<PAGE>
Filed pursuant to Rule 424(b)(1).
Registration File Number 333-05057.
PROSPECTUS
3,000,000 Shares
[LOGO]
Class A Common Stock
------
All of the shares of Class A Common Stock of Pegasus Communications
Corporation ("Pegasus" and, together with its direct and indirect subsidiaries,
the "Company") offered hereby are being offered by Pegasus. All of the shares of
Class A Common Stock are being offered (the "Offering") by the Underwriters (the
"Underwriters"). Prior to this Offering, there has been no public market for the
Class A Common Stock. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price. The Class A Common
Stock has been approved for listing on the Nasdaq National Market under the
symbol "PGTV."
Upon consummation of this Offering, after giving effect to the Transactions
(as defined), Pegasus' issued and outstanding capital stock will consist of
4,663,229 shares of Class A Common Stock and 4,581,900 shares of Class B Common
Stock. Holders of Class A Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders generally and holders of Class B
Common Stock are entitled to ten votes per share. Both classes vote together as
a single class on all matters except in connection with certain amendments to
Pegasus' Amended and Restated Certificate of Incorporation, the authorization or
issuance of additional shares of Class B Common Stock, and as required by
Delaware law. See "Description of Capital Stock." Immediately after this
Offering, Marshall W. Pagon, Pegasus' President and Chief Executive Officer, by
virtue of his beneficial ownership of all the Class B Common Stock, will
generally have the voting power to determine all matters submitted to the
stockholders for approval.
------
For a discussion of certain factors that should be considered by prospective
purchasers of the Class A Common Stock offered hereby, see "Risk Factors"
beginning on page 17.
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
===============================================================================
Price to Underwriting Discounts Proceeds to
Public and Commissions(1) Company(2)
- -------------------------------------------------------------------------------
Per Share ... $14.00 $0.98 $13.02
- -------------------------------------------------------------------------------
Total(3) .... $42,000,000 $2,940,000 $39,060,000
===============================================================================
(1) Pegasus has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by Pegasus estimated at $975,000.
(3) Pegasus has granted to the Underwriters a 30-day option to purchase up to
450,000 additional shares of Class A Common Stock on the same terms and
conditions as set forth above solely to cover over-allotments, if any. If
such option is exercised in full, the total Price to Public, Underwriting
Discounts and Commissions and Proceeds to Company will be $48,300,000,
$3,381,000 and $44,919,000, 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 October 8, 1996.
------
LEHMAN BROTHERS
BT SECURITIES CORPORATION
CIBC WOOD GUNDY SECURITIES CORP.
PAINEWEBBER INCORPORATED
October 3, 1996
<PAGE>
*Cable TV Systems (New Hampshire -- pending sale)
*To be programmed by Pegasus through an LMA
- ----------------------------------------------------------------------------
Figures based on estimates of the U.S. television market derived from Paul
Kagan & Associates and Warren Publishing Inc.'s 1996 Television & Cable Fact
Book.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Primary TV Households 95,000,000 ABC Network Affiliates 204
Secondary TV Households 8,000,000 CBS Network Affiliates 201
Total TV Households 103,000,000 FOX Network Affiliates 140
Total Homes Unpassed by Cable 11,000,000 NBC Network Affilates 209
Total Homes Passed by Cable 92,000,000 UPN Network Affiliates 78
Cable Subscribers 62,000,000 WB Network Affiliates 69
----------
Non-cable subscribers 30,000,000 Total 901
Cable Penetration 67% Total Business Locations 8,600,000
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</TABLE>
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE CLASS
A COMMON STOCK OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE
PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ
NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless the context otherwise requires, all references herein
to the "Company" refer to Pegasus Communications Corporation ("Pegasus")
together with its direct and indirect subsidiaries. The historical financial
and other data for the Company are presented herein on a combined basis. See
Note 1 to Pegasus' Combined Financial Statements included elsewhere herein.
Unless otherwise indicated, the information in this Prospectus assumes the
Underwriters' over-allotment option is not exercised and that all of the PM&C
Class B Shares have been exchanged pursuant to the Registered Exchange Offer.
The discussion below includes certain Transactions that, if not already
completed, are scheduled or anticipated to occur concurrently with or after
the consummation of this Offering. The "Transactions" consist of certain
acquisitions (the Portland Acquisition, the Portland LMA, the Michigan/Texas
DBS Acquisition, the Ohio DBS Acquisition, and the Cable Acquisition),
certain corporate reorganization events (the Parent's contribution of PM&C
Class A Shares to Pegasus, the Management Agreement Acquisition, the
Registered Exchange Offer, the Management Share Exchange, and the Towers
Purchase), the New Hampshire Cable Sale and the closing of the New Credit
Facility. See "-- Acquisitions and Other Transactions." This Offering is
conditioned upon the consummation of all of the Transactions except for the
Registered Exchange Offer, the Management Share Exchange, the Ohio DBS
Acquisition and the New Hampshire Cable Sale. It is anticipated that the Ohio
DBS Acquisition will occur by November 15, 1996 and that the New Hampshire
Cable Sale will occur by December 31, 1996. See "Glossary of Defined Terms,"
which begins on page 14 of this Prospectus Summary, for definitions of
certain terms used in this Prospectus.
THE COMPANY
The Company is a diversified media and communications company operating in
three business segments: broadcast television ("TV"), direct broadcast
satellite television ("DBS") and cable television ("Cable"). The Company has
grown through the acquisition and operation of media and communications
properties characterized by clearly identifiable "franchises" and significant
operating leverage, which enables increases in revenues to be converted into
disproportionately greater increases in Location Cash Flow. The Company's
business segments are described below.
TV. The Company owns and operates five Fox affiliates in midsize
television markets. The Company has entered into agreements to program
additional television stations, pending certain FCC approvals, in two of
these markets in 1997, which stations the Company anticipates will be
affiliated with the United Paramount Network ("UPN").
DBS. The Company is the largest independent provider of DIRECTV(R)
("DIRECTV") services with an exclusive DIRECTV service territory that
includes approximately 476,000 television households and 50,000 business
locations in rural areas of New York, Connecticut, Massachusetts and New
Hampshire. The Company has recently agreed to acquire the DIRECTV
distribution rights and related assets of the third largest independent
provider of DIRECTV services (the "Michigan/Texas DBS Acquisition"), whose
exclusive territory includes approximately 391,000 television households and
20,000 business locations in rural areas of Michigan and Texas. The Company
has entered into a letter of intent regarding its acquisition of the DIRECTV
distribution rights and related assets of the fifth largest independent
provider of DIRECTV services (the "Ohio DBS Acquisition"), whose exclusive
territory includes approximately 168,000 television households and 13,000
business locations in rural areas of Ohio. After giving effect to the
Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, the Company will
have approximately 23,000 DIRECTV subscribers in territories that include
approximately 1,035,000 television households and 83,000 business locations
or a household penetration rate of 2.2% in its service territories. Although
the Company's service territories are exclusive for DIRECTV, other DBS
operators may compete with the Company in its service territories. See
"Business -- Competition."
3
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Cable. The Company owns and operates cable systems in Puerto Rico and New
England serving approximately 47,000 subscribers. The Company recently
acquired a contiguous cable system in Puerto Rico (the "Cable
Acquisition"), which will be interconnected with the Company's existing
system. It is anticipated that as a result of the Cable Acquisition, the
Company's Puerto Rico Cable system will serve approximately 27,000
subscribers in a franchise area comprising approximately 111,000
households from a single headend. The Company has entered into a letter of
intent with respect to the sale of its New Hampshire Cable systems (the
"New Hampshire Cable Sale"). Following the New Hampshire Cable Sale, the
Company's New England Cable systems will serve approximately 15,500
subscribers in a franchise area comprising approximately 22,900
households.
After giving effect to the Transactions, the Company would have had pro
forma net revenues and EBITDA of $51.0 million and $14.7 million,
respectively, for the twelve months ended June 30, 1996. The Company's net
revenues and EBITDA have increased at compound annual growth rates of 98% and
84%, respectively, from 1991 to 1995.
The following tables set forth certain information with respect to the
Company's TV, DBS and Cable segments:
TV
<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 3 125%
WDBD-40 ........ May 1993 Fox Jackson, MS 91 287,000 3 2 (tie) 2 114%
WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3 2 2 100%
Additional Stations:
WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3 N/A N/A N/A
WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3 N/A N/A N/A
</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(11)
----------------- ----------- --------- --------- --------------- ------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owned:
Western New
England ........ 288,273 41,465 246,808 5,208 1.8% 10.5% 0.3%
New Hampshire ... 167,531 42,075 125,456 3,273 2.0% 6.6% 0.4%
Martha's Vineyard
and Nantucket .. 20,154 1,007 19,147 635 3.2% 51.7% 0.6%
----------- --------- --------- --------------- ------- ---------- -------- --------------
Total .......... 475,958 84,547 391,411 9,116 1.9% 9.1% 0.4% $40.32
----------- --------- --------- --------------- ------- ---------- -------- --------------
To Be Acquired:
Michigan ........ 241,713 61,774 179,939 5,213 2.2% 6.6% 0.6% $43.35
Texas ........... 149,530 54,504 95,026 4,449 3.0% 6.2% 1.1% $36.95
Ohio ............ 167,558 32,180 135,378 4,355 2.6% 10.1% 0.8% $39.27
----------- --------- --------- --------------- ------- ---------- -------- --------------
Total .......... 558,801 148,458 410,343 14,017 2.5% 7.2% 0.8% $40.10
----------- --------- --------- --------------- ------- ---------- -------- --------------
Total ......... 1,034,759 233,005 801,754 23,133 2.2% 7.9% 0.6% $40.18
=========== ========= ========= =============== ======= ========== ======== ==============
</TABLE>
4
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CABLE
<TABLE>
<CAPTION>
Average
Monthly
Homes in Homes Basic Revenue
Channel Franchise Passed Basic Service per
Cable Systems Capacity Area(12) by Cable(13) Subscribers(14) Penetration(15) Subscriber
------------------- ---------- ----------- ------------ --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Owned:
New England ....... (16) 29,400 28,600 20,100 70% $33.08
Mayaguez .......... 62 38,300 34,000 10,900 32% $32.68
San German(17) .... 50(18) 72,400 47,700 16,300 34% $30.82
----------- ------------ --------------- --------------- ------------
Total Puerto Rico 110,700 81,700 27,200 34% $31.57
----------- ------------ --------------- --------------- ------------
To be Sold:
New Hampshire ..... (19) 6,500 6,100 4,600 75% $34.20
----------- ------------ --------------- --------------- ------------
Total ........... 133,600 104,200 42,700 41% $31.99
=========== ============ =============== =============== ============
</TABLE>
- ------
(1) Represents total homes in a DMA for each TV station as estimated by
Broadcast Investment Analysts ("BIA").
(2) Commercial stations not owned by the Company which are licensed to and
operating in the DMA.
(3) "Prime" represents local station rank in the 18 to 49 age category
during "prime time" based on A.C. Nielsen Company ("Nielsen") estimates
for May 1996.
(4) "Access" indicates local station rank in the 18 to 49 age category
during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen
estimates for May 1996.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1995 BIA market data and 1995 Nielsen audience
share data.
(6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain
FCC approvals, the Company intends to separately program WOLF as an
affiliate of UPN.
(7) The Company anticipates programming WWLA pursuant to an LMA as an
affiliate of UPN.
(8) Based on NRTC estimates of primary residences derived from 1990 U.S.
Census data and after giving effect to a 1% annual housing growth rate
and seasonal residence data obtained from county offices. Does not
include business locations. Includes approximately 23,400 seasonal
residences.
(9) Based on NRTC estimates of primary residences derived from 1990 U.S.
Census data and after giving effect to a 1% annual housing growth rate
and seasonal residence data obtained from county offices. Does not
include business locations. Includes approximately 87,600 seasonal
residences.
(10) As of August 1996.
(11) Based upon July 1996 revenues and average July 1996 subscribers.
(12) Based on information obtained from municipal offices.
(13) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the cable
distribution plant. These data are the Company's estimates as of July
31, 1996.
<PAGE>
(14) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly
charge for a single outlet in the area. This information is as of July
31, 1996.
(15) Basic subscribers as a percentage of homes passed by cable.
(16) The channel capacities of the New England Cable systems are 36, 50 and
62 and represent 44%, 24% and 32% of the Company's New England Cable
subscribers, respectively. After giving effect to certain system
upgrades which are anticipated to be completed by October 1996, the 36,
50 and 62 channel systems would have represented 22%, 24% and 54% of the
Company's total New England Cable subscribers, respectively.
(17) The San German Cable System was acquired upon consummation of the Cable
Acquisition in August 1996.
(18) After giving effect to certain system upgrades which are anticipated to
be completed during the first quarter of 1997, this system will be
capable of delivering 62 channels.
(19) The channel capacities of the New Hampshire Cable systems are 36 and 50
and represent 16% and 84% of the Company's New Hampshire Cable
subscribers, respectively.
5
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OPERATING AND ACQUISITION STRATEGY
The Company's operating strategy is to generate consistent revenue growth
and to convert this revenue growth into disproportionately greater increases
in Location Cash Flow. The Company's acquisition strategy is to identify
media and communications businesses in which significant increases in
Location Cash Flow can be realized and where the ratio of required investment
to potential Location Cash Flow is low.
TV. The Company's business strategy in broadcast television is to acquire
and operate television stations whose revenues and market shares can be
substantially improved with limited increases in fixed costs. The Company has
focused upon midsize markets because it believes that they have exhibited
consistent and stable increases in local advertising and that television
stations in them have fewer and less aggressive direct competitors. The
Company seeks to increase the audience ratings of its TV stations in key
demographic segments and to capture a greater share of their markets'
advertising revenues than their share of the local television audience. The
Company accomplishes this by developing aggressive, opportunistic local sales
forces and investing in a cost-effective manner in programming, promotion and
technical facilities.
The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction
permits in markets where it currently owns and operates Fox affiliates. The
Company has historically purchased Fox affiliates because (i) Fox affiliates
generally have had lower ratings and revenue shares than stations affiliated
with ABC, CBS and NBC, and, therefore, greater opportunities for improved
performance, and (ii) Fox-affiliated stations retain a greater percentage of
their inventory of advertising spots than do affiliates of ABC, CBS and NBC,
thereby enabling these stations to retain a greater share of any increase in
the value of their inventory. The Company is pursuing expansion in its
existing markets through LMAs because second stations can be operated with
limited additional fixed costs (resulting in high incremental operating
margins) and can allow the Company to create more attractive packages for
advertisers and program providers.
DBS. The Company believes that DBS is the lowest cost medium for
delivering high capacity, high quality, digital video, audio and data
services to television households and commercial locations in rural areas and
that DIRECTV offers superior video and audio quality and a substantially
greater variety of programming than is available from other multichannel
video services. DIRECTV initiated service to consumers in 1994 and, as of
August 20, 1996, there were approximately 1.8 million DIRECTV subscribers.
The introduction of DIRECTV is widely reported to be one of the most
successful rollouts of a consumer service ever.
As the exclusive provider of DIRECTV services in its purchased
territories, the Company provides a full range of services, including
installation, authorization and financing of equipment for new customers as
well as billing, collections and customer service support for existing
subscribers. The Company's business strategy in DBS is to (i) establish
strong relationships with retailers, (ii) build its own direct sales and
distribution channels, (iii) develop local and regional marketing and
promotion to supplement DIRECTV's national advertising, and (iv) offer
aggressively priced equipment rental, lease and purchase options.
The Company anticipates continued significant growth in subscribers and
operating profitability in DBS through increased penetration of DIRECTV
territories it currently owns and will acquire pursuant to the Michigan/Texas
DBS Acquisition and the Ohio DBS Acquisition. The Company's current DBS
operations achieved positive Location Cash Flow in 1995, its first full year
of operations. The Company's DIRECTV subscribers currently generate revenues
of approximately $40 per month at an average gross margin of 34%. The
Company's remaining expenses consist of marketing costs incurred to build its
growing base of subscribers and overhead costs which are predominantly fixed.
As a result, the Company believes that future increases in its DBS revenues
will result in disproportionately greater increases in Location Cash Flow.
For the first six months of 1996, the Company has been adding DIRECTV
subscribers at approximately twice the rate of the same period in 1995.
6
<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 7.7 million television households in
predominantly rural areas of the United States, which are the most likely to
subscribe to DBS services. These territories comprise 8% of United States
television households, but represent between 25% and 30% of DIRECTV's
existing subscriber base. As the largest, and only publicly held, independent
provider of DIRECTV services, the Company believes that it is well positioned
to achieve economies of scale through the acquisition of DIRECTV territories
held by other NRTC members.
Cable. The Company's business strategy in cable is to achieve revenue
growth by (i) adding new subscribers through improved signal quality,
increases in the quality and the quantity of programming, housing growth and
line extensions, and (ii) increasing revenues per subscriber through new
program offerings and rate increases.
ACQUISITIONS AND OTHER TRANSACTIONS
Set forth below are a number of transactions, including acquisitions and
corporate reorganization events, that, if not already completed, are
scheduled or anticipated to occur concurrently with or after the consummation
of this Offering. This Offering is conditioned upon the consummation of all
of the Transactions except for the Registered Exchange Offer, the Management
Share Exchange, the Ohio DBS Acquisition and the New Hampshire Cable Sale.
The pro forma financial data included in this Prospectus assume, unless
otherwise indicated, the completion of each of the Transactions, including
those whose completion is not a condition to the completion of this Offering.
See "The Company -- Acquisitions," "The Company -- Pending Sale" and "The
Company -- Corporate Reorganization and Other Transactions." See "Ownership
and Control" for a chart that sets forth the organizational structure and
ownership interests of Pegasus after giving effect to this Offering and the
Transactions.
COMPLETED ACQUISITIONS
Since January 1, 1996, the Company has acquired the following media and
communications properties:
Television Station WPXT. The Company acquired the principal tangible
assets of television station WPXT, the Fox-affiliated television station
serving the Portland, Maine DMA. Upon the consummation of this Offering, the
Company will have acquired WPXT's license and Fox Affiliation Agreement.
These transactions are collectively referred to as the "Portland
Acquisition."
Television Station WTLH. The Company acquired WTLH, the Fox-affiliated TV
station serving the Tallahassee, Florida DMA (the "Tallahassee Acquisition").
Television Station WWLA. Upon the consummation of this Offering, the
Company will have acquired an LMA with the holder of a construction permit
for WWLA, a new TV station licensed to operate UHF channel 35 in the
Portland, Maine DMA (the "Portland LMA"). Under the Portland LMA, the Company
will lease facilities and provide programming to WWLA. Construction of WWLA
is expected to be completed in 1997.
Cable Acquisition. In August 1996, the Company acquired substantially all
of the assets of a cable system (the "San German Cable System"), serving ten
communities contiguous to the Company's Mayaguez Cable system (the "Cable
Acquisition").
7
<PAGE>
CONCURRENT ACQUISITION
Michigan/Texas DBS Acquisition. In May 1996, the Company entered into an
agreement to acquire DIRECTV distribution rights for portions of Texas and
Michigan and related assets (the "Michigan/Texas DBS Acquisition"). The
Michigan/Texas DBS Acquisition is subject to conditions typical in
acquisitions of this nature, certain of which conditions may be beyond the
Company's control. This Offering is conditioned on completion of the
Michigan/Texas DBS Acquisition. See "Risk Factors -- Risks Attendant to
Acquisition Strategy."
PENDING ACQUISITION
Ohio DBS Acquisition. In July 1996, the Company entered into a letter of
intent with respect to the acquisition of DIRECTV distribution rights for
portions of Ohio and related assets (the "Ohio DBS Acquisition"). The Ohio
DBS Acquisition is subject to the negotiation of a definitive agreement and,
among other conditions, the prior approval of Hughes Communications Galaxy,
Inc. ("Hughes"). In addition to these conditions, the Ohio DBS Acquisition is
also expected to be subject to conditions typical in acquisitions of this
nature, certain of which conditions, like the Hughes consent, may be beyond
the Company's control. The letter of intent provides for a closing to occur
no later than November 15, 1996. There can be no assurance that the Ohio DBS
Acquisition will be consummated on the terms described herein or at all. See
"Risk Factors -- Risks Attendant to Acquisition Strategy."
PENDING SALE
New Hampshire Cable Sale. In July 1996, the Company entered into a letter
of intent with respect to the sale of its New Hampshire Cable systems (the
"New Hampshire Cable Sale"). The New Hampshire Cable Sale is subject to the
negotiation of a definitive agreement, the prior approval of the local
franchising authorities and to other conditions typical in transactions of
this nature, certain of which are beyond the Company's control. The letter of
intent provides for execution of a definitive agreement no later than October
15, 1996. It is anticipated that the New Hampshire Cable Sale will occur by
December 31, 1996. There can be no assurance that the New Hampshire Cable
Sale will be consummated on the terms described herein or at all.
CORPORATE REORGANIZATION AND OTHER TRANSACTIONS
Parent's Contribution of PM&C Class A Shares. The Parent is the holder of
all PM&C Class A Shares. PM&C is the principal subsidiary of the Parent which
now conducts through subsidiaries the Company's current operations as
described in this Prospectus. Concurrently with the consummation of this
Offering, the Parent will contribute all of the PM&C Class A Shares to
Pegasus.
Management Agreement Acquisition. PM&C and its operating subsidiaries are
party to a management agreement (the "Management Agreement") with the
Management Company under which PM&C and its subsidiaries are obligated to pay
the Management Company 5% of their net revenues and reimburse the Management
Company for its accounting department costs. Upon consummation of this
Offering, the Management Agreement together with certain net assets will be
transferred to the Company (the "Management Agreement Acquisition").
Registered Exchange Offer. Purchasers of the Notes in PM&C's 1995 Note
offering hold all of the PM&C Class B Shares. The Company will offer through
a registered exchange offer (the "Registered Exchange Offer") to exchange all
of the PM&C Class B Shares for shares of Class A Common Stock.
Management Share Exchange. Certain members of the Company's management
hold shares of Parent Non-Voting Stock. It is anticipated that all of these
members will exchange their shares for shares of Class A Common Stock
pursuant to an exchange offer (the "Management Share Exchange") and that the
Parent Non-Voting Stock will be distributed to the Parent.
8
<PAGE>
Towers Purchase. An affiliate of the Company operates in the broadcast
tower business. The Company intends to acquire certain tower properties from
this affiliate concurrently with the consummation of this Offering.
New Credit Facility. In August 1996, the Company entered into the New
Credit Facility. Borrowings under the New Credit Facility are available for
acquisitions, subject to the approval of the lenders of the New Credit
Facility, and general corporate purposes. See "Description of Indebtedness --
New Credit Facility."
9
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Class A Common Stock offered by the
Company .......................... 3,000,000 shares(1)
Common Stock to be outstanding
after this Offering:
Class A Common Stock ........... 4,663,229 shares(1)(2)
Class B Common Stock ........... 4,581,900 shares(3)
Total Common Stock ............. 9,245,129 shares(1)(2)(3)
Voting and conversion rights ...... Holders of Class A Common Stock and Class B Common Stock (collectively,
the "Common Stock") are entitled to one vote per share and ten votes per
share, respectively. Both classes vote together as a single class on all
matters except in connection with certain amendments to Pegasus' Amended
and Restated Certificate of Incorporation, the authorization or issuance
of additional shares of Class B Common Stock, and as required by Delaware
law. Immediately after this Offering, after giving effect to the Transactions,
(i) holders of Class A Common Stock and Class B Common Stock will have approximately
9.2% and 90.8%, respectively, of the combined voting power of all outstanding
Common Stock, and (ii) Marshall W. Pagon, Pegasus' President and Chief
Executive Officer, by virtue of his beneficial ownership of all of the
Class B Common Stock, will generally have the voting power to determine
the outcome of all matters submitted to the stockholders for approval.
The Class B Common Stock is convertible into Class A Common Stock on a
share for share basis, at the election of the holder and automatically
upon 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 $38.1 million (approximately $44.0 million
if the Underwriters' over-allotment option is exercised in full). The Company
intends to apply the total estimated net proceeds as follows: (i) $17.9
million for the payment of the cash portion of the purchase price of the
Michigan/Texas DBS Acquisition, (ii) $12.0 million for the Ohio DBS
Acquisition, (iii) $3.0 million to repay indebtedness under the New Credit
Facility, (iv) $1.9 million to make a payment on account of the Portland
Acquisition, (v) $1.4 million for the payment of the cash portion of the
purchase price in the Management Agreement Acquisition and (vi) $1.4 million
for the Towers Purchase. The remaining net proceeds, if any, together with
available borrowings under the New Credit Facility, will be used for future
expansion and general corporate purposes; however, a portion of the net
proceeds may be used for future acquisitions by the Company. See "Use of
Proceeds."
Nasdaq National Market
Symbol ........................... The Class A Common Stock has been approved for listing on the Nasdaq National
Market under the symbol "PGTV."
</TABLE>
10
<PAGE>
- ------
(1) Excludes up to 450,000 shares of Class A Common Stock that may be issued
upon the exercise of the over-allotment option granted to the
Underwriters.
(2) Includes 852,110 shares to be issued in the Michigan/Texas DBS
Acquisition, 191,792 shares to be issued pursuant to the Registered
Exchange Offer (assuming that all holders of the PM&C Class B Shares
accept the Registered Exchange Offer), 263,606 shares to be issued
pursuant to the Management Share Exchange, 269,964 shares initially
issued as Class B Common Stock and transferred as Class A Common Stock to
certain members of management who are participants in the Management
Share Exchange, 10,714 shares to be issued in connection with the
Portland Acquisition and 71,429 shares to be issued in connection with
the Portland LMA. Excludes 720,000 shares reserved for issuance under the
Incentive Program, 3,385 reserved for outstanding stock options and
4,581,900 shares reserved for issuance upon conversion of the Class B
Common Stock.
(3) Includes 1,217,348 shares to be issued in the Management Agreement
Acquisition (after giving effect to 182,652 shares of Class B Common
Stock transferred as Class A Common Stock to certain members of
management who are participants in the Management Share Exchange), 71,429
shares to be issued in the Portland Acquisition, and 3,293,123 shares to
be issued to the Parent on account of the Parent's contribution of all of
the outstanding PM&C Class A Shares to Pegasus (after giving effect to
87,312 shares of Class B Common Stock transferred as Class A Common Stock
to certain members of management who are participants in the Management
Share Exchange).
RISK FACTORS
Prior to making an investment in the Class A Common Stock offered hereby,
prospective purchasers of the Class A Common Stock should take into account
the specific considerations set forth in "Risk Factors" as well as other
information set forth in this Prospectus.
11
<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 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,
--------------------------------------------------------------
1991 (1) 1992 1993 (1) 1994 1995
---------- ---------- ---------- ---------- ---------
(Dollars in thousands, except earnings per share)
<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
========== ========== ========== ========== =========
Net income (loss) per share $0.40
=========
Weighted average shares
outstanding (000's) ..... 5,143
=========
Other Data:
Location Cash Flow (5) ..... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007
EBITDA (5) ................. 801 2,131 5,795 8,100 9,115
Capital expenditures ....... 213 681 885 1,264 2,640
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------------------
Pro Pro
Forma Forma
1995 (2) 1995 1996 1996 (2)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ...................... $27,305 $ 8,861 $11,932 $12,600
DBS ..................... 4,924 528 1,568 4,328
Cable ................... 14,919 5,177 5,626 8,032
Other ................... 100 36 56 56
----------- ---------- ---------- ----------
Total net revenues .... 47,248 14,602 19,182 25,016
----------- ---------- ---------- ----------
Location operating expenses:
TV ...................... 19,210 6,714 8,271 8,765
DBS ..................... 5,138 622 1,261 3,604
Cable ................... 8,176 2,912 3,087 4,298
Other ................... 38 14 9 9
Incentive compensation (3) . 511 356 430 421
Corporate expenses ......... 1,364 613 709 709
Depreciation and
amortization ............ 15,368 3,927 4,905 7,356
----------- ---------- ---------- ----------
Income (loss) from
operations .............. (2,557) (556) 510 (146)
Interest expense ........... (11,573) (3,350) (5,570) (6,716)
Interest income ............ 129 -- 151 151
Other expense, net ......... (58) (84) (62) (59)
Provision (benefit) for
taxes ................... 30 20 (133) (133)
Extraordinary gain (loss)
from extinguishment of
debt .................... -- (4) -- -- --
----------- ---------- ---------- ----------
Net income (loss) .......... $(14,089) $(4,010) $(4,838) $(6,637)
=========== ========== ========== ==========
Net income (loss) per share $(1.52) $(0.94) $(0.72)
=========== ========== ==========
Weighted average shares
outstanding (000's) ..... 9,245 5,143 9,245
=========== ========== ==========
Other Data:
Location Cash Flow (5) ..... $14,686 $ 4,340 $6,554 $8,340
EBITDA (5) ................. 12,811 3,371 5,415 7,210
Capital expenditures ....... 3,022 1,536 2,748 2,734
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
Twelve Months
Ended June 30,
1996 (2)
--------------
<S> <C>
Net revenues ........ $50,963
Location Cash Flow
(5) .............. 16,714
EBITDA (5) .......... 14,666
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of June 30, 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 .......... $ 901 $ 938 $ 1,506 $ 1,380 $21,856 $ 8,068 $ 13,457
Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566 4,073 8,689
Total assets ................ 17,306 17,418 76,386 75,394 95,770 104,247 178,226
Total debt (including
current) ................. 13,675 15,045 72,127 61,629 82,896 94,863 114,663
Total liabilities ........... 14,572 16,417 78,954 68,452 95,521 108,730 129,303
Total equity (deficit) (6) .. 2,734 1,001 (2,427) 6,942 249 (4,483) 48,923
</TABLE>
(footnotes on following page)
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, six months ended June 30, 1996 and the twelve months ended June 30,
1996 give effect to the acquisitions and this Offering as if such events
had occurred at the beginning of such periods. The pro forma balance
sheet data as of June 30, 1996 give effect to the acquisitions after June
30, 1996 and this Offering as if such events had occurred on such date.
See "Pro Forma Combined Financial Data."
(3) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and 401(k) Plans. See "Management and Certain
Transactions -- Incentive Program."
(4) The pro forma income statement data for the year ended December 31, 1995
do not include the extraordinary gain on the extinguishment of debt of
$10.2 million and the $214,000 writeoff of deferred financing costs that
were incurred in 1995 in connection with the creation of the Old Credit
Facility.
(5) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. EBITDA is defined as income (loss) before
(i) extraordinary items, (ii) provision (benefit) for income taxes, (iii)
other (income) expense, (iv) interest (income) expense, and (v)
depreciation and amortization expenses. The difference between Location
Cash Flow and EBITDA is that EBITDA includes incentive compensation and
corporate expenses. Although Location Cash Flow and EBITDA are not
measures of performance under generally accepted accounting principles,
the Company believes that Location Cash Flow and EBITDA are accepted
within the Company's business segments as generally recognized measures
of performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
(6) The Company has not paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
13
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
Cable Acquisition The acquisition of the San German Cable System.
<S> <C>
Class A Common Stock Pegasus' Class A Common Stock, par value $.01 per share.
Class B Common Stock Pegasus' Class B Common Stock, par value $.01 per share.
Common Stock The Class A Common Stock and the Class B Common Stock.
Company Pegasus and its direct and indirect subsidiaries.
DBS Direct broadcast satellite television.
DIRECTV The video, audio and data services provided via satellite by DIRECTV
Enterprises, Inc.
DMA Designated Market Area. There are 211 DMAs in the United States with each
county in the continental United States assigned uniquely to one DMA. Ranking
of DMAs is based upon Nielsen estimates of the number of television households.
DSS Digital satellite system or DSS(R). DSS(R) is a registered trademark of
DIRECTV Enterprises, Inc.
EBITDA Income (loss) before extraordinary items, provision (benefit) for income
taxes, other (income) expense, interest (income) expense, and depreciation
and amortization expenses. Although EBITDA is not a measure of performance
under generally accepted accounting principles, the Company believes that
EBITDA is accepted within the Company's business segments as a generally
recognized measure of performance and is used by analysts who report publicly
on the performance of companies operating in such segments. Nevertheless,
the measure should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating activities
or any other measure for determining the Company's operating performance
or liquidity which is calculated in accordance with generally accepted
accounting principles.
FCC Federal Communications Commission.
Fox Fox Broadcasting Company.
Fox Affiliation Agreements The affiliation agreements between WOLF, WDSI, WDBD, WTLH, and WPXT and
Fox.
Incentive Program The Company's Restricted Stock Plan together with its 401(k) Plans and Stock
Option Plan. See "Management and Certain Transactions -- Incentive Program."
Indenture The indenture dated July 7, 1995 by and among PM&C, certain of its subsidiaries
and First Union National Bank, as trustee.
LMAs Local marketing agreements, program service agreements or time brokerage
agreements between broadcasters and television station licensees pursuant
to which broadcasters provide programming to and retain the advertising
revenues of such stations in exchange for fees paid to television station
licensees.
14
<PAGE>
Location Cash Flow Net revenues less location operating expenses, which consist of programming,
barter programming, general and administrative, technical and operations,
marketing and selling expenses. The difference between Location Cash Flow
and EBITDA is that EBITDA includes incentive compensation and corporate
expenses. Although Location Cash Flow is not a measure of performance under
generally accepted accounting principles, the Company believes that Location
Cash Flow is accepted within the Company's business segments as a generally
recognized measure of performance and is used by analysts who report publicly
on the performance of companies operating in such segments. Nevertheless,
this measure should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating activities
or any other measure for determining the Company's operating performance
or liquidity which is calculated in accordance with generally accepted
accounting principles.
Management Agreement The agreement between PM&C and its operating subsidiaries and the Management
Company to provide management services.
Management Company BDI Associates L.P., an affiliate of the Company.
Michigan/Texas DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas of
Texas and Michigan and related assets.
New Credit Facility The Company's seven-year, senior collateralized credit facility. See
"Description of Indebtedness -- New Credit Facility."
New Hampshire Cable Sale The sale of the Company's New Hampshire Cable systems.
Notes PM&C's 12 1/2% Series B Senior Subordinated Notes due 2005 issued in an
aggregate principal amount of $85.0 million.
NRTC The National Rural Telecommunications Cooperative, the only entity authorized
to provide DIRECTV services that is independent of DIRECTV Enterprises,
Inc. There are 252 NRTC members that are authorized to provide DIRECTV services
in exclusive territories granted to the NRTC by DIRECTV Enterprises, Inc.
Ohio DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas of
Ohio and related assets.
Old Credit Facility The Company's $10.0 million revolving credit facility that was retired
concurrently with the entering into of the New Credit Facility.
Parent Pegasus Communications Holdings, Inc., the direct parent of Pegasus.
Parent Non-Voting Stock The Class B Non-Voting Stock of the Parent.
Pegasus Pegasus Communications Corporation, the issuer of the Class A Common Stock
offered hereby.
PM&C Pegasus Media & Communications, Inc., which is currently a direct subsidiary
of the Parent and will become a direct subsidiary of Pegasus upon completion
of this Offering.
15
<PAGE>
PM&C Class A Shares The Class A shares of PM&C held by the Parent, which will be transferred
to Pegasus upon completion of this Offering.
PM&C Class B Shares The Class B shares of PM&C held by purchasers in the Notes offering.
Portland Acquisition The acquisition of WPXT.
Portland LMA The LMA relating to WWLA.
Registered Exchange Offer Pegasus' registered exchange offer to holders of PM&C Class B Shares for
191,792 shares in the aggregate of Class A Common Stock.
Tallahassee Acquisition The acquisition of the principal tangible assets of WTLH.
Towers Purchase The acquisition of certain tower properties from Towers, an affiliate of
the Company.
Towers Pegasus Towers, L.P.
WDBD Station WDBD-TV in the Jackson, Mississippi DMA.
WDSI Station WDSI-TV in the Chattanooga, Tennessee DMA.
WILF Station WILF-TV in the Northeastern Pennsylvania DMA.
WOLF Station WOLF-TV in the Northeastern Pennsylvania DMA.
WPXT Station WPXT-TV in the Portland, Maine DMA.
WTLH Station WTLH-TV in the Tallahassee, Florida DMA.
WTLH Warrants Warrants to purchase $1.0 million of the Class A Common Stock at an exercise
price equal to the price to the public in this Offering, which were issued
in connection with the Tallahassee Acquisition.
WWLA Station WWLA-TV to be constructed to serve the Portland, Maine DMA.
WWLF Station WWLF-TV in the Northeastern Pennsylvania DMA.
</TABLE>
16
<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 with the exception of the affiliation agreement
with respect to WTLH, which expires on December 31, 2000. Thereafter, the
affiliation agreements may be extended for additional two-year terms by Fox
in its sole discretion. Fox has, in the past, changed affiliates in certain
markets where it acquired a significant ownership position in a station in
such market. In the event that Fox, directly or indirectly, acquires any
significant ownership and/or controlling interest in any TV station licensed
to any community within the Company's TV markets, Fox has the right to
terminate the affiliation agreement of the Company's TV station serving that
market. As a consequence, there is no assurance that Fox could not enter into
such an arrangement in one of the Company's markets. There can also be no
assurance that Fox programming will continue to be as successful as in the
past or that Fox will continue to provide programming to its affiliates on
the same basis as it currently does, all of which matters are beyond the
Company's control. The non-renewal or termination of the Fox affiliation of
one or more of the Company's stations could have a material adverse effect on
the Company's operations. See "Business -- TV" and "Business -- Licenses,
LMAs, DBS Agreements and Cable Franchises."
RELIANCE ON DBS TECHNOLOGY AND DIRECTV
The Company's DBS business is a new business with unproven potential.
There are numerous risks associated with DBS technology, in general, and
DIRECTV, in particular. DBS technology is highly complex and requires the
manufacture and integration of diverse and advanced components that may not
function as expected. Although the DIRECTV satellites are estimated to have
orbital lives at least through the year 2007, there can be no assurance as to
the longevity of the satellites or that loss, damage or changes in the
satellites as a result of acts of war, anti-satellite devices, electrostatic
storms or collisions with space debris will not occur and have a material
adverse effect on DIRECTV and the Company's DBS business. Furthermore, the
digital compression technology used by DBS providers is not standardized and
is undergoing rapid change. Since the Company serves as an intermediary for
DIRECTV, the Company would be adversely affected by material adverse changes
in DIRECTV's financial condition, programming, technological capabilities or
services, and such effect could be material to the Company's prospects. There
can also be no assurance that there will be sufficient demand for DIRECTV
services since such demand depends upon consumer acceptance of DBS, the
availability of equipment and related components required to access DIRECTV
services and the competitive pricing of such equipment. See "Business -- DBS"
and "Business -- Competition."
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominately rural
areas of the United States. Pursuant to agreements between Hughes and the
NRTC (the "NRTC Agreement") and between the NRTC and participating NRTC
members (the "Member Agreement" and, together with the NRTC Agreement, the
"DBS Agreements"), participating NRTC members acquired the exclusive right to
provide DIRECTV programming services to residential and commercial
subscribers in certain service areas. The DBS Agreements authorize the NRTC
and participating NRTC members to provide all commercial services offered by
Hughes that are transmitted from the frequencies that the FCC has authorized
for DIRECTV's use at its present orbital location for a term running through
the life of Hughes' current satellites. The NRTC has advised the Company
17
<PAGE>
that the NRTC Agreement also provides the NRTC a right of first refusal to
acquire comparable rights in the event that Hughes elects to launch successor
satellites upon the removal of the present satellites from active service.
The financial terms of any such purchase are likely to be the subject of
negotiations. Any exercise of such right is uncertain and will depend, in
part, on DIRECTV's costs of constructing, launching and placing in service
such successor satellites. The Company is, therefore, unable to predict
whether substantial additional expenditures by the NRTC and its members,
including the Company, will be required in connection with the exercise of
such right of first refusal.
SUBSTANTIAL INDEBTEDNESS AND LEVERAGE
The Company is highly leveraged. As of June 30, 1996, on a pro forma basis
after giving effect to this Offering and the use of the proceeds therefrom and
the Transactions, the Company would have had consolidated indebtedness of $114.7
million, total stockholders' equity of $48.9 million and, assuming certain
conditions are met, $21.4 million available under the $50.0 million New Credit
Facility. For the year ended December 31, 1995 and the six months ended June 30,
1996, on a pro forma basis after giving effect to this Offering and the use of
the proceeds therefrom and the Transactions, the Company's earnings would have
been inadequate to cover its fixed charges by $14.1 million and approximately
$6.8 million, respectively. The ability of the Company to repay its existing
indebtedness will depend upon future operating performance, which is subject to
the success of the Company's business strategy, prevailing economic conditions,
regulatory matters, levels of interest rates and financial, business and other
factors, many of which are beyond the Company's control. The current and future
debt service obligations of the Company could have important consequences,
including the following: (i) the ability of the Company to obtain additional
financing for future working capital needs or financing for possible future
acquisitions or other purposes may be limited, (ii) a substantial portion of the
Company's cash flow from operations will be dedicated to the payment of the
principal and interest on its indebtedness, thereby reducing funds available for
other purposes, and (iii) the Company will be more vulnerable to adverse
economic conditions than some of its competitors and, thus, may be limited in
its ability to withstand competitive pressures. The agreements with respect to
the Company's indebtedness contain numerous financial and operating covenants,
including, among others, restrictions on the ability of the Company to incur
additional indebtedness, to create liens or other encumbrances, to pay dividends
and to make certain other payments and investments, and to sell or otherwise
dispose of assets or merge or consolidate with another entity. These covenants
may have the effect of impeding the Company's growth opportunities, which may
affect its cash flow and the value of the Class A Common Stock. There can be no
assurance that future cash flows of the Company will be sufficient to meet all
of the Company's obligations and commitments. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Liquidity and
Capital Resources" and "Description of Indebtedness."
RISKS ATTENDANT TO ACQUISITION STRATEGY
The Company plans to pursue additional acquisitions. Since January 1,
1996, the Company has acquired or entered into agreements to acquire a number
of properties, including the Ohio DBS Acquisition. The Ohio DBS Acquisition
is subject to a number of conditions, certain of which are beyond the
Company's control, and there can be no assurance that this acquisition will
be completed on the terms described herein and as reflected in the pro forma
financial statements included herein or at all. Furthermore, there can be no
assurance that the anticipated benefits of any of the acquisitions described
herein or future acquisitions will be realized. The process of integrating
acquired operations into the Company's operations may result in unforeseen
operating difficulties, could absorb significant management attention and may
require significant financial resources that would otherwise be available for
the ongoing development or expansion of the Company's existing operations.
The Company's acquisition strategy may be unsuccessful since the Company may
be unable to identify acquisitions in the future or, if identified, to take
advantage of them. The successful completion of an acquisition may depend on
consents from third parties, including federal, state and local regulatory
authorities or private parties such as Fox, the NRTC and Hughes, all of whose
consents are beyond the Company's control. Possible future acquisitions by
the Company could result in dilutive issuances of equity securities, the
incurrence of additional debt and contingent liabilities, and additional
amortization expenses related to goodwill and other intangible assets, which
could materially adversely affect the Company's financial condition and
operating results.
18
<PAGE>
INABILITY TO MANAGE GROWTH EFFECTIVELY
The Company has experienced a period of rapid growth primarily as a result
of its acquisition strategy. In order to achieve its business objectives, the
Company expects to continue to expand largely through acquisitions, which
could place a significant strain on its management, operating procedures,
financial resources, employees and other resources. The Company's ability to
manage its growth may require it to continue to improve its operational,
financial and management information systems, and to motivate and effectively
manage its employees. If the Company's management is unable to manage growth
effectively, the Company's results of operations could be materially
adversely affected.
DEPENDENCE ON KEY PERSONNEL
The Company's future success may depend to a significant extent upon the
performance of a number of the Company's key personnel, including Marshall W.
Pagon, Pegasus' President and Chief Executive Officer. See "Management and
Certain Transactions." The loss of Mr. Pagon or other key management
personnel or the failure to recruit and retain personnel could have a
material adverse effect on the Company's business. The Company does not
maintain "key-man" insurance and has not entered into employment agreements
with respect to any such individuals.
COMPETITION IN THE TV, DBS AND CABLE BUSINESSES
Each of the markets in which the Company operates is highly competitive.
Many of the Company's competitors have substantially greater resources than
the Company and may be able to compete more effectively than the Company in
the Company's markets. In addition, the markets in which the Company operates
are in a constant state of change due to technological, economic and
regulatory developments. The Company is unable to predict what forms of
competition will develop in the future, the extent of such competition or its
possible effects on the Company's businesses. The Company's TV stations
compete for audience share, programming and advertising revenue with other
television stations in their respective markets, and compete for advertising
revenue with other advertising media, such as newspapers, radio, magazines,
outdoor advertising, transit advertising, yellow page directories, direct
mail and local cable systems. The Company's DBS business faces competition
from other current or potential multichannel programming distributors,
including other DBS operators, other DTH providers, cable operators, wireless
cable operators and local exchange and long-distance telephone companies,
which may be able to offer more competitive packages or pricing than the
Company or DIRECTV. The Company's Cable systems face competition from
television stations, SMATV systems, wireless cable systems, direct to home
("DTH") and DBS systems. See "Business -- Competition."
GOVERNMENT LEGISLATION, REGULATION, LICENSES AND FRANCHISES
The Company's businesses are subject to extensive and changing laws and
regulations, including those of the FCC and local regulatory bodies. Many of
the Company's operations are subject to licensing and franchising
requirements of federal, state and local law and are, therefore, subject to
the risk that material licenses and franchises will not be obtained or
renewed in the future. The United States Congress and the FCC have in the
past, and may in the future, adopt new laws, regulations and policies
regarding a wide variety of matters, including rulemakings arising as a
result of the Telecommunications Act of 1996 (the "1996 Act"), that could,
directly or indirectly, affect the operations of the Company's businesses.
The business prospects of the Company could be materially adversely affected
by the application of current FCC rules or policies in a manner leading to
the denial of pending applications by the Company, by the adoption of new
laws, policies and regulations, or changes in existing laws, policies and
regulations, including changes to their interpretations or applications, that
modify the present regulatory environment or by the failure of certain rules
or policies to change in the manner anticipated by the Company. See "Business
- -- Licenses, LMAs, DBS Agreements and Cable Franchises" and "Business --
Legislation and Regulation."
To the extent that the Company expects to program stations through the use
of LMAs, there can be no assurance that the licensees of such stations will
not unreasonably exercise rights to preempt the programming of the Company,
or that the licensees of such stations will continue to maintain the
transmission facilities of
19
<PAGE>
the stations in a manner sufficient to broadcast a high quality signal over
the station. As the licensees must also maintain all of the qualifications
necessary to be a licensee of the FCC, and as the principals of the licensees
are not under the control of the Company, there can be no assurance that
these licenses will be maintained by the entities which currently hold them.
In the 1996 Act, the continued performance of then existing LMAs was
generally grandfathered. Currently, LMAs are not considered attributable
interests under the FCC's multiple ownership rules. However, the FCC is
currently considering proposals which would make LMAs attributable, as they
generally are in the radio broadcasting industry. If the FCC were to adopt a
rulemaking that makes such interests attributable, without modifying its
current prohibitions against the ownership of more than one television
station in a market, the Company could be prohibited from entering into such
arrangements with other stations in markets in which it owns television
stations.
CONCENTRATION OF SHARE OWNERSHIP AND VOTING CONTROL BY MARSHALL W. PAGON
The Company's capital stock is divided into two classes with different voting
rights. Holders of Class A Common Stock are entitled to one vote per share on
all matters submitted to a vote of stockholders generally and holders of Class B
Common Stock are entitled to ten votes per share. Both classes vote together as
a single class on all matters except in connection with certain amendments to
the Company's Amended and Restated Certificate of Incorporation, the
authorization or issuance of additional shares of Class B Common Stock, and
except where class voting is required under the Delaware General Corporation
Law. See "Description of Capital Stock." Upon completion of this Offering, as a
result of his beneficial ownership of all the outstanding voting stock of the
sole general partner of a limited partnership that indirectly controls the
Parent and of his control of the only other holder of Class B Common Stock,
Marshall W. Pagon, the President and Chief Executive Officer of Pegasus, will
beneficially own all of the Class B Common Stock of Pegasus. After giving effect
to the greater voting rights attached to the Class B Common Stock, Mr. Pagon
will be able to effectively vote 90.8% of the combined voting power of the
outstanding Common Stock and will have sufficient power (without the consent of
the holders of the Class A Common Stock) to elect the entire Board of Directors
of the Company and, in general, to determine the outcome of matters submitted to
the stockholders for approval. See "Ownership and Control" and "Description of
Capital Stock -- Common Stock." Purchasers in this Offering will be acquiring
shares of Class A Common Stock, shares of Class A Common Stock representing
32.4% of all of the outstanding Common Stock but possessing only 5.9% of the
total voting power of the Common Stock to be outstanding immediately following
this Offering, after giving effect to the shares to be issued in the
Transactions.
ABSENCE OF PRIOR PUBLIC MARKET AND VOLATILITY OF STOCK PRICE
Prior to this Offering, there has been no public market for the Class A
Common Stock, and there can be no assurance that an active trading market
will develop or be sustained in the future. The initial public offering price
of the Class A Common Stock has been determined solely by negotiations
between the Company and the representatives of the Underwriters and does not
necessarily reflect the price at which the Class A Common Stock may be sold
in the public market after this Offering. See "Underwriting" for a discussion
of the factors considered in determining the initial public offering price.
There may be significant volatility in the market price of the Class A Common
Stock due to factors that may or may not relate to the Company's performance.
The market price of the Class A Common Stock may be significantly affected by
various factors such as economic forecasts, financial market conditions,
reorganizations and acquisitions and quarterly variations in the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Upon completion of this Offering and after giving effect to the issuance of
shares contemplated by the Transactions, the Company will have outstanding
4,663,229 shares of Class A Common Stock and 4,581,900 shares of Class B Common
Stock, all of which shares of Class B Common Stock are convertible into shares
of Class A
20
<PAGE>
Common Stock on a share for share basis. Of these shares, the 3,000,000
shares of Class A Common Stock sold in this Offering will be tradeable
without restriction unless they are purchased by affiliates of the Company.
All shares to be received pursuant to the Registered Exchange Offer will also
be tradeable without restriction, except that the terms of the Registered
Exchange Offer are expected to require that each exchanging holder agrees not
to sell, otherwise dispose of or pledge any shares of Class A Common Stock
received in the Registered Exchange Offer for a period of at least 180 days
after the date of this Prospectus without the prior written consent of Lehman
Brothers Inc. The approximately 1,471,437 remaining shares of Class A Common
Stock and all of the 4,581,900 shares of Class B Common Stock will be
"restricted securities" under the Securities Act of 1933, as amended (the
"Securities Act"). These "restricted securities" and any shares purchased by
affiliates of the Company in this Offering may be sold only if they are
registered under the Securities Act or pursuant to an applicable exemption
from the registration requirements of the Securities Act, including Rule 144
and Rule 701 thereunder. The holders of 4,944,564 of the 6,053,337 shares
constituting restricted securities have agreed not to sell, otherwise dispose
of or pledge any shares of the Company's Common Stock or securities
convertible into or exercisable or exchangeable for such Common Stock for 180
days after the date of this Prospectus without the prior written consent of
Lehman Brothers Inc. No prediction can be made as to the effect, if any, that
market sales of such shares or the availability of such shares for future
sale will have on the market price of shares of Class A Common Stock
prevailing from time to time. Up to an additional 720,000 and 3,385 shares of
Class A Common Stock are reserved for issuance under the Incentive Program
and for outstanding stock options, respectively. In connection with the
Michigan/Texas DBS Acquisition and the acquistion of the Portland LMA,
holders of the Class A Common Stock have been granted certain piggyback
registration rights in connection with the issuance of their shares. See
"Shares Eligible for Future Sale."
POTENTIAL EFFECT ON COMPANY OF MINORITY OWNERSHIP OF PM&C CAPITAL STOCK
Upon completion of this Offering, PM&C will be the principal subsidiary of
Pegasus with two classes of capital stock outstanding: the PM&C Class A Shares
and the PM&C Class B Shares. Holders of the PM&C Class A Shares are entitled to
ten votes per share, and holders of the PM&C Class B Shares are entitled to one
vote per share. The Parent owns all of the PM&C Class A Shares, constituting 95%
of the capital stock of PM&C and representing 99.5% of the combined voting power
of PM&C, and will transfer these shares to the Company upon the closing of this
Offering. Pegasus intends to file a registration statement with the Securities
and Exchange Commission to commence the Registered Exchange Offer of the PM&C
Class B Shares for shares of Class A Common Stock. Unless all of the holders of
the PM&C Class B Shares accept the Registered Exchange Offer, PM&C will not be a
wholly owned subsidiary of the Company. The pro forma financial data included in
this Prospectus assume that the Registered Exchange Offer has been consummated
and that all holders of the PM&C Class B Shares accepted the offer. If all
holders do not accept this offer, the actual pro forma data would differ from
that set forth herein. In addition, holders of the PM&C Class B Shares have
certain preemptive, tag-along and registration rights which may restrict the
Company from engaging in certain transactions.
DIVIDEND POLICY; RESTRICTIONS ON PAYMENT OF DIVIDENDS
The Company does not anticipate paying cash dividends on its Common Stock
in the foreseeable future. Moreover, Pegasus is a holding company, and its
ability to pay dividends is dependent upon the receipt of dividends from its
direct and indirect subsidiaries. The Company is a party to the New Credit
Facility and the Indenture that restrict its ability to pay dividends. See
"Dividend Policy" and "Description of Indebtedness."
POTENTIAL ANTI-TAKEOVER PROVISIONS
Pegasus' Amended and Restated Certificate of Incorporation contains, among
other things, provisions authorizing the issuance of "blank check" preferred
stock and two classes of Common Stock with different voting rights. See
"Description of Capital Stock." In addition, the Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions could delay, deter or prevent a merger, consolidation, tender
offer, or other business combination or change of control involving the
Company that some or a majority of the Company's stockholders might consider
to be in their best interests,
21
<PAGE>
including tender offers or attempted takeovers that might otherwise result in
such stockholders receiving a premium over the market price for the Class A
Common Stock. In the event of a Change of Control (as defined in the
Indenture), the Company will be required, subject to certain conditions, to
offer to purchase all outstanding Notes at a price equal to 101% of the
principal amount thereof, plus accrued interest to the date of purchase. In
addition, upon such a Change of Control, the Company will be obligated to
prepay all amounts owing under the New Credit Facility and the commitments
thereunder will be reduced to zero. The requirement that the Company offer to
repurchase the Notes and the obligation to prepay the amounts owing under the
New Credit Facility and the reduction of the commitments thereunder to zero
in the event of a Change of Control may have the effect of deterring a third
party from acquiring the Company in a transaction that would constitute a
Change of Control. See "Description of Indebtedness."
DILUTION IN INVESTMENT TO PURCHASERS OF THE CLASS A COMMON STOCK
Purchasers of the Class A Common Stock offered hereby will realize an
immediate and substantial dilution of approximately $23.02 in net tangible book
value per share of Common Stock of their investment from the initial public
offering price after giving effect to the Transactions. See "Dilution."
22
<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, the Portland LMA and the Cable Acquisition. The
assets relating to these transactions were subsequently contributed to the
Company. Upon the consummation of this Offering, the Company will hold all of
the assets acquired by the Parent in the Michigan/Texas DBS Acquisition and
will have all rights of acquisition with respect to the Ohio DBS Acquisition.
Set forth below is certain information relating to these acquisitions.
COMPLETED ACQUISITIONS
Television Station WPXT. The Company acquired the principal tangible
assets of WPXT, the Fox-affiliated television station serving the Portland,
Maine DMA, and entered into a noncompetition agreement with WPXT's prior
owner for consideration totalling $12.4 million in cash and $400,000 of
assumed liabilities. Upon completion of this Offering and subject to any
necessary FCC approvals, the Parent will contribute WPXT's FCC license and
Fox Affiliation Agreement to the Company in exchange for $1.9 million in cash
and $150,000 of Class A Common Stock (valued at the price to the public in
this Offering) to be paid to WPXT's prior owner and $1.0 million of Class B
Common Stock (valued at the price to the public in this Offering) resulting
in an aggregate consideration of $15.8 million for the Portland Acquisition.
Television Station WTLH. In March 1996, the Company acquired substantially
all of the tangible assets of WTLH, the Fox-affiliated TV station serving the
Tallahassee, Florida DMA, for $5.0 million in cash and WTLH Warrants to
purchase $1.0 million of Class A Common Stock (valued at the price to the
public in this Offering). In August 1996, the Company acquired WTLH's FCC
licenses in exchange for notes of a subsidiary of the Company aggregating
$3.1 million, payable on March 1, 1998, with interest at 10% payable March 1,
1997 and 1998.
Television Station WWLA. In May 1996, the Parent acquired the Portland
LMA. As a condition of the completion of this Offering, the Parent will
contribute the Portland LMA to Pegasus in exchange for $1.0 million of Class
A Common Stock (valued at the price to the public in this Offering), which
the Parent will transfer to the seller. Under the Portland LMA, the Company
will lease facilities and provide programming to WWLA, retain all revenues
generated from advertising sales, and make payments of $52,000 per year to
the FCC license holder in addition to reimbursement of certain expenses.
Construction of WWLA is expected to be completed in 1997. Both WWLA's and
WPXT's offices, studio and transmission facilities will share the same
location.
23
<PAGE>
Cable Acquisition. In August 1996, the Company acquired substantially all
of the assets of the San German Cable System, which serves ten communities
contiguous to the Company's Mayaguez Cable system, for approximately $26.4
million in cash and assumed liabilities. The Company plans to interconnect
the Mayaguez and San German Cable systems and operate them from a single
headend.
CONCURRENT ACQUISITION
Michigan/Texas DBS Acquisition. In May 1996, the Parent entered into an
agreement with Harron Communications Corp. ("Harron"), under which the Company
will acquire rights as exclusive provider of DIRECTV services in certain rural
areas of Texas and Michigan and related assets in exchange for $11.9 million of
Class A Common Stock (valued at the price to the public in this Offering) and
approximately $17.9 million in cash. After giving effect to this Offering and
the Transactions, Harron would own approximately 852,110 shares of the Class A
Common Stock and would be deemed to be the beneficial owner of approximately
9.2% of the outstanding Common Stock. The Michigan/Texas DBS Acquisition is
subject to conditions typical in acquisitions of this nature, certain of which
conditions may be beyond the Company's control. One of the conditions precedent
for the completion of this Offering is the consummation of the Michigan/Texas
DBS Acquisition. In connection with the Michigan/Texas DBS Acquisition, the
Parent agreed to nominate a designee of Harron as a member of Pegasus' Board of
Directors. See "Risk Factors -- Risks Attendant to Acquisition Strategy."
PENDING ACQUISITION
Ohio DBS Acquisition. In July 1996, the Company entered into a letter of
intent with respect to the acquisition of DIRECTV distribution rights for
portions of Ohio and related assets. The letter of intent contemplates a
purchase price of approximately $12.0 million in cash. The Ohio DBS
Acquisition is subject to the negotiation of a definitive agreement and,
among other conditions, the prior approval of Hughes. In addition to these
conditions, the Ohio DBS Acquisition is also expected to be subject to
conditions typical in acquisitions of this nature, certain of which
conditions, like the Hughes consent, may be beyond the Company's control. The
letter of intent terminates on October 20, 1996 if a definitive agreement is
not entered into by that date and provides for a closing to occur no later
than November 15, 1996. There can be no assurance that the Ohio DBS
Acquisition will be consummated on the terms described herein or at all. The
Ohio DBS Acquisition is expected to be financed by proceeds from this
Offering or borrowings under the New Credit Facility. See "Risk Factors --
Risks Attendant to Acquisition Strategy."
PENDING SALE
New Hampshire Cable Sale. In July 1996, the Company entered into a letter
of intent with respect to the sale of its New Hampshire Cable systems. The
letter of intent contemplates a sale price of approximately $7.3 million in
cash. After payment of a sales commission, the net proceeds are expected to
be approximately $7.1 million. The New Hampshire Cable Sale is subject to the
negotiation of a definitive agreement, the prior approval of the local
franchising authorities and to other conditions typical in transactions of
this nature, certain of which are beyond the Company's control. The letter of
intent provides for execution of a definitive agreement by no later than
October 15, 1996. It is anticipated that the New Hampshire Cable Sale will
occur by December 31, 1996. There can be no assurance that the New Hampshire
Cable Sale will be consummated on the terms described herein or at all.
CORPORATE REORGANIZATION AND OTHER TRANSACTIONS
Set forth below is a description of certain of the Transactions that have
occurred or are scheduled to occur concurrently with or after the
consummation of this Offering. Completion of this Offering is conditioned on
all of the Transactions described below except for the Registered Exchange
Offer and the Management Share Exchange.
PARENT'S CONTRIBUTION OF PM&C CLASS A SHARES
Pegasus is a newly-formed subsidiary of the Parent and has no material
assets or operating history. The Parent's principal subsidiary is PM&C, which
now conducts through subsidiaries the Company's current
24
<PAGE>
operations as described herein. Simultaneously with, and as a condition of,
the closing of this Offering, the Parent will contribute to Pegasus all of
its stock in PM&C, which consists of 161,500 PM&C Class A Shares in exchange
for 3,380,435 shares of Class B Common Stock.
MANAGEMENT AGREEMENT ACQUISITION
PM&C and its operating subsidiaries are party to the Management Agreement
with the Management Company, under which the Management Company provides
certain management and accounting services and PM&C and its subsidiaries are
obligated to pay the Management Company 5% of their net revenues and
reimburse the Management Company for its accounting department costs. The
Management Company is an affiliate of PM&C and Pegasus and is controlled and
predominantly owned by Marshall W. Pagon, the President and Chief Executive
Officer of PM&C and Pegasus.
Concurrently with the completion of this Offering, the Company will acquire
the Management Agreement together with certain net assets, including
approximately $1.4 million of accrued management fees, from the Management
Company in exchange for the Company's issuance of 1,400,000 shares of Class B
Common Stock and approximately $1.4 million in cash. Of these shares, 182,652
will be exchanged for an equal number of shares of Class A Common Stock and
transferred to certain members of management who are participants in the
Management Share Exchange. The fair market value of the Management Agreement has
been determined by an independent appraiser. At the time that the Management
Agreement is transferred, the executive officers and other employees of the
Management Company will become employees of the Company. See "Management and
Certain Transactions -- Management Agreement."
REGISTERED EXCHANGE OFFER
PM&C has outstanding 8,500 PM&C Class B Shares that were issued to purchasers
of the Notes in PM&C's Notes offering. After the date of this Prospectus,
Pegasus intends to make the Registered Exchange Offer to the holders of the PM&C
Class B Shares to exchange such shares for 191,792 shares in the aggregate of
Class A Common Stock.
The exchange ratio of Class A Common Stock to be issued in the Registered
Exchange Offer for PM&C Class B Shares has been determined such that immediately
after giving effect to the Parent's contribution of the PM&C Class A Shares to
Pegasus, the Management Share Exchange, 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, together with certain members of the
Company's management participating in the Management Share Exchange, and holders
of the PM&C Class B Shares, respectively, will hold 95% and 5% of the equity of
Pegasus and 99.5% and 0.5% of the voting rights of Pegasus' Common Stock, which
are the same proportions in which they now own PM&C.
Holders of PM&C Class B Shares who accept the Registered Exchange Offer
will receive shares of Class A Common Stock that have been registered under
the Securities Act and will be freely tradeable, except that the terms of the
Registered Exchange Offer are expected to require that each exchanging holder
agree not to sell, otherwise dispose of or pledge any shares of Class A
Common Stock received in the Registered Exchange Offer for a period of at
least 180 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc. Holders who do not accept the Registered
Exchange Offer will retain their PM&C Class B Shares, for which there will be
no trading market. For this reason, the Company expects that all holders of
PM&C Class B Shares will accept the Registered Exchange Offer. However, there
can be no assurance that this will be the case, and the completion of this
Offering is not conditioned on any level of acceptances of the Registered
Exchange Offer. Accordingly, it is possible that PM&C will have up to a 5%
minority equity interest outstanding after completion of this Offering, which
minority interest is not reflected in the pro forma financial statements
included in this Prospectus.
MANAGEMENT SHARE EXCHANGE
Certain members of the Company's management hold 5,000 shares of Parent
Non-Voting Stock. It is expected that all shares of the Parent Non-Voting
Stock will be exchanged for 263,606 shares of Class A Common Stock of Pegasus
pursuant to the Management Share Exchange and that the Parent Non-Voting
Stock will be distributed to the Parent.
25
<PAGE>
TOWERS PURCHASE
Concurrently with this Offering, the Company will purchase the broadcast
tower assets of Towers, an affiliate of the Company, for cash consideration
of approximately $1.4 million. These assets consist of ownership or leasehold
interests in three tower properties. Towers leases space on all of its towers
to the Company and also leases space to unaffiliated companies. The purchase
price has been determined by an independent appraisal.
NEW CREDIT FACILITY
In August 1996, the Company entered into the New Credit Facility. The New
Credit Facility provides for up to $50.0 million in revolving credit
borrowings. See "Description of Indebtedness -- New Credit Facility."
26
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from its sale of 3,000,000 shares of Class A
Common Stock in this Offering after deducting underwriting discounts and
commissions and estimated fees and expenses of this Offering, are estimated to
be approximately $38.1 million (approximately $44.0 million if the Underwriters'
over-allotment option is exercised in full). The Company intends to apply the
total net proceeds from this Offering as follows: (i) $17.9 million for the
payment of the cash portion of the purchase price of the Michigan/Texas DBS
Acquisition, (ii) $12.0 million for the Ohio DBS Acquisition, (iii) $3.0 million
to repay indebtedness under the New Credit Facility, (iv) $1.9 million to make a
payment on account of the Portland Acquisition, (v) $1.4 million for the payment
of the cash portion of the purchase price of the Management Agreement
Acquisition, and (vi) $1.4 million for the Towers Purchase. See "Management and
Certain Transactions." The remaining net proceeds, if any, together with
available borrowings under the New Credit Facility will be used for working
capital and general corporate purposes; however, they may be applied to future
acquisitions. Pending application of the net proceeds as set forth above, the
Company intends to temporarily invest the net proceeds in short-term, investment
grade securities. If the Ohio DBS Acquisition is not consummated, the Company
intends to use the approximately $12.0 million in net proceeds designated for
this acquisition to fund future acquisitions, for working capital and general
corporate purposes or to repay additional indebtedness under the New Credit
Facility.
On August 29, 1996, all outstanding indebtedness under the Old Credit
Facility, which amounted to $8.8 million, was repaid from borrowings under
the New Credit Facility. In addition to the $8.8 million drawn under the New
Credit Facility to retire all outstanding indebtedness under the Old Credit
Facility, $22.8 million was also drawn on August 29, 1996 to fund the Cable
Acquisition. Borrowings under the New Credit Facility bear interest, payable
monthly, at LIBOR or the prime rate (as selected by the Company) plus spreads
that vary with PM&C's ratio of total debt to adjusted operating cash flow (as
defined therein). As of September 30, 1996, the New Credit Facility bore
interest at a blended rate of 9.375%. Borrowings under the New Credit
Facility mature on June 30, 2003, when all outstanding principal and accrued
interest is due and payable.
DIVIDEND POLICY
Pegasus is a newly formed corporation and has not paid any cash dividends
on its Common Stock. The Company currently intends to retain future earnings
for use in its business and, therefore, does not anticipate paying any cash
dividends in the foreseeable future. The payment of future dividends, if any,
will depend, among other things, on the Company's results of operations and
financial condition, any restriction in the Company's loan agreements and on
such other factors as the Company's Board of Directors may, in its
discretion, consider relevant. Since Pegasus is a holding company, its
ability to pay dividends is dependent upon the receipt of dividends from its
direct and indirect subsidiaries. PM&C, which upon consummation of this
Offering will be a direct subsidiary of Pegasus, is a party to the New Credit
Facility and the Indenture that restrict its ability to pay dividends. See
"Description of Indebtedness" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
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<PAGE>
DILUTION
The net tangible book deficit of the Company at June 30, 1996 was $68.2
million, or $20.18 per share of Common Stock. The net tangible book deficit per
share of Common Stock represents the amount of the Company's total tangible
assets less its total liabilities, divided by the number of shares of Common
Stock outstanding. After giving effect to the Transactions, the pro forma net
tangible book deficit of the Company as of June 30, 1996 would have been $121.5
million, or $19.46 per share of Common Stock. After giving effect to the sale of
the 3,000,000 shares of Class A Common Stock offered by the Company in this
Offering and the issuance of Common Stock pursuant to the Transactions, the pro
forma net tangible book deficit of the Company as of June 30, 1996 would have
been $83.4 million, or $9.02 per share of Common Stock. This represents an
immediate increase in net tangible book value of $11.16 per share of Common
Stock to existing stockholders and an immediate dilution in net tangible book
value of $23.02 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>
Initial public offering price per share .............................. $ 14.00
Net tangible book deficit per share as of June 30, 1996(1) ....... $(20.18)
Increase in net tangible book value per share attributable to new
stockholders purchasing stock ("Purchasers") in this Offering .. $ 15.46
----------
Pro forma net tangible book value per share after giving effect to
this Offering .................................................. $ (4.72)
Decrease in net tangible book value per share after giving effect
to the Transactions ............................................ $ (4.30)
----------
Pro forma net tangible book deficit after giving effect to this
Offering and the Transactions ....................................... $ (9.02)
----------
Dilution in net tangible book value per share to the Purchasers in this
Offering after giving effect to the Transactions .................... $(23.02)
==========
</TABLE>
- ------
(1) Assumes initial exchange of 3,380,435 shares of Class B Common Stock for
161,500 PM&C Class A Shares.
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<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June 30,
1996 and as adjusted to give effect to (i) the sale and issuance by the Company
of 3,000,000 shares of Class A Common Stock and (ii) the issuance of 1,663,229
shares of Class A Common Stock and 4,581,900 shares of Class B Common Stock
pursuant to the Transactions (after giving effect to the 269,964 shares of Class
B Common Stock transferred as Class A Common Stock to certain members of
management who are participating in the Management Share Exchange). See "Use of
Proceeds," "Selected Historical and Pro Forma Combined Financial Data," and "Pro
Forma Combined Financial Data."
<TABLE>
<CAPTION>
As of June 30, 1996
---------------------------
Pro Forma
Actual As Adjusted
---------- -------------
(Dollars in thousands)
<S> <C> <C>
Cash, cash equivalents and restricted cash ................................... $ 8,068 $ 13,457
========== =============
Total debt:
New Credit Facility(1)(2) .................................................. $ -- $ 28,600
Old Credit Facility ........................................................ 8,800 --
12 1/2 % Series B Senior Subordinated Notes due 2005(3) .................... 81,391 81,391
Capital leases and other ................................................... 4,672 4,672
---------- -------------
Total debt ................................................................. 94,863 114,663
---------- -------------
Total stockholders' equity:
Preferred Stock, $0.01 par value, 5,000,000 shares authorized; no shares
issued and outstanding .................................................. -- --
Class A Common Stock, $0.01 par value, 30,000,000 shares authorized;
4,663,229 shares issued and outstanding, as adjusted .................... 2 47
Class B Common Stock, $0.01 par value, 15,000,000 shares authorized;
4,581,900 shares issued and outstanding, as adjusted .................... -- 46
Additional paid-in capital ................................................. 7,881 57,136
Retained earnings (deficit) ................................................ (474) 3,586
Partners' deficit .......................................................... (11,892) (11,892)
---------- -------------
Total stockholders' equity (deficit) .................................... (4,483) 48,923
---------- -------------
Total capitalization .................................................... $ 90,380 $163,586
========== =============
</TABLE>
- ------
(1) For a description of the New Credit Facility, see "Description of
Indebtedness -- New Credit Facility."
(2) As of September 30, 1996, $31.6 million had been drawn under the New Credit
Facility in connection with the retirement of the Old Credit Facility and
the consummation of the Cable Acquisition.
(3) For a description of the principal terms of the Notes, see "Description
of Indebtedness -- Notes."
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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 six months ended June 30, 1995 and 1996 have been derived from unaudited
combined financial information, which in the opinion of the Company's
management, contain all adjustments necessary for a fair presentation of this
information. The selected historical combined financial data for the six
months ended June 30, 1996 should not be regarded as indicative of the
results that may be expected for the entire year. The information should be
read in conjunction with the Combined Financial Statements and the notes
thereto, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," and "Pro Forma Combined Financial Data," which are
included elsewhere herein.
30
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1991(1) 1992 1993 (1) 1994 1995
---------- ---------- ---------- ---------- ---------
(Dollars in thousands, except earnings per share)
<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 ..................... $(1.59)
Extraordinary item .......... 1.99
---------
Net income (loss) per share . $0.40
=========
Weighted average shares
outstanding (000's) ...... 5,143
=========
Other Data:
Location Cash Flow (5) ...... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007
EBITDA (5) .................. 801 2,131 5,795 8,100 9,115
Capital expenditures ........ 213 681 885 1,264 2,640
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<PAGE>
<TABLE>
<CAPTION>
Six Months
Ended June 30,
--------------------------------------
Pro Pro
Forma Forma
1995 (2) 1995 1996 1996 (2)
----------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ....................... 27,305 $8,861 $11,932 $12,600
DBS ...................... 4,924 528 1,568 4,328
Cable .................... 14,919 5,177 5,626 8,032
Other .................... 100 36 56 56
----------- ---------- ---------- ----------
Total net revenues ..... 47,248 14,602 19,182 25,016
----------- ---------- ---------- ----------
Location operating expenses:
TV ....................... 19,210 6,714 8,271 8,765
DBS ...................... 5,138 622 1,261 3,604
Cable .................... 8,176 2,912 3,087 4,298
Other .................... 38 14 9 9
Incentive compensation (3) .. 511 356 430 421
Corporate expenses .......... 1,364 613 709 709
Depreciation and amortization 15,368 3,927 4,905 7,356
----------- ---------- ---------- ----------
Income (loss) from operations (2,557) (556) 510 (146)
Interest expense ............ (11,573) (3,350) (5,570) (6,716)
Interest income ............. 129 -- 151 151
Other expense, net .......... (58) (84) (62) (59)
Provision (benefit) for taxes 30 20 (133) (133)
Extraordinary gain (loss)
from extinguishment of
debt ..................... -- (4) -- -- --
----------- ---------- ---------- ----------
Net income (loss) ........... $(14,089) $(4,010) $(4,838) $(6,637)
=========== ========== ========== ==========
Income (loss) per share:
Loss before extraordinary
item ..................... $(1.52) $(0.94) $(0.72)
Extraordinary item .......... -- (4) -- --
----------- ---------- ----------
Net income (loss) per share . $(1.52) $(0.94) $(0.72)
=========== ========== ==========
Weighted average shares
outstanding (000's) ...... 9,245 5,143 9,245
=========== ========== ==========
Other Data:
Location Cash Flow (5) ...... $14,686 $4,340 $6,554 $8,340
EBITDA (5) .................. 12,811 3,371 5,415 7,210
Capital expenditures ........ 3,022 1,536 2,748 2,734
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Twelve Months
Ended June 30,
1996 (2)
--------------
<S> <C>
Net revenues ................ $ 50,963
Location Cash Flow (5) ...... 16,714
EBITDA (5) .................. 14,666
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and
restricted cash ..........$ 901 $ 938 $ 1,506 $ 1,380 $21,856
Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566
Total assets ................ 17,306 17,418 76,386 75,394 95,770
Total debt (including
current) ................. 13,675 15,045 72,127 61,629 82,896
Total liabilities ........... 14,572 16,417 78,954 68,452 95,521
Total equity (deficit) (6) .. 2,734 1,001 (2,427) 6,942 249
As of June 30, 1996
-------------------------------------
Actual Pro Forma (2)
--------- --------------
Balance Sheet Data:
Cash, cash equivalents and
restricted cash .......... $ 8,068 $ 13,457
Working capital (deficiency) 4,073 8,689
Total assets ................ 104,247 178,226
Total debt (including
current) ................. 94,863 114,663
Total liabilities ........... 108,730 129,303
Total equity (deficit) (6) .. (4,483) 48,923
</TABLE>
(footnotes on following page)
31
<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, six months ended June 30, 1996 and the twelve months ended June 30,
1996 give effect to the acquisitions and this Offering as if such events
had occurred in the beginning of such periods. The pro forma balance
sheet data as of June 30, 1996 give effect to the acquisitions after June
30, 1996 and this Offering as if such events had occurred on such date.
See "Pro Forma Combined Financial Data."
(3) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and 401(k) Plans. See "Management and Certain
Transactions -- Incentive Program."
(4) The pro forma income statement data for the year ended December 31, 1995
do not include the extraordinary gain on the extinguishment of debt of
$10.0 million and the $214,000 writeoff of deferred financing costs that
were incurred in 1995 in connection with the creation of the Old Credit
Facility.
(5) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. EBITDA is defined as income (loss) before
(i) extraordinary items, (ii) provisions for income taxes, (iii) other
(income) expense, (iv) interest (income) expense, and (v) depreciation
and amortization expenses. The difference between Location Cash Flow and
EBITDA is that EBITDA includes incentive compensation and corporate
expenses. Although EBITDA and Location Cash Flow are not measures of
performance under generally accepted accounting principles, the Company
believes that Location Cash Flow and EBITDA are accepted within the
Company's business segments as generally recognized measures of
performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
(6) The Company has not paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
32
<PAGE>
PRO FORMA COMBINED FINANCIAL DATA
Pro forma combined income statement and other data for the year ended
December 31, 1995, the six months ended June 30, 1996 and the twelve months
ended June 30, 1996 give effect to (i) the Portland Acquisition, which
actually closed on January 29, 1996, (ii) the Tallahassee Acquisition, which
actually closed on March 8, 1996, (iii) the Michigan/Texas DBS Acquisition,
which is to close concurrently with the closing of this Offering, (iv) the
Cable Acquisition, which actually closed on August 29, 1996, (v) the Ohio DBS
Acquisition, which is a pending acquisition, (vi) the New Hampshire Cable
Sale, which is a pending sale and (vii) this Offering, all as if such events
had occurred at the beginning of each period. The pro forma combined balance
sheet as of June 30, 1996 gives effect to (i) payments in connection with the
Portland Acquisition, (ii) the Michigan/Texas DBS Acquisition, which is to
close concurrently with the closing of this Offering, (iii) the Cable
Acquisition, which actually closed on August 29, 1996, (iv) the Ohio DBS
Acquisition, which is a pending acquisition, (v) acceptance of the Registered
Exchange Offer by all holders of the PM&C Class B Shares, (vi) the New
Hampshire Cable Sale, which is a pending sale and (vii) this Offering, as if
such events had occurred on such date. The Company's pro forma income (loss)
from continuing operations and income (loss) per share would be affected to
the extent that holders of PM&C Class B Shares do not accept the Registered
Exchange Offer. The Company does not believe that any such effect would be
material and expects that all such holders will accept the Registered
Exchange Offer.
These acquisitions are accounted for using the purchase method of
accounting. The total costs of such acquisitions are allocated to the
tangible and intangible assets acquired and liabilities assumed based upon
their respective fair values. The allocation of the purchase price included
in the pro forma financial statements is preliminary. The Company does not
expect that the final allocation of the purchase price will materially differ
from the preliminary allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. The pro forma
combined financial information should be read in conjunction with the
Company's Combined Financial Statements and notes thereto, as well as the
financial statements and notes thereto of the acquisitions, included
elsewhere in this Prospectus. The pro forma combined financial data are not
necessarily indicative of the Company's future results of operations. There
can be no assurance whether or when the Ohio DBS Acquisition or the New
Hampshire Cable Sale will be consummated. See "Risk Factors -- Risks
Attendant to Acquisition Strategy."
33
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
Acquisitions
------------------------------------------------------------
MI/TX
Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) Adjustments
-------- --------- ------------ -------- ------- -----------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................ $19,973 $ 4,409 $2,784 $ -- $ -- $ 139(7)
DBS ............................... 1,469 -- -- 2,513 -- --
Cable ............................. 10,606 -- -- -- 5,777 --
Other ............................. 100 -- -- -- -- --
-------- --------- ------------ -------- ------- -----------
Total net revenues ............... 32,148 4,409 2,784 2,513 5,777 139
-------- --------- ------------ -------- ------- -----------
Location operating expenses
TV ................................ 13,933 3,441 2,133 -- (186)(8)
-- (111)(9)
DBS ............................... 1,379 -- -- 3,083 -- (280)(10)
Cable ............................. 5,791 -- -- -- 3,485 (332)(11)
Other ............................. 38 -- -- -- -- --
Incentive compensation .............. 528 -- -- -- -- --
Corporate expenses .................. 1,364 147 40 139 -- (326)(12)
Depreciation and amortization ....... 8,751 212 107 559 501 4,527 (13)
-------- --------- ------------ -------- ------- -----------
Income (loss) from operations ....... 364 609 504 (1,268) 1,791 (3,153)
Interest expense .................... (8,817) (1,138) (163) (631) (850) (1,828)(14)
Interest income ..................... 370 -- -- -- -- (241)(15)
Other income (expense), net ......... (44) (542) (64) -- 50 542 (16)
Provision (benefit) for income taxes 30 -- 105 -- (189) 84 (17)
-------- --------- ------------ -------- ------- -----------
Income (loss) before extraordinary
items ............................. $(8,157) $(1,071) $ 172 $(1,899) $1,180 $(4,764)
======== ========= ============ ======== ======= ===========
Income (loss) per share:
Loss before extraordinary items ...
Weighted average shares
outstanding ....................
Other Data:
Location Cash Flow (21) ............. $11,007 $ 968 $ 651 $ (570) $2,292 $1,048
EBITDA (21) ......................... 9,115 821 611 (709) 2,292 1,374
Capital expenditures ................ 2,640 139 28 58 304 --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Pending Transactions
-----------------------------------------
OH DBS NH The Pro
Sub-Total Acquisition(5) Adjustments Cable Sale(6) Total Offering Forma
--------- ------------ ----------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................ $ 27,305 $ -- $-- $ -- $27,305 $ -- $27,305
DBS ............................... 3,982 942 -- -- 4,924 -- 4,924
Cable ............................. 16,383 -- -- (1,464) 14,919 -- 14,919
Other ............................. 100 -- -- -- 100 -- 100
--------- ------------ ----------- ----------- --------- ----------- --------
Total net revenues ............... 47,770 942 -- (1,464) 47,248 -- 47,248
--------- ------------ ----------- ----------- --------- ----------- --------
Location operating expenses
TV ................................ 19,210 -- -- -- 19,210 -- 19,210
DBS ............................... 4,182 956 -- -- 5,138 -- 5,138
Cable ............................. 8,944 -- (768) 8,176 -- 8,176
Other ............................. 38 -- -- -- 38 -- 38
Incentive compensation .............. 528 -- -- (17) 511 -- 511
Corporate expenses .................. 1,364 -- -- -- 1,364 -- 1,364
Depreciation and amortization ....... 14,657 183 1,017 (13) (618) 15,239 129(18) 15,368
--------- ------------ ----------- ----------- --------- ----------- --------
Income (loss) from operations ....... (1,153) (197) (1,017) (61) (2,428) (129) (2,557)
Interest expense .................... (13,427) -- (1,065)(14) -- (14,492) 2,919(19) (11,573)
Interest income ..................... 129 -- -- -- 129 -- 129
Other income (expense), net ......... (58) -- -- -- (58) -- (58)
Provision (benefit) for income taxes 30 -- -- 30 -- 30
--------- ------------ ----------- ----------- --------- ----------- ---------
Income (loss) before extraordinary
items ............................. $(14,539) $(197) $(2,082 ) $ (61) $(16,879) $2,790(20) $(14,089)
========= ============ =========== =========== ========= =========== =========
Income (loss) per share:
Loss before extraordinary items ... $(2.77) $(1.52)
========= =========
Weighted average shares
outstanding .................... 6,084,509 9,245,129
========= =========
Other Data:
Location Cash Flow (21) ............. $ 15,396 $ (14) $-- $ (696) $14,686 $ -- $14,686
EBITDA (21) ......................... 13,504 (14) -- (679) 12,811 -- 12,811
Capital expenditures ................ 3,169 -- -- (147) 3,022 -- 3,022
</TABLE>
34
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Acquisitions
----------------------------------------------------------
MI/TX
Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) Adjustments
--------- --------- ------------ ------- ------ -----------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................ $11,932 $ 247 $404 $ -- $ -- $ 17(7)
DBS ............................... 1,568 -- -- 1,896 -- --
Cable ............................. 5,626 -- -- -- 3,190 --
Other ............................. 56 -- -- -- -- --
--------- --------- ------------ ------- ------ -----------
Total net revenues ............... 19,182 247 404 1,896 3,190 17
--------- --------- ------------ ------- ------ -----------
Location operating expenses
TV ................................ 8,271 294 243 -- (28)(8)
-- (15)(9)
DBS ............................... 1,261 -- -- 1,769 -- (168)(10)
Cable ............................. 3,087 -- -- -- 1,811 (166)(11)
Other ............................. 9 -- -- -- -- --
Incentive compensation .............. 430 -- -- -- -- --
Corporate expenses .................. 709 12 21 76 -- (109)(12)
Depreciation and amortization ....... 4,905 6 11 291 201 1,690 (13)
--------- --------- ------------ ------- ------ -----------
Income (loss) from operations ....... 510 (65) 129 (240) 1,178 (1,187)
Interest expense .................... (5,570) (565) (20) (343) (413) (732)(14)
Interest income ..................... 151 -- -- -- -- --
Other income (expense), net ......... (62) 20 (17) -- -- --
Provision (benefit) for income taxes (133) -- 35 -- 333 (368)(17)
--------- --------- ------------ ------- ------ -----------
Income (loss) before extraordinary
items ............................. $(4,838) $(610) $ 57 $ (583) $ 432 $(1,551)
========= ========= ============ ======= ====== ===========
Income (loss) per share:
Loss before extraordinary items ....
Weighted average shares
outstanding ......................
Other Data:
Location Cash Flow (21) ............. $ 6,554 $ (47) $161 $ 127 $1,379 $ 394
EBITDA (21) ......................... 5,415 (59) 140 51 1,379 503
Capital expenditures ................ 2,748 -- -- -- 133 --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Pending Transactions
-----------------------------------------
OH DBS NH The Pro
Sub-Total Acquisition(5) Adjustments Cable Sale(6) Total Offering Forma
--------- ------------ ----------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ................................ $12,600 $ -- $ -- $ -- $12,600 $ -- $12,600
DBS ............................... 3,464 864 -- -- 4,328 -- 4,328
Cable ............................. 8,816 -- -- (784) 8,032 -- 8,032
Other ............................. 56 -- -- -- 56 -- 56
--------- ------------ ----------- ----------- --------- --------- ---------
Total net revenues ............... 24,936 864 -- (784) 25,016 -- 25,016
--------- ------------ ----------- ----------- --------- --------- ---------
Location operating expenses
TV ................................ 8,765 -- -- -- 8,765 -- 8,765
DBS ............................... 2,862 742 -- -- 3,604 -- 3,604
Cable ............................. 4,732 -- -- (434) 4,298 -- 4,298
Other ............................. 9 -- -- -- 9 -- 9
Incentive compensation .............. 430 -- -- (9) 421 -- 421
Corporate expenses .................. 709 -- -- -- 709 -- 709
Depreciation and amortization ....... 7,104 94 406(13) (312) 7,292 64(18) 7,356
--------- ------------ ----------- ----------- --------- ---------- ---------
Income (loss) from operations ....... 325 28 (406) (29) (82) (64) (146)
Interest expense .................... (7,643) -- (533)(14) -- (8,176) 1,460(19) (6,716)
Interest income ..................... 151 -- -- -- 151 -- 151
Other income (expense), net ......... (59) -- -- -- (59) -- (59)
Provision (benefit) for income taxes (133) -- -- -- (133) -- (133)
--------- ------------ ----------- ----------- --------- ---------- ---------
Income (loss) before extraordinary
items ............................. $(7,093) 28 $(939) $ (29) $(8,033) $1,396(20) $ (6,637)
========= ============ =========== =========== ========= ========== =========
Income (loss) per share:
Loss before extraordinary items .... $(1.32) $ (0.72)
========= =========
Weighted average shares
outstanding ...................... 6,084,509 9,245,129
========= =========
Other Data:
Location Cash Flow (21) ............. $ 8,568 $122 -- $(350) $8,340 $ -- $8,340
EBITDA (21) ......................... 7,429 122 -- (341) 7,210 -- 7,210
Capital expenditures ................ 2,881 -- -- (147) 2,734 -- 2,734
</TABLE>
35
<PAGE>
PRO FORMA STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
Acquisitions
-------------------------------------------------------------
MI/TX
Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) Adjustments
--------- --------- ------------ --------- ------- -----------
(Dollars in thousands, except earnings per share)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data :
Net revenues
TV ............................... $ 23,044 $ 2,467 $1,893 -- -- $100(7)
DBS .............................. 2,509 -- -- $ 3,686 -- --
Cable ............................ 11,055 -- -- -- $6,184 --
Other ............................ 120 -- -- -- -- --
--------- --------- ------------ --------- ------- -----------
Total net revenues ............ 36,728 2,467 1,893 3,686 6,184 100
--------- --------- ------------ --------- ------- -----------
Location operating expenses
TV ............................... 15,490 2,147 1,449 -- -- (121)(8)
(67)(9)
DBS .............................. 2,018 -- -- 4,044 -- (388)(10)
Cable ............................ 5,966 -- -- -- 3,512 (332)(11)
Other ............................ 33 -- -- -- -- --
Incentive compensation ............. 602 -- -- -- -- --
Corporate expenses ................. 1,460 -- -- 145 -- (145)(12)
Depreciation and amortization ...... 9,729 172 58 575 558 4,153 (13)
--------- --------- ------------ --------- ------- ----------
Income (loss) from operations ...... 1,430 148 386 (1,078) 2,114 (3,000)
Interest expense ................... (11,037) (1,423) (123) (666) (852) (1,515)(14)
Interest income .................... 521 -- -- -- -- (211)(15)
Other income (expense), net ........ (22) (522) (85) -- -- 512 (16)
Provision (benefit) for income taxes (123) -- 73 -- 273 (346)(17)
--------- --------- ------------ --------- ------- -----------
Income (loss) before extraordinary
items ............................ $ (8,985) $(1,797) $ 105 $(1,744) $ 989 $(3,868)
========= ========= ============ ========= ======= ========
Income (loss) per share:
Loss before extraordinary items ...
Weighted average shares
outstanding .....................
Other Data:
Location Cash Flow (21) ............ $ 13,221 $ 320 $ 444 $ (358) $2,672 $1,008
EBITDA (21) ........................ 11,159 320 444 (503) 2,672 1,153
Capital expenditures ............... 3,832 50 14 29 267 --
</TABLE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<PAGE>
<TABLE>
<CAPTION>
Pending Transactions
-----------------------------------------
OH DBS NH The Pro
Sub-Total Acquisition(5) Adjustments Cable Sale(6) Total Offering Forma
--------- ------------ ----------- ----------- --------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data :
Net revenues
TV ............................... $ 27,504 -- $ -- -- $ 27,504 -- $ 27,504
DBS .............................. 6,195 1,473 -- -- 7,668 -- 7,668
Cable ............................ 17,239 -- -- $(1,568) 15,671 -- 15,671
Other ............................ 120 -- -- -- 120 -- 120
--------- ------------ ----------- ----------- --------- ---------- ---------
Total net revenues ............ 51,058 1,473 -- (1,568) 50,963 -- 50,963
--------- ------------ ----------- ----------- --------- ---------- ---------
Location operating expenses
TV ............................... 18,898 -- -- -- 18.898 -- 18.898
DBS .............................. 5,674 1,329 -- -- 7,003 -- 7,003
Cable ............................ 9,146 -- -- (831) 8,315 -- 8,315
Other ............................ 33 -- -- -- 33 -- 33
Incentive compensation ............. 602 -- -- (14) 588 -- 588
Corporate expenses ................. 1,460 -- -- -- 1,460 -- 1,460
Depreciation and amortization ...... 15,245 185 1,015(13) (776) 15,669 129(18) 15,798
--------- ------------ ----------- ----------- --------- ---------- ---------
Income (loss) from operations ...... -- (41) (1,015) 53 (1,003) (129) (1,132)
Interest expense ................... (15,616) -- (1,065)(14) -- (16,681) 2,919(19) (13,762)
Interest income .................... 310 -- -- -- 310 -- 310
Other income (expense), net ........ (117) -- -- -- (117) -- (117)
Provision (benefit) for income taxes (123) -- -- -- (123) -- (123)
--------- ------------ ----------- ----------- --------- ---------- ---------
Income (loss) before extraordinary
items ............................ $(15,300) $ (41) $(2,080) $ 53 $(17,368) $2,790(20) $(14,578)
========= ============ =========== ========= ========= ========== =========
Income (loss) per share:
Loss before extraordinary items ... $ (2.85) $ (1.58)
========= =========
Weighted average shares
outstanding ..................... 6,084,509 9,245,129
========= =========
Other Data:
Location Cash Flow (21) ............ $17,307 $144 -- $(737) $ 16,714 -- $ 16,714
EBITDA (21) ........................ 15,245 144 -- (723) 14,666 -- 14,666
Capital expenditures ............... 4,192 -- -- (245) 3,947 -- 3,947
</TABLE>
36
<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) Financial results of the DBS Operations of the Chillicothe Telephone
Company.
(6) Financial results of the New Hampshire Operations of Pegasus Cable
Television.
(7) To reduce the commissions paid by WPXT and WTLH to their national
advertising sales representative to conform to the Company's contract.
(8) To eliminate payroll expense related to staff reductions implemented
upon the consummation of the Portland Acquisition.
(9) To eliminate rent expenses incurred by WTLH, Inc. for the tower site
acquired and office property to be acquired by the Company in connection
with the Tallahassee Acquisition.
(10) To eliminate rent and other overhead expenses incurred by the prior
owner that will not be incurred by the Company for certain office
properties in connection with the Michigan/Texas DBS Acquisition.
(11) To eliminate expense reductions, such as redundant staff, rent,
professional fees and utilities to be implemented in connection with the
Cable Acquisition and interconnection of its Puerto Rico Cable systems.
(12) To eliminate corporate expenses charged by prior owners.
(13) To record additional depreciation and amortization resulting from the
purchase accounting treatment of the acquisitions outlined above. Such
amounts are based on a preliminary allocation of the total
consideration. The actual depreciation and amortization may change based
upon the final allocation of the total consideration to be paid to the
tangible and intangible assets acquired.
(14) To record the increase in net interest expense associated with the
borrowings incurred in connection with the acquisitions described above.
(15) To eliminate interest income earned on funds escrowed and used for
acquisitions.
(16) To eliminate certain nonrecurring expenses, primarily comprised of legal
and professional expenses incurred by the prior owners of the businesses
in connection with the acquisitions.
(17) To eliminate net tax benefit in connection with the acquisitions.
(18) To eliminate amortization of deferred costs related to the Old Credit
Facility and record amortization of costs incurred in connection with
the New Credit Facility.
(19) To remove interest expense on the debts to be retired with the proceeds
of this Offering.
(20) Upon repayment of the Old Credit Facility, the Company incurred an
extraordinary expense in connection with the write-down of deferred
financing costs of approximately $214,000, which is not included in
these pro forma statements. Upon consummation of the New Hampshire Cable
Sale, the Company will recognize a one time gain of approximately $4.3
million, which is not included in these pro forma statements.
(21) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. EBITDA is defined as income (loss)
before (i) extraordinary items, (ii) provision (benefit) for income
taxes, (iii) other (income) expense, (iv) interest (income) expense, and
(v) depreciation and amortization expenses. The difference between
Location Cash Flow and EBITDA is that EBITDA includes incentive
compensation and corporate expenses. Although Location Cash Flow and
EBITDA are not measures of performance under generally accepted
accounting principles, the Company believes that Location Cash Flow and
EBITDA are accepted within the Company's business segments as generally
recognized measures of performance and are used by analysts who report
publicly on the performance of companies operating in such segments.
Nevertheless, these measures should not be considered in isolation or as
a substitute for income from operations, net income, net cash provided
by operating activities or any other measure for determining the
Company's operating performance or liquidity which is calculated in
accordance with generally accepted accounting principles.
37
<PAGE>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF JUNE 30, 1996
<TABLE>
<CAPTION>
Acquisitions
-----------------------------------------------
Portland MI/TX
Actual Portland(1) LMA(2) DBS(3) Cable
--------- --------- -------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 3,199 $ (3,550) $ -- $ (17,894) $(22,200)
Restricted cash held in
escrow ............... 4,869 -- -- -- --
Accounts receivable, net 6,825 -- -- -- --
Inventories ............. 460 -- -- -- --
Prepaid expenses and
other current assets . 1,729 -- -- -- --
Property and equipment,
net .................. 24,472 -- -- -- 1,865
Intangibles ............. 60,757 4,100 1,000 29,824 21,708
Other assets ............ 1,936 -- -- -- --
--------- --------- -------- ---------- ----------
Total assets .......... $104,247 $ 550 $1,000 $ 11,930 $ 1,373
========= ========= ======== ========== ==========
Liabilities and Equity:
Current liabilities ..... $ 5,913 $ (600) $ -- $ -- $ 1,373
Notes payable ........... 54 -- -- -- --
Accrued interest ........ 5,322 -- -- -- --
Current portion of
long-term debt ....... 364 -- -- -- --
Current portion of
program liabilities .. 1,356 -- -- -- --
Long-term debt .......... 94,445 -- -- -- --
Long-term program
liabilities .......... 1,161 -- -- -- --
Other long-term
liabilities .......... 115 -- -- -- --
--------- --------- -------- ---------- ----------
Total liabilities ..... 108,730 (600) -- -- 1,373
Class A Common Stock(8) . 2 1 1 8 --
Class B Common Stock .... -- -- -- -- --
Additional paid-in
capital .............. 7,881 1,149 999 11,922 --
Retained earnings
(deficit) ............ (474) -- -- -- --
Partners deficit ........ (11,892) -- -- -- --
--------- --------- -------- ---------- ----------
Total equity .......... (4,483) 1,150 1,000 11,930 --
--------- --------- -------- ---------- ----------
Total liabilities and
equity ............. $104,247 $ 550 $1,000 $ 11,930 $ 1,373
========= ========= ======== ========== ==========
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<PAGE>
Pending Transactions
---------------------------
New NH
Credit OH DBS Cable The
Facility Sub-Total Acquisition(5) Sale(6) Total Offering(7) Pro Forma
-------- ---------- ------------ ----------- --------- --------- ---------
Assets:
Cash and cash equivalents $21,645 $(18,800) $(12,000) $ 7,122 $(23,678) $32,266 $ 8,588
Restricted cash held in
escrow ............... -- 4,869 -- -- 4,869 -- 4,869
Accounts receivable, net -- 6,825 -- -- 6,825 -- 6,825
Inventories ............. -- 460 -- -- 460 -- 460
Prepaid expenses and
other current assets . -- 1,729 -- -- 1,729 -- 1,729
Property and equipment,
net .................. -- 26,337 -- (1,888) 24,449 -- 24,449
Intangibles ............. 941 118,330 12,000 (960) 129,370 -- 129,370
Other assets ............ -- 1,936 -- -- 1,936 -- 1,936
-------- ---------- ------------ ----------- --------- --------- ---------
Total assets .......... $22,586 $141,686 $ -- $ 4,274 $145,960 $32,266 $178,226
======== ========== ============ =========== ========= ========= =========
Liabilities and Equity:
Current liabilities ..... $ -- $ 6,686 $ -- $ -- $ 6,686 $ -- $ 6,686
Notes payable ........... -- 54 -- -- 54 -- 54
Accrued interest ........ -- 5,322 -- -- 5,322 -- 5,322
Current portion of
long-term debt ....... -- 364 -- -- 364 -- 364
Current portion of
program liabilities .. -- 1,356 -- -- 1,356 -- 1,356
Long-term debt .......... 22,800 117,245 -- -- 117,245 (3,000) 114,245
Long-term program
liabilities .......... -- 1,161 -- -- 1,161 -- 1,161
Other long-term
liabilities .......... -- 115 -- -- 115 -- 115
-------- ---------- ------------ ----------- --------- --------- ---------
Total liabilities ..... 22,800 132,303 -- -- 132,303 (3,000) 129,303
Class A Common Stock(8) . -- 12 -- -- 12 35 47
Class B Common Stock .... -- -- -- -- -- 46 46
Additional paid-in
capital .............. -- 21,951 -- -- 21,951 38,004 --
(1,400)
(1,419) 57,136
Retained earnings
(deficit) ............ (214) (688) -- 4,274 3,586 -- 3,586
Partners deficit ........ -- (11,892) -- -- (11,892) -- (11,892)
-------- ---------- ------------ ----------- --------- --------- ---------
Total equity .......... (214) 9,383 -- 4,274 13,657 35,266 48,923
-------- ---------- ------------ ----------- --------- --------- ---------
Total liabilities and
equity ............. $22,586 $141,686 $-- $4,274 $145,960 $32,266 $178,226
======== ========== ============ =========== ========= ========= =========
</TABLE>
38
<PAGE>
- ------
(1) To record the acquisition of WPXT's license and Fox Affiliation
Agreement, the noncompetition agreement with the prior owner of WPXT and
satisfaction of amounts due to the prior owner of WPXT for accrued
compensation for aggregate consideration of $4.7 million. The aggregate
consideration consists of $3.6 million in cash, $1.0 million of Class B
Common Stock (valued at the price to the public in this Offering) and
$150,000 of Class A Common Stock (valued at the price to the public in
this Offering). Of the total consideration, $4.1 million is allocated to
intangible assets consisting of broadcast licenses, network affiliation
agreements and noncompetition agreements and $600,000 is applied as a
reduction of current liabilities.
(2) To record the acquisition of the Portland LMA for $1.0 million of Class A
Common Stock (valued at the price to the public in this Offering), all of
which is allocated to LMAs.
(3) To record the Michigan/Texas DBS Acquisition for total consideration of
approximately $29.8 million consisting of $17.9 million in cash and $11.9
million in Class A Common Stock (valued at the price to the public in
this Offering), all of which is allocated to DBS rights.
(4) To record the Cable Acquisition for total consideration of approximately
$26.4 million consisting of $25.0 million in cash and $1.4 million in
assumed liabilities. Of the total consideration, approximately $4.7
million is allocated to property and equipment and approximately $21.7
million is allocated to franchise agreements.
(5) To record the Ohio DBS Acquisition for $12.0 million in cash, all of
which is allocated to DBS rights.
(6) To record the New Hampshire Cable Sale for $7.1 million, net of
commission.
(7) To record the net proceeds from the issuance of Class A Common Stock and
the intended uses of such proceeds. As of September 30, 1996, $31.6 million
had been drawn under the New Credit Facility in connection with the
retirement of the Old Credit Facility and the consummation of the Cable
Acquisition.
Source of proceeds:
Gross proceeds from this Offering . $42,000
=======
Intended uses of proceeds:
Michigan/Texas DBS Acquisition ... $17,894
Cash pending Ohio DBS Acquisition . 12,000
Repay indebtedness under the New Credit
Facility ....................... 3,000
Pay transaction costs related to this
Offering ....................... 3,915
Payment on account of Portland
Acquisition .................... 1,850
Management Agreement Acquisition . 1,419
Towers Purchase .................. 1,400
General corporate purposes ....... 522
-------
Total intended uses of proceeds $42,000
=======
(8) Pegasus is a newly-formed subsidiary of the Parent and has no material
assets or operating history. The Parent's principal subsidiary is PM&C,
which currently conducts through subsidiaries the Company's operations as
described herein. Simultaneously with, and as a condition of, the closing
of this Offering, the Parent will contribute to Pegasus all of its stock
in PM&C, which consists of 161,500 PM&C Class A Shares in exchange for
3,380,435 shares of Class B Common Stock.
39
<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. The
following table presents information regarding completed acquisitions, the
concurrent acquisition, the pending acquisition and the pending sale.
<TABLE>
<CAPTION>
Acquisitions
- ---------------------------------------------------------------------------------------------------------------------------------
Adjusted
Property Date Acquired Consideration(1) Form of Consideration
- ------------------------------------ --------------- -------------- -----------------------------------------------
(Dollars in millions)
<S> <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
$14.2 cash, $0.4 assumed liabilities, $0.2 of Class
WPXT .............................. January 1996(9) $15.8 A Common Stock and $1.0 of Class B Common Stock(10)
$5.0 cash, $3.1 deferred obligation and the WTLH
WTLH .............................. March 1996 $ 8.1 Warrants
Portland LMA ...................... May 1996 $ 1.0 $1.0 of Class A Common Stock(10)
Cable Acquisition ................. August 1996 $26.4 $25.0 cash and $1.4 of assumed liabilities, net
Concurrent acquisition:
Michigan/Texas DBS Acquisition .... (11) $29.8 $17.9 cash and $11.9 of Class A Common Stock(10)
Pending acquisition:
Ohio DBS Acquisition .............. (12) $12.0 $12.0 cash
Pending sale:
New Hampshire Cable Sale .......... (13) $ 7.1 $7.1 cash
</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.
40
<PAGE>
(11) Consummation of the Michigan/Texas DBS Acquisition and this Offering
will occur concurrently.
(12) This Offering is not conditioned upon consummation of the Ohio DBS
Acquisition. The Company anticipates that the Ohio DBS Acquisition will
occur after the consummation of this Offering; however, there can be no
assurance that the Ohio DBS Acquisition will be completed on the terms
described herein or at all. See "Risk Factors -- Risks Attendant to
Acquisition Strategy."
(13) This Offering is not conditioned upon consummation of the New Hampshire
Cable Sale. The Company anticipates that the New Hampshire Cable Sale
will occur after consummation of this Offering; however, there can be no
assurance that the New Hampshire Cable Sale will be completed on the
terms described herein or at all.
REORGANIZATION
The Company's Combined Financial Statements include the accounts of PM&C,
PM&C's subsidiaries, Towers and the Management Company. Concurrently with the
consummation of this Offering, the Parent will contribute all of the PM&C
Class A Shares to Pegasus for 3,380,435 shares of Class B Common Stock. The
Company will offer through the Registered Exchange Offer to exchange all of
the PM&C Class B Shares for 191,792 shares of Class A Common Stock, in the
aggregate. Upon consummation of this Offering the Company will acquire the
assets of Towers for $1.4 million in cash. The Company will also acquire the
Management Agreement together with certain net assets, including
approximately $1.4 million of accrued management fees, for $19.6 million of
Class B Common Stock (valued at the price to the public in this Offering) and
approximately $1.4 million in cash.
Although the Company anticipates that all of the holders of the PM&C Class
B Shares will accept the Registered Exchange Offer, the possibility remains
that some of the PM&C Class B Shares will not be exchanged and that PM&C will
not be a wholly owned subsidiary of Pegasus. In such event, the Company's
Combined Financial Statements would include appropriate disclosure of such
minority interests. See "Risk Factors -- Potential Effect on Company of
Minority Ownership of PM&C Capital Stock."
RESULTS OF OPERATIONS
TV revenues are derived from the sale of broadcast air time to local and
national advertisers. DBS revenues are derived from monthly customer
subscriptions, pay-per-view services, DSS equipment rentals, leases and
installation charges. Cable revenues are derived from monthly subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping
commissions, advertising time sales and installation charges.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and
promotion expenses, local sales commissions, and ratings and research
expenditures, (iii) technical and operations costs, and (iv) general and
administrative expenses. TV programming expenses include the amortization of
long-term program rights purchases, music license costs and "barter"
programming expenses which represent the value of broadcast air time provided
to television program suppliers in lieu of cash. DBS programming expenses
consist of amounts paid to program suppliers and also include DSS
authorization charges and satellite control fees, each of which is paid on a
per subscriber basis, and DIRECTV royalties which are equal to 5% of program
service revenues. Cable programming expenses consist of amounts paid to
program suppliers on a per subscriber basis.
41
<PAGE>
SUMMARY COMBINED OPERATING RESULTS
<TABLE>
<CAPTION>
Six Months
Year Ended December 31, Ended June 30,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
--------- --------- --------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Net revenues:
TV ................................. $10,307 $17,808 $19,973 $ 8,861 $11,932
DBS ................................ -- 174 1,469 528 1,568
Cable:
Puerto Rico Cable ................ 3,187 3,842 4,007 2,005 2,044
New England Cable ................ 5,947 6,306 6,599 3,172 3,582
------- ------- ------- ------- -------
Total Cable net revenues ........ 9,134 10,148 10,606 5,177 5,626
------- ------- ------- ------- -------
Other .............................. 46 61 100 36 56
------- ------- ------- ------- -------
Total ......................... 19,487 28,191 32,148 14,602 19,182
======= ======= ======= ======= =======
Location operating expenses:
TV ................................. 7,564 12,380 13,933 6,714 8,271
DBS ................................ -- 210 1,379 622 1,261
Cable:
Puerto Rico Cable ................ 1,654 2,319 2,450 1,244 1,857
New England Cable ................ 3,001 3,226 3,341 1,668 1,230
------- ------- ------- ------- -------
Total Cable location operating
expenses ....................... 4,655 5,545 5,791 2,912 3,087
------- ------- ------- ------- -------
Other .............................. 16 18 38 14 9
------- ------- ------- ------- -------
Total ......................... 12,235 18,153 21,141 10,262 12,628
======= ======= ======= ======= =======
Location Cash Flow(1):
TV ................................. 2,744 5,428 6,040 2,147 3,661
DBS ................................ -- (36) 90 (94) 307
Cable:
Puerto Rico Cable ................ 1,533 1,523 1,557 761 814
New England Cable ................ 2,945 3,080 3,258 1,504 1,725
------- ------- ------- ------- -------
Total Cable Location Cash Flow... 4,478 4,603 4,815 2,265 2,539
------- ------- ------- ------- -------
Other .............................. 30 43 62 22 47
------- ------- ------- ------- -------
Total ......................... $ 7,252 $10,038 $11,007 $ 4,340 $ 6,554
======= ======= ======= ======= =======
Other data:
Growth in net revenues ............. 266% 45% 14% 16% 31%
Growth in Location Cash Flow ....... 175% 38% 10% 9% 51%
</TABLE>
- ------
(1) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. Although Location Cash Flow is not a
measure of performance under generally accepted accounting principles,
the Company believes that Location Cash Flow is accepted within the
Company's business segments as a generally recognized measure of
performance and is used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, this
measure should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
The Company's net revenues increased by approximately $4,580,000 or 31%
for the six months ended June 30, 1996 as compared to the same period in 1995
as a result of (i) a $3,071,000 or 35% increase in TV revenues of which
$717,000 or 23% was due to ratings growth which the Company was able to
convert into higher revenues and $2,354,000 or 77% was due to acquisitions
made in the first quarter of 1996, (ii) a $1,040,000 or 197% increase in
revenues as a result of an increase in the number of DBS subscribers, (iii) a
$39,000 or 2% increase in Puerto Rico Cable revenues due primarily to a rate
increase in April, (iv) a $410,000 or 13% increase in New England Cable
revenues due primarily to rate increases and new combined service packages,
and (v) a $20,000 increase in Tower rental income.
The Company's total location operating expenses increased by approximately
$2,366,000 or 23% for the six months ended June 30, 1996 as compared to the
same period in 1995 as a result of (i) a $1,557,000 or
42
<PAGE>
23% increase in TV operating expenses as the net result of a $20,000 or 1%
decrease in same station direct operating expenses and a $1,577,000 increase
attributable to stations acquired in the first quarter of 1996, (ii) a
$639,000 or 103% increase in operating expenses generated by the Company's
DBS operations due to an increase in programming costs of $456,000, royalty
costs of $45,000, and other DIRECTV costs such as security, authorization
fees and telemetry and tracking charges totaling $138,000, (iii) a $14,000 or
1% decrease in Puerto Rico Cable operating expenses due primarily to reduced
contractor and converter repair work that was brought "in house," (iv) a
$189,000 or 11% increase in New England Cable operating expenses due
primarily to increases in programming costs associated with the new combined
service packages, and (v) a $5,000 decrease in administrative expenses.
As a result of these factors, Location Cash Flow increased by $2,214,000 or
51% for the six months ended June 30, 1996 as compared to the same period in
1995 as a result of (i) a $1,514,000 or 71% increase in TV Location Cash Flow of
which $736,000 or 49% was due to an increase in same station Location Cash Flow
and $778,000 or 51% was due to an increase attributable to stations acquired in
the first quarter 1996, (ii) a $401,000 increase in DBS Location Cash Flow,
(iii) a $53,000 or 7% increase in Puerto Rico Cable Location Cash Flow, (iv) a
$221,000 or 15% increase in New England Cable Location Cash Flow, and a $25,000
increase in Tower Location Cash Flow. The Company expects to continue to report
increases in Location Cash Flow in the second half of 1996 but does not expect
that such increases will continue at the same rate as was experienced in the
first six months of 1996. Although Location Cash Flow is not a measure of
performance under generally accepted accounting principles, the Company believes
that Location Cash Flow is accepted within the Company's business segments as a
generally recognized measure of performance and is used by analysts who report
publicly on the performance of companies operating in such segments.
Nevertheless, this measure should not be considered in isolation or as a
substitute for income from operations, net income, net cash provided by
operating activities or any other measure for determining the Company's
operating performance or liquidity which is calculated in accordance with
generally accepted accounting principles.
As a result of these factors, incentive compensation, which is calculated
based on increases in Location Cash Flow, increased by approximately $74,000
or 21% for the six months ended June 30, 1996 as compared to the same period
in 1995.
Corporate expenses increased by $96,000 or 16% for the six months ended
June 30, 1996 as compared to the same period in 1995 primarily due to the
initiation of public reporting requirements for PM&C.
Depreciation and amortization expense increased by approximately $978,000
or 25% for the six months ended June 30, 1996 as compared to the same period
in 1995 as the Company increased its fixed and intangible assets as a result
of two completed acquisitions during the first quarter of 1996.
As a result of these factors, income from operations increased by
approximately $1.1 million for the six months ended June 30, 1996 as compared
to the same period in 1995.
Interest expense increased by approximately $2.2 million or 66% for the
six months ended June 30, 1996 as compared to the same period in 1995 as a
result of a combination of the Company's issuance of the Notes on July 7,
1995 and an increase in debt associated with the Company's 1996 acquisitions.
A portion of the proceeds from the issuance of the Notes was used to retire
floating rate debt on which the effective interest rate was lower than the
12.5% interest rate under the Notes.
The Company's net loss increased by $827,000 for the six months ended June
30, 1996 as compared to the same period in 1995 and was the net result of a
increase in income from operations of approximately $1.1 million, an increase
in interest expense of $2.2 million, an increase in interest income of
$151,000, a decrease in the provision for income taxes of $143,000 and a
decrease in other expenses of approximately $23,000.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's net revenues increased by approximately $4.0 million or 14%
in 1995 as compared to 1994 as a result of (i) a $2.2 million or 12% increase
in TV revenues due to ratings growth and improved economic conditions, within
the Company's markets, which the Company was able to convert into higher
revenues, (ii) a $1.3 million increase in revenues from DBS operations which
commenced in the fourth
43
<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.
44
<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 the three TV stations for a full year and the remaining $1.4
million or 29% was due to the replacement of free programming such as
infomercials with syndicated programming and sales expense increases of 73%
which are a direct function of the increase in revenues, (ii) $210,000 of DBS
operating expenses incurred in 1994, the Company's first year of DBS
operations, (iii) a $665,000 or 40% increase in Puerto Rico Cable operating
expenses primarily from operating the system for a full year, but also due to
programming cost increases which were not passed on to subscribers due to
rate freezes imposed by the 1992 Cable Act (as defined), (iv) a $225,000 or
8% increase in New England Cable operating expenses, as a result of
subscriber growth and programming cost increases which were not passed on to
subscribers due to rate freezes imposed by the 1992 Cable Act, and (v) a
$2,000 increase in tower administrative expenses.
As a result of these factors, Location Cash Flow increased by $2.8 million
or 38% in 1994 as compared to 1993 as a result of (i) a $2.7 million or 98%
increase in TV Location Cash Flow, (ii) a negative DBS Location Cash Flow of
$36,000 in the Company's first year of DBS operations, (iii) a $10,000 or 1%
decrease in Puerto Rico Cable Location Cash Flow, (iv) a $135,000 or 5%
increase in New England Cable Location Cash Flow, and (v) a $13,000 increase
in Tower Location Cash Flow.
As a result of the increase in Location Cash Flow, incentive compensation
increased by approximately $240,000 or 125% for year ended December 31, 1994
as compared to the same period in 1993.
Corporate expenses increased by approximately $241,000 or 19% in 1994 as
compared to 1993 due primarily to corporate staff additions related to the
Company's 1993 acquisitions.
Depreciation and amortization increased by $962,000 or 16% in 1994 as
compared to 1993 due primarily to the acquisitions described above.
As a result of these factors, income from operations increased by
approximately $1.3 million in 1994 as compared to 1993.
Interest expense increased by approximately $1.6 million or 36% in 1994 as
compared to 1993 primarily as a result of increases in interest charges on
the Company's floating rate debt and the inclusion of a full year of interest
expense in 1994 on the indebtedness assumed by the Company in connection with
the acquisitions of the three television stations and the Mayaguez Cable
system.
Other expenses decreased by approximately $155,000 in 1994 as compared to
1993 as a result of a tax settlement made during 1993 with the Puerto Rico
Treasury Department in connection with withholding taxes on program payments
made by the Puerto Rico Cable system from 1987 through 1993 which was
recorded in other expenses in 1993.
Income taxes increased by approximately $140,000 in 1994 as compared to
1993 due principally to deferred income taxes recorded in connection with the
conversion of certain of the Company's subsidiaries from partnership to
corporate form during 1994.
As a result of certain refinancing transactions that occurred during 1994,
the Company recorded an extraordinary loss of approximately $633,000
representing the write-off of the balance of deferred finance costs related
to the refinanced indebtedness.
As a result of these factors, the Company's net loss increased by
approximately $845,000 in 1994 as compared to 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been the net cash provided
by its TV and Cable operations and credit available under its credit
facilities. Additionally, the Company had $4.9 million in a restricted cash
account that was used to pay interest on the Company's Notes in July 1996.
The Company's principal uses of its cash have been to fund acquisitions, to
meet its debt service obligations, to fund investments in its TV and Cable
technical facilities and to fund investments in Cable and DBS customer
premises equipment that is rented or leased to subscribers.
45
<PAGE>
During the six months ended June 30, 1996, net cash utilized by operations
was approximately $2.0 million, which together with $12.0 million of cash on
hand and $8.8 million of net cash provided by the Company's credit facility
and $5.0 million of restricted cash was used to fund investing activities of
$20.6 million. Investment activities consisted of (i) the acquisitions of the
principal tangible assets of television station WPXT and the Tallahassee
Acquisition for approximately $17.1 million, (ii) the purchase of an office
facility for the Company's Connecticut Cable operations for $135,000, (iii)
the purchase of DSS units used as rental and lease units for $562,000 and
(iv) maintenance and other capital expenditures and intangibles totaling
approximately $2.8 million. As of June 30, 1996, the Company's cash on hand
(excluding restricted cash) approximated $3.2 million.
During 1995, net cash provided by operations was approximately $4.8
million, which together with $1.4 million of cash on hand and $11.1 million
of net cash provided by the Company's financing activities, was used to fund
a $12.5 million distribution to the Parent and to fund investment activities
totalling $5.2 million. Investment activities consisted of (i) the final
payment of the deferred purchase price for the Company's New England DBS
rights of approximately $1.9 million, (ii) the purchase of a new WDSI studio
and office facility for $520,000, (iii) the purchase of a LIBOR cap for
$300,000, (iv) the purchase of DSS units used as rental and lease units for
$157,000, and (v) maintenance and other capital expenditures totalling
approximately $2.3 million.
During 1994, net cash provided by operations amounted to $2.8 million,
which together with cash on hand and borrowings of $35.0 million was used to
fund capital expenditures of $1.3 million, to pay a portion of the deferred
purchase price of the DBS rights for $943,000, to repay debt totalling $34.0
million and to fund debt issuance costs of $1.6 million.
During 1993, net cash provided by operations amounted to $1.7 million,
which together with cash received in acquisitions of $804,000 and borrowings
of $15.1 million, was used to fund maintenance and other capital expenditures
of $885,000, to repay debt totalling $15.2 million and to fund debt issuance
costs of $843,000.
The Company completed the $85.0 million Notes offering on July 7, 1995.
The Notes were issued pursuant to an Indenture between PM&C and First Union
National Bank, as trustee. The Indenture restricts PM&C's ability to engage
in certain types of transactions including debt incurrence, payment of
dividends, investments in unrestricted subsidiaries and affiliate
transactions. The Notes were sold at a $4.0 million discount. The proceeds
from the Notes offering, together with cash on hand, were used to (i) repay
approximately $38.6 million in loans and other obligations, (ii) repurchase
$25.6 million of notes for approximately $13.0 million, which resulted in a
$10.2 million extraordinary gain net of expenses, (iii) make a $12.5 million
distribution to the Parent, (iv) escrow $9.7 million for the purpose of
paying interest on the Notes, (v) pay $3.3 million in fees and expenses, and
(vi) fund $8.8 million of the cash portion of the purchase price of the
Portland Acquisition.
During July 1995, the Company entered into the Old Credit Facility in the
amount of $10.0 million from which $6.0 million was drawn in connection with
the Portland and Tallahassee Acquisitions in the first quarter of 1996 and
$2.8 million was drawn to fund deposits in connection with the Cable
Acquisition. The Old Credit Facility was retired in August 1996 from
borrowings under the New Credit Facility.
The New Credit Facility is a seven-year, senior collateralized revolving
credit facility for $50.0 million. The amount of the New Credit Facility will
reduce quarterly beginning March 31, 1998. As of September 30, 1996, $31.6
million had been drawn under the New Credit Facility in connection with the
retirement of the Old Credit Facility and the consummation of the Cable
Acquisition. The New Credit Facility is intended to be used for general
corporate purposes and to fund possible future acquisitions. Borrowings under
the New Credit Facility are subject to among other things, PM&C's ratio of total
funded debt to adjusted operating cash flow. Currently, no additional funds may
be drawn under the New Credit Facility. Upon repayment of $3.0 million of the
New Credit Facility from the proceeds of this Offering, the Company will be able
to draw down an additional $3.0 million from the credit facility, subject to
certain exceptions. The Company's ability to draw under the New Credit Facility
increases as its Location Cash Flow increases. See "Description of Indebtedness
- -- New Credit Facility."
The Company plans to use part of the net proceeds of this Offering to
repay $3.0 million of debt under the New Credit Facility (but not to reduce
the commitment level thereunder) and to fund the cash portion of
46
<PAGE>
the Michigan/Texas DBS Acquisition. The Company believes that following the
completion of the concurrent and pending acquisition it will have adequate
resources to meet its working capital, maintenance capital expenditure and
debt service obligations. The Company believes that the net proceeds of this
Offering together with available borrowings under the New Credit Facility
will give the Company the ability to fund acquisitions and other capital
requirements in the future. However, there can be no assurance that the
future cash flows of the Company will be sufficient to meet all of the
Company's obligations and commitments. See "Risk Factors -- Substantial
Indebtedness and Leverage."
The Company closely monitors conditions in the capital markets to identify
opportunities for the effective and prudent use of financial leverage. In
financing its future expansion and acquisition requirements, the Company
would expect to avail itself of such opportunities and thereby increase its
indebtedness which could result in increased debt service requirements. The
Company is currently contemplating issuing additional debt securities to
refinance existing debt, to fund expansion and future acquisitions and/or to
fund general corporate purposes. There can be no assurance that such debt
financing can be completed on terms satisfactory to the Company or at all.
The Company may also issue additional equity to fund its future expansion and
acquisition requirements.
CAPITAL EXPENDITURES
The Company expects to incur capital expenditures in the aggregate of
$14.7 million in 1996 and 1997 in comparison to $2.6 million in 1995. With
the exception of recurring renewal and refurbishment expenditures of
approximately $1.6 million per year, these capital expenditures are
discretionary and nonrecurring in nature. The Company believes that
substantial opportunities exist for it to increase Location Cash Flow through
implementation of several significant capital improvement projects. In
addition to recurring renewal and refurbishment expenditures, the Company's
capital expenditure plans for 1996 and 1997,currently include (i) TV
expenditures of approximately $6.1 million for broadcast television
transmitter, tower and facility constructions and upgrades, (ii) DBS
expenditures of approximately $4.1 million for DSS equipment purchases for
lease and rental to the Company's DIRECTV subscribers and certain subscriber
acquisition costs, and (iii) Cable expenditures of approximately $1.3 million
for the interconnection of the Puerto Rico Cable systems and fiber upgrades
in Puerto Rico and New England. Beyond 1997, the Company expects its ongoing
capital expenditures to consist primarily of renewal and refurbishment
expenditures totalling approximately $1.6 million annually. There can be no
assurance that the Company's capital expenditure plans will not change in the
future.
OTHER
As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Under the
terms of the Indenture, PM&C is prohibited from paying dividends prior to
July 1, 1998. The payment of dividends subsequent to July 1, 1998 will be
subject to the satisfaction of certain financial conditions set forth in the
Indenture, and will also be subject to lender consent under the terms of the
New Credit Facility.
PM&C's ability to incur additional indebtedness is limited under the terms
of the Indenture and the New Credit Facility. These limitations take the form
of certain leverage ratios and are dependent upon certain measures of
operating profitability. Under the terms of the New Credit Facility, capital
expenditures and business acquisitions that do not meet certain criteria will
require lender consent.
The Company's revenues vary throughout the year. As is typical in the
broadcast television industry, the Company's first quarter generally produces
the lowest revenues for the year, and the fourth quarter generally produces
the highest revenues for the year. The Company's operating results in any
period may be affected by the incurrence of advertising and promotion
expenses that do not necessarily produce commensurate revenues in the
short-term until the impact of such advertising and promotion is realized in
future periods.
The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of
the Company's indebtedness bear interest at a fixed rate.
The Company has reviewed the provisions of Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and believes that future
implementation of the above standards will not have a material impact on the
Company.
47
<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 plans, which reward
employees in proportion to annual increases in Location Cash Flow, coupled
with rigorous budgeting and strict cost controls.
The Company's acquisition strategy is to identify media and communications
businesses in which significant increases in Location Cash Flow may be
realized and where the ratio of required investment to potential Location
Cash Flow is low. After giving effect to the Transactions, the Company would
have had pro forma net revenues and EBITDA of $51.0 million and $14.7
million, respectively, for the twelve months ended June 30, 1996. The
Company's net revenues and EBITDA have increased at a compound annual growth
rate of 98% and 84%, respectively, from 1991 to 1995.
TV
BUSINESS STRATEGY
The Company's operating strategy in TV is focused on (i) developing strong
local sales forces and sales management to maximize the value of its
stations' inventory of advertising spots, (ii) improving the stations'
programming, promotion and technical facilities in order to maximize their
ratings in a cost-effective manner and (iii) maintaining strict control over
operating costs while motivating employees through the use of incentive
plans, which rewards Company employees in proportion to annual increases in
Location Cash Flow.
The Company seeks to maximize demand for each station's advertising
inventory and thereby increase its revenue per spot. Each station's local
sales force is incentivized to attract first-time television advertisers as
well as provide a high level of service to existing advertisers. Sales
management seeks to "oversell" the Company's share of the local audience. A
television station oversells its audience share if its share of its market's
television revenues exceeds its share of the viewing devoted to all stations
in the market. Historically, the Company's stations have achieved oversell
ratios ranging from 120% to 200%. The Company recruits and develops sales
managers and salespeople who are aggressive, opportunistic and highly
motivated.
In addition, the Company seeks to make cost-effective improvements in its
programming, promotion and transmitting and studio equipment in order to
enable its stations to increase audience ratings in its targeted demographic
segments. In purchasing programming, the Company seeks to avoid competitive
program purchases and to take advantage of group purchasing efficiencies
resulting from the Company's ownership of multiple stations. The Company also
seeks to counter-program its local competitors in order to target specific
audience segments which it believes are underserved.
48
<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 and less aggressive direct
competitors. In these markets, the Company seeks television stations whose
revenues and market revenue share can be substantially improved with limited
increases in their fixed costs.
The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction
permits in markets where it currently owns and operates Fox affiliates. The
Company has historically purchased Fox affiliates because (i) Fox affiliates
generally have had lower ratings and revenue shares than stations affiliated
with ABC, CBS and NBC and, therefore, greater opportunities for improved
performance, and (ii) Fox affiliated stations retain a greater share of their
inventory of advertising spots than do stations affiliated with ABC, CBS or
NBC, thereby enabling these stations to retain a greater share of any
increase in the value of their inventory. The Company is pursuing expansion
in its existing markets through LMAs because second stations can be operated
with limited additional fixed costs (resulting in high incremental operating
margins) and can allow the Company to create more attractive packages for
advertisers and program providers.
THE STATIONS
The following table sets forth general information for each of the
Company's stations.
<TABLE>
<CAPTION>
Number
Acquisition Station Market of TV
Station Date Affiliation Area DMA Households(1) Competitors(2)
---------------- -------------- ------------- --------------- ----- ------------- --------------
Existing Stations:
WWLF-56/WILF-53/
<S> <C> <C> <C> <C> <C> <C>
WOLF-38(6) .... May 1993 Fox Northeastern PA 49 553,000 3
WPXT-51 ........ January 1996 Fox Portland, ME 79 344,000 3
WDSI-61 ........ May 1993 Fox Chattanooga, TN 82 320,000 4
WDBD-40 ........ May 1993 Fox Jackson, MS 91 287,000 3
WTLH-49 ........ March 1996 Fox Tallahassee, FL 116 210,000 3
Additional Stations:
WOLF-38(6) ..... May 1993 UPN Northeastern PA 49 553,000 3
WWLA-35(7) ..... May 1996 UPN Portland, ME 79 344,000 3
</TABLE>
<TABLE>
<CAPTION>
Ratings Rank Oversell
---------------------- ----------
Station Prime(3) Access(4) Ratio(5)
---------------- --------- --------- ----------
Existing Stations:
WWLF-56/WILF-53/
<S> <C> <C> <C>
WOLF-38(6) .... 3 (tie) 1 166%
WPXT-51 ........ 2 4 122%
WDSI-61 ........ 4 3 125%
WDBD-40 ........ 2 (tie) 2 114%
WTLH-49 ........ 2 2 100%
Additional Stations:
WOLF-38(6) ..... N/A N/A N/A
WWLA-35(7) ..... N/A N/A N/A
</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 May 1996.
(4) "Access" indicates local station rank in the 18 to 49 age category
during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen
estimates for May 1996.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1995 BIA market data and 1995 Nielsen audience
share data.
(6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain
FCC approvals, the Company intends to separately program WOLF as an
affiliate of UPN.
(7) The Company anticipates programming WWLA pursuant to an LMA as an
affiliate of UPN.
49
<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
May 1996.
The Company acquired WOLF and WWLF in May 1993 from a partnership of which
Guyon W. Turner was the managing general partner, and also acquired WILF at
the same time from a partnership unaffiliated with Mr. Turner. Mr. Turner is
a Vice President of Pegasus and Vice President of the subsidiary that
operates the Company's TV stations. He has been employed by the Company since
it acquired WOLF and WWLF. Historically, WOLF, WWLF and WILF have been
commonly programmed with WWLF and WILF operated as satellites of WOLF.
However, the Company believes that it can achieve over the air coverage of
the Northeastern Pennsylvania DMA comparable to that currently provided by
WOLF, WWLF and WILF together by moving WWLF to a tower site occupied by the
other stations in the market and by increasing the authorized power of WILF.
The Company has filed an application with the FCC, which if granted, will
enable the Company to accomplish this objective. This application is
currently pending. If this application is granted by the FCC, the Company
intends to relocate WWLF's transmitter and tower, to increase the power of
WILF and to separately program WOLF as an affiliate of UPN. The continued
ownership of WOLF by the Company following relocation of the WWLF tower may
depend on changes in the FCC's ownership rules. See "-- Licenses, LMAs, DBS
Agreements and Cable Franchises."
PORTLAND, MAINE
Portland is the 79th largest DMA in the United States, comprising 12
counties in Maine and New Hampshire with a total of 344,000 television
households and a population of 902,000. Portland's economy is based on
financial services, lumber, tourism, and its status as a transportation and
distribution gateway for central and northern Maine. In 1995, annual retail
sales in the Portland market totaled approximately $8.9 billion and the total
television revenues in this market increased 4.0% from approximately $40.0
million to approximately $41.6 million. In addition to WPXT, there are three
VHF and three UHF stations operating in the Portland DMA, including one VHF
and two UHF educational stations.
50
<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 May 1996.
In the Portland Acquisition, the Company acquired television station WPXT,
the Fox-affiliated television station serving the Portland DMA. Pursuant to
the Portland LMA, the Company acquired an LMA with the holder of a
construction permit for WWLA, a new TV station licensed to operate UHF
channel 35 in the Portland market. Under the Portland LMA, the Company will
lease facilities and provide programming to WWLA, retain all revenues
generated from advertising, and make payments of $52,000 per year to the FCC
license holder in addition to reimbursement of certain expenses. Construction
of WWLA is expected to be completed in 1997. WWLA's offices, studio and
transmission facilities will be co-located with WPXT. In April 1996, an
application was filed with the FCC to significantly increase WWLA's
authorized power in order to expand its potential audience coverage. That
application is currently pending before the FCC.
CHATTANOOGA, TENNESSEE
Chattanooga is the 82nd largest DMA in the United States, comprising 18
counties in Tennessee, Georgia, North Carolina and Alabama with a total of
320,000 television households and a population of 842,000. Chattanooga's
economy is based on insurance and financial services in addition to
manufacturing and tourism. In 1995, annual retail sales in the Chattanooga
market totaled approximately $7.1 billion and total television revenues in
this market increased 2.4% from approximately $37.6 million to approximately
$38.5 million. In addition to WDSI, there are three VHF and four UHF stations
operating in the Chattanooga DMA, including one religious and two educational
stations. The Company acquired WDSI in May 1993. From October 1991 through
April 1993, the station was managed by the Company. See "Management and
Certain Transactions."
<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 3
Oversell Ratio ....................... 132% 119% 129% 125% --
</TABLE>
- ------
(1) Prime and access ratings ranks based on Nielson estimates for May 1996.
JACKSON, MISSISSIPPI
Jackson is the 91st largest DMA in the United States, comprising 24
counties in central Mississippi with a total of 287,000 television households
and a population of 819,000. Jackson is the capital of Mississippi and its
economy reflects the state and local government presence as well as
agriculture and service industries. Because of its central location, it is
also a major transportation and distribution center. In 1995, annual retail
sales in the greater Jackson market totaled approximately $6.1 billion and
total television revenues in the market increased 10.8% from approximately
$32.5 million to approximately $36.0 million. In addition to WDBD, there are
two VHF and two UHF television stations operating in the Jackson DMA,
including one educational station. The Jackson DMA also has an allocation for
an additional television channel which is not operational. The Company
acquired WDBD in May 1993. From October 1991 through April 1993, the station
was managed by the Company. See "Management and Certain Transactions."
51
<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 May 1996.
TALLAHASSEE, FLORIDA
The Tallahassee DMA is the 116th largest in the United States comprising
18 counties in northern Florida and southern Georgia with a total of 210,000
television households and a population of 578,000. Tallahassee is the state
capital of Florida and its major industries include state and local
government as well as firms providing commercial service to North Florida's
cattle, lumber, tobacco and farming industries. In 1995, annual retail sales
in this market totaled $4.4 billion and total television advertising revenues
increased 5.3% from approximately $18.9 million in 1994 to approximately
$19.9 million. In addition to WTLH, there are two VHF and two UHF television
stations operating in the Tallahassee DMA, including one educational station.
An additional station licensed to Valdosta, Georgia broadcasts from a
transmission facility located in the Albany, Georgia DMA. The Tallahassee DMA
has allocations for three TV stations that are not operational.
<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 May 1996.
In March 1996, the Company acquired the principal tangible assets of WTLH
and entered into an LMA to operate WTLH. In August 1996, the Company acquired
WTLH's FCC license and its Fox Affiliation Agreement. WTLH has filed with the
FCC an application which, if granted, will enable the Company to move WTLH's
tower and transmitter facilities to a site approximately ten miles closer to
Tallahassee and to increase its tower height and power. That application is
currently pending before the FCC. The Company anticipates relocating WTLH's
transmitter and tower to this site in 1997 to increase its audience coverage
in the Tallahassee market.
DBS
DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
United States television households in 1994. DIRECTV currently offers in
excess of 175 channels of near laser disc quality video and CD quality audio
programming and transmits via three high-power Ku band satellites, each
containing 16 transponders. As of August 20, 1996, there were over 1.8
million DIRECTV subscribers. DIRECTV expects to have over 2.6 million
subscribers by the end of 1996 and approximately ten million subscribers by
the year 2000.
The equipment required for reception of DIRECTV services (a DSS unit)
includes an 18-inch satellite antenna, a digital receiver approximately the
size of a standard VCR and a remote control, all of which are used with
standard television sets. Each DSS receiver includes a "smart card" which is
uniquely addressed to it. The smart card, which can be removed from the
receiver, prevents unauthorized reception of DIRECTV services and retains
billing information on pay-per-view usage, which information is sent at
regular intervals from the DSS receiver telephonically to DIRECTV's
authorization and billing system. DSS units also enable
52
<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 Time Warner and Viacom
satellite programming services, such as multiple channels of HBO and
Showtime, which are not available through DIRECTV but which are generally
complementary to DIRECTV programming.
A license to manufacture DSS units was initially awarded by Hughes to
Thomson Consumer Electronics, Inc., the manufacturer of RCA-branded products
("RCA/Thomson"). This license provided RCA/Thomson with an exclusivity
period, which ended in April 1995, covering the first one million DSS units.
RCA/Thomson's DSS units retail for as low as $399. Hughes awarded a second
license to Sony which provided Sony joint exclusivity with RCA/Thomson until
December 1995. Hughes has awarded additional licenses to Hughes Network
Systems, Toshiba Consumer Electronics, Samsung Electronics America, Inc.,
Sanyo Fisher Corporation, Daewoo Electronics Corporation of America, Uniden
Corporation and Philips Electronics, N.V., whose production and distribution
have commenced or are expected to commence in 1996. At the end of 1995, more
than 20,000 retailers were selling DSS equipment and DIRECTV programming
packages.
In January 1996, DIRECTV entered into a strategic relationship with AT&T
that is designed to accelerate DIRECTV's market penetration. The agreement
calls for AT&T to invest $137.5 million for a 2.5% equity interest in DIRECTV
with rights to purchase up to 30% of DIRECTV based on subscriber acquisition
performance. The agreement gives AT&T an exclusive right to market, except in
NRTC territories, DIRECTV services to all residential customers. In May 1996,
AT&T began to offer DIRECTV programming and DSS receiving equipment to its 90
million customers utilizing its Universal Card to provide financing and its
True Rewards(R) frequent buyers program. Additionally, DIRECTV has recently
announced a joint venture with Microsoft to offer interactive programming and
data services to be introduced in early 1997.
THE COMPANY'S DBS OPERATIONS
The Company owns, through agreements with the NRTC, the exclusive right to
provide DIRECTV services in certain rural areas of Connecticut,
Massachusetts, New Hampshire and New York. Upon consummation of the
Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, it will also
acquire exclusive rights to provide DIRECTV services in certain rural areas
of Michigan, Texas and Ohio. The Company is the largest independent provider
of DIRECTV services not affiliated with Hughes. The Company's New England DBS
service area encompasses all of its New England Cable systems except for its
systems in central Massachusetts. Its Michigan DBS service area covers nine
counties in the Flint, Saginaw and thumb regions of Michigan, its Texas DBS
service area covers seven counties approximately 45 miles south of the
Dallas/Fort Worth metroplex and its Ohio DBS service area covers 11 counties
in southern Ohio.
53
<PAGE>
<TABLE>
<CAPTION>
Homes Average
Not Homes Monthly
Total Passed Passed Penetration Revenue
DIRECTV Homes in by by Total -------------------------------- Per
Territory Territory Cable(1) Cable(2) Subscribers(3) Total Uncabled Cabled Subscriber(4)
----------------- ----------- --------- --------- -------------- ------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Owned:
Western New
England ........ 288,273 41,465 246,808 5,208 1.8% 10.5% 0.3%
New Hampshire ... 167,531 42,075 125,456 3,273 2.0% 6.6% 0.4%
Martha's Vineyard
and Nantucket .. 20,154 1,007 19,147 635 3.2% 51.7% 0.6%
----------- --------- --------- -------------- ------- ---------- -------- ---------
Total .......... 475,958 84,547 391,411 9,116 1.9% 9.1% 0.4% $40.32
----------- --------- --------- -------------- ------- ---------- -------- ---------
To Be Acquired:
Michigan ........ 241,713 61,774 179,939 5,213 2.2% 6.6% 0.6% $43.35
Texas ........... 149,530 54,504 95,026 4,449 3.0% 6.2% 1.1% $36.95
Ohio ............ 167,558 32,180 135,378 4,355 2.6% 10.1% 0.8% $39.27
----------- --------- --------- -------------- ------- ---------- -------- ---------
Total .......... 558,801 148,458 410,343 14,017 2.5% 7.2% 0.8% $40.10
----------- --------- --------- -------------- ------- ---------- -------- ---------
Total ......... 1,034,759 233,005 801,754 23,133 2.2% 7.9% 0.6% $40.18
=========== ========= ========= ============== ======= ========== ======== =========
</TABLE>
- ------
(1) Based on NRTC estimates of primary residences derived from 1990 U.S.
census data and after giving effect to a 1% annual housing growth rate
and seasonal residence data obtained from county offices. Does not
include business locations. Includes approximately 22,200 seasonal
residences.
(2) Based on NRTC estimates of primary residences derived from 1990 U.S.
census data and after giving effect to a 1% annual housing growth rate
and seasonal residence data obtained from county offices. Does not
include business locations. Includes approximately 80,300 seasonal
residences.
(3) As of August 1996.
(4) Based upon July 1996 revenues and average July 1996 subscribers.
BUSINESS STRATEGY
As the exclusive provider of DIRECTV services in its purchased
territories, the Company provides a full range of services, including
installation, authorization and financing of equipment for new customers as
well as billing, collections and customer service support for existing
subscribers. The Company's operating strategy in DBS is to (i) establish
strong relationships with retailers, (ii) build its own direct sales and
distribution channels, (iii) develop local and regional marketing and
promotion to supplement DIRECTV's national advertising, and (iv) offer
aggressively priced equipment rental, lease and purchase options.
The Company anticipates continued significant growth in subscribers and
operating profitability in DBS through increased penetration of DIRECTV
territories it currently owns and will acquire pursuant to the Michigan/Texas
DBS Acquisition and the Ohio DBS Acquisition. The Company's DBS operations
achieved positive Location Cash Flow in 1995, its first full year of
operations. The Company's DIRECTV subscribers currently generate revenues of
approximately $40 per month at an average gross margin of 34%. The Company's
remaining expenses consist of marketing costs incurred to build its growing
base of subscribers and overhead costs which are predominantly fixed. As a
result, the Company believes that future increases in its DBS revenues will
result in disproportionately greater increases in Location Cash Flow. For the
first six months of 1996, the Company has been adding DIRECTV subscribers at
approximately twice the rate of the same period in 1995.
The Company also believes that there is an opportunity for additional
growth through the acquisition of DIRECTV territories held by other NRTC
members. NRTC members are the only independent providers of DIRECTV services.
In excess of 250 NRTC members have collectively purchased DIRECTV territories
consisting of approximately 7.7 million television households in
predominantly rural areas of the United States, which are among the most
likely to subscribe to DBS services. These territories comprise 8% of United
States television households, but represent between 25% and 30% of DIRECTV's
existing subscriber base. As the largest, and only publicly held, independent
provider of DIRECTV services, the Company believes that it is well positioned
to achieve economies of scale through the acquisition of DIRECTV territories
held by other NRTC members.
DIRECTV PROGRAMMING
DIRECTV programming includes (i) cable networks, broadcast networks and
<PAGE>
audio services available for purchase in tiers for a monthly subscription,
(ii) premium services available a la carte or in tiers for a monthly
subscription, (iii) sports programming (including regional sports networks
and seasonal college and major professional league sports packages) available
for a yearly, seasonal or monthly subscription and (iv) movies
54
<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 (e.g. Sears, Circuit City and Best Buy) selected
by DIRECTV,
55
<PAGE>
(ii) through consumer electronics dealers authorized by DIRECTV to sell
DIRECTV programming, (iii) through satellite dealers and consumer electronics
dealers authorized by five regional sales management agents ("SMAs") selected
by DIRECTV, (iv) through members of the NRTC who, like the Company, have
agreements with the NRTC to provide DIRECTV services, and (v) by AT&T, which
has the exclusive right to market, except in NRTC territories, DIRECTV
services to all residential customers. All programming packages currently
must be authorized by the Company in its service areas. See "Business --
Licenses, LMAs, DBS Agreements, and Cable Franchises."
The Company markets DIRECTV programming services and DSS units in its
distribution area in three separate but overlapping ways. In residential
market segments in which authorized DSS dealers exist, the Company seeks to
develop close, cooperative relationships with these dealers in which the
Company provides marketing, subscriber authorization, installation and
customer service support, but where the purchase, inventory and sale of the
DSS unit is handled by the dealers. In these circumstances, the dealer earns
a profit on the sale of the DSS unit and a commission payable by the Company
from the sale of DIRECTV programming, while the Company may receive a profit
from a subscriber's initial installation and receives the programming service
revenues payable by the subscriber. Many DSS dealers are also authorized to
offer the Company's lease program.
In addition, the Company has developed a network of its own sales agents
("Programming Sales Agents") from among local satellite dealers, utilities,
cable installation companies, retailers and other contract sales people or
organizations. Programming Sales Agents earn commissions on the lease or sale
of DSS units, as well as on the sale of DIRECTV programming.
In residential market segments in which a significant number of potential
subscribers wish to lease DSS units and in all commercial market segments,
the Company utilizes its own telemarketing and direct sales agents to sell
DIRECTV residential and commercial programming packages, to sell or lease DSS
units and to provide subscriber installations. In these instances, the
Company earns a profit from the sale, lease or rental of the DSS unit, from a
subscriber's initial installation and from the programming service revenues
payable by the subscriber.
The Company offers a lease program in which subscribers may lease DSS
units for $15 per month. The initial lease term is 36 months, at the end of
which the subscriber has the option to continue to pay $15 a month for an
additional 12 months to purchase the unit or continue on a month-to-month
basis. Subscribers that lease equipment must also select a monthly
programming package from DIRECTV throughout the term of the lease. Additional
receivers can be leased for an additional $15 per month. Programming
authorizations for additional outlets are $1.95 per month. There is a
one-time charge of $199 for standard installations. The lease program is
available only to subscribers that reside in the Company's service area.
The Company seeks to identify and target market segments within its
service area in which it believes DIRECTV programming services will have
strong appeal. Depending upon their individual circumstances, potential
subscribers may subscribe to DIRECTV services as a source of multichannel
television where no other source currently exists, as a substitute for
existing cable service due to its high price or poor quality or as a source
of programming which is not available via cable but which is purchased as a
supplement to existing cable service. The Company seeks to develop
promotional campaigns, marketing methods and distribution channels designed
specifically for each market segment.
The Company's primary target market consists of residences which are not
passed by cable or which are passed by older cable systems with fewer than 40
channels. The Company estimates that after giving effect to the
Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, its exclusive
DIRECTV territories will contain approximately 233,000 television households
which are not passed by cable and approximately 488,000 television households
which are passed by older cable systems with fewer than 40 channels. The
Company actively markets DIRECTV services as a primary source of television
programming to potential subscribers in this market segment since the Company
believes that it will achieve its largest percentage penetration in this
segment.
The Company also targets potential subscribers who are likely to be
attracted by specific DIRECTV programming services. This market segment
includes (i) residences in which a high percentage of the viewing is devoted
to movie rentals or sports, (ii) residences in which high fidelity audio or
video systems have been
56
<PAGE>
installed and (iii) commercial locations (such as bars, restaurants, hotels
and private offices) which currently subscribe to pay television or
background music services. The Company estimates that after giving effect to
the Michigan/Texas DBS Acquisition and the Ohio DBS Acquisition, its
exclusive DIRECTV territories will contain approximately 83,000 commercial
locations in its DBS territory.
The Company also targets seasonal residences in which it believes that the
capacity to start and discontinue DIRECTV programming seasonally or at the
end of a rental term has significant appeal. These subscribers are easily
accommodated on short notice without the requirement of a service call
because DIRECTV programming is a fully "addressable" digital service. The
Company estimates that after giving effect to the Michigan/Texas DBS
Acquisition and the Ohio DBS Acquisition, its exclusive DIRECTV territories
will contain in excess of 111,000 seasonal residences in this market segment.
Additional target markets include apartment buildings, multiple dwelling
units and private housing developments. While DSS units designed specifically
for use in such locations have not yet been introduced commercially,
RCA/Thomson has announced its intention to offer such a product for sale by
the end of 1996.
Finally, DIRECTV has announced its intention to utilize a portion of the
additional capacity from its third satellite and improved compression to
offer, in a joint venture with Microsoft, one or more data services to
residences and businesses in 1997. When this occurs, the Company believes
that additional market segments will develop for data services within its
service areas.
The Company benefits from national promotion expenditures incurred by
DIRECTV, USSB and licensed manufacturers of DSS, such as RCA/Thomson and
Sony, to increase consumer awareness and demand for DIRECTV programming and
DSS units. The Company benefits as well from national, regional and local
advertising placed by national retailers, satellite dealers and consumer
electronics dealers authorized to sell DIRECTV programming and DSS units. The
Company also undertakes advertising and promotion cooperatively with local
dealers designed for specific market segments in its distribution area, which
are placed through local newspapers, television, radio and yellow pages. The
Company supplements its advertising and promotion campaigns with direct mail,
telemarketing and door-to-door direct sales.
CABLE
BUSINESS STRATEGY
The Company operates cable systems whose revenues and Location Cash Flow
it believes can be increased with limited increases in fixed costs. In
general, the Company's Cable systems (i) have the capacity to offer in excess
of 50 channels of programming, (ii) are "addressable" and (iii) serve
communities where off-air reception is poor. The Company's business strategy
in cable is to achieve revenue growth by (i) adding new subscribers through
improved signal quality, increases in the quality and the quantity of
programming, housing growth and line extensions and (ii) increasing revenues
per subscriber through new program offerings and rate increases. The Company
emphasizes the development of strong engineering management and the delivery
of a reliable, high-quality signal to subscribers. The Company adds new
programming (including new cable services, premium services and pay-per-view
movies and events) and invests in additional channel capacity, improved
signal delivery and line extensions to the extent it believes that it can add
subscribers at a low incremental fixed cost.
The Company believes that significant opportunities for growth in revenues
and Location Cash Flow exist in Puerto Rico from the delivery of traditional
cable services. Cable penetration in Puerto Rico averages 34% (versus a
United States average of 65% to 70%). The Company believes that this low
penetration is due principally to the limited amount of Spanish language
programming offered on Puerto Rico's cable systems. In contrast, Spanish
language programming represents virtually all of the programming offered by
television stations in Puerto Rico. The Company believes that cable
penetration in its Puerto Rico Cable systems will increase over the next five
years as it substitutes Spanish language programming for much of the English
language cable programming currently offered. The Company may also
selectively expand its presence in Puerto Rico.
57
<PAGE>
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 20,100 70% $33.08
Mayaguez .......... 62 38,300 34,000 10,900 32% $32.68
San German(6) ..... 50(7) 72,400 47,700 16,300 34% $30.82
----------- ----------- -------------- -------------- ------------
Total Puerto Rico 110,700 81,700 27,200 34% $31.57
----------- ----------- -------------- -------------- ------------
To Be Sold:
New Hampshire ..... (8) 6,500 6,100 4,600 75% $34.20
----------- ----------- -------------- -------------- ------------
Total ........... 133,600 104,200 42,700 41% $31.99
=========== =========== ============== ============== ============
</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 July 31,
1996.
(3) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly charge
for a single outlet in the area. This information is as of July 31, 1996.
(4) Basic subscribers as a percentage of homes passed by cable.
(5) The channel capacities of New England Cable systems are 36, 50 and 62 and
represent 44%, 24% and 32% of the Company's New England Cable
subscribers, respectively. After giving effect to certain system upgrades
which are anticipated to be completed by September 1996, the 36, 50 and
62 channel systems would have represented 22%, 24% and 54% of the
Company's total New England Cable subscribers, respectively.
(6) The San German Cable System was acquired upon consummation of the Cable
Acquisition in August 1996.
(7) After giving effect to certain system upgrades which are anticipated to
be completed during the first quarter of 1997, this system will be
capable of delivering 62 channels.
(8) The channel capacities of the New Hampshire Cable systems are 36 and 50
and represent 16% and 84% of the Company's New Hampshire Cable
subscribers, respectively.
PUERTO RICO CABLE SYSTEMS
Mayaguez. The Mayaguez Cable system serves the port city of Mayaguez,
Puerto Rico's third largest municipality and the economic hub of the western
coast of Puerto Rico. The economy is based largely on pharmaceuticals,
canning, textiles and electronics. Key employers include Eli Lilly, Bristol
Laboratories, Bumble Bee, Neptune, Allergan, Hewlett-Packard, Digital
Equipment, Wrangler and Levi Strauss. At June 30, 1996, the system passed
approximately 34,000 homes with 260 miles of plant and had 10,900 basic
subscribers, representing a basic penetration rate of 32%. The system
currently has a 62-channel capacity and offers 58 channels of programming.
The system is fully addressable.
San German. The San German Cable System serves a franchised area
comprising ten communities and approximately 72,400 households. The system
currently serves eight of these communities (two towns are unbuilt) with 480
miles of plant from two headends. At July 31, 1996, the system had 16,300
subscribers. The economy is based largely on tourism, light manufacturing,
pharmaceuticals and electronics. Key employers include Baxter Laboratories,
General Electric, OMJ Pharmaceuticals, White Westinghouse and Allergan
Medical Optics. The system currently offers 45 channels of programming and
has a 52 channel capacity. The system is fully addressable.
Consolidation of Puerto Rico Systems. As a result of the Cable
Acquisition, the Company serves contiguous franchise areas of approximately
111,000 households. The Company plans to increase the channel capacity of the
San German Cable System to 62 channels and to consolidate the headends,
offices, billing systems, channel lineup, and rates of the Mayaguez and San
German Cable systems. The consolidated system will consist of one headend
serving approximately 27,200 subscribers and passing approximately 82,000
homes with 740 miles of plant. The Company estimates that the consolidation
will result in significant expense savings and will also enable it to
increase revenues in the San German Cable System from the addition of
pay-per-view movies, additional programming (including Spanish language
channels) and improvements in picture quality. The Company also plans to
expand the system to pass an additional 8,950 homes in the San German
franchise.
58
<PAGE>
NEW ENGLAND CABLE SYSTEMS
The Company's New England Cable systems consist of seven headends serving
19 towns in Connecticut, Massachusetts and New Hampshire. At July 31, 1996,
these systems had approximately 20,100 basic subscribers. From 1990 to 1995,
these systems experienced compound annual growth rates of 10% in the number
of their subscribers and 37% in Location Cash Flow. This growth has been
principally achieved as a result of line extensions and housing growth. New
England Cable systems historically have had higher than national average
basic penetration rates due to the region's higher household income levels
and poor off air reception. The Company's systems offer addressable
converters to all premium and pay-per-view customers, which allow the Company
to activate these services without the requirement of a service call. The
Massachusetts and New Hampshire systems were acquired in June 1991 (with the
exception of the North Brookfield, Massachusetts Cable system, which was
acquired in July 1992), and the Connecticut system was acquired in August
1991.
The Company has entered into a letter of intent with respect to the sale
of its New Hampshire Cable systems. The Company's New Hampshire Cable systems
consist of two headends serving six towns. At July 31, 1996, these systems
had approximately 4,600 basic subscribers.
COMPETITION
The Company's TV stations compete for audience share, programming and
advertising revenue with other television stations in their respective
markets, and compete for advertising revenue with other advertising media,
such as newspapers, radio, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail and local cable systems.
Competition for audience share is primarily based on program popularity,
which has a direct effect on advertising rates. Advertising rates are based
upon the size of the market in which the station operates, a program's
popularity among the viewers that an advertiser wishes to attract, the number
of advertisers competing for the available time, the demographic composition
of the market served by the station, the availability of alternative
advertising media in the market area, aggressive and knowledgeable sales
forces and the development of projects, features and programs that tie
advertiser messages to programming. The Company believes that its focus on a
limited number of markets and the strength of its programming allows it to
compete effectively for advertising within its markets.
Cable operators face competition from television stations, private
satellite master antenna television ("SMATV") systems that serve
condominiums, apartment complexes and other private residential developments,
wireless cable, direct-to-home ("DTH") and DBS systems. As a result of the
passage of the 1996 Act, electric utilities and telephone companies will be
allowed to compete directly with cable operators both inside and outside of
their telephone service areas. In September 1996, an affiliate of Southern
New England Telephone Company, which is the dominant provider of local
telephone service in Connecticut, was granted a non-exclusive franchise to
provide cable television service throughout Connecticut. Currently, there is
only limited competition from SMATV, wireless cable, DTH and DBS systems in
the Company's franchise areas. The only DTH and DBS systems with which the
Company's cable systems currently compete are DIRECTV, USSB, EchoStar
Communications Corp. ("EchoStar"), PrimeStar Partners ("PrimeStar") and
AlphaStar Digital Television. The Company is the exclusive provider of
DIRECTV services to areas encompassing over 60% of its cable subscribers in
New England. However, the Company cannot predict whether additional
competition will develop in its service areas in the future. Additionally,
cable systems generally operate pursuant to franchises granted on a
non-exclusive basis and, thus, more than one applicant could secure a cable
franchise for an area at any time. It is possible that a franchising
authority might grant a second franchise to another cable company containing
terms and conditions more favorable than those afforded the Company. Although
the potential for "overbuilds" exists, there are presently no overbuilds in
any of the Company's franchise areas and, except as noted above with respect
to its Connecticut franchise, the Company is not aware of any other company
that is actively seeking franchises for areas currently served by the
Company.
Both the television and cable industries are continuously faced with
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media, and governmental
restrictions or actions of federal regulatory bodies, including the FCC, any
of which could possibly have a material effect on the Company's operations
and results.
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DIRECTV faces competition from cable (including in New England, the
Company's Cable systems), wireless cable and other microwave systems and
other DTH and DBS operators. Cable currently possesses certain advantages
over DIRECTV in that cable is an established provider of programming, offers
local programming and does not require that its subscribers purchase
receiving equipment in order to begin receiving cable services. DIRECTV,
however, offers significantly expanded service compared to most cable
systems. Additionally, upgrading cable companies' coaxial systems to offer
expanded digital video and audio programming similar to that offered by
DIRECTV will be costly. While local programming is not currently available
through DIRECTV directly, DIRECTV provides programming from affiliates of
national broadcast networks to subscribers who are unable to receive networks
over-the-air and who have not subscribed to cable. DIRECTV faces additional
competition from wireless cable systems such as multichannel multipoint
distribution systems ("MMDS") which use microwave frequencies to transmit
video programming over the air from a tower to specially equipped homes
within the line of sight of the tower. The Company is unable to predict
whether wireless video services, such as MMDS, will continue to develop in
the future or whether such competition will have a material impact on the
operations of the Company.
DIRECTV also faces competition from other providers and potential
providers of DBS services. Of the eight orbital locations within the BSS band
allocated for United States licensees, three orbital positions enable full
coverage of the contiguous United States. The remaining orbital positions are
situated to provide coverage to either the eastern or western United States,
but cannot provide full coverage of the contiguous United States. This
provides companies licensed to the three orbital locations with full coverage
a significant advantage in providing DBS service to the entire United States,
as they must place satellites in service at only one and not two orbital
locations. The orbital location licensed to Hughes and USSB is generally
recognized as the most centrally located for coverage of the contiguous
United States; however, EchoStar has launched, and a joint venture of MCI and
News Corp. has announced its intention to launch, DBS services from the other
two orbital locations with full coverage of the contiguous United States.
MCI/News Corp. was the successful bidder for the transponder slot auctioned
by the FCC at 110o west longitude. MCI/News Corp. has announced that it
anticipates being operational in two years.
In addition, two entities, Western Tele-Communications, Inc., a
wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), and another
company, TeleQuest Ventures, L.L.C., have applied for authority from the FCC
to operate earth stations that would be used to communicate with Canadian DBS
satellites that have service coverage of the United States. If such authority
is granted, these entities could enter the United States multichannel
television programming distribution market and compete with DIRECTV.
The Company also competes with PrimeStar, owned primarily by a consortium
of cable companies, including TCI, that currently offers medium-power Ku-band
programming service to customers using dishes approximately three feet in
diameter.
INDUSTRY BACKGROUND
TV
Commercial television began in the United States on a regular basis in the
1940s. Initially, television stations operated only in the larger cities on a
portion of the broadcast spectrum commonly known as the "VHF" band.
Additional television channels were subsequently assigned to cities
throughout the country for use on the "UHF" band. There are 12 channels in
the VHF band, numbered 2 through 13, and 56 channels in the UHF band,
numbered 14 through 69. UHF band channels differ from VHF channels in that
UHF channels broadcast at higher frequencies and thus are more affected by
terrain and obstructions to line-of-sight transmission. There are only a
limited number of channels available for broadcasting in any one geographic
area, with the license to operate a station being granted by the FCC.
The majority of commercial television stations in the United States are
affiliated with the major national networks (ABC, CBS, NBC, and Fox). Two
newer networks, UPN and the Warner Brothers Network ("WB"), are affiliated
with many of the remainder. Stations that operate without network
affiliations are commonly referred to as "independent" stations. Each
national network offers its affiliates a wide variety of television programs
in exchange for the right to retain a significant portion of the available
advertising time during its network programs. ABC, CBS and NBC currently
offer more than 12 hours of programming a day on average, which represents
approximately two-thirds of the typical broadcasting day. UPN and WB program
up
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to six hours per week in prime time. Since its inception in 1986, Fox has
increased the amount of programming available to its affiliates. Fox
currently provides its affiliates with six hours of programming a day on
average. The Fox network currently consists of 163 primary affiliates, and
Fox programming is available in more than 94% of the television households in
the United States.
Advertising and Ratings
Most television station revenues are derived from the sale of time to
national, regional and local advertisers for commercials which are inserted
in or adjacent to the programming shown on the station. These commercials are
commonly referred to as "spot" advertising. Network-affiliated stations are
required to carry the advertising sold by the network during the network
programming broadcast by the station. This reduces the amount of spot
advertising available for sale by the station. The networks generally
compensate their affiliates for network carriage according to a formula based
on coverage as well as other qualitative factors. Independent stations retain
all of the revenues received from the sale of advertising time.
The advertising sales market consists of national network advertising,
national spot advertising and local spot advertising. An advertiser wishing
to reach a nationwide audience usually purchases advertising time directly
from the major networks, including Fox, or nationwide ad hoc networks (groups
of otherwise unrelated stations that combine to show a particular program or
series of programs). A national advertiser wishing to reach a particular
regional or local audience usually buys advertising time directly from local
stations through national advertising sales representative firms. Local
businesses purchase advertising directly from the stations' local sales
staffs. In addition, television stations derive significant revenues from the
sale of time (usually in the early morning time blocks) for the broadcast of
"infomercials" and other programs supplied by advertisers.
Programming that is not supplied to stations by a network is acquired from
programming syndicators either for cash, in exchange for advertising time
("barter") or a combination of cash and barter. Typically, television
stations acquiring syndicated programs are given the exclusive right to show
the program in the station's market for the number of times and during the
period of time agreed upon by the station and the syndicator. Over the last
several years, there has been an increase in programming available through
barter or a combination of cash and barter and a decrease in cash
transactions in the syndication market.
Nielsen periodically publishes data on estimated audiences for television
stations in all DMAs throughout the United States. The estimates are
expressed in terms of the station's share of the total potential audience in
the market (the station's "rating") and of the audience actually watching
television (the station's "share"). The ratings service provides such data on
the basis of total television households and of selected demographic
groupings in the market. Nielsen uses one of two methods to measure the
station's actual viewership. In larger markets, ratings are determined by a
combination of meters connected directly to selected television sets (the
results of which are reported on a daily basis) and periodic surveys of
television viewing (diaries), while in smaller markets only periodic surveys
are conducted. Generally, ratings for Fox affiliates and independent stations
are lower in diary (non-metered) markets than in metered markets. Most
analysts believe that this is a result of the greater accuracy of measurement
that meters allow.
DBS
The widespread use of satellites for television developed in the 1970s, as
a means to distribute news and entertainment programming to and from
broadcast television stations and to the headends of cable systems. The use
of satellites by cable systems permitted low cost networking of cable
systems, thereby promoting the growth of satellite-delivered pay channel
services (such as HBO and Showtime) and enhanced basic services (such as CNN,
ESPN and C-SPAN).
The DTH satellite market developed as consumers in rural markets without
access to cable or broadcast television programming purchased home satellite
television receive only ("TVRO") products to receive programming directed
towards broadcast television stations and cable headends. The DTH business
has grown as satellite-delivered services have been developed and marketed
specifically for TVRO system owners. Currently, there are estimated to be
approximately 2.3 million TVRO systems authorized to receive DTH programming
in the United States.
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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
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events and from the sale of available advertising spots on
advertiser-supported programming and on locally generated programming. Cable
systems also frequently offer to their customers home shopping services,
which pay the systems a share of revenues from sales of products in the
systems' service areas. Lastly, cable systems may charge subscribers for
services such as installations, reconnections, and service calls and the
monthly rental of equipment such as converters and remote controls.
LICENSES, LMAS, DBS AGREEMENTS AND CABLE FRANCHISES
TV
FCC Licensing. The broadcast television industry is subject to regulation
by the FCC pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). Approval by the FCC is required for the issuance,
renewal, transfer and assignment of broadcast station operating licenses.
Under the 1996 Act, the FCC has been authorized to renew television station
licenses for a term of up to eight years. The FCC is currently conducting a
rulemaking to determine whether television license terms should be extended
from their current term of five years to the maximum eight-year term provided
by the 1996 Act. While in the vast majority of cases such licenses are
renewed by the FCC, there can be no assurance that the Company's licenses
will be renewed at their expiration dates or that such renewals will be for
full terms. The Company's licenses with respect to TV stations
WOLF/WWLF/WILF, WDSI and WDBD are scheduled to expire on August 1, 1999,
August 1, 1997 and June 1, 1997, respectively. In addition, the licenses with
respect to stations WTLH and WPXT are scheduled to expire on April 1, 1997
and April 1, 1999, respectively. In order for the Company to acquire the
licenses for television stations WTLH and WPXT, the FCC's consent to the
assignment of these licenses to the Company is required. See "Business --
TV."
Fox Affiliation Agreement. Each of the Company's TV stations which are
affiliated with Fox is a party to a substantially identical station
affiliation agreement with Fox (as amended, the "Fox Affiliation
Agreements"). Each Fox Affiliation Agreement provides the Company's
Fox-affiliated stations with the right to broadcast all programs transmitted
by Fox, on behalf of itself and its wholly-owned subsidiary, the Fox
Children's Network, Inc. ("FCN"), which include programming from Fox as well
as from FCN. In exchange, Fox has the right to sell a substantial portion of
the advertising time associated with such programs and to retain the revenue
from the advertising it has sold. The stations are entitled to sell the
remainder of the advertising time and retain the associated advertising
revenue. The stations are also compensated by Fox according to a
ratings-based formula for Fox programming and a share of the programming net
profits of FCN programming, as specified in the Fox Affiliation Agreements.
Each Fox Affiliation Agreement is for a term ending October 31, 1998 with
the exception of the WTLH Fox Affiliation Agreement, which expires on
December 31, 2000. The Fox Affiliation Agreements are renewable for a
two-year extension, at the discretion of Fox and upon acceptance by the
Company. The Fox Affiliation Agreements may be terminated generally (a) by
Fox upon (i) a material change in the station's transmitter location, power,
frequency, programming format or hours of operation, with 30 days' written
notice, (ii) acquisition by Fox, directly or indirectly, of a significant
ownership and/or controlling interest in any television station in the same
market, with 60 days' written notice, (iii) assignment or attempted
assignment by the Company of the Fox Affiliation Agreements, with 30 days
written notice, (iv) three or more unauthorized preemptions of Fox
programming within a 12-month period, with 30 days written notice, or (b) by
either Fox or the affiliate station upon occurrence of a force majeure event
which substantially interrupts Fox's ability to provide programming or the
station's ability to broadcast the programming. The Company's Fox Affiliation
Agreements have been renewed in the past. The Company believes that it enjoys
good relations with Fox.
Each Fox Affiliation Agreement provides the Company's Fox-affiliated
stations with all programming which Fox and FCN make available for
broadcasting in the community to which the station is licensed by the FCC.
Fox has committed to supply approximately six hours of programming per day
during specified time periods. Each of the Company's stations have agreed to
broadcast all such Fox programs in their entirety, including all commercial
announcements. In return for a station's full performance of its obligations
under its respective affiliation agreement, Fox will pay such station
compensation determined in accordance with Fox's current, standard,
performance-based station compensation formula.
As part of the agreement with Fox to extend the stations' Fox Affiliation
Agreements until 1998, each of the stations granted Fox the right to
negotiate with the cable operators in their respective markets for
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retransmission consent agreements. Under the Fox "Win/Win Plan," the cable
operators received the right to retransmit the programming of the Company's
TV stations in exchange for the carriage by the cable operators of a new
cable channel owned by Fox. The Company's TV stations are to receive
consideration from Fox based on the number of subscribers carrying the new
Fox channel within the stations' market. Fox has reached agreements in
principle with most of the largest cable operators in the country.
LMAs. Current FCC rules preclude the ownership of more than one television
station in a market, unless such stations are operated as a satellite of a
primary station, initially duplicating the programming of the primary station
for a significant portion of their broadcast day. WWLF and WILF are currently
authorized as satellites of WOLF. In recent years, in a number of markets
across the country, certain television owners have entered into arrangements
to provide the bulk of the broadcast programming on stations owned by other
licensees, and to retain the advertising revenues generated from such
programming.
When operating pursuant to an LMA, while the bulk of the programming is
provided by someone other than the licensee of the station, the station
licensee must retain control of the station for FCC purposes. Thus, the
licensee has the ultimate responsibility for the programming broadcast on the
station and for the station's compliance with all FCC rules, regulations, and
policies. The licensee must retain the right to preempt programming supplied
pursuant to the LMA where the licensee determines, in its sole discretion,
that the programming does not promote the public interest or where the
licensee believes that the substitution of other programming would better
serve the public interest. The licensee must also have the primary
operational control over the transmission facilities of the station.
To the extent that the Company currently programs WTLH through an LMA, and
expects to program other stations through the use of such agreements, there
can be no assurance that the licensee of such stations will not unreasonably
exercise its right to preempt the programming of the Company, or that the
licensees of such stations will continue to maintain the transmission
facilities of the stations in a manner sufficient to broadcast a high quality
signal over the station. As the licensee must also maintain all of the
qualifications necessary to be a licensee of the FCC, and as the principals
of the licensee are not under the control of the Company, there can be no
assurances that these licenses will be maintained by the entities which
currently hold them.
In the 1996 Act, the continued performance of then existing LMAs was
generally grandfathered. Currently, LMAs are not considered attributable
interests under the FCC's multiple ownership rules. However, the FCC is
currently considering proposals which would make LMAs attributable, as they
generally are in the radio broadcasting industry. If the FCC were to adopt a
rulemaking that makes such interests attributable, without modifying its
current prohibitions against the ownership of more than one television
station in a market, the Company could be prohibited from entering into such
arrangements with other stations in markets in which it owns television
stations.
DBS AGREEMENTS
Prior to the launch of the first DIRECTV satellite in 1993, Hughes entered
into various agreements intended to assist it in the introduction of DIRECTV
services, including agreements with RCA/Thomson for the development and
manufacture of DSS units and with USSB for the sale of five transponders on
the first satellite. At this time, Hughes also offered the NRTC and its
members the opportunity to become the exclusive providers of DIRECTV services
in rural areas of the United States in which an NRTC member purchased such a
right. The NRTC is a cooperative organization whose members are engaged in
the distribution of telecommunications and other services in predominantly
rural areas of the United States. Pursuant to the DBS Agreements,
participating NRTC members acquired the exclusive right to provide DIRECTV
programming services to residential and commercial subscribers in certain
service areas. Service areas purchased by participating NRTC members comprise
approximately 7.7 million television households and were acquired for
aggregate purchase payments exceeding $100 million.
The DBS Agreements provide the NRTC and participating NRTC members in
their service areas substantially all of the rights and benefits otherwise
retained by DIRECTV in other areas, including the right
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to set pricing (subject to certain obligations to honor national pricing on
subscriptions sold by national retailers), to bill subscribers and retain all
subscription remittances and to appoint sales agents within their
distribution areas (subject to certain obligations to honor sales agents
appointed by DIRECTV and its regional SMAs). In exchange, the NRTC and
participating NRTC members paid to DIRECTV a one-time purchase price. In
addition to the purchase price, NRTC members are required to reimburse
DIRECTV for the allocable share of certain common expenses (such as
programming, satellite-specific costs and expenses associated with the
billing and authorization systems) and to remit to DIRECTV a 5% royalty on
subscription revenues.
The DBS Agreements authorize the NRTC and participating NRTC members to
provide all commercial services offered by Hughes that are transmitted from
the frequencies that the FCC has authorized for DIRECTV's use at its present
orbital location for a term running through the life of Hughes' current
satellites. The NRTC has advised the Company that the NRTC Agreement also
provides the NRTC a right of first refusal to acquire comparable rights in
the event that Hughes elects to launch successor satellites upon the removal
of the present satellites from active service. The financial terms of any
such purchase are likely to be the subject of negotiation and the Company is
unable to predict whether substantial additional expenditures of the NRTC
will be required in connection with the exercise of such right of first
refusal. Finally, under a separate agreement with Hughes (the "Dealer
Agreement"), the Company is an authorized agent for sale of DIRECTV
programming services to subscribers outside of its service area on terms
comparable to those of DIRECTV's other authorized sales agents.
The Member Agreement terminates when Hughes removes DIRECTV satellites
from their orbital location, although under the Dealer Agreement the right of
the Company to serve as a DIRECTV sales agent outside of its designated
territories may be terminated upon 60 days' notice by either party. If the
satellites are removed earlier than June 2004, the tenth anniversary of the
commencement of DIRECTV services, the Company will receive a prorated refund
of its original purchase price for the DIRECTV rights. The Member Agreement
may be terminated prior to the expiration of its term as follows: (a) if the
NRTC Agreement is terminated because of a breach by Hughes, the NRTC may
terminate the Member Agreement, but the NRTC will be responsible for paying
to the Company its pro rata portion of any refunds that the NRTC receives
from Hughes, (b) if the Company fails to make any payment due to the NRTC or
otherwise breaches a material obligation of the Member Agreement, the NRTC
may terminate the Member Agreement in addition to exercising other rights and
remedies against the Company and (c) if the NRTC Agreement is terminated
because of a breach by the NRTC, Hughes is obligated to continue to provide
DIRECTV services to the Company (i) by assuming the NRTC's rights and
obligations under the Member Agreement or (ii) under a new agreement
containing substantially the same terms and conditions as the Member
Agreement.
The Company is not permitted under the Member Agreement or the Dealer
Agreement to assign or transfer, directly or indirectly, its rights under
these agreements without the prior written consent of the NRTC and Hughes,
which consent cannot be unreasonably withheld.
CABLE FRANCHISES
Cable systems are generally constructed and operated under non-exclusive
franchises granted by state or local governmental authorities. The franchise
agreements may contain many conditions, such as the payment of franchise
fees; time limitations on commencement and completion of construction;
conditions of service, including the number of channels, the carriage of
public, educational and governmental access channels, the carriage of broad
categories of programming agreed to by the cable operator, and the provision
of free service to schools and certain other public institutions; and the
maintenance of insurance and indemnity bonds. Certain provisions of local
franchises are subject to limitations under the 1992 Cable Act.
After giving effect to the Cable Acquisition and the New Hampshire Cable
Sale, the Company will hold 11 cable franchises, all of which are
non-exclusive. The Cable Communications Policy Act of 1984 (the "1984 Cable
Act") prohibits franchising authorities from imposing annual franchise fees
in excess of 5% of gross revenues and permits the cable system operator to
seek renegotiation and modification of franchise requirements if warranted by
changed circumstances.
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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 July 31,
1996, after giving effect to the Cable Acquisition and the New Hampshire
Cable Sale.
<TABLE>
<CAPTION>
Number of Basic Percent of Basic
Year of Franchise Expiration Number of Franchises Subscribers Subscribers
---------------------------- -------------------- --------------- ----------------
<C> <C> <C> <C>
1996-1998 .................. 1 2,900 7%
1999-2002 .................. 2 9,800 22%
2003 and thereafter ........ 8 30,000 71%
-------------------- --------------- ----------------
Total .................... 11 42,700 100%
</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 TV
stations WOLF/WWLF/WILF, WDSI and WDBD are scheduled to expire on August 1,
1999, August 1, 1997 and June 1, 1997, respectively. In addition, the
licenses with respect to television stations WTLH and WPXT are scheduled to
expire on April 1, 1997 and April 1, 1999, respectively. The Company is not
aware of any facts or circumstances that might reasonably be expected to
prevent any of its stations from having its current license renewed at the
end of its respective term.
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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.
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In August 1996, the FCC adopted new children's television rules mandating,
among other things, that as of January 1, 1996 stations must identify and
provide information concerning children's programming to publishers of
program guides and listings and as of September 1, 1997 stations must
broadcast three hours each week of educational and informational programming
directed to children. The 1996 Act also requires commercial television
stations to report on complaints concerning violent programming in their
license renewal applications. In addition, most broadcast licensees,
including the Company's licensees, must develop and implement affirmative
action programs designed to promote equal employment opportunities and must
submit reports to the FCC with respect to these matters on an annual basis
and in connection with a license renewal application.
Must Carry and Retransmission Consent. The 1992 Cable Act requires each
television broadcaster to make an election to exercise either certain "must
carry" or, alternatively, "retransmission consent" rights in connection with
its carriage by cable systems in the station's local market. If a broadcaster
chooses to exercise its must carry rights, it may demand carriage on a
specified channel on cable systems within its defined market. Must carry
rights are not absolute, and their exercise is dependent on variables such as
the number of activated channels on, and the location and size of, the cable
system and the amount of duplicative programming on a broadcast station.
Under certain circumstances, a cable system may decline carriage of a given
station. If a broadcaster chooses to exercise its retransmission consent
rights, it may prohibit cable systems from carrying its signal, or permit
carriage under a negotiated compensation arrangement. The FCC's must carry
requirements took effect on June 2, 1993; however, stations had until June
17, 1993 to make their must carry/retransmission consent elections. Under the
Company's Fox Affiliation Agreements, the Company appointed Fox as its
irrevocable agent to negotiate such retransmission consents with the major
cable operators in the Company's respective markets. Fox exercised the
Company's stations' retransmission consent rights. Television stations must
make a new election between must carry and retransmission consent rights
every three years. The next required election date is October 1, 1996.
Although the Company expects the current retransmission consent agreements to
be renewed upon their expiration, there can be no assurance that such
renewals will be obtained.
In April 1993, the United States District Court for the District of
Columbia upheld the constitutionality of the legislative must carry
provision. This decision was vacated by the United States Supreme Court in
June 1994, and remanded to the District Court for further development of a
factual record. The District Court has again upheld the must carry rules, and
the matter will be considered again by the Supreme Court. The Company cannot
predict the outcome of the case. In the meantime, the must carry provisions
and the FCC's regulations implementing those provisions are in effect.
Pending or Proposed Legislation and FCC Rulemakings. The FCC has proposed
rules for implementing advanced (including high-definition) television
("ATV") service in the United States. Implementation of ATV is intended to
improve the technical quality of television. Under certain circumstances,
however, conversion to ATV operations may reduce a station's coverage area.
The FCC is considering an implementation proposal that would allot a second
broadcast channel to each full-power commercial television station for ATV
operation. Under the proposal, stations would be required to phase in their
ATV operations on the second channel over approximately nine years following
adoption of a final table of allotments and to surrender their present
channel six years later. Recently, there has been consideration by the FCC of
shortening further this transition period. In August 1995, the FCC commenced
a further rulemaking proceeding to address ATV transition issues. In August
1996, the FCC adopted a further notice of proposed rulemaking presenting a
proposed table of allotments for television stations for ATV operations. The
table is only a draft proposal and may differ significantly from the final
table. Implementation of ATV service may impose additional costs on
television stations providing the new service, due to increased equipment
costs, and may affect the competitive nature of the markets in which the
Company operates if competing stations adopt and implement the new technology
before the Company's stations. Various proposals have been put forth in
Congress to auction the new ATV channels, which could preclude the Company
from obtaining such channels if better financed companies were to participate
in such auction. The FCC's current proposal that television stations obtain
ATV channels and subsequently surrender their existing channels appears to
have stalled the auction effort, although the Company cannot predict the
ultimate outcome of the legislative consideration of these matters.
The FCC is now conducting a rulemaking proceeding to consider changes to
the multiple ownership rules that could, under certain limited circumstances,
permit common ownership of television stations with
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overlapping service areas, while imposing restrictions on television time
brokerage. Certain of these changes, if adopted, could allow owners of
television stations who currently cannot buy a television station or an
additional television station in the Company's markets to acquire television
properties in such markets. This may increase competition in such markets,
but may also work to the Company's advantage by permitting it to acquire
additional stations in its present markets and by enhancing the value of the
Company's stations by increasing the number of potential buyers. In addition,
the FCC is conducting an inquiry to consider proposals to increase
broadcasters' obligations under its rules implementing the Children's
Television Act of 1990, which requires television stations to present
programming specifically directed to the "educational and informational"
needs of children. The FCC also is conducting a rulemaking proceeding to
consider the adoption of more restrictive standards for the exposure of the
public and workers to potentially harmful radio frequency radiation emitted
by broadcast station transmitting facilities. Other matters which could
affect the Company's broadcast properties include technological innovations
affecting the mass communications industry and technical allocation matters,
including assignment by the FCC of channels for additional broadcast
stations, low-power television stations and wireless cable systems and their
relationship to and competition with full power television service, as well
as possible spectrum fees or other changes imposed on broadcasters for the
use of their channels. The ultimate outcome of these pending proceedings
cannot be predicted at this time.
The FCC has initiated a Notice of Inquiry proceeding seeking comment on
whether the public interest would be served by establishing limits on the
amount of commercial matter broadcast by television stations. No prediction
can be made at this time as to whether the FCC will impose any commercial
limits at the conclusion of its deliberations. The Company is unable to
determine what effect, if any, the imposition of limits on the commercial
matter broadcast by television stations would have upon the Company's
operations.
The FCC recently lifted its financial interest/syndication ("FIN/SYN")
rules that prohibited ABC, CBS and NBC from engaging in syndication for the
sale, licensing, or distribution of television programs for non-network
broadcast exhibition in the United States. Further, these rules prohibited
networks from sharing profits from any syndication and from acquiring any new
financial or proprietary interest in programs of which they were not the sole
producer. The Company cannot predict the effect of the elimination of the
FIN/SYN rules on the Company's ability to acquire desirable programming at
reasonable prices.
The FCC also recently eliminated the prime time access rule ("PTAR"),
effective August 30, 1996. PTAR currently limits a station's ability to
broadcast network programming (including syndicated programming previously
broadcast over a network) during prime time hours. The elimination of PTAR
could increase the amount of network programming broadcast over a station
affiliated with ABC, CBS or NBC. Such elimination also could result in (i) an
increase in the compensation paid by the network (due to the additional prime
time hours during which network programming could be aired by a
network-affiliated station) and (ii) increased competition for syndicated
network programming that previously was unavailable for broadcast by network
affiliates during prime time. For purposes of the prime time access rule, the
FCC defines "network" to include those entities that deliver more than 15
hours of "prime time programming" (a term defined in those rules) to
affiliates reaching 75% of the nation's television homes. Neither Fox nor its
affiliates, including the Company's TV stations, are subject to the prime
time access rule. The Company cannot predict the effect that the repeal many
ultimately have on the market for syndicated programming.
The Congress and the FCC have considered in the past and may consider and
adopt in the future, (i) other changes to existing laws, regulations and
policies or (ii) new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation,
ownership, and profitability of the Company's broadcast stations, result in
the loss of audience share and advertising revenues for these stations or
affect the ability of the Company to acquire additional broadcast stations or
finance such acquisitions.
DBS
Unlike a common carrier, such as a telephone company, or a cable operator,
DBS operators such as DIRECTV are free to set prices and serve customers
according to their business judgment, without rate of return or other
regulation or the obligation not to discriminate among customers. However,
there are laws and regulations that affect DIRECTV and, therefore, affect the
Company. As an operator of a privately owned United States satellite system,
DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with
respect to (i) the licensing of individual satellites (i.e., the requirement
that DIRECTV meet minimum
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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 1996, the Supreme
Court ruled unconstitutional the indecency prohibitions on public access
programming as well as the "segregate and block" restriction on indecent
leased access programming.
Scrambling. The 1996 Act requires that upon the request of a cable
subscriber, the cable operator must, free of charge, fully scramble or
otherwise fully block the audio and video programming of each channel
carrying adult programming so that a non-subscriber does not receive it.
Cable operators must also fully scramble or otherwise fully block the
video and audio portion of sexually explicit or other programming that is
indecent on any programming channel that is primarily dedicated to sexually
oriented programming so that a non-subscriber to such channel may not receive
it. Until full scrambling or blocking occurs, cable operators must limit the
carriage of such programming to hours when a significant number of children
are not likely to view the programming. The Company's systems do not
presently have the necessary technical capability to comply with the
scrambling requirement. However, the effective date of these requirements has
been stayed by the United States District Court for Delaware.
Cable Entry Into Telecommunications. The 1996 Act declares that no state
or local laws or regulations may prohibit or have the effect of prohibiting
the ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. The 1996 Act further
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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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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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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 Lease-Purchase (1) 5,600 square foot building; N/A
transmitter building) 900 square foot building
West Mountain, PA (tower and
transmitter) Leased 9.6 acres 1/31/00
916 Oak Street, Scranton, PA Leased 8,600 square feet 4/30/00
station) (television 400 square feet
Bald Eagle Mountain, PA (transmitting) Leased (Williamsport Tower) 9/30/97
Nescopec Mountain, PA (transmitting) Owned 400 foot tower N/A
Williamsport, PA (tower) Owned 175 foot tower N/A
Chattanooga, TN (transmitting) Owned 577 foot tower N/A
2401 East Main St., Chattanooga, TN Owned 14,800 square feet N/A
(former television station)
1201 East Main St., Chattanooga, TN Owned 16,240 square foot building N/A
(present television station) on 3.17 acres
2320 Congress Street, Portland, ME Leased 8,000 square feet 12/31/97
(television station)
Gray, ME (tower) Owned 18.6 acres N/A
1203 Governor's Square, Tallahassee, FL Leased 5,012 square feet 1/31/97
(television station)
Leon County, FL Leased(2) 30 acres 2/28/98
Nickleville, GA (tower) Owned 22.5 acres N/A
DBS Systems
Marlboro, MA (office) Leased 1,310 square feet 7/31/99
Charlton, MA (warehouse) Leased 1,750 square foot area monthly
Cable Systems
Winchester, CT (headend) Owned 15.22 acres N/A
140 Willow Street, Winsted, CT (office) Owned 1,900 square feet N/A
Charlton, MA (office, headend site) Leased 38,223 square feet 5/9/99
Hinsdale, MA (headend site) Leased 30,590 square feet 2/1/04
Lanesboro, MA (headend site) Leased 62,500 square feet 4/13/97
West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05
Bethlehem, NH (headend site)(3) Leased 1.84 acres 5/1/03
Moultonboro, NH (office)(3) Leased 1,250 square feet 12/31/02
Tuftonboro, NH (headend site)(3) Leased 58,789 square feet 6/30/03
Route #2, Puerto Rico (office) Leased 2,520 square foot building 8/30/98
Mayaguez, Puerto Rico (headend) Leased 530 square foot building 8/30/98
Mayaguez, Puerto Rico (warehouse) Leased 1,750 square foot area monthly
San German, Puerto Rico (headend site) Owned 1,200 square feet; 200 foot tower N/A
San German, Puerto Rico (tower and Owned 60 foot tower; 192 square meters N/A
transmitter)
San German, Puerto Rico (office) Leased 2,928 square feet 2/1/01
Anasco, Puerto Rico (office) Leased 500 square feet 2/28/99
Anasco, Puerto Rico (headend site) Leased 1,200 square meters 3/24/97
Anasco, Puerto Rico (headend) Owned 59 foot tower N/A
Guanica, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 2/28/04
Cabo Rojo, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 11/10/04
Hormigueros, Puerto Rico (warehouse) Leased 2,000 square feet monthly
</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.
(3) In connection with the New Hampshire Cable Sale, these leases would be
assigned to the prospective purchaser.
74
<PAGE>
EMPLOYEES
At August 15, 1996, the Company had 240 full-time and 29 part-time
employees. The Company is not a party to any collective bargaining agreement
and considers its relations with its employees to be good.
LEGAL AND OTHER PROCEEDINGS
Pursuant to the 1992 Cable Act and related regulations and orders, the
Connecticut Department of Public Utility Control (the "DPUC") initiated
proceedings in 1994 to review the basic service rates and certain related
charges of certain cable systems in Connecticut, including those of the
Company. In addition, pursuant to complaints received in accordance with the
1992 Cable Act and related regulations and orders, the FCC initiated a review
of rates for CPST services (comprising traditional cable networks) provided
by certain of the Company's New England Cable systems. In connection with the
state and FCC proceedings, the Company has made filings to justify its
existing service rates and to request further rate increases. In March and
April 1996, the FCC approved the CPST rates that had been in effect for the
Company's Connecticut Cable system, and in July 1996, the final rate
complaint affecting the Company's Massachusetts Cable System was dismissed.
The Connecticut DPUC issued two adverse rate orders on November 28, 1994
concerning the cost-of-service rate justification filed by the Company,
requiring the Company to issue refunds for two different time periods. The
first order ("Phase One") covers the period September 1, 1993 through May 14,
1994. The second order ("Phase Two") covers the period after May 14, 1994. In
its rate orders, the Connecticut DPUC ordered refunds of basic service and
equipment charges totalling $90,000 and $51,000 as of December 31, 1994 for
the Phase One and Phase Two periods, respectively. The Company appealed the
Connecticut DPUC order to the FCC arguing that in ordering refunds, the
Connecticut DPUC misapplied its own and the FCC's cost-of-service standards
by ignoring past precedent, by failing to consider the Company's unique
circumstances and by failing to make appropriate exceptions to
cost-of-service presumptions. The FCC has stayed the Connecticut DPUC orders.
To date, the FCC has not yet issued sufficient rulings to predict how it will
decide the issues raised by the Company on appeal. Although no decision with
respect to the Company's Connecticut DPUC appeal has been reached, in the
event the FCC issues an adverse ruling, the Company expects to make refunds
in kind rather than in cash.
The 1996 Act immediately eliminates rate regulation for CPST for small
cable operators, such as the Company. Pursuant to the 1996 Act, a small cable
operator is one that directly or through an affiliate serves in the aggregate
less than one percent of the subscribers in the United States and is not
affiliated with any entity or entities whose gross annual revenues in the
aggregate exceeds $250,000,000. In June 1995 the FCC released an order
providing rate regulation relief to small cable operators which serve 400,000
or fewer subscribers in any system with 15,000 or fewer subscribers. As a
result of this order, such small cable operators are now eligible to justify
their basic rates based on a four-element rate calculation. If the per
channel rate resulting from this calculation is $1.24 or less, the rate is
presumed reasonable. If the rate is higher than $1.24, the cable operator
bears the burden of justifying the higher rate. The current per channel rate
for each of the Company's Cable systems is substantially less than $1.24.
This new rate regulation option is available regardless of whether the
operator has used another option previously. If a small system is later
acquired by a larger company, the system will continue to have this
regulatory option. In addition, small systems, as defined by this ruling, are
now permitted to use all previously available small system and small operator
relief, which includes the ability to pass through certain headend upgrade
costs, and the ability to enter into alternative rate regulation agreements
with franchising authorities.
Acting pursuant to the FCC's June 1995 order with respect to small cable
systems, in early 1996, the Company filed with the Massachusetts Community
Antenna Television Commission (the "Massachusetts Cable Commission") and the
Connecticut DPUC proposed new rates for the Company's revised basic service
for its Massachusetts and Connecticut cable systems. In March 1996, the
Massachusetts Cable Commission approved the proposed higher rates for the
Massachusetts systems, and those rates went into effect on April 1, 1996. As
of this date, the Connecticut DPUC has not yet acted upon the Company's
filing. On April 1, 1996, the Company put into effect the proposed new rates
for its Connecticut system, subject to possible refund. The new rates are on
a per-channel basis less that the $1.24 presumed-reasonable standard
established by the FCC's June 1995 order.
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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. 40 Senior Vice President, Chief Financial Officer and
Assistant Secretary
Ted S. Lodge ......... 40 Senior Vice President, General Counsel, Chief
Administrative Officer and Assistant Secretary
Howard E. Verlin ..... 35 Vice President and Secretary
Guyon W. Turner ...... 54 Vice President
Donald W. Weber ...... 59 Director
</TABLE>
Marshall W. Pagon has served as President, Chief Executive Officer,
Treasurer and Chairman of the Board of Pegasus since its incorporation. Mr.
Pagon also serves as Chief Executive Officer and Director of each of Pegasus'
subsidiaries. From 1991 to October 1994, when the assets of various
affiliates of PM&C, principally limited partnerships that owned and operated
the Company's TV and Cable operations, were transferred to PM&C's
subsidiaries, Mr. Pagon or entities controlled or affiliated with Mr. Pagon
served as the general partner of these partnerships and conducted the
business of the Company. Mr. Pagon's background includes over 15 years of
experience in the media and communications industry. In 1987, Mr. Pagon
organized the Management Company to provide management and other services to
companies in the media and communications industry. The Management Company
has provided management and accounting services to PM&C and its subsidiaries.
Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief
Financial Officer and Assistant Secretary since its inception. He has also
served similar functions for PM&C's affiliates and predecessors in interest
since 1990. Mr. Verdecchio is a certified public accountant and has over ten
years of experience in the media and communications industry.
Ted S. Lodge has served as Senior Vice President, General Counsel, Chief
Administrative Officer and Assistant Secretary of Pegasus since July 1, 1996.
From June 1992 through May 1996, Mr. Lodge practiced law with the law firm of
Lodge & Company. During such period, Mr. Lodge was engaged by the Company as
its outside legal counsel in connection with several of the Company's
acquisitions. Prior to founding Lodge & Company, Mr. Lodge served as Vice
President, Legal Department of SEI Corporation from May 1991 to June 1992 and
as Vice President, General Counsel of Vik Brothers Insurance, Inc. from March
1989 to May 1991.
Howard E. Verlin is a Vice President and Secretary of Pegasus and is
responsible for operating activities of the Company's Cable and DBS
subsidiaries, including supervision of their general managers. Mr. Verlin has
served similar functions with respect to the Company's predecessors in
interest and affiliates since 1987 and has over 14 years of experience in the
media and communications industry.
Guyon W. Turner is a Vice President of Pegasus and is responsible for the
Company's broadcast television subsidiary. From 1984 to 1993, Mr. Turner was
the managing general partner of Scranton TV Partners, Ltd., from which the
Company acquired WOLF and WWLF in 1993. Mr. Turner was also chairman and
director of Empire Radio Partners, Ltd. from March 1991 to December 1993. In
November 1992, Empire filed for protection under Chapter 11 of the Bankruptcy
Code. Mr. Turner's background includes over 20 years of experience in the
media and communications industry.
Donald W. Weber has been a Director of Pegasus since its incorporation and
a director of PM&C since November 1995. Mr. Weber has been the President and
Chief Executive Officer of Viewstar Entertainment Services, Inc., an NRTC
member that distributes DIRECTV services in North Georgia, since August 1993.
76
<PAGE>
From November 1991 through August 1993, Mr. Weber was a private investor and
consultant to various communication companies. Prior to that time, Mr. Weber
was President and Chief Operating Officer of Contel Corporation until its
merger with GTE Corporation in 1991. Mr. Weber is currently a member of the
boards of directors of InterCel, Inc. and Healthdyne Information Enterprises,
Inc. each of which are publicly-traded companies.
In connection with the Michigan/Texas DBS Acquisition, the Parent agreed
to nominate a designee of Harron as a member of the Company's Board of
Directors. Shortly after the consummation of this Offering, the Company
anticipates having a Board of Directors consisting of five members, including
Mr. Pagon, Mr. Weber and the Harron nominee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to this Offering, the Company did not have a compensation committee
or any other committee of the Board of Directors performing similar
functions. Decisions concerning compensation of executive officers were made
by the Board of Directors, which included Mr. Pagon, the President and Chief
Executive Officer of the Company. Upon increasing the size of the Board to
five members, the Company expects to establish a compensation committee.
COMPENSATION OF DIRECTORS
Under the Company's By-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the Board of
Directors. The Company currently pays its directors who are not employees or
officers of the Company an annual retainer of $5,000 plus $500 for each Board
meeting attended in person and $250 for each Board meeting held by telephone.
The Company also reimburses each director for all reasonable expenses
incurred in traveling to and from the place of each meeting of the Board or
committee of the Board.
As additional remuneration for joining the Board, Mr. Weber was granted in
April 1996 an option to purchase 3,385 shares of Class A Common Stock at an
exercise price of $20.87 per share. Mr. Weber's option vested upon issuance, is
exercisable until November 2000 and, at the time of grant, was issued at an
exercise price equal to fair market value at the time Mr. Weber was elected a
director.
MANAGEMENT AGREEMENT
The Management Company performs various management and accounting services
for the Company pursuant to the Management Agreement between the Management
Company and the Company. Mr. Pagon controls and is the majority owner of the
Management Company. Upon the consummation of this Offering, the Management
Agreement will be transferred to the Company, and the employees of the
Management Company will become employees of the Company. In consideration for
the transfer of this agreement together with certain net assets, including
approximately $1.4 million of accrued management fees, the Management Company
will receive $19.6 million of Class B Common Stock or 1,400,000 shares of Class
B Common Stock and approximately $1.4 million in cash. Of these shares, 182,652
will be exchanged for an equal number of shares of Class A Common Stock and
transferred to certain members of management who are participants in the
Management Share Exchange. The fair market value of the Management Agreement has
been determined by Kane Reece Associates, Inc. ("Kane Reece"), an independent
appraiser, based upon a discounted cash flow approach using historical financial
results and management's financial projections. In return for Kane Reece's
services, the Company incurred a fee of approximately $15,000 plus expenses.
Under the Management Agreement, the Management Company provided specified
executive, administrative and management services to PM&C and its operating
subsidiaries. These services included: (i) selection of personnel; (ii)
review, supervision and control of accounting, bookkeeping, recordkeeping,
reporting and revenue collection; (iii) supervision of compliance with legal
and regulatory requirements; and (iv) conduct and control of daily
operational aspects of the Company. In consideration for the services
performed by the Management Company under the Management Agreement, the
Company was charged management fees, which represented 5% of the Company's
net revenues, and reimbursements for the Management Company's accounting
department costs. The Management Company's offices are located at 5 Radnor
Corporate Center, Suite 454, Radnor, Pennsylvania 19087.
77
<PAGE>
TOWERS PURCHASE
Simultaneously with the completion of this Offering, the Company will
purchase Towers' assets for total consideration of approximately $1.4
million. Towers is beneficially owned by Marshall W. Pagon. The Towers
Purchase consists of ownership and leasehold interests in three tower
properties. Towers leases space on each of its towers to the Company and also
leases space to unaffiliated companies. The purchase price has been
determined by an independent appraisal.
SPLIT DOLLAR AGREEMENT
In October 1996, the Company plans to enter into a Split Dollar Agreement
with the trustees of an insurance trust established by Marshall W. Pagon.
Under the Split Dollar Agreement, the Company will agree to pay a portion of
the premiums for certain life insurance policies covering Mr. Pagon owned by
the insurance trust. The Agreement will provide that the Company will be
repaid for all amounts it expends for such premiums, either from the cash
surrender value or the proceeds of the insurance policies.
EXECUTIVE COMPENSATION
The salaries of the Company's executive officers have historically been
paid by the Management Company. Upon the closing of this Offering, the
Management Agreement will be transferred to the Company and the salaries of
the Company's executive officers will be paid for by the Company. The
following table summarizes the compensation paid for the last two fiscal
years to the Chief Executive Officer and to each of the Company's most highly
compensated officers whose total annual salary and bonus for the fiscal year
ended December 31, 1995 exceeded $100,000.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Long-Term
Annual Compensation(1) Compensation
---------------------------- --------------
Restricted
Other Annual Stock
Name Principal Position Year Salary Compensation Awards
--------------------- -------------------------------------- ------ ---------- -------------- --------------
<S> <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. The salary amounts presented above were
paid by the Management Company. There are no employment agreements
between the Company and its executive officers.
(2) Includes $18,000 housing allowance paid by the Company.
(3) Represents grants of the Parent's Non-Voting Common Stock in 1995 (875
shares to Mr. Verdecchio and 625 shares each to Messrs. Verlin and
Turner). Amounts shown in the table are based on a valuation prepared for
the Parent at the time of the grants. One-fourth of the shares vest on
December 31 of each of 1995, 1996, 1997 and 1998. Upon the completion of
this Offering, it is anticipated that all of the Parent's Non-Voting
Common Stock will be exchanged for shares of Class A Common Stock
pursuant to the Managaement Share Exchange.
INCENTIVE PROGRAM
GENERAL
The Incentive Program, which includes the Restricted Stock Plan (as
defined), the 401(k) Plans (as defined) and the Stock Option Plan (as
defined), is designed to promote growth in stockholder value by providing
employees with restricted stock awards in the form of Class A Common Stock
and grants of options
78
<PAGE>
to purchase Class A Common Stock. Awards under the Restricted Stock Plan and
the 401(k) Plans are in proportion to annual increases in Location Cash Flow.
For this purpose Location Cash Flow is automatically adjusted for
acquisitions such that, for the purpose of calculating the annual increase in
Location Cash Flow, the Location Cash Flow of the acquired properties is
included as if it had been a part of the Company's financial results for the
comparable period of the prior year. The Company has authorized up to 720,000
shares of Class A Common Stock in connection with the Incentive Program
(subject to adjustment to reflect stock dividends, stock splits,
recapitalizations, and similar changes in the capitalization of Pegasus).
The Company believes that the Restricted Stock Plan and 401(k) Plans
result in greater increases in stockholder value than result from a
conventional stock option program, because these plans create a clear cause
and effect relationship between initiatives taken to increase Location Cash
Flow and the amount of incentive compensation that results therefrom.
Although the Restricted Stock Plan and 401(k) Plans like conventional
stock option programs provide compensation to employees as a function of
growth in stockholder value, the tax and accounting treatments of these
programs are different. For tax purposes, incentive compensation awarded
under the Restricted Stock Plan (upon vesting) and the 401(k) Plans is fully
tax deductible as compared to conventional stock option grants which
generally are only partially tax deductible upon exercise. For accounting
purposes, conventional stock option programs generally do not result in a
charge to earnings while compensation under the Restricted Stock Plan and the
401(k) Plans do result in a charge to earnings. The Company believes that
these differences result in a lack of comparability between the EBITDA of
companies that utilize conventional stock option programs and the EBITDA of
the Company.
The table below lists the specific maximum components of the Restricted
Stock Plan and the 401(k) Plans in terms of a $1 increase in annual Location
Cash Flow.
<TABLE>
<CAPTION>
Component Amount
------------------------------------------------------------------------------------------ ----------
<S> <C>
Restricted Stock grants to general managers based on the increase in annual Location Cash
Flow of individual business units ....................................................... 6cents
Restricted Stock grants to department managers based on the increase in annual Location
Cash Flow of individual business units .................................................. 6cents
Restricted Stock grants to corporate managers (other than executive officers) based on the
Company-wide increase in annual Location Cash Flow ...................................... 3cents
Restricted Stock grants to employees selected for special recognition .................... 5cents
Restricted Stock grants under the 401(k) Plan for the benefit of all eligible employees
and allocated pro-rata based on wages ................................................... 10cents
----------
Total ................................................................................ 30cents
==========
</TABLE>
Currently, the Company has seven general managers, 27 department managers
and nine corporate managers.
Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the Restricted Stock Plan. Executive officers are
eligible to receive awards under the Restricted Stock Plan consisting of (i)
special recognition awards and (ii) awards made to the extent that an
employee does not receive a matching contribution because of restrictions of
the Internal Revenue Code of 1986, as amended (the "Code"). Executive
Officers and non-employee directors are eligible to receive options under the
Stock Option Plan.
RESTRICTED STOCK PLAN
In September 1996, Pegasus adopted the Pegasus Restricted Stock Plan (the
"Restricted Stock Plan" and, together with the 401(k) Plans and the Stock
Option Plan, the "Incentive Program"), which was also approved by Pegasus'
stockholders in September 1996. Under the Restricted Stock Plan, 270,000
shares of Class A Common Stock (subject to adjustment to reflect stock
dividends, stock splits, recapitalizations, and similar changes in the
capitalization of Pegasus) are available for granting restricted stock awards
to eligible employees of the Company who have completed at least one year of
service. The Restricted Stock Plan provides for three types of restricted
stock awards that are made in the form of Class A Common Stock as
79
<PAGE>
shown in the table above: (i) profit sharing awards to general managers,
department managers and corporate managers (other than executive officers);
(ii) special recognition awards for consistency (team award), initiative (a
team or individual award), problem solving (a team or individual award) and
individual excellence; and (iii) awards that are made to the extent that an
employee does not receive a matching contribution under the U.S. 401(k) Plan
because of restrictions of the Code.
Administration. The Restricted Stock Plan is administered by a committee
whose members are selected by Pegasus' Board of Directors (the "Restricted
Stock Plan Committee"). With respect to special recognition awards made to
managers who are officers or directors, the Restricted Stock Plan will be
administered by a committee of not fewer than two non-employee directors of
Pegasus, or the entire Board of Pegasus.
Vesting. Restricted Stock Awards vest on the following schedule: 34% after
two years of service with the Company (including years before the Restricted
Stock Plan was established), 67% after three years of service and 100% after
four years of service. A grantee also becomes fully vested in his outstanding
restricted stock award(s) upon death or disability. If a grantee's employment
is terminated for a reason other than death or disability before completing
four years of service, his unvested restricted stock awards will be
forfeited. Restricted stock is held by the Company prior to becoming vested.
The grantee will, however, be entitled to vote the restricted stock and
receive any dividends of record prior to vesting.
Duration and Amendment of Restricted Stock Plan. The Restricted Stock Plan
became effective in September 1996, and will terminate in September 2006. The
Board of Directors of Pegasus may amend, suspend or terminate the Restricted
Stock Plan, and the Restricted Stock Plan administrator may amend any
outstanding restricted stock awards, at any time, subject to stockholder
approval under certain circumstances, including increases in the number of
shares authorized under the plan. A grantee must approve the suspension,
discontinuance or amendment of the Restricted Stock Plan or the agreement
evidencing his restricted stock award, if such action would materially impair
the rights of the grantee under any restricted stock award previously granted
to him or her.
Restricted Stock Awards. The following special recognition awards have
been made under the Restricted Stock Plan:
Number of
Name and Position Shares(1)
----------------------------------------------------- -----------------
Marshall W. Pagon, President
and Chief Executive Officer ........................ N/A(2)
Robert N. Verdecchio, Senior Vice President, Chief
Financial Officer and Assistant Secretary .......... 903
Howard E. Verlin, Vice President, Cable and
Satellite Television and Secretary ................. 0
Guyon W. Turner, Vice President, Broadcast Television 0
Executive Group ..................................... 903
Non-Executive Director Group ........................ N/A(2)
Non-Executive Officer Employee Group ................ 2,711
-----------
Total ..................................... 3,614
===========
- ------
(1) Number of shares of Class A Common Stock subject to restricted stock
awards granted to date.
(2) Marshall W. Pagon and non-executive directors are not eligible to receive
the special recognition awards under the Restricted Stock Plan.
80
<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 Shares(1)
--------------------------------------------------------- --------------------
Marshall W. Pagon, President
and Chief Executive Officer ............................ N/A(2)
Robert N. Verdecchio, Senior Vice President, Chief
Financial Officer and Assistant Secretary .............. N/A(2)
Howard E. Verlin, Vice President, Cable and
Satellite Television and Secretary ..................... N/A(2)
Guyon W. Turner, Vice President, Broadcast Television ... N/A(2)
Executive Group ......................................... N/A(2)
Non-Executive Director Group ............................ N/A(2)
Non-Executive Officer Employee Group .................... 18,072
- ------
(1) Number of shares of Class A Common Stock.
(2) The Company's executive officers and non-executive directors are not
eligible to participate in the profit sharing awards under the Restricted
Stock Plan.
STOCK OPTION PLAN
In September 1996, Pegasus adopted the Pegasus Communications 1996 Stock
Option Plan (the "Stock Option Plan"), which was also approved by Pegasus'
stockholders in September 1996. Under the Stock Option Plan, up to 450,000
shares of Class A Common Stock (subject to adjustment to reflect stock
dividends, stock splits, recapitalizations, and similar changes in the
capitalization of Pegasus) are available for the granting of nonqualified
stock options ("NQSOs") and options qualifying as incentive stock options
("ISOs") under Section 422 of the Code.
Executive officers, who are not eligible to receive profit sharing awards
under the Restricted Stock Plan, are eligible to receive NQSOs or ISOs under
the Stock Option Plan, but no executive officer may be granted options
covering more than 275,000 shares of Class A Common Stock under the Stock
Option Plan. Directors of Pegasus who are not employees of the Company are
eligible to receive NQSOs under the Stock Option Plan. Currently, five
executive officers and one non-employee director are eligible to receive
options under the Stock Option Plan.
Administration. The Stock Option Plan is administered by a committee of
not fewer than two non-employee directors of Pegasus, or the entire Board of
Pegasus (the "Stock Option Plan Committee"). Executive officers and
non-employee directors selected by the Stock Option Plan Committee will be
eligible to receive options based on an executive officer's or non-employee
director's contribution to the achievement of the Company's objectives and
other relevant matters.
Terms and Conditions of Options. When an option is granted, the Stock
Option Plan Committee determines the term of the option (which may not be
more than ten years), the exercise price (which may not be less than the fair
market value of Class A Common Stock on the date of grant), and the date(s)
on which the option becomes exercisable. However, ISOs granted to a person
who owns more than 10% of the combined voting power of the stock of Pegasus
(or of a subsidiary or parent) must have a term of not more than five years,
and an exercise price of not less than 110% of the fair market value of Class
A Common Stock on the date of grant. Options automatically become exercisable
upon a Change of Control (as defined in the Stock Option Plan).
The Stock Option Plan Committee may also provide that the term of an
option will be shorter than it otherwise would have been if an optionee
terminates employment or Board membership (for any reason, including death or
disability). However, an ISO will expire no later than (i) three months after
termination of employment for a reason other than death or disability, or
(ii) one year after termination of employment on account of disability. Also,
no option may be exercised more than three years after an optionee's death.
The exercise price and tax withholding obligations on exercise may be paid
in various methods, including a cash payment and/or surrendering shares
subject to the option or previously acquired shares of Class A Common Stock.
81
<PAGE>
Duration and Amendment of Stock Option Plan. The Stock Option Plan will
terminate in September 2006 (ten years after it was adopted by the Board of
Directors of Pegasus). The Board of Directors of Pegasus may amend, suspend
or terminate the Stock Option Plan, and the Stock Plan Committee may amend
any outstanding options, at any time. Nevertheless, certain amendments listed
in the Stock Option Plan require stockholder approval. Examples of amendments
which require stockholder approval include an amendment increasing the number
of shares which may be subject to options, and an amendment increasing the
duration of the Stock Option Plan with respect to ISOs. Further, an optionee
must approve the suspension, discontinuance or amendment of the Stock Option
Plan or the agreement evidencing his or her option, if such action would
materially impair the rights of the optionee under any option previously
granted to him or her.
Federal Income Tax Treatment of Options.
ISOs. If the requirements of Section 422 of the Code are met, an
optionee recognizes no income upon the grant or exercise of an ISO (unless
the alternative minimum tax rules apply), and the Company is not entitled to
a deduction.
NQSOs. An optionee recognizes no income at the time an NQSO is granted.
Upon exercise of the NQSO, the optionee recognizes ordinary income for
federal income tax purposes in an amount generally measured as the excess of
the then fair market value of Class A Common Stock over the exercise price.
Subject to Section 162(m) of the Code, the Company will be entitled to a tax
deduction in the amount and at the time that an optionee recognizes ordinary
income with respect to an NQSO.
401(K) PLANS
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "U.S. 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the
Pegasus Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k)
Plan" and, together with the U.S. 401(k) Plan, the "401(k) Plans") for
eligible employees of the Company's Puerto Rico subsidiaries. The U.S. 401(k)
Plan is intended to be qualified under sections 401(a) and 401(k) of the
Code. The Puerto Rico 401(k) Plan is intended to be qualified under sections
1165(a) and 1165(e) of the Puerto Rico Internal Revenue Code of 1994, as
amended.
Substantially all Company employees who, as of the enrollment date under
the 401(k) Plans, have completed at least one year of service with the
Company are eligible to participate in one of the 401(k) Plans. Participants
may make salary deferral contributions of 2% to 6% of salary to the 401(k)
Plans.
The Company may make three types of contributions to the 401(k) Plans, each
allocable to a participant's account if the participant completes at least 1,000
hours of service in the applicable plan year, and is employed on the last day of
the applicable plan year: (i) the Company matches 100% of a participant's salary
deferral contributions to the extent the participant invested his or her salary
deferral contributions in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans; (ii) the Company, in its discretion, may
contribute in an amount that equals up to 10% of the annual increase in
Company-wide Location Cash Flow (these Company discretionary contributions, if
any, are allocated to eligible participants' accounts based on each
participant's salary for the plan year); and (iii) the Company also matches a
participant's rollover contribution, if any, to the 401(k) Plans, to the extent
the participant invests his or her rollover contribution in Class A Common Stock
at the time of his or her initial contribution to the 401(k) Plans.
Discretionary Company contributions and Company matches of employee salary
deferral contributions and rollover contributions are made in the form of Class
A Common Stock, or in cash used to purchase Class A Common Stock. Company
contributions to the 401(k) Plans are subject to limitations under applicable
laws and regulations.
All employee contributions to the 401(k) Plans are fully vested at all
times and all Company contributions, if any, vest on the following schedule:
34% after two years of service with the Company (including years before the
401(k) Plans were established); 67% after three years of service and 100%
after four years of service. A participant also becomes fully vested in
Company contributions to the 401(k) Plans upon attaining age 65 or upon his
or her death or disability.
To the extent a participant's account under the 401(k) Plans is invested
in Class A Common Stock (one of eight investment alternatives currently
available under the 401(k) Plans), distributions are made in Class A Common
Stock. As of August 15, 1996, $88,225 of employee contributions are held by
the Trustees of the 401(k) Plans pending the purchase of Class A Common
Stock.
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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 to the Transactions.
Holders of Class A Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders generally, and holders of Class B
Common Stock are entitled to ten votes per share. Shares of Class B Common Stock
are convertible immediately into shares of Class A Common Stock on a one-for-one
basis, and accordingly, holders of Class B Common Stock are deemed to own the
same number of shares of Class A Common Stock. The Parent and Pegasus Capital,
L.P. hold in the aggregate all shares of Class B Common Stock, representing
49.6% of the Common Stock (and 90.8% of the combined voting power of all voting
stock) of Pegasus on a fully diluted basis. Marshall W. Pagon is deemed to be
the beneficial owner of all of the Class B Common Stock. Upon consummation of
this Offering and the Transactions, the outstanding capital stock of the Parent
will consist of 64,119 shares of Class A Voting Common Stock and 5,000 shares of
Parent Non-Voting Stock, all of which will be beneficially owned by Marshall W.
Pagon. See "Risk Factors -- Concentration of Share Ownership and Voting Control
by Marshall W. Pagon."
<TABLE>
<CAPTION>
Pegasus Class B
Common Stock
Pegasus Class A Pegasus Class A Beneficially
Common Stock Beneficially Common Stock Beneficially Owned Before and After
Owned Before Offering Owned After Offering Offering
------------------------- ------------------------- -----------------------
Beneficial Owner Shares % Shares % Shares %
------------------------- -------------- ------- -------------- ------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon(1)(2) . 4,581,900(3) 73.4% 4,581,900(3) 49.6% 4,581,900 100.0%
Guyon W. Turner(1) ...... 114,184 6.9% 114,184 2.4% -- --
Robert N. Verdecchio(1) . 191,388 11.5% 191,388 4.1% -- --
Howard E. Verlin ........ 57,092 3.4% 57,092 1.2% -- --
Donald W. Weber(4) ...... 3,385 (5) 3,385 (5) -- --
Harron Communications
Corp.(6)
70 East Lancaster Avenue
Frazer, PA 19355 ....... 852,110 51.2% 852,110 18.3% -- --
Directors and Executive
Officers as a Group (6
persons)(7) ............ 4,947,949 79.2% 4,947,949 53.5% 4,581,900 100.0%
</TABLE>
- ------
(1) The address of this person is c/o Pegasus Communications Management
Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road,
Radnor, Pennsylvania 19087.
(2) Pegasus Capital, L.P. holds 1,217,348 shares of Class B Common Stock. Mr.
Pagon is the sole shareholder of the general partner of Pegasus Capital,
L.P. and is deemed to be the beneficial owner of these shares. All of the
3,364,552 remaining shares of Class B Common Stock are owned by the
Parent. All Class A Voting Common Stock of the Parent are held by Pegasus
Communications Limited Partnership. Mr. Pagon controls Pegasus
Communications Limited Partnership by reason of his ownership of all the
outstanding voting stock of the sole general partner of a limited
partnership that is, in turn, the sole general partner in Pegasus
Communications Limited Partnership. As such, Mr. Pagon is the beneficial
owner of 100% of Class B Common Stock with sole voting and investment
power over all such shares.
(3) Represents 4,581,900 shares of Class B Common Stock, which are
convertible into shares of Class A Common Stock on a one-for-one basis.
(4) Consists of 3,385 shares of Class A Common Stock issuable upon the
exercise of the vested portion of outstanding stock options.
(5) Represents less than 1% of the outstanding shares of the class of Common
Stock.
(6) Under the terms of a stockholder's agreement entered into by the Company
in connection with the Michigan/Texas DBS Acquisition, the Company has a
right of first offer to purchase any shares sold by Harron in a private
transaction exempt from registration under the Securities Act.
(7) See footnotes (2), (3) and (4).
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<PAGE>
PRO FORMA ORGANIZATIONAL STRUCTURE AND OWNERSHIP INTERESTS(1)
CLASS A COMMON STOCK
CLASS B COMMON STOCK
Marshall W. Pagon
Public Participants in
Stockholders the Registered
in this Exchange Offer Parent and
Offering and Management Pegasus Capital,
(2) Share Exchange Harron Other L.P.
(3) (4) (5) (6)
32.4% 7.8% 9.2% 1.0% 49.6%
100.0%
Pegasus
100.0%
PM&C
- ------
(1) This chart assumes that all holders of the PM&C Class B Shares have accepted
the Registered Exchange Offer.
(2) Consists of 3,000,000 shares of Class A Common Stock offered to the public
in this Offering, which represents 5.9% of the voting power, and does not
give effect to any exercise of the Underwriters' over-allotment option.
(3) Consists of 191,792 shares of Class A Common Stock offered to the holders
of the PM&C Class B Shares pursuant to the Registered Exchange Offer
(assuming all holders of the PM&C Class B Shares accept the Registered
Exchange Offer), which represents 0.4% of the voting power; 263,606 shares
of the Company's Class A Common Stock to be issued in connection with the
Management Share Exchange, which represents 0.5% of the voting power; and
269,964 shares initially issued as Class B Common Stock and transferred as
Class A Common Stock to certain members of management who are participants
in the Management Share Exchange, which represents 0.5% of the voting
power.
(4) Consists of 852,110 shares of the Class A Common Stock to be issued to
Harron Communications Corp. ("Harron") in connection with the Michigan/Texas
DBS Acquisition, which represents 1.7% of the voting power.
(5) Includes 10,714 shares of the Company's Class A Common Stock to be issued
in connection with the Portland Acquisition and 71,429 shares of the
Company's Class A Common Stock to be issued in connection with the
Portland LMA.
(6) Consists of 3,293,123 shares of Class B Common Stock to be issued to the
Parent in exchange for the Parent's contribution of all of the PM&C Class
A Shares (after giving effect to 87,312 shares of Class B Common Stock
transferred as Class A Common Stock to certain members of management who
are participants in the Management Share Exchange); 1,217,348 shares to be
issued to Pegasus Capital, L.P. in connection with the Management Agreement
Acquisition (after giving effect to 182,652 shares of Class B Common Stock
transferred as Class A Common Stock to certain members of management who
are participants in the Management Share Exchange); and 71,429 shares to be
issued to the Parent in connection with the Portland Acquisition. Marshall
W. Pagon is deemed to be the beneficial owner of all Common Stock held by
the Parent and Pegasus Capital, L.P. See footnote 2 to the "Ownership and
Control" table above. As such, Mr. Pagon has control of over 90.8% of the
voting power of the Common Stock.
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DESCRIPTION OF INDEBTEDNESS
NOTES
PM&C, which will become the direct subsidiary of Pegasus upon completion
of this Offering, has outstanding $85.0 million in aggregate principal amount
of its 12 1/2 % Series B Senior Subordinated Notes due 2005 (the "Notes").
The Notes are subject to the terms and conditions of an Indenture dated as of
July 7, 1995 among PM&C, certain of its direct and indirect subsidiaries, as
guarantors (the "Guarantors"), and First Union National Bank, as trustee, a
copy of which is filed as an exhibit to the registration statement of which
this Prospectus is a part. The Notes are subject to all of the terms and
conditions of the Indenture. The following summary of the material provisions
of the Indenture does not purport to be complete, and is subject to, and
qualified in its entirety by reference to, all of the provisions of the
Indenture and those terms made a part of the Indenture by the Trust Indenture
Act of 1939, as amended. All terms defined in the Indenture and not otherwise
defined herein are used below with the meanings set forth in the Indenture.
General. The Notes will mature on July 1, 2005 and bear interest at 12 1/2
% per annum, payable semi-annually on January 1 and July 1 of each year. The
Notes are general unsecured obligations of PM&C and are subordinated in right
of payment to all existing and future Senior Debt of PM&C. The Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis,
jointly and severally, by the Guarantors.
Optional Redemption. The Notes are subject to redemption at any time, at
the option of PM&C, in whole or in part, on or after July 1, 2000 at
redemption prices (plus accrued interest and Liquidated Damages, if any)
starting at 106.25% of principal during the 12-month period beginning July 1,
2000 and declining annually to 100% of principal on July 1, 2003 and
thereafter.
In addition, prior to July 1, 1998, PM&C may redeem up to 33 1/3 % of the
aggregate principal amount of the Notes with the net proceeds of one or more
public offerings of its common equity or the common equity of PM&C's direct
parent, to the extent such proceeds are contributed (within 120 days of any
such offering) to PM&C as common equity, at a price equal to 112.5% of the
principal amount thereof plus accrued interest and Liquidated Damages, if
any, provided that at least 66 2/3% of the original aggregate principal
amount of the Notes remains outstanding thereafter.
Change of Control. Upon the occurrence of a Change of Control, each holder
of the Notes may require the Company to repurchase all or a portion of such
holder's Notes at a purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest and Liquidated Damages
thereon, if any, to the date of repurchase. Generally, a Change of Control,
means the occurrence of any of the following: (i) the disposition of all or
substantially all of PM&C's assets to any person other than Marshall W. Pagon
or his Related Parties, (ii) the adoption of a plan relating to the
liquidation or dissolution of PM&C, (iii) the consummation of any transaction
in which a person becomes the beneficial owner of more of the voting stock of
PM&C than is beneficially owned at such time by Mr. Pagon and his Related
Parties, or (iv) the first day on which a majority of the members of the
Board of Directors of PM&C or the Parent are not Continuing Directors.
Subordination. The Notes are general unsecured obligations of PM&C and are
subordinate to all existing and future Senior Debt of PM&C. The Notes will
rank senior in right of payment to all junior subordinated Indebtedness of
PM&C. The Subsidiary Guarantees are general unsecured obligations of the
Guarantors and are subordinated to the Senior Debt and to the guarantees of
Senior Debt of such Guarantors. The Subsidiary Guarantees rank senior in
right of payment to all junior subordinated Indebtedness of the Guarantors.
Certain Covenants. The Indenture contains a number of covenants
restricting the operations of PM&C, which, among other things, limit the
ability of PM&C to incur additional Indebtedness, pay dividends or make
distributions, sell assets, issue subsidiary stock, restrict distributions
from Subsidiaries, create certain liens, enter into certain consolidations or
mergers and enter into certain transactions with affiliates.
Events of Default. Events of Default under the Indenture include the
following: (i) a default for 30 days in the payment when due of interest on,
or Liquidated Damages with respect to, the Notes; (ii) default in payment
when due of the principal of or premium, if any, on the Notes; (iii) failure
by PM&C to comply with certain provisions of the Indenture (subject, in some
but not all cases, to notice and cure periods); (iv) default
85
<PAGE>
under certain items of Indebtedness for money borrowed by PM&C or any of its
Restricted Subsidiaries; (v) failure by PM&C or any Restricted Subsidiary
that would be a Significant Subsidiary to pay final judgments aggregating in
excess of $2.0 million, which judgments are not paid, discharged or stayed
for a period of 60 days; (vi) except as permitted by the Indenture, any
Subsidiary Guarantee shall be held in any judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force
and effect or any Guarantor, or any Person acting on behalf of any Guarantor,
shall deny or disaffirm its obligations under its Subsidiary Guarantee; or
(vii) certain events of bankruptcy or insolvency with respect to PM&C or any
of its Restricted Subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding Notes may accelerate the maturity of all the Notes as provided in
the Indenture.
NEW CREDIT FACILITY
PM&C entered into a seven-year, senior secured revolving credit facility. The
New Credit Facility will be for $50.0 million. Proceeds of borrowings under the
New Credit Facility may be used for acquisitions approved by the lenders in the
TV, DBS or Cable businesses and for general corporate purposes. All subsidiaries
of PM&C (other than Pegasus Cable Television of Connecticut, Inc. and
subsidiaries that hold certain of the Company's broadcast licenses) are
guarantors of the New Credit Facility, which is collateralized by a security
interest in all assets of, and all stock in, Pegasus' subsidiaries (other than
the assets of Pegasus Cable Television of Connecticut, Inc., the assets and
stock of certain of the Company's license-holding subsidiaries, and any PM&C
Class B Shares not held by Pegasus following the Registered Exchange Offer).
Borrowings under the New Credit Facility bear interest, payable monthly,
at LIBOR or the prime rate (as selected by the Company) plus spreads that
vary with PM&C's ratio of total debt to operating cash flow. The New Credit
Facility required payment of a closing fee of approximately $950,000 (which
will increase by $350,000 to approximately $1.3 million upon completion of
the lending consortium) and an annual commitment fee of 0.5% of the unused
portion of the commitment payable quarterly in arrears and requires PM&C to
purchase an interest rate hedging contract covering an amount equal to at
least 50% of the total amount of borrowings from the reducing revolving
facility for a minimum period of at least two years.
The New Credit Facility requires prepayments and concurrent reductions of
the commitment from asset sales or other transactions outside the ordinary
course of business (subject to provisions permitting the proceeds of certain
sales to be used to make approved acquisitions within stated time periods
without reducing the commitments of the lenders) and contains covenants
limiting the amounts of indebtedness that PM&C may incur, requiring the
maintenance of minimum fixed charge coverage, interest coverage and debt
service coverage ratios and limiting capital expenditures, dividends and
other restricted payments. The New Credit Facility also contains other
customary covenants, representations, warranties, indemnities, conditions
precedent to closing and borrowing, and events of default.
Beginning March 31, 1998, commitments under the New Credit Facility will
reduce in quarterly amounts ranging from $1.3 million per quarter in 1998 to
$2.3 million in 2002.
All indebtedness under the New Credit Facility will constitute Senior Debt
(as defined in the Indenture). See "Description of Indebtedness -- Notes."
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company (which, in this section,
refers only to Pegasus) consists of (i) 30,000,000 shares of Class A Common
Stock, par value $.01 per share (the "Class A Common Stock"), (ii) 15,000,000
shares of Class B Common Stock, par value $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), and
(iii) 5,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). Upon the closing of this Offering and after giving effect
to the Transactions, 4,663,229 shares of Class A Common Stock and 4,581,900
shares of Class B Common Stock will be issued and outstanding. There are
currently no shares of Preferred Stock outstanding.
The following summary description relating to the Company's capital stock
sets forth the material terms of the capital stock, but does not purport to
be complete. A description of the Company's capital stock is contained in the
Amended and Restated Certificate of Incorporation, which is filed as an
exhibit to the registration statement of which this Prospectus forms a part.
Reference is made to such exhibit for a detailed description of the
provisions thereof summarized below.
COMMON STOCK
Voting, Dividend and Other Rights. The voting powers, preferences and
relative rights of the Class A Common Stock and the Class B Common Stock are
identical in all respects, except that (i) the holders of Class A Common
Stock are entitled to one vote per share and holders of Class B Common Stock
are entitled to ten votes per share, (ii) stock dividends on Class A Common
Stock may be paid only in shares of Class A Common Stock and stock dividends
on Class B Common Stock may be paid only in shares of Class B Common Stock
and (iii) shares of Class B Common Stock have certain conversion rights and
are subject to certain restrictions on ownership and transfer described below
under "Conversion Rights and Restrictions on Transfer of Class B Common
Stock." Any amendment to the Amended and Restated Certificate of
Incorporation that has any of the following effects will require the approval
of the holders of a majority of the outstanding shares of each of the Class A
Common Stock and Class B Common Stock, voting as separate classes: (i) any
decrease in the voting rights per share of Class A Common Stock or any
increase in the voting rights of Class B Common Stock; (ii) any increase in
the number of shares of Class A Common Stock into which shares of Class B
Common Stock are convertible; (iii) any relaxation on the restrictions on
transfer of the Class B Common Stock; or (iv) any change in the powers,
preferences or special rights of the Class A Common Stock or Class B Common
Stock adversely affecting the holders of the Class A Common Stock. The
approval of the holders of a majority of the outstanding shares of each of
the Class A Common Stock and Class B Common Stock, voting as separate
classes, is also required to authorize or issue additional shares of Class B
Common Stock after the completion of this Offering (except for parallel
action with respect to Class A Common Stock in connection with stock
dividends, stock splits, recapitalizations and similar changes in the
capitalization of Pegasus). Except as described above or as required by law,
holders of Class A Common Stock and Class B Common Stock vote together on all
matters presented to the stockholders for their vote or approval, including
the election of directors.
After the sale of the Class A Common Stock offered hereby and the
consummation of the Transactions, the outstanding shares of Class A Common Stock
will equal 50.4% of the total Common Stock outstanding, and the holders of Class
B Common Stock will have control of approximately 90.8% of the combined voting
power of the Common Stock. The holders of the Class B Common Stock will,
therefore, have the power to elect the entire Board of Directors of the Company.
In particular, Marshall W. Pagon, by virtue of his beneficial ownership of all
of the Class B Common Stock, will have sufficient voting power to determine the
outcome of any matter submitted to the stockholders for approval (except matters
on which the holders of Class A Common Stock are entitled to vote separately as
a class), including the power to determine the outcome of all corporate
transactions.
Each share of Class A Common Stock and Class B Common Stock is entitled to
receive dividends if, as and when declared by the Board of Directors of the
Company out of funds legally available therefor. The Class A Common Stock and
Class B Common Stock share equally, on a share-for-share basis, in any cash
dividends declared by the Board of Directors.
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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
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<PAGE>
Directors is empowered by Pegasus' Amended and Restated Certificate of
Incorporation to designate and issue from time to time one or more classes or
series of Preferred Stock without any action of the stockholders. The Board
of Directors may authorize issuance in one or more classes or series, and may
fix and determine the relative rights, preferences and limitations of each
class or series so authorized. Such action could adversely affect the voting
power of the holders of the Common Stock or could have the effect of
discouraging or making difficult any attempt by a person or group to obtain
control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank.
LIMITATION ON DIRECTORS' LIABILITY
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the
corporation, directors must exercise an informed business judgment based on
all material information reasonably available to them. In the absence of the
limitations authorized by the Delaware statute, directors could be
accountable to corporations and their stockholders for monetary damages for
conduct that does not satisfy their duty of care. Although the statute does
not change directors' duty of care, it enables corporations to limit
available relief to equitable remedies such as injunction or rescission.
Pegasus' Amended and Restated Certificate of Incorporation limits the
liability of Pegasus' directors to Pegasus or its stockholders to the fullest
extent permitted by the Delaware statute. Specifically, the directors of
Pegasus will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to Pegasus or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation law or (iv) for any transaction from
which the director derived an improper personal benefit. The inclusion of
this provision in the Amended and Restated Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited Pegasus
and its stockholders.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering and after giving effect to the issuance of
shares contemplated by the Transactions, the Company will have outstanding
4,663,229 shares of Class A Common Stock and 4,581,900 shares of Class B Common
Stock, all of which shares of Class B Common Stock are convertible into shares
of Class A Common Stock on a share for share basis. Of these shares, the
3,000,000 shares of Class A Common Stock sold in this Offering will be tradeable
without restriction unless they are purchased by affiliates of the Company. All
shares to be received pursuant to the Registered Exchange Offer will also be
tradeable without restriction, except that the terms of the Registered Exchange
Offer are expected to require that each exchanging holder agrees not to sell,
otherwise dispose of or pledge any shares of the Class A Common Stock received
in the Registered Exchange Offer for a period of at least 180 days after the
date of this Prospectus without the prior written consent of Lehman Brothers
Inc. The approximately 1,471,437 remaining shares of Class A Common Stock and
all of the 4,581,900 shares of Class B Common Stock are "restricted securities"
under the Securities Act. These "restricted securities" and any shares purchased
by affiliates of the Company in this Offering may be sold only if they are
registered under the Securities Act or pursuant to an applicable exemption from
the registration requirements of the Securities Act, including Rule 144 and Rule
701 thereunder. The holders of 4,944,564 of the 6,053,337 "restricted
securities" have agreed not to sell, otherwise dispose of or pledge any shares
of the Company's Common Stock or securities convertible into or exercisable or
exchangeable for such Common Stock for 180 days after the date of this
Prospectus without the prior written consent of Lehman Brothers Inc. All of the
Company's directors and executive officers are subject to the 180-day lock-up.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted shares for at least two years, including
affiliates, may sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the then outstanding Class A Common Stock
(approximately 46,632 shares immediately after this Offering) or the average
weekly trading volume in the Class A Common Stock on the Nasdaq during the four
calendar weeks preceding such sale. Sales under Rule 144 are also subject to
certain provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. A person who is
not deemed an affiliate of the Company and who has beneficially owned restricted
shares for three years from the date of acquisition of restricted securities
from the Company or any affiliate is entitled to sell such shares under Rule
144(k) freely and without restriction or registration under the Securities Act.
As used in Rule 144, affiliates of the Company generally include its directors,
executive officers and persons directly or indirectly owning 10% or more of the
Class A Common Stock. Without consideration of the lock-up agreements described
above, none of the restricted securities would be available for immediate sale
in the public market in reliance on Rule 144(k) or would be available for
immediate sale under Rule 144.
The Securities and Exchange Commission (the "Commission") has proposed to
amend the holding period required by Rule 144 to permit sales of "restricted
securities" after one year rather than two years (and two years rather than
three years for non-affiliates who desire to sell such shares under Rule
144(k). If such proposed amendment were enacted, the "restricted securities"
would become freely tradeable (subject to any applicable contractual
restrictions) at correspondingly earlier dates.
Under Rule 701, any employee, officer or director of, or consultant to the
Company who prior to this Offering purchased shares pursuant to a written
compensatory plan or contract and who is not an affiliate of the Company, is
entitled to sell such shares without having to comply with the public
information, holding period, volume limitation or notice provisions of Rule 144
commencing 90 days after this Offering. Rule 701 also permits affiliates to sell
such shares without having to comply with the Rule 144 holding period
restrictions commencing 90 days after this Offering. As of the date hereof,
approximately 264,509 shares of Class A Common Stock would be eligible for sale
under Rule 701.
OPTIONS AND WARRANTS
As additional remuneration for joining the Board of Directors of PM&C, Donald
W. Weber was granted in April 1996 an option to purchase 3,385 shares of Class A
Common Stock at an exercise price of $20.87 per
90
<PAGE>
share. Mr. Weber's option vested upon issuance, is exercisable until November
2000 and, at the time of grant, was issued at an exercise price equal to fair
market value at the time Mr. Weber was elected a director.
In connection with the acquisition of WTLH, the Parent issued to various
trusts controlled by the sellers of WTLH (the "WTLH Trusts") the WTLH Warrants
to purchase in the aggregate $1,000,000 of Class A Common Stock of Pegasus at
the price to the public in this Offering, commencing on the date that the
registration statement to which this Prospectus relates is declared effective
and ending 120 days after such date. The WTLH Trusts will have the right to
acquire approximately 71,429 shares of Class A Common Stock. Such shares will be
"restricted securities" within the meaning of Rule 144.
REGISTRATION RIGHTS
Class A Common Stock. In connection with the Michigan/Texas DBS
Acquisition, the Company granted certain piggyback registration rights to
Harron. These rights expire upon the Class A Common Stock issued to Harron
becoming eligible for sale under Rule 144 of the Securities Act. Similar
rights have been granted to the holder of the $1.0 million in shares of Class
A Common Stock issued in connection with the acquisition of the Portland LMA
and the $150,000 of shares of Class A Common Stock issued in connection with
the Portland Acquisition.
PM&C Class B Shares. The holders of the PM&C Class B Shares are entitled
to certain demand and piggyback registration rights with respect to the
registration of capital stock by the Parent or PM&C. These rights do not
apply with respect to offerings by Pegasus. Although the Company expects that
all holders of the PM&C Class B Shares will accept the Registered Exchange
Offer, a possibility exists that some holders of the PM&C Class B Shares will
retain their shares. It is likely that once this Offering is completed that
these registration rights will provide little or no practical benefit to
holders of the PM&C Class B Shares who fail to accept the Registered Exchange
Offer. First, it is unlikely that PM&C, once it is a subsidiary of Pegasus,
or the Parent will ever make a public equity offering. Thus, it is unlikely
that holders would have an opportunity to exercise their piggyback
registration rights. Second, the demand registration rights may be exercised
only if the demand registration includes at least 25% of the PM&C Class B
Shares originally issued. If, as the Company anticipates, the holders of more
than 75% of the PM&C Class B Shares accept the Registered Exchange Offer, the
remaining holders of the PM&C Class B Shares will not hold the 25% necessary
to require registration of the PM&C Class B Shares. Third, even if holders of
the PM&C Class B Shares retain more than 25% of their stock after the
Registered Exchange Offer and can initiate a demand registration after July
7, 2000, the date when the demand registration right applies in the absence
of a prior public equity offering by PM&C or the Parent, there is not
expected to be a market for the PM&C Class B Shares.
LOCK-UP AGREEMENT
All of the executive officers and directors of Pegasus, who will be deemed to
beneficially own 4,947,949 shares of Common Stock (including options to purchase
3,385 shares) upon consummation of this Offering, have agreed with the
Underwriters not to sell, otherwise dispose of or pledge any shares of the
Common Stock or any securities convertible into or exercisable for such Common
Stock for 180 days after the date of this Prospectus without the prior written
consent of Lehman Brothers Inc. In addition, the terms of the Registered
Exchange Offer are expected to require that each exchanging holder agree not to
sell, otherwise dispose of or pledge any shares of the Class A Common Stock
received in the Registered Exchange Offer for a period of at least 180 days
after the date of this Prospectus without the consent of Lehman Brothers Inc.
91
<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. ................................... 575,000
BT Securities Corporation .............................. 575,000
CIBC Wood Gundy Securities Corp. ....................... 575,000
PaineWebber Incorporated ............................... 575,000
Alex. Brown & Sons Incorporated.......................... 80,000
Donaldson, Lufkin & Jenrette Securities Corporation ..... 80,000
A.G. Edwards & Sons, Inc. ............................... 80,000
Montgomery Securities ................................... 80,000
Oppenheimer & Co., Inc. ................................. 80,000
Furman Selz LLC ......................................... 50,000
Gabelli & Company, Inc. ................................. 50,000
Gruntal & Co., Incorporated ............................. 50,000
Legg Mason Wood Walker, Incorporated .................... 50,000
Moran & Associates, Inc. ................................ 50,000
Wheat, First Securities, Inc. ........................... 50,000
-------------
Total .............................. 3,000,000
=============
Pegasus has been advised by the Representatives that the Underwriters propose
to offer the shares of Class A Common Stock to the public at the initial public
offering price set forth on the cover page hereof, and to certain dealers at
such initial public offering price less a selling concession not in excess of
$.55 per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $.10 per share to certain other Underwriters or to
certain other brokers or dealers. After the initial offering to the public, the
offering price and other selling terms may be changed by the Representatives.
The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the shares of Class A Common
Stock offered hereby are subject to approval of certain legal matters by
counsel and to certain other conditions, including the condition that no stop
order suspending the effectiveness of the Registration Statement is in effect
and no proceedings for such purpose are pending or threatened by the
Commission and that there has been no material adverse change or any
development involving a prospective material adverse change in the condition
of the Company from that set forth in the Registration Statement otherwise
than as set forth or contemplated in this Prospectus, and that certain
certificates, opinions and letters have been received from the Company and
its counsel and independent auditors. The Underwriters are obligated to take
and pay for all of the above shares of Class A Common Stock if any such
shares are taken.
Pegasus and the Underwriters have agreed in the Underwriting Agreement to
indemnify each other against certain liabilities, including liabilities under
the Securities Act.
Pegasus has granted to the Underwriters an option to purchase up to an
additional 450,000 shares of Class A Common Stock, exercisable solely to
cover over-allotments, at the initial public offering price less the
underwriting discounts and commissions shown on the cover page of this
Prospectus. Such option may be exercised at any time within 30 days after the
date of the Underwriting Agreement. To the extent that the option is
exercised, each Underwriter will be committed to purchase a number of the
additional shares of Class A Common Stock proportionate to such Underwriter's
initial commitment as indicated in the preceding table.
92
<PAGE>
The Underwriters have reserved for sale, at the initial public offering
price, up to 5% of the shares of Class A Common Stock offered hereby to
employees of the Company and certain other individuals who have expressed an
interest in purchasing such shares of Class A Common Stock in the Offering.
The number of shares available for sale to the general public will be reduced
to the extent such persons purchase such reserved shares. Any reserved shares
not so purchased will be offered by the Underwriters to the general public on
the same basis as the other shares offered hereby.
The Representatives of the Underwriters have informed Pegasus that the
Underwriters do not intend to confirm sales to accounts over which they
exercise discretionary authority.
Stockholders of 4,944,564 shares have agreed not to, directly or indirectly,
offer, sell or otherwise dispose of shares of Common Stock of Pegasus or any
securities convertible into, or exercisable or exchangeable for such Common
Stock, with certain limited exceptions, for a period of 180 days after the date
of this Prospectus without the prior written consent of Lehman Brothers Inc.
Pegasus has agreed not to offer, sell, contract to sell or otherwise issue any
shares of Common Stock or other capital stock or any securities convertible into
or exchangeable for, or any rights to acquire, Common Stock or other capital
stock, with certain limited exceptions, prior to the expiration of 180 days from
the date of this Prospectus without the prior written consent of Lehman Brothers
Inc., other than (i) Class A Common Stock to be issued in this Offering and
Common Stock to be issued pursuant to the Transactions, (ii) stock grants
pursuant to the Incentive Program, and (iii) securities issued as consideration
for an acquisition if the party being issued the securities agrees to similar
lock-up provisions or if the securities issued are "restricted securities" under
the Securities Act.
Prior to this Offering, there has been no public market for the Class A
Common Stock. The initial public offering price was negotiated between Pegasus
and the Representatives. Among the factors considered in determining the initial
public offering price of the Class A Common Stock, in addition to the prevailing
market conditions, were the Company's historical performance, capital
structure, estimates of the business potential and earnings prospects of the
Company, an assessment of the Company's management and consideration of the
above factors in relation to market values of the companies in related
businesses.
An affiliate of CIBC Wood Gundy Securities Corp., one of the
Representatives of this Offering, is one of the lenders under the New Credit
Facility. CIBC Wood Gundy Securities Corp. has acted as a financial advisor
to the Company in connection with, among other things, the selection of the
Representatives. For its financial advisory services, CIBC Wood Gundy
Securities Corp. has received a fee of $100,000.
Under Rule 2710(c)(8) of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), if more than 10% of the net proceeds
of a public offering of equity securities are to be paid to members of the
NASD that are participating in the offering, or affiliated or associated
persons, the price at which the equity securities are distributed to the
public must be no lower than that recommended by a "qualified independent
underwriter," as defined in Rule 2720 of the Conduct Rules of the NASD.
Because CIBC Inc., an affiliate of CIBC Wood Gundy Securities Corp., one of
the Representatives of this Offering, may receive more than 10% of the net
proceeds of this Offering as a result of the repayment of amounts under the
New Credit Facility, Lehman Brothers Inc. will act as a qualified independent
underwriter in connection with this Offering.
93
<PAGE>
LEGAL MATTERS
The validity of the issuance of the Class A Common Stock offered hereby
will be passed upon by Drinker Biddle & Reath, counsel for the Company.
Michael B. Jordan, a partner of Drinker Biddle & Reath, is an Assistant
Secretary of the Company. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Latham & Watkins, New
York, New York.
EXPERTS
The Company's combined balance sheets as of December 31, 1994 and 1995 and
the related combined statements of operations, statements of changes in total
equity and statements of cash flows for each of the two years in the period
ended December 31, 1995 included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The Company's combined statement of operations, statement of changes in
total equity and statement of cash flows for the year ended December 31, 1993
included in this Prospectus, have been included herein in reliance on the
report of Herbein + Company, Inc., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The balance sheets of Portland Broadcasting, Inc. as of September 25, 1994
and September 24, 1995 and the related statements of operations, statements
of deficiency in assets and statements of cash flows for the fiscal years
ended September 26, 1993, September 25, 1994 and September 24, 1995, included
in this Prospectus, have been included herein in reliance on the report of
Ernst & Young LLP, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
The balance sheets of WTLH, Inc. as of December 31, 1994 and 1995 and the
related statements of operations, statements of capital deficiency, and
statements of cash flows for each of the two years in the period ended
December 31, 1995, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The combined balance sheets of the DBS Operations of Harron Communications
Corp. as of December 31, 1994 and 1995 and the related combined statements of
operations, and statements of cash flows for each of the two years in the
period ended December 31, 1995 included in this Prospectus, have been
included herein in reliance on the report of Deloitte & Touche, LLP,
independent auditors, given on the authority of that firm as experts in
accounting and auditing.
The balance sheets of Dom's Tele-Cable, Inc. as of May 31, 1995 and 1996
and the related statements of operations and deficit, and statements of cash
flows for each of the three years in the period ended May 31, 1996 included
in this Prospectus, have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
In March 1995, the Company, with the recommendation and approval of the
Company's sole director, selected Coopers & Lybrand L.L.P. to act as
independent accountants for the Company and informed Herbein + Company, Inc.,
the Company's independent accountants since 1990, of its decision. In
connection with its audit for the year ended December 31, 1993 and through
its dismissal in March 1995, there were no disagreements with Herbein +
Company, Inc. on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures. Herbein + Company,
Inc.'s report on the Company's financial statements for the fiscal year ended
December 31, 1993 contained no adverse opinions or disclaimers of opinion and
were not modified or qualified as to uncertainly, audit scope, or accounting
principles.
94
<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 Securities and Exchange Commission a Registration
Statement on Form S-1 under the Securities Act with respect to the
registration of the Class A Common Stock offered hereby. This Prospectus,
which constitutes a part of the Registration Statement, omits certain
information contained in the Registration Statement, and reference is made to
the Registration Statement and the exhibits thereto for further information
with respect to the Company and the Class A Common Stock to which this
Prospectus relates. Statements contained herein concerning the provisions of
any contract, agreement or other document are not necessarily complete, and,
in each instance, reference is made to the copy of such document filed as an
exhibit to the Registration Statement for a more complete description of the
matter involved, and each such statement is qualified in its entirety by such
reference. The Registration Statement, including the exhibits and schedules
filed therewith, may be inspected at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549 and at the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048 and Northwestern Atrium Center, 500 West
Madison Street, Chicago, Illinois 60606. Copies of such materials may be
obtained from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a web site at http://www.sec.gov that contains reports, proxy
information statements and other information regarding registrants, like
Pegasus, that file electronically with the Commission.
As a result of this Offering of the Class A Common Stock, the Company will
become subject to the informational requirements of the Exchange Act. PM&C,
the direct subsidiary of the Company, has been subject to the informational
requirements of the Exchange Act since October 5, 1995. The Company intends
to furnish to its stockholders annual reports containing audited financial
information and furnish quarterly reports containing condensed unaudited
financial information for each of the first three quarters of each fiscal
year.
95
<PAGE>
[The inside back cover page contains a map of Puerto Rico which shows color
coded regions where Cable TV operators operate. Below the map is the following
color coded chart:
Puerto Rico Cable TV Operators:
MCT Cablevision (Pegasus)
Dom's TeleCable TV (Pegasus)
Cable TV del noroeste (Independent)
Tele Ponce (Independent)
Buena Vision (50% owned by TCI)
Greater TV of San Juan (Century)
Puerto Rico Totals*
Population 3,483,000
TV Households 1,132,000
Homes Passed by Cable 735,000
Cable Subscribers 254,000
Cable Penetration 34%
*Based on estimates provided by Media Fax, Inc.
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Pegasus Communications Corporation (a newly formed entity which has nominal assets and includes
the combined operations of entities under common control)
Report of Coopers & Lybrand L.L.P. .................................................................... F-2
Report of Herbein + Company, Inc. ..................................................................... F-3
Combined Balance Sheets as of December 31, 1994, 1995 and June 30, 1996 (unaudited) ................... F-4
Combined Statements of Operations for the years ended December 31, 1993, 1994, 1995 and six months
ended June 30, 1995 (unaudited) and 1996 (unaudited) ................................................. F-5
Combined Statements of Changes in Total Equity for the years ended December 31, 1993, 1994, 1995 and
June 30, 1996 (unaudited) ............................................................................ F-6
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the six
months ended June 30, 1995 (unaudited) and 1996 (unaudited) .......................................... F-7
Notes to Combined Financial Statements ................................................................ F-8
Portland Broadcasting, Inc. (an acquired entity)
Report of Ernst & Young LLP ........................................................................... F-20
Balance Sheets as of September 25, 1994, September 24, 1995, and December 31, 1995 (unaudited) ........ F-21
Statements of Operations for fiscal year ended September 26, 1993, September 25, 1994, September 24,
1995 and fiscal quarters ended December 25, 1994 (unaudited) and December 31, 1995 (unaudited) ....... F-22
Statements of Deficiency in Assets for the fiscal years ended September 26, 1993, September 25, 1994
and September 24, 1995 and the fiscal quarter ended December 31, 1995 (unaudited) .................... F-23
Statements of Cash Flows for fiscal years ended September 26, 1993, September 25, 1994 and September
24, 1995 and fiscal quarter ended December 1994 (unaudited) and 1995 (unaudited) ..................... F-24
Notes to Financial Statements ......................................................................... F-25
WTLH, Inc. (an acquired entity)
Report of Coopers & Lybrand L.L.P. .................................................................... F-29
Balance Sheets as of December 31, 1994, 1995 and February 29, 1996 (unaudited) ........................ F-30
Statements of Operations for the years ended December 31, 1994, 1995 and for the two months ended
February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ...................................... F-31
Statements of Capital Deficiency for the years ended December 31, 1994, 1995 and for the two months
ended February 29, 1996 (unaudited) .................................................................. F-32
Statements of Cash Flows for the years ended December 31, 1994, 1995 and the two months ended February
28, 1995 (unaudited) and February 29, 1996 (unaudited) ............................................... F-33
Notes to Financial Statements ......................................................................... F-34
DBS Operations of Harron Communications Corp. (a proposed acquisition)
Report of Deloitte & Touche LLP ....................................................................... F-40
Combined Balance Sheets as of December 31, 1994, 1995 and June 30, 1996 (unaudited) ................... F-41
Combined Statements of Operations for years ended December 31, 1994, 1995 and the six months ended June
30, 1995 (unaudited) and 1996 (unaudited) ............................................................ F-42
Combined Statements of Cash Flows for years ended December 31, 1994, 1995 and the six months ended June
30, 1995 (unaudited) and 1996 (unaudited) ............................................................ F-43
Notes to Combined Financial Statements ................................................................ F-44
Dom's Tele Cable, Inc. (an acquired entity)
Report of Coopers & Lybrand L.L.P. .................................................................... F-48
Balance Sheets as of May 31, 1995 and 1996 ............................................................ F-49
Statements of Operations and Deficit for years ended May 31, 1994, 1995 and 1996 ...................... F-50
Statements of Cash Flows for the years ended May 31, 1994, 1995 and 1996 .............................. F-51
Notes to Financial Statements ......................................................................... F-52
</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.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
May 31, 1996 except as to Note 14
for which the date is
October 1, 1996
F-2
<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.
HERBEIN + COMPANY, INC.
Reading, Pennsylvania
March 4, 1994
F-3
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
------------------------------ June 30,
1994 1995 1996
------------- ------------- --------------
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................. $ 1,380,029 $11,974,747 $ 3,199,051
Restricted cash ........................... -- 9,881,198 4,869,114
Accounts receivable, less allowance for
doubtful accounts at December 31, 1994,
1995 and June 30, 1996 of $348,000,
$238,000 and $223,000, respectively ..... 4,000,671 4,884,045 6,825,211
Program rights ............................ 1,097,619 931,664 1,194,954
Inventory ................................. 711,581 1,100,899 460,395
Deferred taxes ............................ 77,232 42,440 77,887
Prepaid expenses and other ................ 629,274 329,895 456,280
------------- ------------- --------------
Total current assets .................... 7,896,406 29,144,888 17,082,892
Property and equipment, net .................... 18,047,416 16,571,538 24,472,098
Intangible assets, net ......................... 47,354,826 48,028,410 60,757,363
Program rights ................................. 1,688,866 1,932,680 1,777,760
Deposits and other ............................. 406,168 92,325 156,556
------------- ------------- --------------
Total assets ............................ $75,393,682 $95,769,841 $104,246,669
============= ============= ==============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Notes payable ............................. $ 285,471 $ 316,188 $ 53,893
Advances payable -- related party ......... 142,048 468,327 343,905
Current portion of long-term debt ......... 25,578,406 271,934 363,516
Accounts payable .......................... 2,388,974 2,494,738 2,618,456
Accrued interest .......................... -- 5,173,745 5,321,500
Accrued expenses .......................... 1,619,052 1,712,000 2,951,216
Current portion of program rights payable . 956,740 1,141,793 1,356,325
------------- ------------- --------------
Total current liabilities ............... 30,970,691 11,579,328 13,008,811
------------- ------------- --------------
Long-term debt, net ............................ 35,765,495 82,308,195 94,445,326
Program rights payable ......................... 1,499,180 1,421,399 1,161,393
Deferred taxes ................................. 216,694 211,902 114,593
------------- ------------- --------------
Total liabilities ....................... 68,452,060 95,520,824 108,730,123
Commitments and contingent liabilities ......... -- -- --
Total equity (deficiency):
Common stock .............................. 494 1,700 1,700
Additional paid-in capital ................ 16,382,054 7,880,848 7,880,848
Retained earnings (deficit) ............... (3,905,909) 1,825,283 (474,404)
Partners' deficit ......................... (5,535,017) (9,458,814) (11,891,598)
------------- ------------- --------------
Total equity (deficiency) ............... 6,941,622 249,017 (4,483,454)
------------- ------------- --------------
Total liabilities and equity ............ $75,393,682 $95,769,841 $104,246,669
============= ============= ==============
</TABLE>
See accompanying notes to combined financial statements
F-4
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------------------------------ --------------------------------
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 $6,415,733 $9,326,825
Barter programming revenue .... 2,735,500 4,604,200 5,110,662 2,319,960 2,482,357
Basic and satellite service ... 7,537,325 8,455,815 10,002,579 4,800,924 6,111,267
Premium services .............. 1,335,108 1,502,929 1,652,419 801,619 947,948
Other ......................... 307,388 423,998 519,682 263,572 313,842
-------------- -------------- ------------- -------------- --------------
Total revenues ............... 19,487,372 28,191,090 32,148,076 14,601,808 19,182,239
-------------- -------------- ------------- -------------- --------------
Operating expenses:
Barter programming expense .... 2,735,500 4,604,200 5,110,662 2,319,960 2,482,357
Programming ................... 3,139,284 4,094,688 5,475,623 2,636,623 3,664,245
General and administrative .... 2,219,133 3,289,532 3,885,473 1,894,129 2,497,190
Technical and operations ...... 2,070,896 2,791,885 2,740,670 1,357,530 1,610,481
Marketing and selling ......... 2,070,404 3,372,482 3,928,073 2,053,531 2,374,617
Incentive compensation ........ 192,070 432,066 527,663 356,207 429,765
Corporate expenses ............ 1,265,451 1,505,904 1,364,323 613,040 709,118
Depreciation and amortization . 5,977,678 6,940,147 8,751,489 3,927,134 4,904,796
-------------- -------------- ------------- -------------- --------------
Income (loss) from operations (183,044) 1,160,186 364,100 (556,346) 509,670
Interest expense .............. (4,043,692) (5,360,729) (8,793,823) (3,349,836) (5,570,257)
Interest expense - related
party ...................... (358,318) (612,191) (22,759) -- --
Interest income ............... -- -- 370,300 -- 151,487
Other expenses, net ........... (220,319) (65,369) (44,488) (84,298) (61,541)
-------------- -------------- ------------- -------------- --------------
Loss before income taxes and
extraordinary items ........ (4,805,373) (4,878,103) (8,126,670) (3,990,480) (4,970,641)
Provision (benefit) for income
taxes ...................... -- 139,462 30,000 20,000 (132,756)
-------------- -------------- ------------- -------------- --------------
Loss before extraordinary items (4,805,373) (5,017,565) (8,156,670) (4,010,480) (4,837,885)
Extraordinary gain (loss) from
extinguishment of debt, net -- (633,267) 10,210,580 -- --
-------------- -------------- ------------- -------------- --------------
Net income (loss) ............. ($ 4,805,373) ($ 5,650,832) $2,053,910 ($4,010,480) ($4,837,885)
============== ============== ============= ============== ==============
Pro forma income (loss) per
share; (See Note 14)
Loss before extraordinary
items .................... $(1.59) $(0.94)
Extraordinary gain ......... 1.99 --
------------- --------------
Net income (loss) .......... $0.40 $(0.94)
============= ==============
Weighted average shares .... 5,142,500 5,142,500
</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 ....................... (2,299,687) (2,538,198) (4,837,885)
Contribution by partner ........ 105,414 105,414
----------- -------- -------------- ------------- --------------- --------------
Balances at June 30, 1996
(unaudited) ................... 170,000 $1,700 $ 7,880,848 ($ 474,404) ($11,891,598) ($ 4,483,454)
=========== ======== ============== ============= =============== ==============
</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, Six Months Ended June 30,
------------------------------------------------- --------------------------------
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 ($ 4,010,480) ($ 4,837,885)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Extraordinary (gain) loss on
extinguishment of debt, net ...... -- 633,267 (10,210,580) -- --
Depreciation and amortization ...... 5,977,678 6,940,147 8,751,489 3,927,134 4,904,796
Program rights amortization ........ 1,342,194 1,193,559 1,263,190 662,542 760,929
Accretion of bond discount ......... -- -- -- -- 195,926
Gain (loss) on disposal of fixed assets (9,344) 30,524 -- -- --
Bad debt expense ................... 96,932 200,039 146,147 91,470 130,713
Deferred income taxes .............. -- 139,462 30,000 20,000 (132,756)
Payments of programming rights ..... (1,278,650) (1,310,294) (1,233,777) (605,078) (607,085)
Interest paid with refinancing of debt (671,803) -- -- -- --
Change in assets and liabilities:
Accounts receivable .............. (853,305) (1,353,448) (815,241) 751,771 (2,086,735)
Inventory ........................ -- (711,581) (389,318) (326,382) 590,352
Prepaid expenses and other ....... (133,745) (250,128) 490,636 -- 50,152
Accounts payable & accrued expenses (113,160) 702,240 (826,453) 19,657 (942,632)
Advances payable -- related party . -- 142,048 326,279 370,488 (124,422)
Accrued interest ................. 1,851,800 2,048,569 5,173,745 443 134,464
Deposits and other ............... 64,133 39,633 5,843 2,631 (68,611)
-------------- -------------- -------------- -------------- --------------
Net cash provided (used) by operating
activities ......................... 1,693,677 2,793,205 4,765,870 904,196 (2,032,794)
Cash flows from investing activities:
Acquisitions ....................... -- -- -- -- (17,107,329)
Capital expenditures ............... (884,950) (1,264,212) (2,640,475) (1,536,086) (2,747,890)
Purchase of intangible assets ...... -- (943,238) (2,334,656) (1,895,493) (573,239)
Cash acquired from acquisitions .... 803,908 -- -- -- --
Other .............................. (25,065) (53,648) (250,000) (28,761) (157,500)
-------------- -------------- -------------- -------------- --------------
Net cash used for investing activities . (106,107) (2,261,098) (5,225,131) (3,460,340) (20,585,958)
Cash flows from financing activities:
Proceeds from long-term debt ....... 15,060,000 35,015,000 81,651,373 590,202 247,736
Borrowings on revolving credit facility -- -- 2,591,335 2,591,335 8,800,000
Proceeds from long-term borrowings from
related parties .................. 5,574 26,000 20,000 13,000 --
Repayments on revolving credit
facility ......................... -- -- (2,591,335) -- --
Repayments of long-term debt ....... (15,194,664) (33,991,965) (48,095,692) (38,150) (53,283)
Restricted cash .................... -- -- (9,881,198) -- 5,012,084
Debt issuance costs ................ (843,380) (1,552,539) (3,974,454) -- --
Capital lease repayments ........... (47,347) (154,640) (166,050) (138,302) (163,481)
Distributions to Parent ............ -- -- (12,500,000) -- --
Proceeds from the issuance of PM&C Class
B Shares ......................... -- -- 4,000,000 -- --
-------------- -------------- -------------- -------------- --------------
Net cash provided (used) by financing
activities ....................... (1,019,817) (658,144) 11,053,979 3,018,085 13,843,056
Net increase (decrease) in cash and cash
equivalents ........................... 567,753 (126,037) 10,594,718 461,941 (8,775,696)
Cash and cash equivalents, beginning of period 938,313 1,506,066 1,380,029 1,380,029 11,974,747
-------------- -------------- -------------- -------------- --------------
Cash and cash equivalents, end of period . $ 1,506,066 $ 1,380,029 $ 11,974,747 $ 1,841,970 $ 3,199,051
============== ============== ============== ============== ==============
</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 using the
straight-line method based upon the following lives:
Reception and distribution facilities .................... 7 to 11 years
Transmitter equipment .................................... 5 to 10 years
Equipment, furniture and fixtures ........................ 5 to 10 years
Building and improvements ................................ 12 to 39 years
Vehicles ................................................. 3 to 5 years
INTANGIBLE ASSETS:
Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and
amortized over the lives of the related franchise agreements, while
unsuccessful franchise applications and abandoned franchises are charged to
expense. Financing costs incurred in obtaining long-term financing are
amortized over the term of the applicable loan. Goodwill, broadcast licenses,
network affiliation agreements and other intangible assets ("Intangible
Assets") are reviewed for impairment whenever events or circumstances provide
evidence that suggest that the carrying amounts may not be recoverable. The
Company assesses the recoverability of its Intangible Assets by determining
whether the amortization of the respective Intangible Asset balance can be
recovered through projected undiscounted future cash flows.
Amortization of Intangible Assets is computed using the straight-line
method based upon the following lives:
Broadcast licenses ....................................... 40 years
Network affiliation agreement ............................ 40 years
Goodwill ................................................. 40 years
Other intangibles ........................................ 2 to 14 years
REVENUE:
The Company operates in three industry segments: broadcast television
("TV"), cable television ("Cable") and direct broadcast satellite television
("DBS"). The Company recognizes revenue in its TV operations when advertising
spots are broadcasted. The Company recognizes revenue in its Cable and DBS
operations when video and audio services are provided.
PROGRAMMING:
The Company obtains a portion of its programming, including presold
advertisements, through its network affiliation agreement with Fox and also
through independent producers. The Company does not make any direct payments
for this programming. For running network programming, the Company received
payments from Fox, which totaled $60,608, $71,139 and $215,310 in 1993, 1994
and 1995, respectively. For
F-9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
running independent producers' programming, the Company received no direct
payments. Instead, the Company retains a portion of the available
advertisement spots to sell on its own account. Barter programming revenue
and the related expense are recognized when the presold advertisements are
broadcasted. The Company recorded barter programming revenue and related
programming expenses of $2,735,500, $4,604,200 and $5,110,662 for the years
ended December 31, 1993, 1994 and 1995, respectively. These amounts are
presented gross as barter programming revenue and expense in the accompanying
combined statements of operations.
CASH AND CASH EQUIVALENTS:
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less. The Company has cash balances in
excess of the federally insured limits at various banks.
RESTRICTED CASH:
The Company had restricted cash held in escrow of $9,881,198 and
$4,869,114 at December 31, 1995 and June 30, 1996, respectively. These funds
may be disbursed from the escrow only to pay interest on its Series B Senior
Subordinated Notes due 2005 (the "Series B Notes").
PROGRAM RIGHTS:
The Company enters into agreements to show motion pictures and syndicated
programs on television. In accordance with the Statements of Financial
Accounting Standards No. 63 ("SFAS No. 63"), only the right and associated
liabilities for those films and programs currently available for showing are
recorded. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period which approximates amortization based on the
estimated number of showings during the contract period. Amortization of
$1,359,117, $1,238,849 and $1,306,768 is included in programming expenses for
the years ended December 31, 1993, 1994 and 1995, respectively. The
obligations arising from the acquisition of film rights are recorded at the
gross amount. Payments for the contracts are made pursuant to the contractual
terms over periods which are generally shorter than the license periods.
The Company has entered into agreements totaling $798,800 as of December
31, 1995, which are not yet available for showing at December 31, 1995, and
accordingly, are not recorded by the Company.
At December 31, 1995, the Company has commitments for future program
rights of $1,141,793, $827,793, $438,947 and $154,659 in 1996, 1997, 1998 and
1999, respectively.
INCOME TAXES:
On October 31, 1994, in conjunction with the incorporation, PBT, PCT, and
PST adopted the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Prior to such date, the
above entities operated as partnerships for federal and state income tax
purposes and, therefore, no provision for income taxes was necessary. MCT is
treated as a partnership for federal and state income tax purposes, but taxed
as a corporation for Puerto Rico income tax purposes. The adoption of SFAS
No. 109 did not have a material impact on the Company's financial position or
results of operations. For the year ended December 31, 1994, income and
deferred taxes are based on the Company's operations from November 1, 1994
through December 31, 1994, excluding (i) MCT, which for Puerto Rico income
tax purposes is taxed as a corporation for the 12 month period ended December
31, 1994, and (ii) PBA and Towers, which are limited partnerships.
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different businesses and
geographic regions. As of December 31, 1994 and 1995, the Company had no
significant concentrations of credit risk.
F-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
3. INTERIM FINANCIAL INFORMATION:
The financial statements as of June 30, 1996 and for the six months ended
June 30, 1995 and 1996 are unaudited. In the opinion of management, all
adjustments, including normal recurring adjustments, necessary for a fair
presentation of the results of operations have been included. Results for the
six months ended June 30, 1996 may not be indicative of the results expected
for the year ending December 31, 1996.
The Company has provided unaudited footnote information for the interim
periods to the extent such information is substantially different from the
audited periods.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
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 26,163,561
Transmitter equipment ................ 7,249,289 7,478,134 10,371,864
Building and improvements ............ 823,428 1,554,743 1,579,571
Equipment, furniture and fixtures .... 938,323 1,333,797 3,830,115
Vehicles ............................. 304,509 571,456 703,042
Other equipment ...................... 655,167 997,352 1,702,213
-------------- -------------- --------------
32,385,952 35,034,411 45,212,664
Accumulated depreciation ............. (14,338,536) (18,462,873) (20,740,566)
-------------- -------------- --------------
Net property and equipment ........... $ 18,047,416 $ 16,571,538 $ 24,472,098
============== ============== ==============
</TABLE>
Depreciation expense amounted to $3,154,394, $4,027,866, $4,140,058,
$2,065,358 and $2,277,693 for the years ended December 31, 1993, 1994, 1995
and for the six months ended June 30, 1995 and 1996, respectively.
5. INTANGIBLES:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, June 30,
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 4,003,702
DBS rights ........................... 3,130,093 4,832,160 4,832,160
Non-compete agreement ................ -- -- 1,800,000
Organization and other deferred costs 3,130,926 3,862,021 6,781,791
-------------- -------------- --------------
54,155,818 58,774,757 74,064,136
Accumulated amortization ............. (6,800,992) (10,746,347) (13,306,773)
-------------- -------------- --------------
Net intangible assets .............. $47,354,826 $ 48,028,410 $ 60,757,363
============== ============== ==============
</TABLE>
Amortization expense amounted to $2,823,284, $2,912,281, $4,611,431,
$1,861,771 and $2,560,737 for the years ended December 31, 1993, 1994, 1995
and for the six months ended June 30, 1995 and 1996, respectively.
F-11
<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, June 30,
1994 1995 1996
-------------- -------------- -------------
(unaudited)
<S> <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 $3,608,620 as
of December 31, 1995 and June 30, 1996, respectively ....... $81,195,454 $81,391,380
Senior term note, due 2001, interest at the Company's option
at either the bank's prime rate, plus an applicable margin
or LIBOR, plus an applicable margin (9.25% at December 31,
1994) ...................................................... $20,000,000 -- --
Subordinated term loan, due 2003, interest at the Company's
option of either 4%, plus the higher of the bank's prime
rate or the Federal Funds rate plus 1% or the Eurodollar
rate, plus 6.5% (12.5% at December 31, 1994) ............... 15,000,000 -- --
Senior loan payable by MCT, due 1995, interest at prime, plus
2% (10.5% at December 31, 1994) ............................ 15,000,000 -- --
Junior loan payable by MCT, due 1995, interest at prime plus
2% (10.5% at December 31, 1994) ............................ 10,348,857 -- --
Senior five year revolving credit facility dated July 7,
1995, interest at the Company's option at either the banks
prime rate, plus an applicable margin or LIBOR, plus an
applicable margin (8.2% at June 30, 1996) .................. -- -- 8,800,000
Mortgage payable, due 2000, interest at 8.75% ............... -- 517,535 508,209
Other ....................................................... 995,044 867,140 4,109,253
-------------- -------------- -------------
61,343,901 82,580,129 94,808,842
Less current maturities ..................................... 25,578,406 271,934 363,516
-------------- -------------- -------------
Long-term debt .............................................. $35,765,495 $82,308,195 $94,445,326
============== ============== =============
</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 $1.2 million at June 30, 1996.
On October 31, 1994, the Company repaid the outstanding balances under its
senior and junior term loan agreements with a portion of the proceeds from a
$20,000,000 term note agreement ("senior note") and $15,000,000 subordinated
term loan agreement ("subordinated loan") from various banking institutions.
The senior note and subordinated loan were scheduled to mature on December
31, 2001 and September 30, 2003, respectively. Amounts were subsequently
repaid as described below.
On July 7, 1995, the Company sold 85,000 units consisting of $85,000,000
in aggregate amount of 12.5% Series A Senior Subordinated Notes due 2005 (the
"Series A Notes" and, together with the Series B Notes, the "Notes") and
8,500 shares of Class B Common Stock of PM&C (the "Note Offering"). The net
proceeds from the sale were used to (i) repay approximately $38.6 million in
loans and other obligations, (ii) repurchase $26.0 million of notes for
approximately $13.0 million resulting in an extraordinary gain of $10.2
million, net of expenses of $2.8 million, (iii) make a $12.5 million
distribution to PCH, (iv) escrow $9.7 million for the purpose of paying
interest on the Notes, (v) pay $3.3 million in fees and expenses and (vi) to
fund proposed acquisitions.
F-12
<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:
1994 1995
---------- ----------
Notes payable ....................................... $211,728 $257,228
Interest expense related to subordinated notes payable 594,875 --
At December 31, 1994 and 1995, PCMC had advances payable to an affiliate
for $142,048 and $468,327, respectively. The advances are payable on demand
and are non-interest bearing.
At December 31, 1994 and 1995, Towers had a demand note payable to an
affiliate, with interest accruing at 8% per annum, for $131,815 and $151,815,
respectively. Total interest expense on the affiliated debt was $10,440 and
$10,901 for the years ended December 31, 1994 and 1995, respectively. Also,
at December 31, 1994 and 1995, PBA had a demand note payable to an affiliate,
with interest accruing at prime plus two percent payable monthly in arrears,
for $79,913 and $105,413, respectively. The effective interest rate was
10.25% at December 31, 1995. Total interest expense on the affiliated debt
was $6,876 and $11,858, for the years ended December 31, 1994 and 1995,
respectively.
11. SUPPLEMENTAL CASH FLOW INFORMATION:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended December 31, Six months ended June 30,
--------------------------------------------- ----------------------------
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 $2,319,960 $2,482,357
Intangible assets and related affiliated
debt .................................. 2,994,811 -- -- -- --
Acquisition of program rights and
assumption of related program payables -- 1,797,866 1,335,275 317,265 --
Acquisition of plant under capital
leases ................................ 289,786 168,960 121,373 121,373 247,736
Redemption of minority interests and
related receivable .................... -- 49,490 246,515 -- --
Interest converted to principal ........ -- 867,715 -- -- --
Issuance of put/call agreement ......... -- -- -- -- 3,050,000
</TABLE>
For the years ended December 31, 1993, 1994, 1995 and for the six months
ended June 30, 1995 and 1996, the Company paid cash for interest in the
amount of $3,280,520, $3,757,097, $3,620,931, $3,349,836 and $5,531,271,
respectively. The Company paid no taxes for the years ended December 31,
1993, 1994, 1995 and for the six months ended June 30, 1995 and 1996.
F-16
<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. Pegasus is authorized to issue
30,000,000 shares of Class A and 15,000,000 shares of Class B, $0.01 par
value common stock and 5,000,000 shares of Preferred Stock.
13. INDUSTRY SEGMENTS:
The Company operates in three industry segments: broadcast television
(TV), cable television (Cable), and direct broadcast satellite television
(DBS). TV consists of three Fox affiliated television stations, of which one
also simulcasts its signal in Hazelton and Williamsport, Pennsylvania. Cable
and DBS consists of cable television services and direct broadcast satellite
services/equipment, respectively. Information regarding the Company's
business segments in 1993, 1994, and 1995 is as follows:
<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:
A. PEGASUS SAVINGS PLAN
Effective January 1, 1996, the Company adopted the Pegasus Communications
Savings Plan (the "U.S. Plan"). The U.S. Plan is intended to be qualified
under sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as
amended. Substantially all the Company's employees who have completed at
least one year of service are eligible to participate. Participants may make
salary contributions up to 6% of their base salary.
The Company makes employing matching contributions up to 100% of
participant contributions. Company matching contributions vest over a four
year period.
B. ACQUISITIONS
On January 29, 1996, PCH acquired 100% of the outstanding stock of
Portland Broadcasting, Inc. ("PBI"), a wholly owned subsidiary of Bride
Communications, Inc. ("BCI") which owns the tangible assets of WPXT,
Portland, Maine. PCH immediately transferred the ownership of PBI to the
Company. The aggregate purchase price was approximately $11,700,000 of which
$4,200,000 was allocated to fixed and tangible assets and $7,500,000 to
goodwill. On June 20, 1996, PCH acquired the FCC license of WPXT for
aggregate consideration of $3,000,000.
Effective March 1, 1996, the Company acquired the principal tangible
assets of WTLH, Inc. and certain of its affiliates for approximately
$5,000,000 in cash, except for the FCC license and Fox affiliation agreement.
Additionally, WTLH License Corp., a subsidiary of the Company entered into a
put/call agreement regarding the FCC license and Fox affiliation agreement
with General Management Consultants, Inc. ("GMC"), the licensee of WTLH,
Tallahassee, Florida. As a result of entering into the put/call agreement,
the Company recorded $3,050,000 in intangible assets and long term debt
representing the FCC license and Fox affiliation agreement and the related
contingent liability. In August 1996, the Company exercised the put/call
agreement for $3,050,000.
The aggregate purchase price of WTLH, Inc. and the related FCC licenses
and Fox affiliation agreement is approximately $8,050,000 of which $2,150,000
was allocated to fixed and tangible assets and $5,900,000 to various
intangible assets. In addition, the Company granted the owners of WTLH a
warrant to purchase $1,000,000 of stock at the initial public offering price.
The warrant expires 120 days after the effective date of the registration
statement relating to the Company's initial public offering.
On March 21, 1996, the Company entered into a definitive agreement to
acquire all of the assets of Dom's Tele Cable, Inc. ("Dom's") for
approximately $25 million in cash and $1.4 million in assumed liabilities.
Dom's operates a cable system serving ten communities contiguous to MCT. The
Company completed this transaction on August 29, 1996.
F-18
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
14. Subsequent Events: - (Continued)
On May 30, 1996, PCH entered into an agreement with Harron Communications
Corp., under which the Company will acquire the rights to provide DIRECTV
programming in certain rural areas of Texas and Michigan and related assets
in exchange for approximately $17.9 million in cash and $11.9 million of the
Company's Class A Common Stock.
The above acquisitions have been or will be accounted for as purchases.
C. ADDITIONAL ACQUISITIONS AND DEPOSITIONS
On July 8, 1996, the Company entered into a letter of intent to purchase
the direct broadcast satellite assets of Chillicothe Telephone Company for
approximately $12 million in cash.
In July 1996, the Company entered into a letter of intent to sell certain
assets of its New England cable system for approximately $7 million in cash.
The Company anticipates recognizing a gain in the transaction.
D. PRO FORMA INCOME (LOSS) PER SHARE
Historical earnings per share has not been provided since it is not
meaningful due to the combined presentation of Pegasus. Pro forma earnings
per share has been presented as if Pegasus operated as a consolidated entity
for the year ended December 31, 1995 and the six months ended June 30, 1996.
The pro forma income (loss) per share has been calculated based upon
5,142,500 shares outstanding and has been retroactively applied. The pro
forma average shares consists of the following:
<TABLE>
<CAPTION>
Class A Class B Total
--------- ----------- -----------
<S> <C> <C> <C>
o Exchange for 161,500 Class A shares of PM&C . 3,380,435 3,380,435
o Exchange for 8,500 Class B shares of PM&C ... 191,792 191,792
o Exchange for 5,000 shares of Parent
non-voting common stock ...................... 263,606 263,606
o Exchange for certain assets and liabilities
of PCMC at an assumed offering price of $15
per share .................................... 1,306,667 1,306,667
--------- ----------- -----------
455,398 4,687,102 5,142,500
========= =========== ===========
</TABLE>
E. STOCK OPTION PLANS
In September 1996, the Pegasus Communications 1996 Stock Option Plan,
which provides for the granting of up to 450,000 qualified and non qualified
stock options, and the Pegasus Restricted Stock Option Plan, which provides
for the granting for up to 270,000 shares, were adopted.
F. NEW CREDIT FACILITY
On August 29, 1996, PM&C entered into a $50.0 million seven-year senior
revolving credit facility, which is collateralized by substantially all of
the assets of PM&C. On the same date, the Company had drawn $8.8 million to
repay all amounts outstanding under the $10 million senior collateralized
five-year revolving credit facility and approximately $23 million to fund the
acquisition of Dom's.
F-19
<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.
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.
STATEMENTS 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
--------------- --------------- --------------- -------------- --------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
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 ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accounts of the Company are maintained on the accrual basis of
accounting. The financial statements include only the accounts of the Company
and do not include the accounts of Bride, its parent, or other Bride
subsidiaries.
DEFERRED FILM COSTS AND FILM CONTRACT COMMITMENTS
The Company has contracts with various film distributors from which films
are leased for television transmission over various contract periods
(generally one to five years). The total obligations due under these
contracts are recorded as liabilities and the related film costs are stated
at the lower of amortized cost or estimated net realizable value. Deferred
film costs are amortized based on an accelerated method over the contract
period.
The portions of the cost to be amortized within one year and after one
year are reported in the balance sheet as current and other assets,
respectively, and the payments under these contracts due within one year and
after one year are similarly classified as current and long-term liabilities.
BANK OVERDRAFT
Bank overdraft represents the overdrawn balance of the Company's demand
deposit accounts with a financial institution, and is included in the change
in accounts payable and accrued expenses for statement of cash flow purposes.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost or value received in
exchange for broadcasting. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets. In general, estimated
useful lives of such assets are 19 years for buildings and range from 5 to 10
years for equipment.
BARTER TRANSACTIONS
Revenue from barter transactions (advertising provided in exchange for
goods and services) is recognized as income when advertisements are broadcast
and goods or services received are capitalized or charged to operations when
received or used. Included in the statements of operations is broadcasting
net revenue from barter transactions of $290,168, $278,935, and $331,233 and
station operating costs and expenses from barter transactions of $307,525,
$277,806, and $321,667 for 1993, 1994, and 1995, respectively. Included in
the balance sheets is equipment capitalized from barter transactions of
$4,437, $8,869, and $30,814 during 1993, 1994, and 1995, respectively, and
deferred barter expense of $21,581, $26,593, and $7,103 at September 26,
1993, September 25, 1994, and September 24, 1995, respectively.
INCOME TAXES
The operations of the Company are included in the consolidated federal and
state income tax returns filed under Bride Communications, Inc. and
subsidiaries. Federal and state income taxes are provided based on the amount
that would be payable on a separate company basis. Tax benefits are allocated
to loss members in the same year the losses are availed of by the profit
members of the consolidated group. Investment tax credits have been accounted
for using the flow-through method.
F-25
<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:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
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 .................... $ -- $ --
============= =============
</TABLE>
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.
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
F-34
<PAGE>
WTLH, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. Summary of Significant Accounting Policies: - (Continued)
independent producers' programming to be $310,208, $470,589, 51,701 and
$78,431 for the years ended December 31, 1994 and 1995 and the two month
periods ended February 28, 1995 and February 29, 1996, respectively. These
amounts are presented gross as barter broadcasting revenue and barter
programming expense in the accompanying financial statements.
Income Taxes -- Deferred income tax assets are recognized for the expected
future consequences of events that have been included in the financial
statements and income tax returns. Deferred tax assets and liabilities are
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse.
2. PROPERTY AND EQUIPMENT:
The major classes of equipment consist of the following:
<TABLE>
<CAPTION>
February 29,
1994 1995 1996
----------- ----------- --------------
(Unaudited)
<S> <C> <C> <C>
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
=========== =========== ==============
</TABLE>
Building and equipment under capital leases consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1994 1995 1996
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
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
============== ============== ==============
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
1999 ........................................................... $418,623
========
</TABLE>
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>
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.
DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
April 26, 1996, except for
Note 9 as to which the
date is September 3, 1996
F-40
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND JUNE 30, 1996
<TABLE>
<CAPTION>
December 31,
------------------------------ June 30,
1994 1995 1996
------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................... $ 140,311 $ 452,016 $ 313,923
Accounts Receivable, net of allowance for
doubtful accounts of $64,100 in 1995 and 1996 71,818 485,803 323,659
Inventory ...................................... 766,945 304,335 31,079
------------- ------------- -------------
Total current assets ................... 979,074 1,242,154 668,661
------------- ------------- -------------
PROPERTY AND EQUIPMENT ........................... 14,270 71,777 71,777
Accumulated depreciation ....................... (1,000) (9,565) (17,132)
------------- ------------- -------------
Property and equipment, net ............ 13,270 62,212 54,645
------------- ------------- -------------
FRANCHISE COSTS .................................. 5,399,321 5,590,167 5,590,167
Accumulated amortization ....................... (224,877) (775,423) (1,058,599)
------------- ------------- -------------
Franchise costs, net ................... 5,174,444 4,814,744 4,531,568
------------- ------------- -------------
TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,254,874
============= ============= =============
LIABILITIES AND DIVISION DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ............................... $ 272,340 $ 49,290 $ 22,987
Accrued expenses (Note 4) ..................... 121,085 504,339 651,127
------------- ------------- -------------
Total current liabilities .............. 393,425 553,629 674,114
------------- ------------- -------------
DUE TO AFFILIATE (Note 8) ........................ 6,708,407 8,399,809 7,997,900
------------- ------------- -------------
Total liabilities ............................ 7,101,832 8,953,438 8,672,014
COMMITMENTS AND CONTINGENCIES
DIVISION DEFICIENCY .............................. (935,044) (2,834,328) (3,417,140)
------------- ------------- -------------
TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,254,874
============= ============= =============
</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
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
-------------------------------- -----------------------------
1994 1995 1995 1996
------------- --------------- ------------ -------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Programming ................ $ 95,488 $ 1,677,581 $ 576,032 $1,606,878
Equipment and other ........ 279,430 835,379 147,175 289,708
------------- --------------- ------------ -------------
374,918 2,512,960 723,207 1,896,586
------------- --------------- ------------ -------------
COST OF SALES:
Programming ................ 42,464 707,880 245,717 798,796
Equipment and other ........ 233,778 901,420 135,386 288,284
------------- --------------- ------------ -------------
276,242 1,609,300 381,103 1,087,080
------------- --------------- ------------ -------------
GROSS PROFIT ................. 98,676 903,660 342,104 809,506
------------- --------------- ------------ -------------
OPERATING EXPENSES:
Selling .................... 17,382 463,425 85,806 87,241
General and administrative . 199,683 1,009,633 341,657 594,479
Corporate allocation ....... 103,200 139,700 69,800 76,393
Depreciation and
amortization ............ 225,877 559,111 274,661 290,743
------------- --------------- ------------ -------------
546,142 2,171,869 771,924 1,048,856
------------- --------------- ------------ -------------
LOSS FROM OPERATIONS ......... (447,466) (1,268,209) (429,820) (239,350)
INTEREST EXPENSE ............. 487,578 631,075 307,843 343,462
------------- --------------- ------------ -------------
NET LOSS ..................... $(935,044) $ 1,899,284) $(737,663) $ (582,812)
============= =============== ============ =============
</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
SIX MONTHS ENDED JUNE 30, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30,
-------------------------------- ------------------------------
1994 1995 1995 1996
------------- --------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................. $ (935,044) $(1,899,284) $ (737,663) $(582,812)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .......... 225,877 559,111 274,661 290,743
Changes in assets and liabilities:
Accounts receivable .................. (71,818) (413,985) (35,256) 162,144
Inventory ............................ (766,945) 462,610 (169,343) 273,256
Accounts payable ..................... 272,340 (223,050) (165,084) (26,303)
Accrued expenses ..................... 121,085 383,254 66,048 146,788
------------- --------------- ------------- -------------
Net cash provided by (used in)
operating activities ............ (1,154,505) (1,131,344) (766,637) 263,816
------------- --------------- ------------- -------------
INVESTING ACTIVITIES:
Purchase of property and equipment ........ (14,270) (57,507) (48,217) --
Purchase of franchise rights and other .... (190,846) (189,690) --
------------- --------------- ------------- -------------
Net cash used in investing
activities ...................... (14,270) (248,353) (237,907) --
------------- --------------- ------------- -------------
FINANCING ACTIVITIES -- Advances from (to)
affiliate, net ............................ 1,309,086 1,691,402 1,006,890 (401,909)
------------- --------------- ------------- -------------
NET INCREASE (DECREASE) IN CASH ............. 140,311 311,705 2,346 (138,093)
CASH, BEGINNING OF YEAR ..................... 140,311 140,311 452,016
------------- --------------- ------------- -------------
CASH, END OF YEAR ........................... $ 140,311 $ 452,016 $ 142,657 $ 313,923
============= =============== ============= =============
</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 services within the Divisions' markets.
In 1993, the Divisions purchased their initial franchises with a potential
subscriber base of 343,174 homes for approximately $5,395,000. In July 1994,
the Divisions added their first DBS subscriber. In 1995, the Divisions
purchased an additional franchise with a potential subscriber base of 7,695
homes for approximately $190,000. Total subscribers at December 31, 1995 and
1994 were 6,573 and 1,737 homes, respectively.
Under the franchise agreements, DIRECTV operates a satellite through which
programming is transmitted. The NRTC provides certain billing and collection
services to the Divisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable -- Accounts receivable consist of amounts due from
customers for programming services and equipment purchases and installation.
In 1995, the Divisions sold equipment and related installation to
approximately 50 customers under contracts with repayment terms of up to 48
months. The Divisions have provided a reserve for estimated uncollectible
amounts of $64,100 at December 31, 1995. Bad debt expense in 1994 and 1995
was $0 and $87,400, respectively.
Inventory -- Inventory, consisting of DBS systems (primarily, satellite
dishes and converter boxes) and related parts and supplies, is stated at the
lower of cost (first in - first out method) or market. Because of the nature
of the technology involved, the value of inventory held by the Divisions is
subject to changing market conditions. Accordingly, inventory has been
written down to its estimated net realizable value, and results of operations
in 1995 include a corresponding charge of approximately $105,000.
In 1995, the Divisions provided demonstration units to certain dealers and
others. The cost of demonstration units is expensed when such units are
placed in service. In 1995, demonstration units amounting to approximately
$32,000 were placed in service.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets.
Franchise Costs -- Franchise acquisition costs are capitalized and are
being amortized using the straight-line method over the remaining minimum
franchise period (originally 10 years) which approximates the estimated
useful life of the satellite operated by DIRECTV.
F-44
<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 June 30, 1996 and the
combined statements of operations and cash flows for the three months ended
June 30, 1995 and 1996 have been prepared by the Divisions and have not been
audited. In the opinion of management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the combined
financial position, results of operations and cash flows of the Divisions as
of June 30, 1996 and for the six months ended June 30, 1995 and 1996 have
been made. The combined results of operations for the six months ended June
30, 1996 are not necessarily indicative of operating results for the full
year.
Disclosures About Fair Value of Financial Instruments -- The following
disclosure of the estimated fair value of financial instruments is made in
accordance with SFAS No. 107, Disclosures About Fair Value of Financial
Instruments.
Cash, Accounts Receivable, Accounts Payable, and Accrued Expenses --
The carrying amounts of these items approximate their fair values as of
December 31, 1994 and 1995 because of their short maturity.
Due to Affiliates -- A reasonable estimate of fair value is not
practicable to obtain because of the related party nature of this item.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated December 31,
Years --------------------------
Useful Life 1994 1995
------------- --------- ---------
Furniture and fixtures . 10 $ 8,550 $19,435
Computer equipment ..... 5 5,720 25,839
Automobiles ............ 3 21,005
Other .................. 3 5,498
--------- ---------
14,270 71,777
Accumulated depreciation . (1,000) (9,565)
--------- ---------
$13,270 $62,212
========= =========
F-45
<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 Divisions based on management's
estimate of the Divisions' allocable share of such costs. Management believes
that its allocation method is reasonable.
The Divisions' assets have been pledged as collateral for certain loans of
Harron that have outstanding balances of approximately $188,000,000 at
December 31, 1995.
9. SUBSEQUENT EVENT
On April 4, 1996, Harron entered into a letter of intent with Pegasus
Communications Holdings, Inc. ("Pegasus"). The terms of this letter are
subject to change pursuant to ongoing negotiations between Pegasus and
Harron. Under the present understanding of terms as of September 3, 1996,
Pegasus and Harron would simultaneously contribute assets into a newly-formed
Delaware Corporation ("Newco"). Newco would simultaneously undertake an
initial public offering of common stock ("Public Stock"). At the closing of
the transaction, Harron would contribute its DBS operations to Newco in
exchange for (a) cash in the amount of $17.9 million and (b) the number of
shares of Newco common stock that could be purchased for $11.9 million at the
price at which the Public Stock is first offered to the public. Although the
Divisions believe that this transaction will be consummated, there can be no
assurances that it will occur at all or on the terms described above.
F-47
<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, 1995 and 1996 and the related statements of operations and deficit
and cash flows for the years ended May 31, 1994, 1995 and 1996. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards required that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Dom's Tele Cable, Inc. as of
May 31, 1995 and 1996, and the results of operations and deficit and its cash
flows for the years ended May 31, 1994, 1995 and 1996 in conformity with
generally accepted accounting principles.
As discussed in Note 11, to the financial statements, the Company has
restated the depreciation expense for the year ended May 31, 1994, to
properly reflect the calculation of depreciation expense.
COOPERS & LYBRAND L.L.P.
San Juan, Puerto Rico
August 9, 1996
F-48
<PAGE>
DOM'S TELE CABLE, INC.
BALANCE SHEETS
MAY 31, 1995 AND 1996
<TABLE>
<CAPTION>
May 31, May 31,
1995 1996
------------- -------------
ASSETS
<S> <C> <C>
Property, plant, and equipment net of accumulated
depreciation and amortization ...................... $ 5,077,102 $ 4,839,293
Cash ................................................ 60,648 146,368
Accounts receivable, trade -- net of allowance for
doubtful accounts of $26,900 and $30,390 for May 31,
1995 and 1996, respectively ........................ 107,876 26,314
Prepaid expenses .................................... 85,536 62,856
Other assets ........................................ 11,086 11,086
Due from related parties ............................ 212 212
Deferred tax asset .................................. 330,200 0
------------- -------------
Total assets ................................... $ 5,672,660 $ 5,086,129
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Liabilities:
Notes and loans payable ........................... $ 6,079,357 $ 5,086,232
Accounts payable, trade ........................... 695,519 194,856
Accrued expenses .................................. 942,227 1,055,337
Unearned revenues ................................. 53,852 41,369
Income tax payable ................................ 16,840 15,410
------------- -------------
7,787,795 6,393,204
------------- -------------
Commitments and contingencies ....................... 477,083 495,352
Stockholders' Deficiency:
Common stock -- $10 par value; authorized, 100,000
shares, issued and outstanding 9,575 shares .... 95,750 95,750
Accumulated deficit ............................... (2,687,968) (1,898,177)
------------- -------------
(2,592,218) (1,802,427)
------------- -------------
Total liabilities and stockholders' deficiency . $ 5,672,660 $ 5,086,129
============= =============
</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, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
May 31, May 31, May 31,
1994 1995 1996
--------------- --------------- --------------
As Restated
<S> <C> <C> <C>
Revenues ............................ $ 5,356,652 $ 5,447,228 $ 6,015,072
Operating costs and expenses ........ 1,521,390 1,950,762 1,909,206
--------------- --------------- --------------
Gross profit ................... 3,835,262 3,496,466 4,105,866
--------------- --------------- --------------
Marketing, general, and
administrative expenses ...... 1,346,487 1,412,951 1,636,322
Depreciation and amortization .. 634,750 491,295 505,042
--------------- --------------- --------------
1,981,237 1,904,246 2,141,364
--------------- --------------- --------------
Operating income .................... 1,854,025 1,592,220 1,964,502
Non-operating (income) expenses:
Other ............................. -- (50,000) --
Interest expense .................. 753,047 777,461 827,800
--------------- --------------- --------------
Income before benefit (provision)
for income taxes ............... 1,100,978 864,759 1,136,702
Benefit (provision) for income
taxes .......................... 184,000 129,356 (346,911)
--------------- --------------- --------------
Net income ..................... 1,284,978 994,115 789,791
Deficit at beginning of period ...... (4,967,061) (3,682,083) (2,687,968)
--------------- --------------- --------------
Deficit at end of period ............ $(3,682,083) $(2,687,968) $(1,898,177)
=============== =============== ==============
</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, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
May 31, May 31, May 31,
1994 1995 1996
------------- ------------- -------------
As Restated
<S> <C> <C> <C>
Cash flows from operating activities:
Net income .................................. $ 1,284,978 $ 994,115 $ 789,791
------------- ------------- -------------
Adjustments to reconcile net income to net cash
provided by operating activities: ...........
Depreciation and amortization ............ 634,750 491,295 505,042
Provision for doubtful accounts .......... 50,595 9,241 110,408
Changes in assets and liabilities:
Increase in accounts
receivables, trade .................. (24,781) (51,864) (28,846)
(Increase) decrease in accounts
receivable, other ................... (14,743) 35,866 --
(Increase) decrease in prepaid expenses (35,218) (4,845) 22,679
Increase in other assets ............... (3,916) -- --
(Increase) decrease in due from related
parties ............................. (2,887) 3,414 --
(Increase) decrease in deferred tax
asset ............................... (184,000) (146,200) 330,200
Increase (decrease) in accounts payable 238,870 266,705 (500,663)
Increase (decrease) in accrued expenses (186,870) (120,322) 113,110
Increase (decrease) in income tax
payable ............................. -- 16,840 (1,430)
Decrease in unearned revenues .......... (12,483) (22,908) (12,483)
Increase in contingencies .............. -- 191,083 18,269
------------- ------------- -------------
Total adjustments ................... 459,317 668,305 556,286
------------- ------------- -------------
Net cash provided by operating
activities ........................ 1,744,295 1,662,420 1,346,077
------------- ------------- -------------
Cash flows from investing activities:
Capital expenditures ........................ (390,172) (249,727) (267,232)
------------- ------------- -------------
Net cash used in investing activities (390,172) (249,727) (267,232)
------------- ------------- -------------
Cash flows from financing activities:
Payments of notes payable ................... (1,469,104) (1,443,650) (1,011,925)
Proceeds from issuance of loan payable ...... 40,000 -- 18,800
------------- ------------- -------------
Net cash used in financing activities (1,429,104) (1,443,650) (993,125)
------------- ------------- -------------
Net increase (decrease) in cash ............... (74,981) (30,957) 85,720
Cash, beginning of period ..................... 166,586 91,605 60,648
------------- ------------- -------------
Cash, end of period ........................... $ 91,605 $ 60,648 $ 146,368
============= ============= =============
Supplemental disclosure of cash flows
information:
Cash paid during the period for interest ..... $ 713,821 $ 805,421 $ 833,209
============= ============= =============
</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 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Dom's Tele Cable, Inc. (the "Company") was incorporated pursuant to the
provisions of the General Corporations Law of the Commonwealth of Puerto Rico
on February 23, 1983. The Company operates a cable television system under a
franchise authorization by the Public Service Commission of Puerto Rico and
the Federal Communications Commission which includes the towns of San German,
Lajas, Cabo Rojo, Sabana Grande, Hormigueros, Guanica, Rincon, Anasco, Las
Marias, and Maricao in Puerto Rico.
CLASSIFICATION OF ACCOUNTS
There is no distinction between current assets and liabilities and
non-current assets and liabilities inasmuch such distinction is not practical
in the cable industry.
REVENUE RECOGNITION
Revenues as well as costs and expenses are recognized under the accrual
method of accounting; as such revenues are earned as the related costs and
expenses are incurred.
UNEARNED REVENUES
Unearned revenues are recorded when a customer pays for the services
before they are delivered or rendered, and are included in income over the
contract or service period.
INITIAL SUBSCRIBER INSTALLATION COSTS
Initial subscriber installation costs, including material, labor and
overhead costs of the drop, are capitalized and depreciated over a period no
longer than 7 years.
HOOKUP REVENUES
The excess of revenues over selling costs for initial cable television
hookups are deferred and amortized over the estimated average period that
subscribers are expected to remain connected to the system, which is
estimated at 10 years.
PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment are stated at cost. Expenditures for
additions and improvements that increase the productive capacity or extend
the useful life of the assets are capitalized and expenditures for
maintenance and repairs are charged to operations. When properties are
retired or otherwise disposed of, the costs and related accumulated
depreciation are removed from the books, and any gain or loss from disposal
is included in operations. Fully depreciated assets are written off against
accumulated depreciation.
Depreciation of property, and equipment is computed on the straight-line
method based upon the following estimated useful lives:
Tower and distribution system 18 years
Machinery and equipment 5 years
Furniture and fixtures 5 years
Motor vehicles 5 years
Building 30 years
Leasehold improvements 5 years
F-52
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For cash and accounts receivable, the estimated fair value is the same or
approximately the same as the recorded value.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements
to be consistent with the current year presentation.
2. FRANCHISE FEES AND COMMITMENTS
The Company was granted a cable television franchise for certain
municipalities on December 28, 1984 by the Puerto Rico Service Commission for
twenty years. The franchise agreement requires a payment of 3% of the
Company's gross revenues. In addition, the Company has to pay its subscribers
5% interest on its customer deposits.
The Company's pole rental agreements with the Puerto Rico Telephone
Company and the Puerto Rico Electric Power Authority are renewed on a yearly
basis. These contracts specify that the Company will pay $3.00 and $7.33,
respectively, for the use of each pole. The rental expense for the years
ended May 31, 1994, 1995, and 1996, amounted to $58,334, $73,063 and $73,065,
respectively.
3. RELATED PARTY TRANSACTION
The Company was partially owned by Three-Sixty Corporation. Transactions
with Three-Sixty Corporation not disclosed elsewhere are management fees
amounting to $55,367, $54,952 and $55,367 in May 31, 1994, 1995, and 1996,
respectively.
In October 1994, all of the Company's stock was acquired by the majority
stockholder.
F-53
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of:
May 31, May 31,
1995 1996
------------- ------------
Building ..................................... $ 122,713 $ 122,713
Tower and distribution ....................... 11,006,704 11,223,338
Furniture and fixtures ....................... 137,498 142,128
Equipment .................................... 394,703 433,743
Leasehold improvements ....................... 32,350 39,279
------------- ------------
11,693,968 11,961,201
Less accumulated depreciation and amortization 6,781,354 7,286,396
Land ......................................... 164,488 164,488
------------- ------------
Property, plant and equipment, net ........... $ 5,077,102 $ 4,839,293
============= ============
5. NOTES AND LOANS PAYABLE
<TABLE>
<CAPTION>
May 31, May 31
1995 1996
------------- -----------
<S> <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. $ 974,315 $ 188,874
Loan payable in 83 monthly installments which fluctuates
from $15,000 up to $100,000 during the term of the loan
in accordance with the payment schedule and one final
balloon payment of $3,305,000, known as the Credit
Facility Loan, plus interest at .75% over the prevailing
prime rate as published from time to time by Citibank
N.A. in New York or at 2% over the U.S. Internal Revenue
Code Section 936 interest rate for the portion of the
loan funded with 936 funds. The loan matures on July 1,
1996. ................................................... 5,080,020 4,880,021
Loan payable to Western Bank of Puerto Rico in 60 equal
monthly installments of $1,112, plus interest at 2% over
the prevailing prime rate, and collateralized with a
motor vehicle. This loan was paid in full on January 19,
1996. ................................................... 25,022 --
Capital lease equipment bearing interest at 7.56% with a
residual value of $3,900. This lease agreement is due in
2001. ................................................... -- 17,337
------------- -----------
$6,079,357 $5,086,232
============= ===========
</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,
--------------------
1997 ............................................ $5,072,483
Thereafter ...................................... 13,749
------------
$5,086,232
============
On October 26, 1995, Philip Credit Corporation sold, assigned and
transferred all of its rights, title, and interest, in and to the credit
agreement dated June 28, 1988, as amended to Lazard Freres & Co., L.L.C. The
credit agreement between the Company is comprised of a Term Loan and a Credit
Facility Loan which are collateralized by substantially all of the assets
owned by the Company along with a personal guarantee of the Company's
stockholder.
The credit agreement contains certain restrictive covenants such as: (i)
subscriber debt ratio; (ii) subscriber payment; (iii) number of homes in
cable system; (iv) number of subscribers; (v) combined plant mileage; and
(vi) subscribers' mileage ratio. As of May 31, 1995, and 1996, the Company
was not in compliance with certain of the restrictive covenants and is in
default on principal payments amounting to approximately $1,500,000 on the
Credit Facility Loan. See Note 10.
6. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," as of June 1, 1993. The application of the
statement did not affect the Company's financial position and result of
operations because the components of the deferred tax primarily relate to net
operating loss carryforwards of $1,611,300 for which a valuation allowance of
100% was provided. During 1994, the Company changed its conclusion about the
realization of operating loss carryforwards and decided to record $184,000
for the realization of losses during 1995. The Company did not recognize a
deferred tax asset for net operating losses to be realized after May 31, 1995
because management expects to have completed the assets sale and liquidation
of the Company shortly after May 31, 1996.
The components of deferred tax asset were as follows:
May 31, May 31,
1995 1996
----------- -----------
Net operating loss carryforwards $ 712,758 $ 500,677
Valuation allowance ............. (382,558) (500,677)
----------- -----------
$ 330,200 $ --
=========== ===========
The comparison of income tax expense at the Puerto Rico statutory rate to
the Company's income tax benefit (provision) is as follows:
<TABLE>
<CAPTION>
May 31, May 31, May 31,
1994 1995 1996
------------- ------------- -----------
As Restated
<S> <C> <C> <C>
Tax at statutory rate ..................... $ 462,411 $ 363,199 $ 443,314
Adjustment due to:
Benefit of net operating loss
carryforwards ...................... (456,149) (354,255) (439,187)
Alternative minimum tax .............. 0 16,844 16,711
Change in valuation allowances ....... (184,000) (146,200) 330,200
Others, net .......................... (6,262) (8,944) (4,127)
------------- ------------- -----------
$(184,000) $(129,356) $ 346,911
============= ============= ===========
</TABLE>
F-55
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
7. CONCENTRATION OF CREDIT RISK
Substantially all of the Company's business activity is with customers
located in eight municipalities located in the southwestern area of Puerto
Rico and as such the Company is subject to the risks of Puerto Rico and more
specifically the economy of such geographic area.
8. CONTINGENCIES
The Company is involved in various litigations arising in the normal
course of business. Management believes that the outcome of these
uncertainties will not have a material adverse effect on its financial
statements.
The Company has not filed the Copyright Statement of Accounts with the
Copyright Office nor has paid royalty fees and interest amounting to
approximately $477,083 and $495,352 for May 31, 1995, and 1996, respectively.
The Company can be subject to various remedies for copyright infringement and
additional penalties for not filing the Copyright Statement of Accounts.
Management has accrued $477,083 and $495,352 for May 31, 1995 and 1996,
respectively, for royalty fees and interest for the unexpired filing periods,
which is three years in accordance with the statute of limitations.
Management plans to make the filing and payment concurrently with the
proposed sale of the Company.
9. SIGNIFICANT TRANSACTIONS
On January 11, 1996, the Company's sole stockholder signed a letter of
intent with respect to the liquidation of the Company's operations and the
eventual sale of its net assets, in an transaction that should be consummated
on or before August 31, 1996. Long-term obligations payable to Lazard Freres
& Co., L.L.C., at present, CIBC Wood Gundy Securities Corporation, will be
paid from the proceeds of this sale. In the event the planned sale is not
made the Company may need to seek additional financing from other sources or
restructure its debt.
10. SUBSEQUENT EVENTS
Effective on June 1, 1996, the Company was liquidated and a new legal
entity was incorporated under the laws of the Commonwealth of Puerto Rico
known as DOMAR Inc., to be in accordance with the sale contract agreement
entered with the buyer, Pegasus Media & Communications, Inc.
On July 1, 1996, Lazard Freres & Co., L.L.C., sold, assigned and
transferred all of its rights, title, interest and obligation to CIBC Wood
Gundy Securities Corporation.
11. PRIOR PERIOD ADJUSTMENT
The Company restated its depreciation expense by $520,329 to correct the
depreciation expense for the year ended May 31, 1994. The effect was to
increase net income for the year ended May 31, 1994 by $520,329.
F-56
<PAGE>
[The inside back cover page contains a map of Puerto Rico which shows color
coded regions where Cable TV operators operate. Below the map is the following
color coded chart:
Puerto Rico Cable TV Operators:
MCT Cablevision (Pegasus)
Dom's TeleCable TV (Pending acquisition by Pegasus)
Cable TV del noroeste (Independent)
Tele Ponce (Independent)
Buena Vision (50% owned by TCI)
Greater TV of San Juan (Century)
Puerto Rico Totals*
Population 3,483,000
TV Households 1,132,000
Homes Passed by Cable 735,000
Cable Subscribers 254,000
Cable Penetration 34%
*Based on estimates provided by Media Fax, Inc.
<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 .................................... 17
The Company ..................................... 23
Use of Proceeds ................................. 27
Dividend Policy ................................. 27
Dilution ........................................ 28
Capitalization .................................. 29
Selected Historical and Pro Forma Combined
Financial Data ................................. 30
Pro Forma Combined Financial Data ............... 33
Management's Discussion and Analysis of
Financial Condition and Results of Operations .. 40
Business ........................................ 48
Management and Certain Transactions ............. 76
Ownership and Control ........................... 83
Description of Indebtedness ..................... 85
Description of Capital Stock .................... 87
Shares Eligible for Future Sale ................. 90
Underwriting .................................... 92
Legal Matters ................................... 94
Experts ......................................... 94
Additional Information .......................... 95
Index to Financial Statements ................... F-1
-----------------
Until October 28, 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>
==============================================================================
3,000,000 SHARES
LOGO
CLASS A COMMON STOCK
------------------
PROSPECTUS
October 3 , 1996
------------------
LEHMAN BROTHERS
BT SECURITIES CORPORATION
CIBC WOOD GUNDY SECURITIES CORP.
PAINEWEBBER INCORPORATED
=============================================================================
