of any notice from PCC of the happening of any event of the kind described in
Section 3.3(c)(v), such Holder will forthwith discontinue disposition of
Registrable Securities pursuant to the Registration Statement until such
Holder's receipt of copies of the supplemented or amended Prospectus, as
contemplated by Section 3.3(i), or until it is advised in writing by PCC that
the use of the Prospectus may be resumed, and has received copies of any
additional or supplemental filings that are incorporated by reference in the
Prospectus, and, if so directed by PCC, such Holder will deliver to PCC all
copies, other than permanent file copies then in such Holder's possession, of
the Prospectus covering such Registrable Securities current at the time of
receipt of such notice.
3.4 Selection of Underwriters. If any Registration is an underwritten
offering, PCC shall have the right to select the underwriters and managing
underwriters(s) of the offering.
3.5 Restrictions on Public Sale. To the extent not inconsistent with
applicable law and unless otherwise advised by PCC or the underwriter(s) for
the Registrable Securities, each Holder whose Registrable Securities are
included in a Registration Statement hereunder agrees not to effect any public
sale or distribution of Registrable Securities, including a sale pursuant to
Rule 144, during the 15 business days prior to, and during the 90-day period
beginning on the effective date of a Registration Statement pursuant to the
Registration.
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3.6 Registration Expenses. All expenses incident and specifically
attributable to PCC's performance of or compliance with Article III of this
Agreement shall be borne by the selling Holders of Registrable Securities on a
pro rata basis, including, without limitation, all registration and filing fees,
the fees and expenses of the counsel and accountants for PCC (including the
expenses of any "comfort" letters and special audits), as well as the fees and
expenses of the counsel and accountants to the selling Holders of Registrable
Securities, all other costs and expenses of PCC incident to the preparation,
printing and filing under the Securities Act of the Registration Statement (and
all amendments and supplements thereto) and furnishing copies thereof and of the
Prospectus included therein, the costs and expenses incurred by PCC in
connection with the qualification of the Registrable Securities under the state
securities or "blue sky" laws of various jurisdictions, the costs and expenses
associated with filings required to be made with the NASD (including, if
applicable, the fees and expenses of any "qualified independent underwriter" and
its counsel as may be required by the rules and regulations of the NASD), the
costs and expenses of listing the Registrable Securities for trading on a
national securities exchange or authorizing them for trading on the Nasdaq
National Market, underwriters' commissions, brokerage fees, transfer taxes and
all other costs and expenses incurred by PCC in connection with the inclusion of
Registrable Securities in any Registration hereunder.
3.7 Indemnification.
(a) PCC agrees to indemnify and hold harmless each selling
Holder, each of its directors and officers and each person who controls such
Holder within the meaning of Section 15 of the Securities Act or Section 20 of
the Exchange Act, against any losses, claims, damages or liabilities, joint or
several, to which they or any of them may become subject under the Securities
Act or the Exchange Act or otherwise, insofar as such losses, claims, damages
or liabilities (or actions in respect thereof) arise out of or are based upon:
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i. any untrue statement or alleged untrue
statement of any material fact contained in (A) any Registration Statement or
Prospectus or any amendment or supplement thereto or (B) any application or
other document, or any amendment or supplement thereto, executed by PCC or
based upon written information furnished by or on behalf of PCC filed in any
jurisdiction in order to qualify Registrable Securities under the securities
or blue sky laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application"); or
ii. the omission or alleged omission to state in
any Registration Statement or Prospectus or any amendment or supplement
thereto or any Application a material fact required to be stated therein or
necessary to make the statements therein not misleading, and shall reimburse
each indemnified person for any legal or other expenses reasonably incurred by
each indemnified person in connection with investigating and defending against
any such loss, claim, damage, liability or action; provided, however, that PCC
shall not be liable in any such case to the extent that any such loss, claim,
damage or liability arises out of or is based upon any untrue statement or
alleged untrue statement or omission or alleged omission made in such
Registration Statement or Prospectus or any amendment or supplement thereto or
any Application in reliance upon and in conformity with information relating
to such Holder that was furnished to PCC by such Holder specifically for use
therein. PCC shall not, without the prior written consent of any such Person,
settle or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder, unless such settlement, compromise or
consent includes a release of such Person and such directors, officers or
controlling persons from all liability arising out of such claim, action, suit
or proceeding.
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(b) Each Holder whose Registrable Securities are included in a
Registration agrees to indemnify and hold harmless PCC, each of its directors
and officers and each person who controls PCC within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act against any losses,
claims, damages or liabilities to which PCC or any such director or officer or
controlling person may become subject under the Securities Act or the Exchange
Act or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in any
Registration Statement or Prospectus or any amendment or supplement thereto, or
any Application or (ii) the omission or the alleged omission to state therein a
material fact required to be stated in any Registration Statement or Prospectus
or any amendment or supplement thereto, or any Application necessary to make the
statements therein not misleading, in each case to the extent that such untrue
statement or alleged untrue statement or omission or alleged omission was made
in reliance upon and in conformity with information relating to such Holder that
was furnished to PCC by such Holder; and will reimburse any legal or other
expenses reasonably incurred by PCC or any such director, officer or controlling
person in connection with investigating or defending any such loss, claim,
damage, liability or any action in respect thereof.
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(c) Promptly after receipt by an indemnified party under
this Section 3.7 of notice of the commencement of any action, such indemnified
party shall, if a claim in respect thereof is to be made against the
indemnifying party under this Section 3.7, notify the indemnifying party of
the commencement thereof. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and
assume the defense thereof, with counsel reasonably satisfactory to such
indemnified party; provided, however, that if the defendants in any such
action include both the indemnified party and the indemnifying party and the
indemnified party shall have reasonably concluded based on the advice of
counsel that there may be one or more legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, the indemnifying party shall not have the
right to direct the defense of such action on behalf of such indemnified party
or parties and such indemnified party or parties shall have the right to
select separate counsel to defend such action on behalf of such indemnified
party or parties. After notice from the indemnifying party to such indemnified
party of its election so to assume the defense thereof and approval by such
indemnified party of counsel appointed to defend such action the indemnifying
party will not be liable to such indemnified party under this Section 3.7 for
any legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the immediately preceding sentence or (ii)
the indemnifying party does not promptly retain counsel reasonably
satisfactory to the indemnified party or (iii) the indemnifying party has
authorized the employment of counsel for the indemnified party at the expense
of the indemnifying party. After such notice from the indemnifying party to
such indemnified party, the indemnifying party shall not be liable for the
costs and expenses of any settlement of such action effected by such
indemnified party without the consent of the indemnifying party.
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ARTICLE IV
RULE 144
PCC agrees that at all times after a Registration Statement pursuant to
the requirements of the Securities Act relating to any class of equity
securities of PCC has become effective, it shall file in a timely manner all
reports required to be filed by it pursuant to the Securities Act and the
Exchange Act and shall take such further action as any Holder may reasonably
request in order that such Holder may effect sales of Registrable Securities
pursuant to Rule 144 under the Securities Act. At any reasonable time and upon
request of a Holder, PCC shall furnish such Holder and others with such
information as may be necessary to enable the Holder to effect sales of
Registrable Securities pursuant to Rule 144 and shall deliver to such Holder a
written statement as to whether PCC has complied with such requirements.
Notwithstanding the foregoing, PCC may deregister any class of its equity
securities under Section 12 of the Exchange Act or suspend its duty to file
reports with respect to any class of its securities under Section 12 of the
Exchange Act or suspend its duty to file reports with respect to any class of
its securities pursuant to Section 15(d) of the Exchange Act if it is then
permitted to do so pursuant to the Exchange Act.
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ARTICLE V
TRANSFER RESTRICTIONS
5.1 Right of First Offer. Whenever, during the period up to
and including the second anniversary hereof, Harron or any of its Affiliates
desires to sell or transfer any Registrable Securities in a private
transaction exempt from registration under the Securities Act and applicable
"blue sky" laws, such Holder shall give notice ("First Offer Notice") to PCC
to the foregoing effect specifying the number of shares of Registrable
Securities that the Holder desires to sell or transfer ("First Offer Shares")
and the desired sale price therefor ("First Offer Sale Price"). Within 45 days
after receipt of the First Offer Notice by PCC ("First Offer Acceptance
Period"), PCC shall have the right to purchase the First Offer Shares for the
First Offer Sale Price. In the event that PCC does not timely respond to the
offer or does not agree to purchase the First Offer Shares at the First Offer
Sale Price during the First Offer Acceptance Period, the transferring Holder
may, during the 120 day period following the expiration of the First Offer
Acceptance Period, sell or transfer all (but not less than all) of the First
Offer Shares at a price equal to or greater than the First Offer Sale Price;
provided that no transferee of the First Offer Shares shall be entitled to any
rights thereunder, unless and until the transferring Holder shall have (i)
informed PCC in writing of the identity of the transferee, the number of
shares of Registrable Securities transferred, and the price paid by the
transferee therefor, (ii) certified that such transfer has been made in
compliance with this Agreement, and (iii) provided to PCC an opinion of
counsel satisfactory to PCC that registration of such Registrable Securities
under the Securities Act and applicable "blue sky" laws is not required in
connection with such transfer. This Section 5.1 shall not apply to transfers
to Persons who are Harron shareholders as of the date hereof or to
Subsidiaries of Harron.
5.2 Change of Harron Control. During the period that Harron or any
Affiliate of Harron is a Holder of Registrable Securities, Harron shall
immediately notify Pegasus of any change of control of Harron or any such
Affiliate. For purposes of this Section 5.2, "control" has the same meaning
assigned to it in the definition of "Affiliate" set forth in Section 1.1.
5.3 Legends. The Parties agree that each certificate representing
Shares shall bear the following legend until such time as the same is no longer
applicable:
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"THE SHARES OF CLASS A COMMON STOCK REPRESENTED BY THIS
CERTIFICATE WERE ORIGINALLY ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER SECTION 5 OF THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND
THE SHARES EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR
AN APPLICABLE EXEMPTION THEREFROM. THE SHARES EVIDENCED HEREBY
ARE SUBJECT TO THE TERMS OF, AND ARE ENTITLED TO THE BENEFITS
SET FORTH IN, A STOCKHOLDERS' AGREEMENT DATED AS OF ________,
1996, A COPY OF WHICH IS ON FILE AT THE OFFICE OF PEGASUS
COMMUNICATIONS AND MEDIA CORPORATION. PEGASUS COMMUNICATIONS
AND MEDIA CORPORATION WILL FURNISH A COPY OF SUCH
STOCKHOLDERS' AGREEMENT TO THE RECORD HOLDER HEREOF WITHOUT
CHARGE UPON WRITTEN REQUEST TO PEGASUS COMMUNICATIONS AND
MEDIA CORPORATION AT ITS PRINCIPAL PLACE OF BUSINESS OR
REGISTERED OFFICE."
ARTICLE VI
MISCELLANEOUS
6.1 Notices. Any notices and other communications required or permitted
hereunder shall be in writing and shall be effective upon delivery by hand or
upon receipt if sent by certified or registered mail (postage prepaid and return
receipt requested) or by a nationally recognized overnight courier service
(appropriately marked for overnight delivery) or upon transmission if sent by
telex or facsimile (with request for immediate confirmation of receipt in a
manner customary for communications of such respective type and with physical
delivery of the communication being made by one or the other means specified in
this Section 6.1 as promptly as practicable thereafter).
Notices shall be addressed as follows:
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(a) If to Pegasus or PCC to:
Pegasus Communications Holdings, Inc.
Pegasus Communications and Media Corporation
5 Radnor Corporate Center
100 Matsonford Road, Suite 454
Radnor, PA 19087
Attn: Mr. Marshall W. Pagon
with a copy to:
Lodge & Company
The Widener Building
One South Penn Square
Philadelphia, PA 19107
Attn: Ted S. Lodge, Esquire
(b) If to Harron, to it at:
Harron Communications Corp.
70 East Lancaster Avenue
P.O. Box 3022
Frazer, PA 19355
Attn: John F. Quigley, III
with a copy to:
Lamb Windle & McErlane, P.C.
24 East Market Street
Box 565
West Chester, PA 19381-0565
Attn: James J. McEntee, III, Esquire
(c) If to Holders of Registrable Securities (other than
Harron), to their respective addresses appearing on
the stock transfer agent's register.
Any Party may change the address to which notices are required to be sent by
giving notice of such change in the manner provided in this Section 6.1.
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6.2 FCC Compliance. Notwithstanding anything to the contrary contained
herein, the Parties recognize that a Holder may be restricted from the exercise
of certain rights contained herein, including, but not limited to, the right to
violation of, or cause PCC to not be in compliance with, the Communications Act
of 1934, as amended, or applicable Federal Communications Commission rules,
regulations or policies, including, but not limited to, those restricting alien
ownership (the "FCC Rules"), and accordingly, the Parties shall act hereunder in
compliance with FCC Rules.
6.3 Amendments and Waivers. The provisions of this Agreement may only
be amended, modified or supplemented, and waivers of or consents to departures
from the provisions hereof may only be given if approved by the Parties in
writing. No action taken pursuant to this Agreement, including, without
limitation, any investigation by or on behalf of any Party, shall be deemed to
constitute a waiver by the Party taking such action. The waiver by any Party
hereto of a breach of any provision of this Agreement shall not operate or be
construed as a waiver of any preceding or succeeding breach and no failure by
any Party to exercise any right or privilege hereunder shall be deemed a waiver
of such Party's rights or privileges hereunder or shall be deemed a waiver of
such Party's rights to exercise the same at any subsequent time or times
hereunder.
6.4 Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the Parties and their respective successors and assigns,
including, without limitation, subsequent holders of Shares.
6.5 Counterparts. This Agreement may be executed in one or more
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
6.6 Headings. The headings in this Agreement are for convenience of
reference only and shall not affect the meaning of any provision of this
Agreement.
6.7 Governing Law. The validity, performance, construction and effect
of this Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Pennsylvania applicable to agreements made and to
be performed therein. The parties hereto agree to submit to the jurisdiction
of the courts of the Commonwealth of Pennsylvania in any action or proceeding
arising out of or relating to this Agreement.
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6.8 Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held to be invalid,
illegal or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
6.9 Entire Agreement. This Agreement is intended by the parties as a
final expression of their agreement and intended to be a complete and exclusive
statement of the agreement and understanding of the parties hereto in respect of
the subject matter contained herein. There are no restrictions, promises,
warranties or undertakings other than those set forth or referred to herein with
respect to the governance and registration rights granted by PCC to Holders or
with respect restrictions on transferability of Registrable Securities. This
Agreement supersedes all prior agreements and understandings between the Parties
with respect to such subject matter.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By:
------------------------------------
Marshall W. Pagon, Chief Executive Officer
PEGASUS COMMUNICATIONS AND MEDIA
CORPORATION
By:
------------------------------------
Marshall W. Pagon, Chief Executive Officer
HARRON COMMUNICATIONS CORP.
By:
------------------------------------
Paul Harron, Chief Executive Officer
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EXHIBIT 4
NONCOMPETITION AGREEMENT
by and among
PEGASUS COMMUNICATIONS HOLDINGS, INC.
PEGASUS COMMUNICATIONS AND MEDIA CORPORATION
and
HARRON COMMUNICATIONS CORP.
----------------------------------
Dated as of May 30, 1996
----------------------------------
<PAGE>
NONCOMPETITION AGREEMENT
This NONCOMPETITION AGREEMENT ("Agreement") is made as of the 30th
day of May, 1996, by and among Pegasus Communications Holdings, Inc.
("Pegasus"), a Delaware corporation, and its subsidiary, Pegasus
Communications and Media Corporation ("PCC"), a Delaware corporation, and
Harron Communications Corp. ("Harron"), a New York corporation. Pegasus, PCC
and Harron are collectively referred to herein as the "Parties."
RECITALS:
WHEREAS, Pegasus and Harron have entered into that certain
Contribution and Exchange Agreement dated as of May ____, 1996, and the
Parties have entered into that certain Joinder Agreement dated as of even date
herewith (the Contribution and Exchange Agreement together with the Joinder
Agreement being referred to herein as "Contribution Agreement"); and
WHEREAS, the Contribution Agreement requires that Harron execute and
deliver this Agreement as a condition precedent to the obligations of Pegasus
and PCC under the Contribution Agreement.
NOW, THEREFORE, in consideration of the premises, mutual promises,
covenants, agreements, representations and warranties contained herein and in
the Contribution Agreement, and intending to be legally bound hereby, the
Parties agree as follows:
1. Definitions. Capitalized terms used and not otherwise defined
herein shall have the respective meanings assigned to them in the Contribution
Agreement.
2. Acknowledgements by Harron. Harron acknowledges that: (i) Pegasus
and PCC have required that Harron make the covenants set forth in Section 3 of
this Agreement as a condition to Pegasus and PCC consummating the transactions
contemplated by the Contribution Agreement; (ii) the provisions of Section 3
of this Agreement are reasonable and necessary because of Harron's access to
confidential and proprietary information of Pegasus, PCC and their Affiliates;
and (iii) PCC would be irreparably damaged if Harron were to breach the
covenants set forth in Section 3 of this Agreement.
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3. Noncompetition. Harron hereby agrees, for a period of five years
("Noncompetition Period"), that:
(a) Neither Harron nor its Subsidiaries shall engage in,
own, manage, operate or control any communications business involved in the
direct-to-home satellite delivery or multichannel multipoint distribution
("MMDS") of data, audio or video signals to residences, businesses or other
users in the Service Areas. Harron agrees that this covenant is reasonable
with respect to its duration, geographical area and scope.
(b) Harron shall not, directly or indirectly, either for
itself or any other Person, induce or attempt to induce any employee of PCC or
its subsidiaries to leave the employ of such company, or employ, or otherwise
engage as an employee, independent contractor or otherwise, any employee of
PCC or its subsidiaries.
(c) Harron shall not, directly or indirectly, either for
itself or any other Person, solicit the business of any Person that is a
Subscriber at Closing.
4. Remedies. If Harron breaches the covenants set forth in Section 3
of this Agreement, Pegasus and PCC shall be entitled to (i) damages from
Harron, and (ii) the right to injunctive or other equitable relief to restrain
any breach or threatened breach or otherwise to specifically enforce the
provisions of Section 3 of this Agreement, it being agreed by the Parties that
money damages alone would be inadequate to compensate Pegasus and PCC for such
breach and that damages would be an inadequate remedy for such breach.
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5. General.
(a) This Agreement shall be binding upon the Parties and
shall inure to the benefit of their affiliates and successors.
(b) The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
Party in exercising any right, power, or privilege under this Agreement will
operate as a waiver of such right, power, or privilege, and no single or
partial exercise of any such right, power, or privilege will preclude any
other or further exercise of such right, power, or privilege or the exercise
of any other right, power, or privilege. To the maximum extent permitted by
applicable law, (i) no claim or right arising out of this Agreement can be
discharged by one Party, in whole or in part, by a waiver or renunciation of
the claim or right unless in writing signed by the other Parties; (ii) no
waiver that may be given by a Party will be applicable except in the specific
instance for which it is given; and (iii) no notice to or demand on one Party
will be deemed to be a waiver of any obligation of such Party or of the right
of the Party giving such notice or demand to take further action without
notice or demand as provided in this Agreement.
(c) This Agreement shall be governed by the laws of the
Commonwealth of Pennsylvania without regard to conflicts of laws principles.
(d) Whenever possible, each provision and term of this
Agreement shall be interpreted in a manner to be effective and valid, but if
any provision or term of this Agreement is held to be prohibited by law or
invalid, then such provision or term shall be ineffective only to the extent
of such prohibition or invalidity, without invalidating or affecting in any
manner whatsoever the remainder of such provision or term or the remaining
provisions or terms of this Agreement. If any of the covenants set forth in
Section 3 of this Agreement is held to be invalid or unenforceable
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due to its scope, breadth or duration, then it shall be modified to the scope,
breadth or duration permitted by law and shall be fully enforceable as so
modified.
(e) This Agreement may be executed in two or more
counterparts, each of which shall be deemed to be an original copy of this
Agreement and all of which, when taken together, shall be deemed to constitute
one and the same agreement.
(f) The headings of Sections in this Agreement are provided
for convenience only and shall not affect its construction or interpretation.
All references to "Section" or "Sections" refer to the corresponding Section
or Sections of this Agreement unless otherwise specified. All words used in
this Agreement shall be construed to be of such gender or number as the
circumstances require.
(g) This Agreement and the Contribution Agreement constitute
the entire agreement between the parties with respect to the subject matter of
this Agreement and supersede all prior written and oral agreements and
understandings with respect to the subject matter of this Agreement. This
Agreement may not be amended except by a written agreement executed by the
Parties.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By:
------------------------------------
Marshall W. Pagon, Chief Executive Officer
PEGASUS COMMUNICATIONS AND MEDIA
CORPORATION
By:
------------------------------------
Marshall W. Pagon, Chief Executive Officer
HARRON COMMUNICATIONS CORP.
By:
------------------------------------
Paul Harron, Chief Executive Officer
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EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
PEGASUS COMMUNICATIONS AND MEDIA CORPORATION
THE UNDERSIGNED, for the purpose of forming a corporation pursuant to
the provisions of the Delaware General Corporation Law, does hereby certify as
follows:
FIRST: The name of the Corporation is PEGASUS COMMUNICATIONS
AND MEDIA CORPORATION (the "Corporation").
SECOND: The address of the Corporation's registered office in the
State of Delaware is 103 Springer Building, 3411 Silverside Road, Wilmington,
Delaware, 19810. The name of the Corporation's registered agent at such
address is Organization Services, Inc., in the County of New Castle.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the Delaware General
Corporation Law.
FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is 5,000 shares, divided into 3,000 shares of
Class A Common Stock par value $0.01 per share, 1,500 shares of Class B Common
Stock, par value $0.01 per share and 500 shares of Preferred Stock, par value
$0.01 per share.
No stockholder shall have any preemptive right to subscribe to or
purchase any issue of stock or other securities of the Corporation, or any
treasury stock or other treasury securities.
The powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights are as follows:
I. PREFERRED STOCK
1. General. The Board of Directors shall have authority, by
resolution, to divide any or all of the shares of Preferred Stock into, and to
authorize the issue of, one or more series, and with respect to each such
series to establish and, prior to the issue thereof, to fix and determine:
(a) a distinguishing designation for such series and the
number of shares comprised by such series, which number may (except as
PHTRANS:109003_4.WP5
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otherwise provided by the Board of Directors in creating such series)
be increased or decreased from time to time (but not below the number
of shares then outstanding) by action of the Board of Directors;
(b) the rate and times at which and the other conditions on
which dividends, if any, on the shares may be declared and paid or
set aside for payment; whether the shares shall be entitled to any
participating or other dividends in addition to dividends at the rate
so determined and, if so, on what terms; and whether dividends shall
be cumulative and, if so, from what date or dates and on what terms;
(c) whether or not the shares shall have voting rights,
in addition to the voting rights provided by law and, if so, the terms
and conditions thereof;
(d) whether the shares shall be convertible or exchangeable,
at the option of either the holder or the Corporation or upon the
happening of a specified event, and, if so, the terms and conditions
of such conversion or exchange, including provisions for any
adjustment of the conversion or exchange rate;
(e) whether or not the shares shall be redeemable and, if
so, the terms and conditions, if any, upon which they may be
redeemed, including the date or dates or event or events upon or
after which they shall be redeemable, the cash, property or rights
(including securities of the Corporation and of a corporation or
corporations other than the Corporation) for which they may be
redeemed, whether they shall be redeemable at the option of the
holder or the Corporation, or both, or upon the happening of a
specified event or events and the amount or rate of cash, property or
rights (including securities of the Corporation and of a corporation
or corporations other than the Corporation) per share payable in case
of redemption, which amount may vary under different conditions and
at different redemption dates, including provisions for any
adjustment of the redemption prices or rates;
(f) whether any shares shall be redeemed through sinking
fund payments and, if so, on what terms;
(g) the amounts payable upon shares in the event of
voluntary or involuntary liquidation, dissolution, winding up or
distribution of the assets of the Corporation; and
(h) the subject to the provisions of the next succeeding
paragraph of this Section 1 of Part I, any other relative powers,
preferences and rights and qualifications, limitations and
restrictions of such series.
In the resolution establishing a new series of Preferred Stock, the
Board of Directors may provide for such additional rights, and with respect to
rights as to dividends, redemption and liquidation, such relative preferences
between shares of different series, as are not
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PHTRANS:109003_4.WP5
<PAGE>
inconsistent with the rights of any outstanding shares of previously
established series, and not inconsistent with any other provision of this
Article FOURTH, but in the resolution creating a new series of Preferred Stock
the Board of Directors may provide that such series shall have a preference
over outstanding shares of any previously created series of Preferred Stock
with respect to rights as to dividends, redemption and liquidation only to the
extent that the resolutions of the Board of Directors authorizing such
previously created series expressly so permit.
All shares of Preferred Stock of all series shall be identical except
as to the above mentioned rights and preferences which the Board of Directors
is authorized as aforesaid to fix and determine. Except to the extent that the
resolution of the Board of Directors establishing a particular series shall
otherwise provide: (i) in case the stated dividends are not paid in full, all
shares of Preferred Stock of all series shall participate ratably in the
payment of dividends, including accumulated but unpaid dividends, in
accordance with the sums which would be payable thereon if all dividends
thereon were declared and paid in full, and (ii) in case amounts payable upon
liquidation of all series are not paid in full, all shares of Preferred Stock
of all series having a liquidation preference on a parity with one another
shall participate ratably in any distribution of assets other than by way of
dividends, in accordance with the sums which would be payable on such
distribution if all sums payable thereon to holders of all shares of Preferred
Stock were discharged in full.
2. Dividends. When and as declared by the Board of Directors, in its
discretion or upon the occurrence of conditions specified in the resolution of
the Board of Directors authorizing a particular series of Preferred Stock
(including, without limitation, the sole specified condition that funds for
the payment of any dividend be legally available for the payment of dividends
under the laws of the State of Delaware as in effect at the time any periodic
dividend is declared or payable, in which event the Board of Directors, in
considering the payment of a dividend on such a series of Preferred Stock,
shall not exercise any element of discretion which it might otherwise exercise
in determining whether a dividend should be declared and paid), the holders of
the shares of Preferred Stock shall be entitled to receive out of any funds of
the Corporation lawfully available for dividends under the laws of the State
of Delaware, dividends at such fixed rate, if any (or, if participating, such
participating rate and such fixed rate, if any), per share for each particular
series, and no more, payable with such frequency and on such dates, and
payable in cash, in property or in rights (including securities of the
Corporation or of one or more corporations or other legal entities other than
the Corporation), or a combination thereof, in each case as the Board of
Directors may determine in fixing and determining the rights and preferences
of such series as above provided. Except to the extent that the resolution of
the Board of Directors establishing a particular series shall provide that
dividends on shares of such series shall not be cumulative or shall otherwise
provide, such dividends on the Preferred Stock shall be cumulative from the
dates as follows:
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PHTRANS:109003_4.WP5
<PAGE>
(a) in the case of shares issued prior to the record date
for the initial dividend on shares of the series of which such shares
shall constitute a part, then from the date of issuance of such
shares;
(b) in the case of shares issued during the period
commencing immediately after the record date for a dividend on shares
of such series and terminating at the close of the payment date for
such dividend, then from such dividend payment date; and
(c) otherwise, from the dividend payment date next
preceding the date of issuance of such shares.
Accrued but undeclared or unpaid dividends on any shares of Preferred
Stock shall not bear interest.
Further restrictions with respect to dividends and distributions on,
and acquisitions for value of, shares of Preferred Stock and shares of Class A
Common Stock and Class B Common Stock are set forth in Section 6 of this Part
1.
3. Redemption of Preferred Stock. Except as otherwise provided in
Section 6 of this Part 1, and except to the extent that the resolution of the
Board of Directors establishing a particular series shall provide that shares
of such series (a) shall not be redeemable by the Corporation or (b) shall be
redeemable by the Corporation only after a specified date or period or subject
to any other condition or conditions or (c) shall be redeemable in another
manner, the Corporation may redeem all or any of the outstanding shares of
Preferred Stock, or all or any shares of any series thereof, at any time or
from time to time, upon payment in respect of the shares so redeemed of the
amount payable upon redemption thereof fixed as aforesaid by the Board of
Directors in respect of the series of which such shares shall constitute a
part, together in each case, to the extent that such shares have cumulative
dividend rights, with an amount equal to all accumulated and unpaid dividends
accrued thereon to the date of redemption, whether or not such dividends shall
have been earned or declared (such price, including such amount equal to such
accumulated and unpaid dividends, and whether payable in cash, property or
rights or a combination thereof, as hereinafter provided, being hereinafter
called the "redemption price"). In fixing the redemption price for shares of
Preferred Stock of a particular series as aforesaid, the Board of Directors
shall specify whether such redemption price shall be paid in cash, in property
or in rights (including securities of the Corporation or of one or more legal
entities other than the Corporation), or a combination thereof. If the
redemption price of shares of a particular series may be paid in whole or in
part in property or rights, the resolution fixing the redemption price shall
specify the method to be followed in valuing the property or rights which may
be used to make such payment.
Any redemption by the Corporation shall be in such amount, at such
place and in such manner as the Board of Directors shall determine. Except to
the extent that the
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resolution of the Board of Directors authorizing a particular series of
Preferred Stock shall otherwise provide, in the case of a redemption by the
Corporation of less than all the outstanding shares of Preferred Stock of any
series, the particular shares to be redeemed shall be selected by lot in such
manner as the Board of Directors shall determine. Unless otherwise waived in
writing by the holder thereof, notice of every redemption shall be mailed at
least 30 days (or such shorter period as shall be specified in the resolutions
of the Board of Directors establishing the particular series) prior to the
date fixed for such redemption to the holders of record of the shares so to be
redeemed at their respective addresses as the same shall appear on the books
of the Corporation.
From and after the date fixed in any such notice as the date of
redemption by the Corporation, unless default shall be made by the Corporation
in providing the redemption price at the time and place specified for the
payment thereof pursuant to said notice, all dividends on the shares of
Preferred Stock thereby called for redemption shall cease to accrue and all
rights of the holders thereof as stockholders in the Corporation, except the
right to receive the redemption price upon surrender of their share
certificates, shall cease and terminate, and such shares shall not be deemed
outstanding for any purpose.
The Corporation may, however, give or irrevocably authorize the
Depositary hereinafter mentioned forthwith to give written notice (in the
manner as the notice of redemption is required to be given as aforesaid) to
the holders of all the shares of Preferred Stock selected for redemption by
the Corporation that the redemption price has been or will on a date specified
be deposited with a designated bank, bank and trust company, or private bank,
which shall have an office in Wilmington, Delaware, Philadelphia,
Pennsylvania, or New York, New York, and shall have a capital and surplus of
not less than $25,000,000 (hereinafter called the "Depositary"), in trust for
the account of the holders of such shares of Preferred Stock, and that such
holders may receive the redemption price of such shares of Preferred Stock
from such Depositary on or after the date of such deposit upon the surrender
of their share certificates without awaiting the date fixed for redemption. In
such event, if the redemption price shall have been so deposited by the
Corporation with such Depositary, all rights as stockholders in the
Corporation of the holders of the shares so called, except the right to
receive the redemption price from such Depositary upon such surrender, shall
cease and terminate upon the date of such deposit or the date of the giving of
such notice or authority, whichever be later, and such shares of Preferred
Stock shall thereafter not be deemed to be outstanding for any purpose; but if
any shares so called for redemption shall at that time be convertible, the
conversion privilege may be exercised in accordance with its terms, but not
later than the close of business on the day prior to the date fixed for
redemption. Any portion of the redemption price so deposited which represents
the redemption price of convertible shares which are actually converted shall
promptly be repaid by the Depository to the Corporation. Any remaining portion
of the redemption price so deposited which shall remain unclaimed by the
holders of such shares of Preferred Stock at the end of two years after the
date so fixed for redemption shall be paid by such Depositary to the
Corporation, after which the holders of such shares of Preferred Stock shall
look only to the Corporation for payment of the redemption price thereof.
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Shares of Preferred Stock of any series redeemed, purchased or
otherwise acquired may be cancelled by the Board of Directors and thereupon
restored to the status of authorized but unissued shares of Preferred Stock
undesignated as to series.
4. Liquidation or Dissolution. Except to the extent that the
resolution of the Board of Directors establishing a particular series, shall
otherwise provide with respect to shares of such series, on any voluntary or
involuntary liquidation or dissolution of the Corporation, before any payment
or distribution shall be made to the holders of any Common Stock, the holders
of the shares of Preferred Stock shall be entitled to be paid the amounts, if
any, respectively fixed therefor as aforesaid by the Board of Directors in
respect of each outstanding series of Preferred Stock, together in each case,
to the extent such shares have cumulative dividend rights, with an amount
equal to all accumulated and unpaid dividends thereon to the date of such
payment, whether or not such dividends shall have been earned or declared.
After such payment shall have been made in full to the holders of
shares of Preferred Stock, they shall be entitled to no further payment or
distribution, and the holders of Common Stock and Class A Common Stock shall
be entitled to share ratably in all remaining assets of the Corporation.
A consolidation with or merger with or into any other corporation or
corporations shall not be deemed a liquidation or dissolution of the
Corporation within the meaning of this Section 4 of Part I.
5. Voting Rights. Except to the extent that the resolution of the
Board of Directors establishing a particular series shall otherwise provide,
and except as otherwise provided herein or by law, at each meeting of
stockholders of the Corporation, each holder of shares of Preferred Stock
shall be entitled to one vote for each such share standing in his or her name
on the books of the Corporation on each matter to come before the meeting.
The resolution of the Board of Directors establishing a particular
series may confer on holders of the shares of such series, voting separately
or with holders of shares of Preferred Stock of other series, the right to
elect a member or members of the Board of Directors at any time or from time
to time.
6. Restrictions on Dividends and Purchase of Shares of Preferred
and Common Stock.
(a) So long as any shares of Preferred Stock shall be outstanding, no
dividend (other than dividends payable in shares of Class A Common Stock or
Class B Common Stock) shall be paid or distribution shall be made on the
shares of Class A Common Stock or Class B Common Stock, nor shall any shares
of Class A Common Stock or Class B Common Stock be purchased, retired or
otherwise acquired by the Corporation, unless in each such case:
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(1) all accumulated and unpaid dividends, if any, on all
outstanding shares of Preferred Stock for all past dividend periods
shall have been paid and full dividends, if any, on all shares of
Preferred Stock for the then current dividend period declared and a
sum sufficient for the payment thereof set apart; and
(2) the Corporation shall not be in arrears in respect of
any sinking fund obligation or obligations of a similar nature in
respect of any series of Preferred Stock.
(b) The resolutions of the Board of Directors establishing a
particular series of Preferred Stock may provide that the payment of any
dividend or the making of any distribution on, or the redemption, purchase or
other acquisition (for sinking fund purposes or otherwise) by the Corporation
of, shares of that series or any other series of Preferred Stock (but, in the
case of any other series established before the series in question, only if
the resolution of the Board of Directors establishing such other series so
permits) shall be conditioned on:
(1) the payment of all accumulated and unpaid dividends, if
any, on all outstanding shares of Preferred Stock of one or more
specified series and the declaration of full dividends, if any, on
all shares of Preferred Stock of one or more specified series for the
then current dividend period and the setting apart of a sum
sufficient for the payments thereof;
(2) the absence of any arrearage in respect of any
sinking fund obligation or obligations of a similar mature in respect
of one or more specified series of Preferred Stock; or
(3) any other condition specified in such resolution.
7. Certain Matters Requiring Consent of Holders of Two-Thirds of
Preferred Stock. So long as any shares of Preferred Stock shall be
outstanding, and subject to the provisions of the last sentence of this
Section 7 of Part I, the Corporation shall not, without the consent of the
holders of at least two-thirds of the shares of Preferred Stock at the time
outstanding, voting as a single class and not separately by series, given in
person or by proxy, either in writing or at a meeting called for the purpose:
(a) adopt or effect any amendment to the Corporation's
Certificate of Incorporation, including any amendment to the terms of
any previously created series of Preferred Stock, other than an
amendment of the nature described under Section 8 of this Part I,
which would adversely affect the powers, preferences or special
rights of the Preferred Stock; but if any such amendment shall
adversely affect the powers, preferences or special rights of one or
more, but not all, of the several series of Preferred Stock at the
time outstanding, the consent of the holders of at least two-thirds
of the shares then outstanding of those series adversely affected,
voting together
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and not by series, shall be required in lieu of the consent of the
holders of two-thirds of the Preferred Stock; or
(b) authorize any new class of stock which is senior to the
Preferred Stock with respect to the payment of dividends or
distributions on liquidation or dissolution.
Notwithstanding the foregoing provisions, the resolution of the Board of
Directors creating a particular series may provide that the consent of the
holders of the outstanding shares of such series shall not be required with
respect to some or all of the foregoing matters and, to the extent so
provided, such shares shall not be deemed outstanding for the purpose of
applying the provisions of this Section 7 of Part I.
8. Certain Matters Requiring Consent of Holders of Majority of All
Outstanding Shares. The Corporation may increase the authorized number of
shares of Preferred Stock, or authorize any new class of stock which is on a
parity with the Preferred Stock with respect to the payment of dividends or
distributions on liquidation or dissolution, by obtaining the affirmative
vote, given in person or by proxy, of the holders of at least a majority of
the then outstanding Class A Common Stock, Class B Common Stock and Preferred
Stock, voting together and not by class.
II. CLASS A COMMON STOCK AND CLASS B COMMON STOCK
1. Dividends.
(a) Subject to the rights of the holders of Preferred Stock, and
subject to any other provisions of this Certificate of Incorporation, as
amended from time to time, the holders of Class A Common Stock and the holders
of Class B Common Stock shall be entitled to receive such dividends and other
distributions in cash or property of the Corporation, or, subject to
subsection (b), securities or obligations of the Corporation, as may be
declared thereon by the Board of Directors from time to time out of assets or
funds of the Corporation legally available therefor; but except as provided in
subsection (b), a dividend may be declared and paid on shares of either the
Class A Common Stock or the Class B Common Stock only if an identical dividend
shall be simultaneously declared and paid on each share of the other class.
(b) In the case of dividends or other distributions payable on the
Class A Common Stock or the Class B Common Stock, including distributions
pursuant to stock splits or divisions of the Class A Common Stock or the Class
B Common Stock, (1) only Class A Common Stock shall be paid or distributed on
the Class A Common Stock, and only Class B Common Stock shall be paid or
distributed on the Class B Common Stock, and (2) any such payment or
distribution on either class may be made only if parallel action is
simultaneously taken in respect of the other class, so that the number of
shares of each class outstanding immediately following such stock dividend,
stock split or stock division shall bear the same
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relationship to each other as the number of shares of each class outstanding
immediately before such stock dividend, stock split or stock division.
(c) In the case of any decrease in the number of outstanding shares
of the Class A Common Stock or the Class B Common Stock resulting from a
combination or consolidation of shares or other capital reclassification,
parallel action shall be simultaneously taken in respect of the other class so
that the number of shares of each class outstanding immediately following such
combination, consolidation or capital reclassification shall bear the same
relationship to each other as the number of shares of each class outstanding
immediately before such combination, consolidation or capital
reclassification.
2. Voting.
(a) At every meeting of stockholders and in respect of each action by
consent in writing of the holders, every holder of Class A Common Stock shall
be entitled to one (1) vote in person or by proxy for each share of Class A
Common Stock standing in his or her name on the transfer books of the
Corporation, and every holder of Class B Common Stock shall be entitled to ten
(10) votes in person or by proxy for each share of Class B Common Stock
standing in his or her name on the transfer books of the Corporation.
(b) Except as may be otherwise required by law or by Section 2(c) of
this Part II, the holders of Class A Common Stock and Class B Common Stock
shall vote together as a single class on all matters with respect to which a
vote of the shareholders of the Corporation is required or permitted under
applicable law, including, without limitation, any amendment of this
Certificate of Incorporation, subject to any voting rights that may be granted
to holders of Preferred Stock.
(c) Notwithstanding Section 2(b) of this Part II, but subject to any
voting rights that may be granted to holders of Preferred Stock, any amendment
to this Certificate of Incorporation that has any of the following effects may
be authorized only by the vote of the holders of a majority of the outstanding
shares of the Class A Common Stock and a majority of the outstanding shares of
the Class B Common Stock, voting as separate classes:
(1) any decrease in the voting rights per share of the Class
A Common Stock or any increase in the voting rights per share of the
Class B Common Stock;
(2) any increase in the number of shares of Class A Common
Stock into which shares of Class B Common Stock are convertible, as
provided herein;
(3) any relaxation on the restrictions on transfer of
the Class B Common Stock, as provided herein;
(4) the authorization or issuance (other than issuances that
comply with Section 1(b)(2) of this Part II) of additional shares of
Class B Common Stock after the
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closing date of the Corporation's initial public offering of shares
of Class A Common Stock registered under the Securities Act of 1933;
or
(5) any change in the powers, preferences or special rights
of the Class A Common Stock or the Class B Common Stock adversely
affecting the holders of the Class A Common Stock.
3. Transfer.
(a) No person holding shares of Class B Common Stock of record
(hereinafter called "Class B Holder") may transfer, and the Corporation shall
not register the transfer of, such shares of Class B Common Stock, whether by
sale, assignment, gift, bequest, appointment, operation of law or otherwise,
except to a Permitted Transferee. "Permitted Transferee" means:
(1) Marshall W. Pagon or any immediate family member
of his; or
(2) any trust (including a voting trust), corporation,
partnership or other entity, more than 50% of the voting equity
interests of which are owned directly or indirectly by (or, in the
case of a trust not having voting equity interests, which is more
than 50% for the benefit of) and which is controlled by, one or more
persons referred to in Section 3(a)(1) of this Part II; or
(3) the estate of any person referred to in Section 3(a)(1)
of this Part II until such time as the property of such estate is
distributed in accordance with his will or applicable law.
For purposes of the definition of "Permitted Transferee": (A) "immediate
family member" means (i) the spouse or any parent of Marshall W. Pagon, (ii)
any lineal descendant of a parent of Marshall W. Pagon, and (iii) the spouse
of any such lineal descendant (parentage and descent in each case to include
adoptive and step relationships); and (B) "control" of a trust, corporation or
other entity means the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of the trust,
corporation or other entity, whether through the ownership of voting
securities, by agreement or otherwise.
(b) Notwithstanding anything to the contrary set forth herein, any
Class B Holder may pledge such Holder's shares of Class B Common Stock to a
pledgee pursuant to a bona fide pledge of such shares as collateral security
for indebtedness due to the pledgee, provided that such shares shall not be
transferred to or registered in the name of the pledgee and shall remain
subject to the provisions of this Section 3. In the event of foreclosure or
other similar action by the pledgee, such pledged shares of Class B Common
Stock may be transferred only to a Permitted Transferee or may be converted
into shares of Class A Common Stock, as the pledgee may elect.
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<PAGE>
(c) The following events shall result in the conversion of the
applicable shares of Class B Common Stock into shares of Class A Common Stock:
(1) a Class B Holder shall transfer Class B Common Stock to
a person or entity not a Permitted Transferee;
(2) a Class B Holder shall transfer to any person or entity
not a Permitted Transferee, including, without limitation, a pledgee,
the right to vote any Class B Common Stock, whether by agreement,
voting trust or otherwise; or
(3) a trust, corporation, partnership or other entity
holding Class B Common Stock ceases to meet the description contained
in Section 3(a)(2) of this Part II.
If any of the foregoing events shall occur, all shares of Class B Common Stock
subject to such transfer or then held by such trust, corporation, partnership
or other entity, whichever is applicable, shall, without further act on
anyone's part, be converted into shares of Class A Common Stock effective upon
the date such event occurs, and stock certificates formerly representing such
shares of Class B Common Stock shall thereupon and thereafter be deemed to
represent the like number of shares of Class A Common Stock. The Corporation
may, in connection with preparing a list of shareholders entitled to vote at
any meeting of shareholders, or as a condition to the transfer or the
registration of shares of Class B Common Stock on the Corporation's books,
require the furnishing of such affidavits, documents or other proof as it
deems necessary to establish that any person is a Permitted Transferee or to
ascertain that none of the events described in this subsection (c) has
occurred.
(d) Shares of Class B Common Stock shall be registered in the names
of a beneficial owner thereof and not in "street" or "nominee" name. For this
purpose, a "beneficial owner" of any shares of Class B Common Stock means a
person or entity that possesses the power, either singly or jointly, to direct
the voting or disposition of such shares. The Corporation shall note on the
certificates for shares of Class B Common Stock the existence of the
restrictions on transfer imposed by this Section 3.
4. Conversion Rights.
(a) Subject to the terms and conditions of this Section 4, each share
of Class B Common Stock shall be convertible at any time or from time to time,
at the option of the respective holder thereof, at the office of any transfer
agent for Class B Common Stock, and at such other place or places, if any, as
the Board of Directors may designate, or, if the Board of Directors shall fail
so to designate, at the principal office of the Corporation, into one (1)
fully paid and nonassessable share of Class A Common Stock. Upon conversion,
the Corporation shall make no payment or adjustment on account of dividends
accrued or in arrears on Class B Common Stock surrendered for conversion or on
account of any dividends
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<PAGE>
on the Class A Common Stock issuable on such conversion. Before any holder of
Class B Common Stock shall be entitled to convert the same into Class A Common
Stock, he shall surrender the certificate or certificates for such Class B
Common Stock at the office of said transfer agent (or other place as provided
above), which certificate or certificates, if the Corporation shall so
request, shall be duly endorsed to the Corporation in blank or be accompanied
by proper instruments of transfer to the Corporation in blank (such
endorsements or instruments of transfer to be in form satisfactory to the
Corporation), and shall give written notice to the Corporation at said office
that he elects so to convert said Class B Common Stock in accordance with the
terms of this Section 4 and shall state in writing therein the name or names
in which he wishes the certificate or certificates for Class A Common Stock to
be issued. The Corporation will as soon as practicable after such deposit of a
certificate or certificates for Class B Common Stock, accompanied by the
written notice and the statement above prescribed, issue and deliver at the
office of said transfer agent (or other place as provided above) to the person
for whose account such Class B Common Stock was so surrendered, or to his
nominee or nominees, a certificate or certificates for the number of full
shares of Class A Common Stock to which he or she shall be entitled as
aforesaid. Subject to the provisions of subsection (c) of this Section 4, such
conversion shall be deemed to have been made as of the date of such surrender
of the Class B Common Stock to be converted; and the person or persons
entitled to receive the Class A Common Stock issuable upon conversion of such
Class B Common Stock shall be treated for all purposes as the record holder of
holder of such Class A Common Stock on such date.
(b) The issuance of certificates for shares of Class A Common Stock
upon conversion of shares of Class B Common Stock shall be made without charge
for any stamp or other similar tax in respect of such issuance. However, if
any such certificate is to be issued in a name other than that of the holder
of the share or shares of Class B Common Stock converted, the person or
persons requesting the issuance thereof shall pay to the Corporation the
amount of any tax which may be payable in respect of any transfer involved in
such issuance or shall establish to the satisfaction of the Corporation that
such tax has been paid.
(c) The Corporation shall not be required to convert Class B Common
Stock, and no surrender of Class B Common Stock shall be effective for that
purpose, while the stock transfer books of Class A Common Stock or Class B
Common Stock are closed for any purpose; but the surrender of Class B Common
Stock for conversion during any period while such books are so closed shall
become effective for conversion immediately upon the reopening of such books,
as if the conversion had been made on the date such Class B Common Stock was
surrendered.
(d) The Corporation covenants that it will at all times reserve and
keep available, solely for the purpose of issuance upon conversion of the
outstanding shares of Class B Common Stock, such number of shares of Class A
Common Stock as shall be issuable upon the conversion of all such outstanding
shares, but nothing contained herein shall be
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construed to preclude the Corporation from satisfying its obligations in
respect of the conversion of the outstanding shares of Class B Common Stock by
delivery of shares of Class A Common Stock held in the treasury of the
Corporation. The Corporation covenants that if any shares of Class A Common
Stock, required to be reserved for purposes of conversion hereunder, require
registration with or approval of any governmental authority under any federal
or state law before such shares of Class A Common Stock may be issued upon
conversion, the Corporation will use its best efforts to cause such shares to
be duly registered or approved, as the case may be. The Corporation will
endeavor to list the shares of Class A Common Stock required to be delivered
upon conversion prior to such delivery upon each national securities exchange,
if any, upon which the outstanding Class A Common Stock is listed at the time
of such delivery. The Corporation covenants that all shares of Class A Common
Stock which shall be issued upon conversion of the shares of Class B Common
Stock, will, upon issuance, be fully paid and nonassessable and not entitled
to an preemptive rights.
(e) Shares of Class A Common Stock, including shares originally
issued upon conversion of Class B Common Stock, shall not be convertible into
Class B Common Stock or any other class of stock.
5. Subscription and Related Rights; Mergers and Other Transactions.
In the event that rights to subscribe to Class A Common Stock, options or
warrants to purchase Class A Common Stock, or any securities convertible into
Class A Common Stock are offered or granted to all holders of Class A Common
Stock or Class B Common Stock, parallel action shall be simultaneously taken
in respect of the other class, so that the number of shares of each class that
would be outstanding immediately after the exercise in full of such rights,
options or warrants or the conversion of such convertible securities shall
bear the same relationship to each other as the number of shares of each class
outstanding immediately before the offer or grant of such rights, options,
warrants or convertible securities. Except as provided in the following
sentence, if there should be any merger, consolidation, purchase or
acquisition of property or stock, separation, reorganization or liquidation of
the Corporation, the holders of Class A Common Stock and the holders of Class
B Common Stock shall receive the shares of stock, securities or other assets
as would be issuable or payable upon such merger, consolidation, purchase or
acquisition of such property or stock, separation, reorganization or
liquidation as if the Class A Common Stock and the Class B Common Stock were
one and the same class of stock. Notwithstanding the foregoing, in the event
of a merger or consolidation which, by its terms, contemplates that the
holders of Class B Common Stock will receive, in exchange for their Class B
Common Stock, capital stock of the surviving corporation, the holders of Class
B Common Stock shall be entitled (to the extent provided for in the terms of
such merger or consolidation) to receive, in exchange for their Class B Common
Stock, shares of stock of the surviving corporation having substantially
similar relative designations, preferences, qualification, privileges,
limitations, restrictions (including, without limitation, restrictions on
transferability) and rights as the relative designations, preferences,
qualifications, privileges, limitations, restrictions and rights of the Class
B Common Stock.
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6. Liquidation Rights. In the event of any dissolution, liquidation
or winding up of the affairs of the Corporation, whether voluntary or
involuntary, after payment or provision for payment of the debts and other
liabilities of the Corporation, and after payment in full of amounts, if any,
required to be paid to the holders of shares of stock having preferential
liquidation rights, including without limitation the holders of Preferred
Stock, the remaining assets of the Corporation shall be divided among and
distributed ratably to the holders of Class A Common Stock and Class B Common
Stock (including those persons who shall become holders of Class A Common
Stock by reason of converting their shares of Class B Common Stock), with no
distinction between the Class A Common Stock and the Class B Common Stock. A
merger or consolidation of the Corporation with or into any corporation or
other entity or a sale of all or any part of the assets of the Corporation
(which shall not in fact result in the liquidation of the Corporation and the
distribution of its assets to stockholders) shall not be deemed to be a
dissolution, liquidation or winding up of the affairs of the Corporation
within the meaning of this Section 6.
7. Other Rights. Except as expressly set forth in this Article
FOURTH, each share of Class A Common Stock shall entitle the holder thereof to
rights that are in all respects identical to the rights of a holder of Class B
Common Stock.
FIFTH: The name and mailing address of the incorporator is as
follows:
Name Mailing Address
---- ---------------
Michael B. Jordan Drinker Biddle & Reath
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
SIXTH: In furtherance and not in limitation of the general powers
conferred by the laws of the State of Delaware, the Board of Directors is
expressly authorized to make, alter or repeal the bylaws of the Corporation,
except as specifically otherwise provided therein.
SEVENTH: A director of the Corporation shall have no personal
liability to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director except to the extent that Section
102(b)(7) (or any successor provision) of the Delaware General Corporation
Law, as amended from time to time, expressly provides that the liability of a
director may not be eliminated or limited. No amendment or repeal of this
Article SEVENTH shall apply to or affect the liability or alleged liability of
any director of the Corporation for or in respect of any act or omission of
such director occurring before such amendment or repeal.
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IN WITNESS WHEREOF, the undersigned, being the incorporator
hereinabove named, does hereby execute this Certificate of Incorporation this
30th day of May 1996.
/s/ Michael B. Jordan
--------------------------
Michael B. Jordan
Incorporator
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<PAGE>
BYLAWS
of
PEGASUS COMMUNICATIONS AND MEDIA CORPORATION
(a Delaware corporation)
ARTICLE 1
OFFICES
Section 1.01. Offices. The Corporation may have offices at
such places both within and without the State of Delaware as the Board of
Directors may from time to time determine or the business of the Corporation may
require.
ARTICLE 2
MEETINGS OF STOCKHOLDERS
Section 2.01. Place of Meeting. Meetings of the stockholders
shall be held at such place, within the State of Delaware or elsewhere, as may
be fixed from time to time by the Board of Directors. If no place is so fixed
for a meeting, it shall be held at the Corporation's then principal executive
office.
Section 2.02. Annual Meeting. The annual meeting of
stockholders shall be held, unless the Board of Directors shall fix some other
hour or date therefor, at 10:00 A.M. on the third Tuesday of April in each year,
if not a legal holiday under the laws of Delaware, and, if a legal holiday, then
on the next succeeding secular day not a legal holiday under the laws of
Delaware, at which the stockholders shall elect by plurality vote a Board of
Directors, and transact such other business as may properly be brought before
the meeting.
Section 2.03. Notice of Annual Meetings. Written notice of the
annual meeting stating the place, date and hour of the meeting shall be given to
each stockholder entitled to vote at such meeting not less than 10 days nor more
than 60 days before the date of the meeting.
Section 2.04. List of Stockholders. The officer who has charge
of the stock ledger of the Corporation shall prepare and make, at least 10 days
before every meeting of stockholders, a complete list of stockholders entitled
to vote at the meeting, arranged in alphabetical order, and showing the address
of each stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder, for
any purpose germane to the meeting, during ordinary business hours, for a period
of at least 10 days prior to the meeting, either at a place within the city
<PAGE>
where the meeting is to be held, which place shall be so specified in the notice
of the meeting, or, if not so specified, at the place where the meeting is to be
held. The list shall also be produced and kept at the time and place of the
meeting during the whole time thereof, and may be inspected by any stockholder
who is present.
Section 2.05. Special Meetings. Special meetings of the
stockholders, for any purpose or purposes, unless otherwise prescribed by
statute or by the Certificate of Incorporation, may be called by the Chairman of
the Board or the President and shall be called by the President or Secretary at
the request in writing of a majority of the Board of Directors. Such request
shall state the purpose or purposes of the proposed meeting. Business transacted
at any special meeting of stockholders shall be limited to the purposes stated
in the notice.
Section 2.06. Notice of Special Meetings. Written notice of a
special meeting stating the place, date and hour of the meeting and the purpose
or purposes for which the meeting is called, shall be given to each stockholder
entitled to vote at such meeting not less than 10 days nor more than 60 days
before the date of the meeting.
Section 2.07. Quorum; Voting. The holders of a majority of the
stock issued and outstanding and entitled to vote thereat, present in person or
represented by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business except as otherwise provided by
statute or by the Certificate of Incorporation. If, however, such quorum shall
not be present or represented at any meeting of the stockholders, the
stockholders entitled to vote thereat, present in person or represented by
proxy, shall have power to adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented any business may be transacted which might have been transacted at
the meeting as originally notified. If the adjournment is for more than thirty
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote at the meeting. When a quorum is present at any meeting,
except for elections of directors, which shall be decided by plurality vote, the
vote of the holders of a majority of the stock having voting power present in
person or represented by proxy shall decide any question brought before such
meeting, unless the question is one upon which by express provision of statute
or of the Certificate of Incorporation, a different vote is required, in which
case such express provision shall govern and control the decision of such
question. Unless otherwise provided in the Certificate of Incorporation, each
stockholder shall at every meeting of stockholders be entitled to one vote in
person or by proxy for each share of the capital stock having voting power held
by such stockholder, but no shares shall be voted pursuant to a proxy more than
three years after the date of the proxy unless the proxy provides for a longer
period.
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Section 2.08. Action Without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation, any action required or permitted
to be taken at any annual or special meeting of stockholders may be taken
without a meeting, without prior notice and without a vote, if a consent or
consents in writing setting forth the action so taken shall be signed by the
holders of outstanding stock having not less than the minimum number of votes
that would be necessary to authorize or take such action at a meeting at which
all shares entitled to vote thereon were present and voted and shall be
delivered to the Corporation by delivery to its registered office in the State,
its principal place of business, or an officer or agent of the Corporation
having custody of the book in which proceedings of meetings of stockholders are
recorded. Delivery made to the Corporation's registered office shall be by hand
or by certified or registered mail, return receipt requested. Every written
consent shall bear the date of signature of each stockholder who signs the
consent and no written consent shall be effective to take the corporate action
referred to therein unless, within sixty days after the earliest dated consent
delivered in the manner required by this Section to the Corporation, written
consents signed by a sufficient number of stockholders to take action are
delivered in the manner required by this Section to the Corporation. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those stockholders who have not
consented in writing.
ARTICLE 3
DIRECTORS
Section 3.01. Number and Term of Office. The number of
directors of the Corporation shall be such number as shall be designated from
time to time by resolution of the Board of Directors and initially shall be two.
The directors shall be elected at the annual meeting of the stockholders, except
as provided in Section 3.02 hereof. Each director elected shall hold office for
a term of one year and shall serve until his successor is elected and qualified
or until his earlier death, resignation or removal. Directors need not be
stockholders.
Section 3.02. Vacancies. Vacancies and newly created
directorships resulting from any increase in the authorized number of directors
may be filled by a majority of the directors then in office, though less than a
quorum, or by a sole remaining director, and the directors so chosen shall hold
office until the next annual election and until their successors are duly
elected and shall qualify, unless sooner displaced. If there are no directors in
office, then an election of directors may be held in the manner provided by
statute. If, at the time of filling any vacancy or any newly created
directorship, the directors then in office shall constitute less than a majority
of the whole board (as constituted immediately prior to any such increase), the
Court of Chancery may, upon application of any stockholder or stockholders
holding at least 10 percent of the total number of the shares at the time
outstanding having the right to vote for such directors, summarily order an
election to be held to fill any such vacancies or newly created directorships,
or to replace the directors chosen by the directors then in office.
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<PAGE>
Section 3.03. Resignations. Any director may resign at any
time by giving written notice to the Board of Directors, the Chairman of the
Board, if there is one, the President, or the Secretary. Such resignation shall
take effect at the time of receipt thereof or at any later time specified
therein; and, unless otherwise specified therein, the acceptance of such
resignation shall not be necessary to make it effective.
Section 3.04. Direction of Management. The business of the
Corporation shall be managed under the direction of its Board of Directors,
which may exercise all such powers of the Corporation and do all such lawful
acts and things as are not by statute or by the Certificate of Incorporation or
by these Bylaws directed or required to be exercised or done by the
stockholders.
Section 3.05. Place of Meetings. The Board of Directors of the
Corporation may hold meetings, both regular and special, either within or
without the State of Delaware.
Section 3.06. Annual Meeting. Immediately after each annual
election of directors, the Board of Directors shall meet for the purpose of
organization, election of officers, and the transaction of other business, at
the place where such election of directors was held or, if notice of such
meeting is given, at the place specified in such notice. Notice of such meeting
need not be given. In the absence of a quorum at said meeting, the same may be
held at any other time and place which shall be specified in a notice given as
hereinafter provided for special meetings of the Board of Directors, or as shall
be specified in a written waiver signed by the directors, if any, not attending
and participating in the meeting.
Section 3.07. Regular Meetings. Regular meetings of the Board
of Directors may be held without notice at such time and place as shall from
time to time be determined by the Board.
Section 3.08. Special Meetings. Special meetings of the Board
of Directors may be called by the Chairman of the Board, if there is one, or the
President on 2 days' notice to each director, either personally (including
telephone), or in the manner specified in Section 4.01; special meetings shall
be called by the Chairman of the Board, if there is one, or the President or the
Secretary in like manner and on like notice on the written request of two
directors.
Section 3.09. Quorum; Voting. At all meetings of the Board, a
majority of the directors shall constitute a quorum for the transaction of
business; and at all meetings of any committee of the Board, a majority of the
members of such committee shall constitute a quorum for the transaction of
business. The act of a majority of the directors present at any meeting of the
Board of Directors or any committee thereof at which there is a quorum present
shall be the act of the Board of Directors or such committee, as the case may
be, except as may be otherwise specifically provided by statute or by the
Certificate of Incorporation. If a quorum shall not be present at any meeting of
the Board of Directors or committee thereof, the directors present thereat may
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present.
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Section 3.10. Action Without a Meeting. Any action required or
permitted to be taken at any meeting of the Board of Directors or of any
committee thereof may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent thereto in writing, and the writing or
writings are filed with the minutes of proceedings of the Board or committee.
Section 3.11. Participation in Meetings. One or more directors
may participate in any meeting of the Board or committee thereof by means of
conference telephone or similar communications equipment by which all persons
participating can hear each other.
Section 3.12. Committees of Directors. The Board of Directors
may, by resolution passed by a majority of the whole Board, designate one or
more committees, each committee to consist of one or more of the directors of
the Corporation. The Board may designate one or more directors as alternate
members of any committee, who may replace any absent or disqualified member at
any meeting of the committee. Any such committee, to the extent provided in the
resolution, shall have and may exercise all of the powers and authority of the
Board of Directors and may authorize the seal of the Corporation to be affixed
to all papers which may require it, but no such committee shall have the power
or authority in reference to amending the Certificate of Incorporation (except
that a committee may, to the extent authorized in the resolution providing for
the issuance of shares of stock adopted by the Board of Directors, fix any
preferences or rights of such shares relating to dividends, redemption,
dissolution, any distribution of assets of the Corporation or the conversion
into, or the exchange of such shares for, shares of any other class or classes
or any other series of the same or any other class or classes of stock of the
Corporation), adopting an agreement of merger or consolidation, recommending to
the stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
Bylaws of the Corporation; and, unless the resolution expressly so provides, no
such committee shall have the power or authority to declare a dividend, to
authorize the issuance of stock, or to adopt a certificate of ownership and
merger. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Each committee shall keep regular minutes of its meetings and report the same to
the Board of Directors when requested.
Section 3.13. Compensation of Directors. Each director shall
be entitled to receive such compensation, if any, as may from time to time be
fixed by the Board of Directors. Members of special or standing committees may
be allowed like compensation for attending committee meetings. Directors may
also be reimbursed by the Corporation for all reasonable expenses incurred in
traveling to and from the place of each meeting of the Board or of any such
committee or otherwise incurred in the performance of their duties as directors.
No payment referred to herein shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
-5-
<PAGE>
ARTICLE 4
NOTICES
Section 4.01. Notices. Whenever, under the provisions of law
or of the Certificate of Incorporation or of these Bylaws, notice is required to
be given to any director or stockholder, such requirement shall not be construed
to necessitate personal notice. Such notice may in every instance be effectively
given by depositing a writing in a post office or letter box, in a postpaid,
sealed wrapper, or by dispatching a prepaid telegram, cable, telecopy or telex
or by delivering a writing in a sealed wrapper prepaid to a courier service
guaranteeing delivery within 2 business days, in each case addressed to such
director or stockholder, at his address as it appears on the records of the
Corporation in the case of a stockholder and at his business address (unless he
shall have filed a written request with the Secretary that notices be directed
to a different address) in the case of a director. Such notice shall be deemed
to be given at the time it is so dispatched.
Section 4.02. Waiver of Notice. Whenever, under the provisions
of law or of the Certificate of Incorporation or of these Bylaws, notice is
required to be given, a waiver thereof in writing, signed by the person or
persons entitled to said notice, whether before or after the time of the event
for which notice is to be given, shall be deemed equivalent thereto. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE 5
OFFICERS
Section 5.01. Number. The officers of the Corporation shall be
a President, a Secretary and a Treasurer, and may also include a Chairman of the
Board, one or more Vice Presidents, one or more Assistant Secretaries and
Assistant Treasurers, and such other officers as may be elected by the Board of
Directors. Any number of offices may be held by the same person.
Section 5.02. Election and Term of Office. The officers of the
Corporation shall be elected by the Board of Directors. Officers shall hold
office at the pleasure of the Board.
Section 5.03. Removal. Any officer may be removed at any time
by the Board of Directors. Any vacancy occurring in any office of the
Corporation may be filled by the Board of Directors.
Section 5.04. Chairman of the Board. The Chairman of the
Board, if there is one, shall preside at all meetings of the Board of Directors
and shall perform such other duties, if any, as may be specified by the Board
from time to time.
-6-
<PAGE>
Section 5.05. President. The President shall be the chief
executive officer of the Corporation and shall have overall responsibility for
the management of the business and operations of the Corporation and shall see
that all orders and resolutions of the Board are carried into effect. In the
absence of the Chairman of the Board he shall preside over meetings of the Board
of Directors. In general, he shall perform all duties incident to the office of
President, and such other duties as from time to time may be assigned to him by
the Board.
Section 5.06. Vice Presidents. The Vice Presidents shall
perform such duties and have such authority as may be specified in these Bylaws
or by the Board of Directors or the President. In the absence or disability of
the President, the Vice Presidents, in order of seniority established by the
Board of Directors or the President, shall perform the duties and exercise the
powers of the President.
Section 5.07. Secretary. The Secretary shall attend all
meetings of the Board of Directors and all meetings of the stockholders and
record all the proceedings of the meetings of the stockholders and of the Board
of Directors in a book to be kept for that purpose and shall perform like duties
for the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or the President. He shall have custody of the corporate seal of
the Corporation and he, or an Assistant Secretary, shall have authority to affix
the same to any instrument, and when so affixed it may be attested by his
signature or by the signature of such Assistant Secretary. The Board of
Directors may give general authority to any other officer to affix the seal of
the Corporation and to attest the affixing by his signature.
Section 5.08. Assistant Secretaries. The Assistant Secretary
or Secretaries shall, in the absence or disability of the Secretary, perform the
duties and exercise the authority of the Secretary and shall perform such other
duties and have such other authority as the Board of Directors or the President
may from time to time prescribe.
Section 5.09. Treasurer. The Treasurer shall have the custody
of the corporate funds and securities and shall keep full and accurate accounts
of receipts and disbursements in books belonging to the Corporation and shall
deposit all monies and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors or the President or the Chief Financial Officer, taking
proper vouchers for such disbursements, and shall render to the Board of
Directors when the Board so requires, an account of all his transactions as
Treasurer and of the financial condition of the Corporation.
-7-
<PAGE>
Section 5.10. Assistant Treasurers. The Assistant Treasurer or
Treasurers shall, in the absence or disability of the Treasurer, perform the
duties and exercise the authority of the Treasurer and shall perform such other
duties and have such other authority as the Board of Directors may from time to
time prescribe.
ARTICLE 6
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 6.01. Indemnification. 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 Corporation, or is or was serving while a director or officer of
the Corporation at the request of the Corporation 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 Corporation 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.
Section 6.02. Advances. Any person claiming indemnification
within the scope of Section 6.01 shall be entitled to advances from the
Corporation for payment of the expenses of defending actions against such person
in the manner and to the full extent permissible under Delaware law.
Section 6.03. Procedure. On the request of any person
requesting indemnification under Section 6.01, the Board of Directors or a
committee thereof shall determine whether such indemnification is permissible or
such determination shall be made by independent legal counsel if the Board or
committee so directs or if the Board or committee is not empowered by statute to
make such determination.
Section 6.04. Other Rights. The indemnification and
advancement of expenses provided by this Article 6 shall not be deemed exclusive
of any other rights to which those seeking indemnification or advancement of
expenses may be entitled under any insurance or other agreement, vote of
shareholders or disinterested directors or otherwise, both as to actions in
their official capacity and as to actions in another capacity while holding an
office, and shall continue as to a person who has ceased to be a director or
officer and shall inure to the benefit of the heirs, executors and
administrators of such person.
Section 6.05. Insurance. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation or is or was serving at
the request of the Corporation as a director, officer, employee, agent,
fiduciary or other representative of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise, against any liability
asserted against him and incurred by him in any such capacity, or arising out of
his status as such, whether or not the Corporation would have the power to
indemnify him against such liability under the provisions of these Bylaws.
-8-
<PAGE>
Section 6.06. Modification. The duties of the Corporation to
indemnify and to advance expenses to a director or officer provided in this
Article 6 shall be in the nature of a contract between the Corporation and each
such director or officer, and no amendment or repeal of any provision of this
Article 6 shall alter, to the detriment of such director or officer, the right
of such person to the advancement of expenses or indemnification related to a
claim based on an act or failure to act which took place prior to such
amendment, repeal or termination.
ARTICLE 7
CERTIFICATES OF STOCK
Section 7.01. Stock Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate in the form prescribed by
the Board of Directors signed on behalf of the Corporation by the Chairman of
the Board or the President or a Vice President and by the Treasurer or an
Assistant Treasurer, or the Secretary or an Assistant Secretary of the
Corporation, representing the number of shares owned by him in the Corporation.
Any or all signatures on the certificate may be a facsimile. In case any
officer, transfer agent or registrar who has signed or whose facsimile signature
has been placed upon a certificate shall have ceased to be such officer,
transfer agent or registrar before such certificate is issued, it may be issued
by the Corporation with the same effect as if such person were such officer,
transfer agent, or registrar at the date of issue.
Section 7.02. Lost Certificates. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen or destroyed, upon the making of an affidavit of that
fact by the person claiming the certificate of stock to be lost, stolen or
destroyed. When authorizing such issue of a new certificate or certificates, the
Board of Directors may, in its discretion and as a condition precedent to the
issuance thereof, require the owner of such lost, stolen or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 7.03. Transfers of Stock. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its books.
-9-
<PAGE>
Section 7.04. Fixing Record Date. The Board of Directors of
the Corporation may fix a record date for the purpose of determining the
stockholders entitled to notice of, or to vote at, any meeting of stockholders
or any adjournment thereof, or to consent to corporate action in writing without
a meeting, or to receive payment of any dividend or other distribution or
allotment of any rights, or to exercise any rights in respect of any change,
conversion or exchange of stock or for the purpose of any other lawful action.
Such record date shall not precede the date upon which the resolution fixing the
record date is adopted by the Board of Directors and such record date shall not
be (i) in the case of such a meeting of stockholders, more than 60 nor less than
10 days before the date of the meeting of stockholders, or (ii) in the case of
consents in writing without a meeting, more than 10 days after the date upon
which the resolution fixing the record date is adopted by the Board of
Directors, or (iii) in other cases, more than 60 days prior to the payment or
allotment or change, conversion or exchange or other action. A determination of
stockholders of record entitled to notice of or to vote at a meeting of
stockholders shall apply to any adjournment of the meeting unless the Board of
Directors fixes a new record date for the adjourned meeting.
Section 7.05. Registered Stockholders. The Corporation shall
be entitled to recognize the exclusive right of a person registered on its books
as the owner of stock to receive dividends and to vote as such owner, and shall
be entitled to hold liable for calls and assessments a person registered on its
books as the owner of stock, and shall not be bound to recognize any equitable
or other claim to, or interest in, such stock on the part of any other person,
whether or not it shall have express or other notice thereof, except as
otherwise provided by the laws of Delaware.
ARTICLE 8
AMENDMENTS
Section 8.01. Amendments. These Bylaws may be altered, amended
or repealed, and new Bylaws may be adopted, by the stockholders or by the Board
of Directors at any regular meeting of the stockholders or of the Board of
Directors or at any special meeting of the stockholders or of the Board of
Directors if notice of such alteration, amendment, repeal or adoption of new
Bylaws be contained in the notice of such special meeting.
-10-
<PAGE>
HERBEIN + COMPANY, INC.
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Gentlemen:
We have read the change of accountants statements made by Pegasus
Communications Corporation in the "Experts" section in the Form S-1
Registration Statement of Pegasus Communications Corporation for the initial
registration of Class A Common Stock. We agree with the explanation as stated.
/s/ HERBEIN + COMPANY, INC.
- ------------------------------
HERBEIN + COMPANY, INC.
Reading, Pemsylvania,
May 31, 1996
<PAGE>
EXHIBIT 21.1
======================================================================
SUBSIDIARY JURISDICTION
MCT Cablevision, Limited Partnership Delaware
MCT Cablevision, Ltd. Pennsylvania
Pegasus Broadcast Associates, L.P. Pennsylvania
Pegasus Broadcast Television, Inc. Pennsylvania
Pegasus Cable Television, Inc. Massachusetts
Pegasus Cable Television Connecticut, Inc. Connecticut
Pegasus Cable Television of San German, Inc. Puerto Rico
Pegasus Communications Management Company Pennsylvania
Pegasus Media and Communications, Inc. Delaware
Pegasus Satellite Television, Inc. Delaware
Portland Broadcasting, Inc. Maine
WDBD License Corp. Delaware
WDSI License Corp. Delaware
WILF, Inc. Delaware
WOLF License Corp. Delaware
WTLH, Inc. Delaware
WTLH License Corp. Delaware
======================================================================
<PAGE>
HERBEIN + COMPANY INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the captions "Experts"
and "Selected Historical and Pro Forma Combined Financial Data" in the Form
S-1 Registration Statement of Pegasus Communications Corporation filed with
the Securities and Exchange Commission for the initial registration of Class
A Common Stock, and to the inclusion therein of our reports dated March 4,
1994 with respect to the 1993 combined financial statements and financial
statement schedule of Pegasus Communications Corporation.
/s/ HERBEIN + COMPANY, INC.
- ------------------------------
HERBEIN + COMPANY, INC.
Reading, Pennsylvania
May 31, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated May 31, 1996, on our audits of the combined financial
statements and financial statement schedule of Pegasus Communications
Corporation. We also consent to the reference to our firm under the caption
"Experts" and "Selected Historical and Pro Forma Combined Financial Data."
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
May 31, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report dated March 8, 1996 on our audits of the financial statements of
WTLH, Inc.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
May 31, 1996
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 of
our report, which includes an explanatory paragraph regarding the restatement
of depreciation expense, dated April 11, 1996 on our audits of the financial
statements of Dom's Tele-Cable, Inc.
Coopers & Lybrand L.L.P.
San Juan, Puerto Rico
May 31, 1996
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report on the balance sheets of Portland Broadcasting, Inc. as
of September 25, 1994 and September 24, 1995 and the related statements of
operations, deficiency in assets, and cash flows for each of the three fiscal
years in the period ended September 24, 1995, dated October 27, 1995, in the
Registration Statement Form S-1 and related Prospectus of Pegasus
Communications Corporation.
/s/ Ernst & Young LLP
- -------------------------------
ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
May 31, 1996
<PAGE>
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 on the DBS Operations
of Harron Communications Corp. appearing elsewhere in this Registration
Statement, and to the reference to us under the heading "Experts" in such
prospectus.
/s/ Deloitte & Touche LLP
- ---------------------------
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
June 3, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
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.
</LEGEND>
<CIK> 0001015629
<NAME> PEGASUS COMMUNICATIONS AND MEDIA CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C> <C>
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<EXCHANGE-RATE> 1 1
<CASH> 21,855,945 8,488,418
<SECURITIES> 0 0
<RECEIVABLES> 5,122,045 5,486,407
<ALLOWANCES> 238,000 291,000
<INVENTORY> 1,100,899 924,193
<CURRENT-ASSETS> 29,144,888 16,517,382
<PP&E> 35,034,411 41,170,376
<DEPRECIATION> 18,462,873 19,575,803
<TOTAL-ASSETS> 95,769,841 100,935,707
<CURRENT-LIABILITIES> 11,579,328 10,635,491
<BONDS> 81,195,454 81,293,358
0 0
0 0
<COMMON> 1,700 1,700
<OTHER-SE> 247,317 (2,752,806)
<TOTAL-LIABILITY-AND-EQUITY> 95,769,841 100,935,707
<SALES> 32,148,076 8,426,612
<TOTAL-REVENUES> 32,148,076 8,426,612
<CGS> 0 0
<TOTAL-COSTS> 31,783,976 8,877,116
<OTHER-EXPENSES> (325,812) (76,176)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 8,816,582 2,900,671
<INCOME-PRETAX> (8,126,670) (3,274,999)
<INCOME-TAX> 30,000 (169,462)
<INCOME-CONTINUING> (8,156,670) (3,105,537)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 10,210,580 0
<CHANGES> 0 0
<NET-INCOME> 2,053,910 (3,105,537)
<EPS-PRIMARY> 0.00 0.00
<EPS-DILUTED> 0.00 0.00
</TABLE>
