<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 21, 1997
REGISTRATION NO. 333-18739
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
------
Pegasus Communications Corporation
(Exact name of registrant as specified in its charter)
------
Delaware 4833 51-0374669
(State or Other (Primary Standard Industrial (I.R.S. Employer
Jurisdiction of Classification Code Number) Identification
Incorporation of Number)
Organization)
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
(610) 341-1801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Marshall W. Pagon, President and Chief Executive Officer
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
(610) 341-1801
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
Michael B. Jordan, Esq. Kirk A. Davenport, Esq.
Scott A. Blank, Esq. Marc D. Jaffe, Esq.
Drinker Biddle & Reath Latham & Watkins
1100 Philadelphia National Bank Building 885 Third Avenue
1345 Chestnut Street Suite 1000
Philadelphia, Pennsylvania 19107-3496 New York, New York 10022
(215) 988-2700 (212) 906-1200
Approximate date of commencement of proposed sale to the public: As soon
as practicable after this Registration Statement becomes effective and the
Underwriting Agreement is executed.
------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this
Registration Statement shall thereafter become effective in accordance with
Section 8(a) of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Commission, acting
pursuant to said Section 8(a), may determine.
================================================================================
<PAGE>
This Prospectus and the information contained herein are subject to change,
completion or amendment without notice. A registration statement relating to
these securities has been filed with the Securities and Exchange Commission.
These securities may not be sold nor may offers to buy be accepted prior to
the time the registration statement becomes effective. Under no circumstances
shall this Prospectus constitute an offer to sell or a solicitation of an
offer to buy nor shall there be any sale of these securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful
prior to registration or qualification under the securities laws of any such
jurisdiction.
SUBJECT TO COMPLETION DATED JANUARY 21, 1997
PROSPECTUS
$100,000,000
LOGO
100,000 UNITS
% SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK AND
WARRANTS TO PURCHASE 193,600 SHARES OF CLASS A COMMON STOCK
------
Pegasus Communications Corporation ("Pegasus," and together with its
direct and indirect subsidiaries, the "Company") hereby offers (this
"Offering") 100,000 Units (the "Units") consisting of 100,000 shares of %
Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred
Stock") and 100,000 Warrants (the "Warrants") to purchase 193,600 shares (the
"Warrant Shares") of Class A Common Stock, par value $.01 per share ("Class A
Common Stock"), of Pegasus. Each Unit consists of one share of Series A
Preferred Stock and one Warrant.
Dividends on the Series A Preferred Stock will accumulate from the date of
issuance and will be payable semi-annually on each and
, commencing , 1997, at a rate per annum of % of the
Liquidation Preference (as defined herein) per share. Dividends may be paid,
at Pegasus' option, on any Dividend Payment Date (as defined herein)
occurring on or prior to , 2002, either in cash or by the issuance
of additional shares of Series A Preferred Stock (and payment of cash in lieu
of fractional shares) having an aggregate Liquidation Preference equal to the
amount of such dividends. The Liquidation Preference of the Series A
Preferred Stock will be $1,000 per share. The Series A Preferred Stock is
redeemable at Pegasus' option, in whole or in part, at any time on or after
, 2002, at the redemption prices set forth herein, plus, without
duplication, accumulated and unpaid dividends to the date of redemption. In
addition, during the first 36 months after the Closing Date (as defined
herein), Pegasus may, on any one or more occasions, use the net proceeds of
one or more offerings of its Class A Common Stock to redeem up to 25% of the
shares of Series A Preferred Stock then outstanding at a redemption price of
110% of the principal amount thereof plus, without duplication, accumulated
and unpaid dividends to the date of redemption; provided that, after any such
redemption, at least $75.0 million in aggregate Liquidation Preference of
Series A Preferred Stock remains outstanding. Pegasus is required, subject to
certain conditions, to redeem all of the Series A Preferred Stock outstanding
on , 2007, at a redemption price equal to the Liquidation
Preference thereof, plus, without duplication, accumulated and unpaid
dividends to the date of redemption. Upon the occurrence of a Change of
Control (as defined herein), Pegasus is required, subject to certain
conditions, to offer to purchase all of the Series A Preferred Stock at a
price equal to 101% of the Liquidation Preference thereof, plus, without
duplication, accumulated and unpaid dividends to the date of purchase. The
Series A Preferred Stock ranks senior to all outstanding classes or series of
capital stock with respect to dividend rights and rights on liquidation of
Pegasus. See "Description of Securities--Description of Series A Preferred
Stock."
(continued on next page)
<PAGE>
------
See "Risk Factors" beginning on page 20 for a discussion of certain factors
that should be considered by prospective purchasers of the Units.
------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
===============================================================================
Underwriting
Price to Discount and Proceeds to
Public(1) Commissions(2) the Company(3)
- -------------------------------------------------------------------------------
Per Unit ... $ $ $
- -------------------------------------------------------------------------------
Total ...... $ $ $
===============================================================================
(1) Plus accumulated dividends on the Series A Preferred Stock, if any, from
the date of issuance.
(2) The Company has agreed to indemnify the Underwriters (as defined herein)
against certain liabilities, including liabilities under the Securities
Act of 1933, as amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $ .
The Units are offered by the Underwriters named herein, subject to prior
sale, when, as and if delivered to and accepted by them, and subject to
certain conditions, including their right to reject orders in whole or in
part. It is expected that delivery of the Units will be made on or about
, 1997 at the offices of CIBC Wood Gundy Securities Corp., New York, New
York.
CIBC WOOD GUNDY SECURITIES CORP.
LEHMAN BROTHERS
BT SECURITIES CORPORATION
------
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE>
(Continued from cover)
Subject to certain conditions, the Series A Preferred Stock is
exchangeable in whole, but not in part, at the option of Pegasus, on any
Dividend Payment Date, for Pegasus' % Senior Subordinated Exchange Notes
due 2007 (the "Exchange Notes"). Interest on the Exchange Notes will be
payable at a rate of % per annum and will accrue from the date of issuance
thereof. Interest on the Exchange Notes will be payable semi-annually in cash
or, at the option of Pegasus on or prior to , 2002, in additional
Exchange Notes, in arrears on each and commencing on the first
such date after the exchange of the Series A Preferred Stock for the Exchange
Notes. The Exchange Notes mature on , 2007 and are redeemable, at the
option of Pegasus, in whole or part, on or after , 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest to the
date of redemption. In addition, during the first 36 months after the Closing
Date, Pegasus may, on any one or more occasions, use the net proceeds of one
or more offerings of its Class A Common Stock to redeem up to 25% of the
aggregate principal amount of the Exchange Notes at a redemption price of
110% of the principal amount thereof, plus accrued and unpaid interest to the
date of redemption; provided that, after any such redemption, the aggregate
principal amount of the Exchange Notes outstanding must equal at least $75.0
million. Upon the occurrence of a Change of Control, Pegasus is required,
subject to certain conditions, to offer to purchase all of the Exchange Notes
at a price equal to 101% of the principal amount thereof, plus accrued and
unpaid interest to the date of purchase. The Exchange Notes will be
unsecured, senior subordinated obligations of Pegasus that will be
subordinated to all existing and future Senior Debt (as defined herein) of
Pegasus and will rank senior to all subordinated Indebtedness (as defined
herein) of Pegasus. The Exchange Notes will not be guaranteed by any of
Pegasus' subsidiaries and will be effectively subordinated to all
Indebtedness and other liabilities (including trade payables) of Pegasus'
subsidiaries. As of September 30, 1996, on a pro forma basis after giving
effect to this Offering and the use of proceeds thereof, the Completed
Transactions, the Transactions and the DBS Acquisitions (each as defined
herein), approximately $86.1 million of Indebtedness would have been
outstanding and the Company would have had $50.0 million of borrowing
availability under the New Credit Facility (as defined herein). See
"Description of Securities -- Description of Exchange Notes."
Each Warrant will entitle the holder thereof to purchase 1.936 Warrant
Shares at an exercise price of $ per share, subject to adjustment under
certain circumstances. The Warrants will become exercisable on or after the
Separation Date (as defined herein) and, unless exercised, will automatically
expire on , 2007. The Warrants are exercisable, in the aggregate, for
approximately 2.0% of the Common Stock of the Company, on a fully diluted
basis. See "Description of Securities--Description of Warrants."
The Units, the Series A Preferred Stock, the Warrants, the Warrant Shares
and the Exchange Notes are referred to herein as the "Securities."
5
<PAGE>
[MAP]
[THE INSIDE FRONT COVER CONTAINS A MAP OF A PORTION OF THE UNITED STATES, WITH
MARKINGS TO INDICATE THE LOCATIONS OF THE COMPANY'S BUSINESSES, INCLUDING THE
DBS ACQUISITIONS]
*Cable TV Systems (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 173
Total Homes Unpassed by Cable 11,250,000 NBC Network Affilates 209
Total Homes Passed by Cable 91,750,000 UPN Network Affiliates 78
Cable Subscribers 62,230,000 WB Network Affiliates 69
Non-cable subscribers 29,520,000 Non-Network Affiliates 247
---------
Cable Penetration 68% Total Commercial Stations 1,203
Total Business Locations 8,600,000
</TABLE>
- -------------------------------------------------------------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S CLASS
A COMMON STOCK AND/OR THE SECURITIES OFFERED HEREBY AT A LEVEL ABOVE THAT WHICH
MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON
THE NASDAQ NATIONAL MARKET, IN THE OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements and notes thereto appearing elsewhere in
this Prospectus. Unless the context otherwise requires, all references herein
to the "Company" refer to Pegasus Communications Corporation ("Pegasus")
together with its direct and indirect subsidiaries. The historical financial
and other data for the Company are presented herein on a combined basis.
Unless otherwise indicated, the discussion below refers to and the
information in this Prospectus gives effect to (i) certain Completed
Transactions, which were completed prior to this Offering, and (ii) certain
other Transactions and DBS Acquisitions, which if not completed prior to the
consummation of this Offering are anticipated to occur in the first quarter
of 1997. See "Glossary of Defined Terms," which begins on page 16 of this
Prospectus Summary, for definitions of certain terms used in this Prospectus,
including "Completed Transactions," "Transactions" and "DBS Acquisitions."
THE COMPANY
The Company is a diversified media and communications company operating in
three business segments: broadcast television ("TV"), direct broadcast
satellite television ("DBS") and cable television ("Cable"). The Company has
grown through the acquisition and operation of media and communications
properties characterized by clearly identifiable "franchises" and significant
operating leverage, which enables increases in revenues to be converted into
disproportionately greater increases in Location Cash Flow. The Company's
business segments are described below.
TV. The Company owns and operates five Fox affiliates in midsize
television markets. The Company has entered into agreements to program
additional television stations, pending certain FCC approvals, in two of
these markets in 1997, which stations the Company anticipates will be
affiliated with the United Paramount Network ("UPN").
DBS. The Company is the largest independent provider of DIRECTV(R)
("DIRECTV") services with an exclusive DIRECTV service territory that
includes approximately 1,035,000 television households and 83,000 business
locations in rural areas of Connecticut, Massachusetts, Michigan, New
Hampshire, New York, Ohio and Texas. The Company has entered into letters of
intent to acquire the DIRECTV distribution rights and related assets from
four independent providers of DIRECTV services (the "DBS Acquisitions"),
whose territories include, in the aggregate, approximately 361,000 television
households and 37,000 business locations in rural areas of Arkansas, Indiana,
Mississippi, Virginia and West Virginia. After giving effect to the DBS
Acquisitions, the Company will have approximately 47,000 DIRECTV subscribers
in territories that include approximately 1,396,000 television households and
approximately 120,000 business locations or a household penetration rate of
3.3%. Although the Company's service territories are exclusive for DIRECTV,
other DBS operators may compete with the Company in its service territories.
See "Business -- Competition."
Cable. The Company owns and operates cable systems in Puerto Rico and New
England serving approximately 46,500 subscribers. The Company recently
acquired a contiguous cable system in Puerto Rico (the "Cable
Acquisition"), which will be interconnected with the Company's existing
system. It is anticipated that as a result of the Cable Acquisition, the
Company's Puerto Rico Cable system will serve approximately 26,900
subscribers in a franchise area comprising approximately 111,000
households from a single headend. The Company has entered into a
definitive agreement to sell its New Hampshire Cable systems (the "New
Hampshire Cable Sale"). Following the New Hampshire Cable Sale, the
Company's New England Cable systems will serve approximately 15,300
subscribers in a franchise area comprising approximately 22,900
households.
After giving effect to the Completed Transactions and the Transactions,
the Company would have had pro forma net revenues and Operating Cash Flow of
$52.6 million and $15.7 million, respectively, for the twelve months ended
September 30, 1996. The Company's net revenues and Operating Cash Flow have
increased at compound annual growth rates of 98% and 85%, respectively, from
1991 to 1995.
1
<PAGE>
MARKET OVERVIEW
BROADCAST TELEVISION
<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>
DIRECT BROADCAST SATELLITE
<TABLE>
<CAPTION>
Homes Average
Not Homes Monthly
Total Passed Passed Penetration Revenue
Homes in by by Total -------------------------------- Per
DIRECTV Territory Territory Cable(8) Cable(9) Subscribers(10) Total Uncabled Cabled Subscriber(11)
- ---------------------- ----------- -------- --------- --------------- ------- ---------- -------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Owned:
Western New
England ............. 288,273 41,465 246,808 6,119 2.1% 11.9% 0.5%
New Hampshire ........ 167,531 42,075 125,456 3,800 2.3% 7.6% 0.5%
Martha's Vineyard and
Nantucket ........... 20,154 1,007 19,147 755 3.7% 60.4% 0.8%
Michigan ............. 241,713 61,774 179,939 6,590 2.7% 7.9% 0.9%
Texas ................ 149,530 54,504 95,026 5,189 3.5% 7.0% 1.4%
Ohio ................. 167,558 32,180 135,378 5,010 3.0% 11.3% 1.0%
----------- --------- --------- --------------- ------- ---------- --------
Owned .............. 1,034,759 233,005 801,754 27,463 2.7% 9.0% 0.8% $41.26
----------- --------- --------- --------------- ------- ---------- -------- -------------
DBS Acquisitions:
Arkansas ............. 36,458 2,408 34,050 1,652 4.5% 37.4% 2.2%
Indiana .............. 131,025 34,811 96,214 5,959 4.5% 11.6% 1.8%
Mississippi .......... 101,799 38,797 63,002 6,500 6.4% 14.3% 1.5%
Virginia/West Virginia . 92,097 10,015 82,082 5,012 5.4% 38.8% 1.4%
----------- --------- --------- --------------- ------- ---------- --------
DBS Acquisitions .... 361,379 86,031 275,348 19,123 5.3% 16.6% 1.8%
----------- --------- --------- --------------- ------- ---------- --------
Total .............. 1,396,138 319,036 1,077,102 46,586 3.3% 11.1% 1.0% $40.45
=========== ========= ========= =============== ======= ========== ======== =============
</TABLE>
CABLE TELEVISION
<TABLE>
<CAPTION>
Average
Homes Monthly
Homes in Passed Basic Revenue
Channel Franchise by Basic Service per
Cable Systems Capacity Area(12) Cable(13) Subscribers(14) Penetration(15) Subscriber
- ------------------- ---------- ----------- --------- --------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Owned:
New England ....... (16) 29,400 28,600 19,600 69% $33.04
Mayaguez .......... 62 38,300 34,000 10,800 32% $32.22
San German(17) .... 50(18) 72,400 47,700 16,100 34% $29.09
----------- --------- --------------- --------------- ------------
Total Puerto Rico 110,700 81,700 26,900 33% $30.35
----------- --------- --------------- --------------- ------------
To be Sold:
New Hampshire ..... (19) 6,500 6,100 4,300 70% $33.01
----------- --------- --------------- --------------- ------------
Total ........... 133,600 104,200 42,200 40% $31.33
=========== ========= =============== =============== ============
</TABLE>
(See footnotes on the following page)
2
<PAGE>
NOTES TO MARKET OVERVIEW
(1) Represents total homes in a DMA for each TV station as estimated by
Broadcast Investment Analysts ("BIA").
(2) Commercial stations not owned by the Company which are licensed to and
operating in the DMA.
(3) "Prime" represents local station rank in the 18 to 49 age category
during "prime time" based on A.C. Nielsen Company ("Nielsen") estimates
for May 1996.
(4) "Access" indicates local station rank in the 18 to 49 age category
during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen
estimates for May 1996.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1995 BIA market data and 1995 Nielsen audience
share data.
(6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain
FCC approvals and assuming no adverse regulatory requirements, the
Company intends to separately program WOLF as an affiliate of UPN.
(7) The Company anticipates programming WWLA pursuant to an LMA as an
affiliate of UPN assuming no adverse change in current FCC regulatory
requirements.
(8) Based on NRTC estimates of primary residences derived from 1990 U.S.
Census data and after giving effect to a 1% annual housing growth rate
and seasonal residence data obtained from county offices. Does not
include business locations. Includes approximately 24,400 seasonal
residences.
(9) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the cable
distribution plant. Based on NRTC estimates of primary residences
derived from 1990 U.S. Census data and after giving effect to a 1%
annual housing growth rate and seasonal residence data obtained from
county offices. Does not include business locations. Includes
approximately 92,400 seasonal residences.
(10) As of December 9, 1996.
(11) Based upon November 1996 revenues and average November 1996 subscribers.
(12) Based on information obtained from municipal offices.
(13) These data are the Company's estimates as of November 30, 1996.
(14) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly
charge for a single outlet in the area. This information is as of
November 30, 1996.
(15) Basic subscribers as a percentage of homes passed by cable.
(16) The channel capacities of the New England Cable systems are 36, 50 and
62 and represent 22%, 24% and 54% of the Company's New England Cable
subscribers, respectively.
(17) Acquired upon consummation of the Cable Acquisition in August 1996.
(18) After giving effect to certain system upgrades which are anticipated to
be completed during the first quarter of 1997, this system will be
capable of delivering 62 channels.
(19) The channel capacities of the New Hampshire Cable systems are 36 and 50
and represent 16% and 84% of the Company's New Hampshire Cable
subscribers, respectively.
3
<PAGE>
OPERATING AND ACQUISITION STRATEGY
The Company's operating strategy is to generate consistent revenue growth
and to convert this revenue growth into disproportionately greater increases
in Location Cash Flow. The Company's acquisition strategy is to identify
media and communications businesses in which significant increases in
Location Cash Flow can be realized and where the ratio of required investment
to potential Location Cash Flow is low.
BROADCAST TELEVISION
The Company's business strategy in broadcast television is to acquire and
operate television stations whose revenues and market shares can be
substantially improved with limited increases in fixed costs. The Company has
focused upon midsize markets because it believes that they have exhibited
consistent and stable increases in local advertising and that television
stations in them have fewer and less aggressive direct competitors. The
Company seeks to increase the audience ratings of its TV stations in key
demographic segments and to capture a greater share of their markets'
advertising revenues than their share of the local television audience. The
Company accomplishes this by developing aggressive, opportunistic local sales
forces and investing in a cost-effective manner in programming, promotion and
technical facilities.
The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction
permits in markets where it currently owns and operates Fox affiliates. The
Company has historically purchased Fox affiliates because (i) Fox affiliates
generally have had lower ratings and revenue shares than stations affiliated
with ABC, CBS and NBC, and, therefore, greater opportunities for improved
performance, and (ii) Fox-affiliated stations retain a greater percentage of
their inventory of advertising spots than do affiliates of ABC, CBS and NBC,
thereby enabling these stations to retain a greater share of any increase in
the value of their inventory. The Company is pursuing expansion in its
existing markets through LMAs because second stations can be operated with
limited additional fixed costs (resulting in high incremental operating
margins) and can allow the Company to create more attractive packages for
advertisers and program providers. The Company's ability to enter into future
LMAs may be restricted by changes in FCC regulations.
DIRECT BROADCAST SATELLITE
The Company believes that DBS is the lowest cost medium for delivering
high capacity, high quality, digital video, audio and data services to
television households and commercial locations in rural areas and that
DIRECTV offers superior video and audio quality and a substantially greater
variety of programming than is available from other multichannel video
services. DIRECTV initiated service to consumers in 1994 and, as of December
31, 1996, there were over 2.3 million DIRECTV subscribers. The introduction of
DIRECTV is widely reported to be one of the most successful rollouts of a
consumer service ever.
As the exclusive provider of DIRECTV services in its purchased
territories, the Company provides a full range of services, including
installation, authorization and financing of equipment for new customers as
well as billing, collections and customer service support for existing
subscribers. The Company's business strategy in DBS is to (i) establish
strong relationships with retailers, (ii) build its own direct sales and
distribution channels, (iii) develop local and regional marketing and
promotion to supplement DIRECTV's national advertising, and (iv) offer
equipment rental, lease and purchase options.
The Company anticipates continued growth in subscribers and operating
profitability in DBS through increased penetration of DIRECTV territories it
currently owns and will acquire pursuant to the DBS Acquisitions. The
Company's New England DBS Territory achieved positive Location Cash Flow in
1995, its first full year of operations. The Company's DIRECTV subscribers
currently generate revenues of approximately $41 per month at an average
gross margin of 34%. The Company's
4
<PAGE>
remaining expenses consist of marketing costs incurred to build its growing
base of subscribers and overhead costs which are predominantly fixed. As a
result, the Company believes that future increases in its DBS revenues will
result in disproportionately greater increases in Location Cash Flow. For the
first eleven months of 1996, the Company has added 5,163 new DIRECTV
subscribers in its New England DBS Territory as compared to 3,630 for the
same period in 1995.
The Company also believes that there is an opportunity for additional
growth through the acquisition of DIRECTV territories held by other NRTC
members. NRTC members are the only independent providers of DIRECTV services.
Approximately 245 NRTC members collectively own DIRECTV territories
consisting of approximately 7.7 million television households in
predominantly rural areas of the United States, which the Company believes
are the most likely to subscribe to DBS services. These territories comprise
8% of United States television households, but represent approximately 23% of
DIRECTV's existing subscriber base. As the largest, and only publicly held,
independent provider of DIRECTV services, the Company believes that it is
well positioned to achieve economies of scale through the acquisition of
DIRECTV territories held by other NRTC members.
CABLE TELEVISION
The Company's business strategy in cable is to achieve revenue growth by
(i) adding new subscribers through improved signal quality, increases in the
quality and the quantity of programming, housing growth and line extensions,
(ii) increasing revenues per subscriber through new program offerings and
rate increases and (iii) consolidating its Puerto Rico Cable systems.
RECENT AND PENDING TRANSACTIONS
COMPLETED ACQUISITIONS
Since January 1, 1996, the Company has acquired the following media and
communications properties:
Television Station WPXT. The Company acquired WPXT, the Fox-affiliated
television station serving the Portland, Maine DMA (the "Portland
Acquisition").
Television Station WTLH. The Company acquired WTLH, the Fox-affiliated
television station serving the Tallahassee, Florida DMA (the "Tallahassee
Acquisition").
Television Station WWLA. The Company acquired an LMA with the holder of a
construction permit for WWLA, a new television station licensed to operate
UHF channel 35 in the Portland, Maine DMA (the "Portland LMA"). Under the
Portland LMA, the Company will lease facilities and provide programming to
WWLA. Construction of WWLA is expected to be completed in 1997.
Cable Acquisition. In August 1996, the Company acquired substantially all
of the assets of a cable system (the "San German Cable System"), serving
ten communities contiguous to the Company's Mayaguez Cable system.
Michigan/Texas DBS Acquisition. In October 1996, the Company acquired the
DIRECTV distribution rights for portions of Texas and Michigan and related
assets (the "Michigan/Texas DBS Acquisition").
Ohio DBS Acquisition. In November 1996, the Company acquired the DIRECTV
distribution rights for portions of Ohio and related assets (the "Ohio DBS
Acquisition").
5
<PAGE>
PENDING ACQUISITIONS
The Company has entered into letters of intent with respect to the following
DIRECTV territories. Each of the acquisitions is subject to the negotiation of a
definitive agreement and, among other conditions, the prior approval of Hughes.
In addition to these conditions, each of the DBS Acquisitions is also expected
to be subject to conditions typical in acquisitions of this nature, certain of
which conditions, like the Hughes consent, may be beyond the Company's control.
There can be no assurance that definitive agreements will be entered into with
respect to all or any of the DBS Acquisitions or, if entered into, that all or
any of the DBS Acquisitions will be completed. See "Risk Factors -- Risks
Attendant to Acquisition Strategy" and "Business -- DBS -- The Pending DBS
Acquisitions."
Arkansas DBS Acquisition. In November 1996, the Company entered into a
letter of intent to acquire DIRECTV distribution rights for portions of
Arkansas and related assets (the "Arkansas DBS Acquisition"). The letter
of intent contemplates a purchase price of approximately $2.4 million in
cash.
Indiana DBS Acquisition. In December 1996, the Company entered into a
letter of intent to acquire DIRECTV distribution rights for portions of
Indiana and related assets (the "Indiana DBS Acquisition"). The letter of
intent contemplates a purchase price of approximately $14.3 million
consisting of $8.7 million in cash (subject to adjustments based on the
number of subscribers) and approximately $5.6 million in either shares of
Class A Common Stock or preferred stock of Pegasus convertible into Class A
Common Stock.
Mississippi DBS Acquisition. In November 1996, the Company entered into a
letter of intent to acquire DIRECTV distribution rights for portions of
Mississippi and related assets (the "Mississippi DBS Acquisition"). The
letter of intent contemplates a purchase price of approximately $14.0
million in cash (subject to possible adjustment).
Virginia/West Virginia DBS Acquisition. In November 1996, the Company entered
into a letter of intent to acquire DIRECTV distribution rights for portions
of Virginia and West Virginia and related assets (the "Virginia/West Virginia
DBS Acquisition"). The letter of intent contemplates the payment of aggregate
consideration (subject to adjustments based on the number of subscribers) of
(i) $9.0 million in cash or (ii) at the seller's option, $10.0 million
consisting of $7.0 million in cash, $3.0 million in preferred stock of a
subsidiary of Pegasus and warrants to purchase a total of (a) 30,000 shares
of Class A Common Stock and (b) the number of shares of Class A Common Stock
that could be purchased for $3.0 million at the market price determined at
approximately the closing date of the Virginia/West Virginia DBS Acquisition.
It is anticipated that the seller will opt for the latter consideration and,
as a consequence, this Prospectus assumes that the seller will make such
election.
Pending Sale
New Hampshire Cable Sale. In November 1996, the Company entered into a
definitive agreement with respect to the sale of its New Hampshire Cable
systems (the "New Hampshire Cable Sale"). The New Hampshire Cable Sale is
subject to the prior approval of the local franchising authorities and to
other conditions typical in transactions of this nature, certain of which are
beyond the Company's control. It is anticipated that the New Hampshire Cable
Sale will be consummated in the first quarter of 1997 and will result in net
proceeds to the Company of approximately $7.1 million. There can be no
assurance that the New Hampshire Cable Sale will be consummated on the terms
described herein or at all.
6
<PAGE>
PUBLIC EQUITY OFFERINGS
THE INITIAL PUBLIC OFFERING
Pegasus consummated the initial public offering of its Class A Common
Stock on October 8, 1996 pursuant to an underwritten offering (the "Initial
Public Offering") in which the Underwriters of this Offering acted as
representatives. The initial public offering price of the Class A Common
Stock was $14.00 per share and resulted in net proceeds to the Company of
approximately $38.1 million.
The Company applied the net proceeds from the Initial Public Offering as
follows: (i) $17.9 million for the payment of the cash portion of the
purchase price of the Michigan/Texas DBS Acquisition, (ii) $12.0 million to
the Ohio DBS Acquisition, (iii) $3.0 million to repay indebtedness under the
New Credit Facility, (iv) $1.9 million to make a payment on account of the
Portland Acquisition, (v) $1.5 million for the payment of the cash portion of
the purchase price of the Management Agreement Acquisition, (vi) $1.4 million
for the Towers Purchase and (vii) $444,000 for general corporate purposes.
REGISTERED EXCHANGE OFFER
Purchasers of the Notes in PM&C's 1995 Notes offering held all of the PM&C
Class B Shares. The Company through a registered exchange offer (the
"Registered Exchange Offer") exchanged all of the PM&C Class B Shares for
approximately 191,792 shares in the aggregate of Class A Common Stock. The
Registered Exchange Offer terminated on December 30, 1996. As a result of the
Registered Exchange Offer, PM&C became a wholly owned subsidiary of Pegasus.
This Prospectus gives effect to the exchange of all of the PM&C Class B Shares
for Class A Common Stock pursuant to the Registered Exchange Offer.
7
<PAGE>
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Issuer ................ Pegasus Communications Corporation.
Securities Offered .... 100,000 Units, with each Unit consisting of one share of Series A Preferred
Stock and one Warrant, with each Warrant representing the right to purchase
1.936 shares of Class A Common Stock.
Separability .......... The Series A Preferred Stock and Warrants will not be separately transferable
until the earlier to occur of (i) April 3, 1997 and (ii) in the event of
a Change of Control, the date Pegasus mails notice thereof (the "Separation
Date").
Use of Proceeds ....... The net proceeds to the Company from its sale of the Units in this Offering
(after deducting the underwriting discount and commissions and estimated
offering expenses) are estimated to be approximately $95.8 million. The
Company intends to apply (i) $28.6 million of the net proceeds of this
Offering to the repayment of all outstanding Indebtedness of PM&C under
the New Credit Facility, (ii) $14.0 million for the Mississippi DBS
Acquisition, (iii) $8.7 million for the cash portion of the Indiana DBS
Acquisition, (iv) $7.0 million for the cash portion of the purchase price
of the Virginia/West Virginia DBS Acquisition and (v) $2.4 million for
the Arkansas DBS Acquisition. The remaining net proceeds together with
available borrowings under the New Credit Facility and proceeds from the
New Hampshire Cable Sale will be used for working capital, general corporate
purposes and to finance future acquisitions. See "Use of Proceeds."
The Series A Preferred Stock
Securities Offered ..... 100,000 shares of % Series A Cumulative Exchangeable Preferred Stock,
par value $.01 per share, plus any additional shares issued from time to
time in lieu of cash dividends.
Liquidation Preference . $1,000 per share, plus accumulated and unpaid dividends.
Dividends .............. The Series A Preferred Stock will pay dividends at a rate per annum of %
of the Liquidation Preference per share. Dividends may be paid, at Pegasus'
option, on any Dividend Payment Date occurring on or prior to , 2002,
either in cash or by the issuance of additional shares of Series A Preferred
Stock (and payment in cash in lieu of fractional shares) having an aggregate
Liquidation Preference equal to the amount of such dividends.
Dividend Payment Dates . Dividends on the Series A Preferred Stock will accumulate from the date
of issuance and will be payable semi-annually on each and commencing
, 1997.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Ranking .......................... The Series A Preferred Stock will, with respect to dividend rights and rights
on liquidation, winding-up and dissolution of Pegasus, rank senior to all
other classes and series of Common Stock and Preferred Stock (as defined
herein) of Pegasus outstanding upon consummation of this Offering. On a
pro forma basis, as of September 30, 1996, after giving effect to this Offering
and the use of proceeds thereof, the Completed Transactions, the Transactions
and the DBS Acquisitions, the Company had approximately $86.1 million of
Indebtedness. See "Risk Factors--Substantial Indebtedness and Leverage,"
"-- Limitations on Access to Cash Flow of Subsidiaries; Holding Company
Structure" and "--Ranking of Series A Preferred Stock and Exchange Notes."
Mandatory Redemption ............. Pegasus is required, subject to certain conditions, to redeem all of the
Series A Preferred Stock outstanding on , 2007 at a redemption price
equal to 100% of the Liquidation Preference thereof, plus, without duplication,
accumulated and unpaid dividends to the date of redemption.
Optional Redemption .............. The Series A Preferred Stock is redeemable, at the option of Pegasus, in
whole or in part, at any time on or after , 2002, at the redemption
prices set forth herein, plus, without duplication, accumulated and unpaid
dividends to the date of redemption. In addition, during the first 36 months
after the Closing Date, Pegasus may, on one or more occasions, use the net
proceeds of one or more offerings of its Class A Common Stock to redeem
up to an aggregate of 25% of the shares of Series A Preferred Stock then
outstanding (whether initially issued or issued in lieu of cash dividends)
at a redemption price of 110% of the Liquidation Preference thereof, plus,
without duplication, accumulated and unpaid dividends to the date of
redemption; provided, however, that after any such redemption, there is
at least $75.0 million in aggregate Liquidation Preference of the Series
A Preferred Stock outstanding and that such redemption occurs within 90
days following the closing of such offering of Class A Common Stock.
Change of Control ................ In the event of a Change of Control, Pegasus will, subject to certain conditions,
be required to offer to purchase all outstanding shares of Series A Preferred
Stock at a purchase price equal to 101% of the Liquidation Preference thereof,
plus, without duplication, accumulated and unpaid dividends to the date
of purchase. There can be no assurance that Pegasus will have sufficient
funds or be permitted by the terms of other Indebtedness to purchase all
of the outstanding shares of Series A Preferred Stock in the event of a
Change of Control or that Pegasus would be able to obtain financing for
such purpose on favorable terms, if at all. See "Risk Factors--Potential
Anti-Takeover Provisions; Change of Control."
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Exchange Provisions .............. Subject to certain conditions, on any Dividend Payment Date Pegasus may,
at its option, exchange all (but not less than all) of the outstanding shares
of Series A Preferred Stock for Exchange Notes.
Voting ........................... The Series A Preferred Stock will be non-voting, except as otherwise required
by law and except in certain circumstances described herein, including (i)
amending certain rights of the Holders (as defined herein) of Series A Preferred
Stock and (ii) the issuance of any new class of equity securities that ranks
pari passu with or senior to the Series A Preferred Stock. In addition,
if Pegasus (i) fails to pay dividends in respect of three or more Dividend
Payment Dates (whether or not consecutive) in the aggregate, (ii) fails
to make a mandatory redemption or a Change of Control Offer (as defined
herein) or (iii) fails to comply with certain covenants or make certain
payments on its Indebtedness, Holders of a majority of outstanding shares
of Series A Preferred Stock, voting separately as a class, will be entitled
to elect two directors to Pegasus' Board of Directors.
Certain Restrictive Provisions ... The Certificate of Designation (as defined herein) will contain certain
restrictive provisions that, among other things, limit the ability of Pegasus
and its Subsidiaries (as defined herein) to incur additional Indebtedness,
pay dividends or make certain other restricted payments, consummate certain
asset sales, enter into certain transactions with affiliates, impose
restrictions on the ability of a Subsidiary to pay dividends or make certain
payments to Pegasus and its Subsidiaries or merge or consolidate with any
other person. These restrictions will be subject to important exceptions.
See "Description of Securities -- Description of Series A Preferred Stock."
The Exchange Notes
Issue ............................ % Senior Subordinated Exchange Notes due 2007 issuable in exchange for
the Series A Preferred Stock in an aggregate principal amount equal to the
Liquidation Preference of the Series A Preferred Stock so exchanged.
Maturity Date .................... , 2007.
Interest Rate .................... The Exchange Notes will bear interest at a rate of % per annum. Interest
may be paid at Pegasus' option on any interest payment date occurring on
or prior to , 2002 either in cash or in additional Exchange Notes. Interest
will accrue from the date of issuance or from the most recent interest payment
date for which interest has been paid or provided.
Interest Payment Dates ........... Interest on the Exchange Notes will accrue from the Exchange Date (as defined
herein) and will be payable on each and , commencing with the first
such date after the Exchange Date.
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Ranking .......................... The Exchange Notes will be unsecured, senior subordinated obligations of
Pegasus that will be subordinated to all existing and future Senior Debt
of Pegasus. The Exchange Notes will rank senior in right of payment to all
subordinated Indebtedness of Pegasus. The Exchange Notes will be effectively
subordinated to all Indebtedness of Pegasus' subsidiaries. See "Risk Factors
-- Limitations on Access to Cash Flow of Subsidiaries; Holding Company
Structure" and "-- Ranking of Series A Preferred Stock and Exchange Notes."
Optional Redemption .............. The Exchange Notes are redeemable, at the option of Pegasus, in whole or
in part, at any time on or after , 2002, at the redemption prices set
forth herein, plus accrued and unpaid interest to the date of redemption.
In addition, during the first 36 months after the Closing Date, Pegasus
may, on one or more occasions, use the net proceeds of one or more offerings
of its Class A Common Stock to redeem up to 25% of the aggregate principal
amount of the Exchange Notes then outstanding (whether initially issued
or issued in lieu of cash interest) at a redemption price of 110% of the
principal amount thereof, plus accrued and unpaid interest to the date of
redemption; provided, however, that after any such redemption, the aggregate
principal amount of the Exchange Notes outstanding must equal at least $75.0
million and that such redemption occurs within 90 days following the closing
of such offering of Class A Common Stock.
Change of Control ................ In the event of a Change of Control, Pegasus will, subject to certain conditions,
be required to offer to purchase all outstanding Exchange Notes at a purchase
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest to the date of purchase. There can be no assurance that Pegasus
will have sufficient funds to purchase all of the Exchange Notes in the
event of a Change of Control or that Pegasus would be able to obtain financing
for such purpose on favorable terms, if at all. See "Risk Factors--Potential
Anti-Takeover Provisions; Change of Control."
Certain Covenants ................ The indenture governing the Exchange Notes (the "Exchange Note Indenture")
will contain certain covenants that will, among other things, limit the
ability of Pegasus and the Subsidiaries to incur additional Indebtedness,
pay dividends or make certain other restricted payments, consummate certain
asset sales, enter into certain transactions with affiliates, incur liens,
impose restrictions on the ability of a Subsidiary to pay dividends or make
certain payments to Pegasus and the Subsidiaries, merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of their assets to any other person. These
restrictions are subject to important exceptions. See "Description of
Securities -- Description of Exchange Notes."
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
The Warrants
Total Number of Warrants ... 100,000 Warrants, which when exercised would entitle the Holders thereof
to acquire an aggregate of 193,600 shares of Class A Common Stock
(representing approximately 2.0% of the Class A Common Stock outstanding
as of the date hereof, on a fully diluted basis). See "Description
of Securities-- Description of Warrants." The Warrants will be issued
pursuant to the Warrant Agreement (as defined herein).
Expiration Date ............ , 2007.
Exercise ................... Each Warrant will entitle the holder thereof to purchase 1.936 shares
of Class A Common Stock. The number of shares of Class A Common Stock
for which, and the price per share at which, a Warrant is exercisable
are subject to adjustment upon the occurrence of certain events as
provided in the Warrant Agreement. The Warrants will be exercisable
on or after the Separation Date.
Common Stock
Common Stock to be outstanding
after this Offering:
Class A Common Stock ........ 4,663,229 shares(1)
Class B Common Stock ........ 4,581,900 shares
Total Common Stock .......... 9,245,129 shares(1)
Nasdaq National Market Symbol .... The Class A Common Stock is listed on the Nasdaq National Market
under the symbol "PGTV."
</TABLE>
- ------
(1) Excludes 720,000 shares reserved for issuance under the Incentive
Program, 3,385 reserved for outstanding stock options, 4,581,900 shares
reserved for issuance upon conversion of the Class B Common Stock and
193,600 shares reserved for issuance upon exercise of the Warrants. Also
excludes an assumed issuance of 400,000 shares of Class A Common Stock in
connection with the Indiana DBS Acquisition based on an assumed value of
$14.00 per share and warrants to purchase 30,000 shares of Class A Common
Stock to be issued in connection with the Virginia/West Virginia DBS
Acquisition.
RISK FACTORS
Prospective purchasers of the Units should consider carefully the
information set forth under "Risk Factors," and all other information set
forth in this Prospectus, in evaluating an investment in the Units.
12
<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 Information" included elsewhere herein.
13
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Nine
Months
Ended
September
Year Ended December 31, 30,
-------------------------------------------------- ---------
Pro
Forma
Income Statement Data: 1993 (1) 1994 1995 1995 (2) 1995
---------- ---------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues:
TV ....................... $10,307 $17,808 $19,973 $ 27,305 $13,563
DBS ...................... -- 174 1,469 4,924 953
Cable .................... 9,134 10,148 10,606 14,919 7,913
Other .................... 46 61 100 100 55
---------- ---------- --------- ----------- ---------
Total net revenues ..... 19,487 28,191 32,148 47,248 22,484
---------- ---------- --------- ----------- ---------
Location operating expenses:
TV ....................... 7,564 12,380 13,933 19,210 10,060
DBS ...................... -- 210 1,379 5,077 914
Cable .................... 4,655 5,545 5,791 8,044 4,389
Other .................... 16 18 38 38 19
Incentive compensation (3) .. 192 432 528 511 444
Corporate expenses .......... 1,265 1,506 1,364 1,364 1,025
Depreciation and amortization 5,978 6,940 8,751 15,368 6,240
---------- ---------- --------- ----------- ---------
Income (loss) from operations (183) 1,160 364 (2,364) (607)
Interest expense ............ (4,402) (5,973) (8,817) (9,035) (5,970)
Interest income ............. -- -- 370 129 184
Other expense, net .......... (220) (65) (44) (58) (68)
Provision (benefit) for taxes -- 140 30 30 30
Extraordinary gain (loss)
from extinguishment of
debt ...................... -- (633) 10,211 -- (4) 6,931
---------- ---------- --------- ----------- ---------
Net income (loss) ........... $(4,805) $(5,651) 2,054 (11,358) $ 440
========== ========== =========
Dividends on Series A
Preferred Stock .......... -- (12,000)
--------- -----------
Net income (loss) applicable
to common shares ......... $ 2,054 $(23,358)
========= ===========
Net income (loss) per share . $ 0.39 $ (2.53)
========= ===========
Weighted average shares
outstanding (000's) ...... 5,236 9,245
========= ===========
Other Data:
Location Cash Flow (5) ...... $ 7,252 $10,038 $11,007 $ 14,879 $ 7,102
Operating Cash Flow (5) ..... 5,795 8,100 9,287 13,159 5,721
Capital expenditures ........ 885 1,264 2,640 3,022 2,064
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Pro
Forma
Income Statement Data: 1996 1996 (2)
---------- -----------
<S> <C> <C>
Net revenues:
TV ....................... $18,363 $19,031
DBS ...................... 2,601 6,870
Cable .................... 9,073 11,867
Other .................... 83 83
---------- -----------
Total net revenues ..... 30,120 37,851
---------- -----------
Location operating expenses:
TV ....................... 12,753 13,247
DBS ...................... 2,371 6,040
Cable .................... 4,915 6,432
Other .................... 17 17
Incentive compensation (3) .. 605 538
Corporate expenses .......... 1,074 1,183
Depreciation and amortization 8,479 12,223
---------- -----------
Income (loss) from operations (94) (1,829)
Interest expense ............ (8,929) (7,913)
Interest income ............. 172 172
Other expense, net .......... (77) (74)
Provision (benefit) for taxes (110) (110)
Extraordinary gain (loss)
from extinguishment of debt. (251) -- (4)
---------- -----------
Net income (loss) ........... (9,069) (9,534)
Dividends on Series A
Preferred Stock .......... -- (9,000)
---------- -----------
Net income (loss) applicable
to common shares .......... $(9,069) $(18,534)
========== ===========
Net income (loss) per share . $ (1.73) $ (2.00)
========== ===========
Weighted average shares
outstanding (000's) ...... 5,236 9,245
========== ===========
Other Data:
Location Cash Flow (5) ...... $10,064 $ 12,115
Operating Cash Flow (5) ..... 8,990 10,932
Capital expenditures ........ 2,607 2,520
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Twelve Months Ended
September 30, 1996
(2)
--------------------
<S> <C>
Net revenues ..................................... $ 52,574
Location Cash Flow (5) ........................... 17,097
Operating Cash Flow (5) .......................... 15,674
Ratio of Operating Cash Flow to interest
expense (5) ................................... 1.4x
Ratio of total debt to Operating Cash Flow (5) ... 5.5x
As of September 30, 1996
---------------------------------
Actual Pro Forma (2)
--------- --------------------
Balance Sheet Data:
Cash and cash equivalents ........................ $ 5,668 $ 46,547
Working capital .................................. 1,014 42,493
Total assets ..................................... 122,569 248,224
Total debt (including current) ................... 117,669 86,069
Total liabilities ................................ 131,284 99,083
Redeemable preferred stock ....................... -- 95,750
Minority interest ................................ -- 3,000
Total equity (deficit) (6) ....................... (8,714) 50,391
</TABLE>
(see footnotes on the following page)
14
<PAGE>
Notes to Summary Historical and Pro Forma Combined Financial Data
(1) The 1993 data include the results of the Mayaguez, Puerto Rico Cable
system from March 1, 1993 and WOLF/WWLF/WILF, WDSI and WDBD from May 1,
1993.
(2) Pro forma income statement and other data for the year ended December 31,
1995, nine months ended September 30, 1996 and the twelve months ended
September 30, 1996 give effect to the Completed Transactions, the
Transactions and this Offering and the use of proceeds thereof (except
for the DBS Acquisitions) as if such events had occurred at the beginning
of such periods. The pro forma balance sheet data as of September 30,
1996 give effect to the Completed Transactions and the Transactions after
September 30, 1996 and this Offering and the use of proceeds thereof
(including the DBS Acquisitions) as if such events had occurred on such
date. See "Pro Forma Combined Financial Data." The Company believes that
the historical income statement and other data for the DBS Acquisitions
in the aggregate would not materially impact the Company's historical and
pro forma income statement data and other data.
(3) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and 401(k) Plans. See "Management and Certain
Transactions -- Incentive Program."
(4) The pro forma income statement data for the year ended December 31, 1995
and the nine months ended September 30, 1996 do not include the
extraordinary gain on the extinguishment of debt of $10.2 million and the
$251,000 writeoff of deferred financing costs that were incurred in 1995
in connection with the creation of the Old Credit Facility, respectively.
(5) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. Operating Cash Flow is defined as income
(loss) from operations plus, (i) depreciation and amortization and (ii)
non-cash incentive compensation. The difference between Location Cash
Flow and Operating Cash Flow is that Operating Cash Flow includes cash
incentive compensation and corporate expenses. Although Location Cash
Flow and Operating Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that
Location Cash Flow and Operating Cash Flow are accepted within the
Company's business segments as generally recognized measures of
performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
(6) The Company has not paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
Payment of cash dividends on the Company's Common Stock will be
restricted by the terms of the Series A Preferred Stock and the Exchange
Notes. The terms of the Series A Preferred Stock and the Exchange Notes
will permit the Company to pay dividends and interest thereon by
issuance, in lieu of cash, of additional shares of Series A Preferred
Stock and additional Exchange Notes, respectively.
15
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
Arkansas DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas
of Arkansas and related assets.
Cable Acquisition The acquisition of the San German Cable System.
Class A Common Stock Pegasus' Class A Common Stock, par value $.01 per share.
Class B Common Stock Pegasus' Class B Common Stock, par value $.01 per share.
Common Stock The Class A Common Stock and the Class B Common Stock.
Company Pegasus and its direct and indirect subsidiaries (except that the "Company"
refers to Pegasus only where indicated).
Completed Transactions The Portland Acquisition, the Portland LMA, the Michigan/Texas DBS
Acquisition, the Ohio DBS Acquisition, the Cable Acquisition, the Management
Share Exchange, the Towers Purchase, the Management Agreement Acquisition,
the Parent's contribution of the PM&C Class A Shares to Pegasus, the Initial
Public Offering and the Registered Exchange Offer.
DBS Direct broadcast satellite television.
DBS Acquisitions The Arkansas DBS Acquisition, the Indiana DBS Acquisition, the Mississippi
DBS Acquisition and the Virginia/West Virginia DBS Acquisition.
DIRECTV The video, audio and data services provided via satellite by DIRECTV
Enterprises, Inc. or the entity, as applicable.
DMA Designated Market Area. There are 211 DMAs in the United States with each
county in the continental United States assigned uniquely to one DMA. Ranking
of DMAs is based upon Nielsen estimates of the number of television households.
DSS Digital satellite system or DSS(R). DSS(R) is a registered trademark of
DIRECTV Enterprises, Inc.
Exchange Note Indenture The indenture between Pegasus and First Union National Bank, as trustee,
governing the Exchange Notes.
Exchange Notes The % Senior Subordinated Exchange Notes due 2007, which are issuable
upon exchange of the Series A Preferred Stock.
FCC Federal Communications Commission.
Fox Fox Broadcasting Company.
Fox Affiliation Agreements The affiliation agreements between WOLF, WDSI, WDBD, WTLH, and WPXT and
Fox.
Hughes Hughes Electronics Corporation or one of its subsidiaries, including DIRECTV
Enterprises, Inc., as applicable.
Incentive Program The Company's Restricted Stock Plan, 401(k) Plans and Stock Option Plan.
See "Management and Certain Transactions -- Incentive Program."
Indenture The indenture dated July 7, 1995 by and among PM&C, certain of its subsidiaries
and First Union National Bank, as trustee.
Indiana DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas
of Indiana and related assets.
Initial Public Offering Pegasus' initial public offering of 3,000,000 shares of Class A Common
Stock, which was completed on October 8, 1996.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
LMAs Local marketing agreements, program service agreements or time brokerage
agreements between broadcasters and television station licensees pursuant
to which broadcasters provide programming to and retain the advertising
revenues of such stations in exchange for fees paid to television station
licensees.
Location Cash Flow Net revenues less location operating expenses, which consist of programming,
barter programming, general and administrative, technical and operations,
marketing and selling expenses. The difference between Location Cash Flow
and Operating Cash Flow is that Operating Cash Flow includes corporate
expenses and cash incentive compensation. Although Location Cash Flow is
not a measure of performance under generally accepted accounting principles,
the Company believes that Location Cash Flow is accepted within the Company's
business segments as a generally recognized measure of performance and
is used by analysts who report publicly on the performance of companies
operating in such segments. Nevertheless, this measure should not be
considered in isolation or as a substitute for income from operations,
net income, net cash provided by operating activities or any other measure
for determining the Company's operating performance or liquidity which
is calculated in accordance with generally accepted accounting principles.
Management Agreement The agreement between PM&C and its operating subsidiaries and the Management
Company to provide management services.
Management Agreement The acquisition of the Management Agreement by the Company, which occurred
Acquisition concurrently with the consummation of the Initial Public Offering.
Management Company Following the completion of the Initial Public Offering, Pegasus
Communications Management Company, a subsidiary of Pegasus; prior thereto,
BDI Associates L.P., an affiliate of the Company.
Management Share The exchange by certain members of the Company's management of Parent
Exchange Non-Voting Stock for shares of Class A Common Stock, which occurred
concurrently with the consummation of the Initial Public Offering.
Michigan/Texas DBS The acquisition of DIRECTV distribution rights for certain rural areas
Acquisition of Texas and Michigan and related assets.
Mississippi DBS The acquisition of DIRECTV distribution rights for certain rural areas
Acquisition of Mississippi and related assets.
New Credit Facility The Company's seven-year, senior collateralized credit facility. See
"Description of Indebtedness -- New Credit Facility."
New England DBS The Company's DIRECTV service territories in Connecticut, Massachusetts,
Territory New Hampshire and New York.
New Hampshire Cable Sale The sale of the Company's New Hampshire Cable systems.
Notes PM&C's 12 1/2 % Series B Senior Subordinated Notes due 2005 issued in an
aggregate principal amount of $85.0 million.
NRTC The National Rural Telecommunications Cooperative, the only entity authorized
to provide DIRECTV services that is independent of DIRECTV Enterprises,
Inc. Approximately 245 NRTC members are authorized to provide DIRECTV services
in exclusive territories granted to the NRTC by DIRECTV Enterprises, Inc.
Ohio DBS Acquisition The acquisition of DIRECTV distribution rights for certain rural areas
of Ohio and related assets.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Old Credit Facility The Company's $10.0 million revolving credit facility that was retired
concurrently with the entering into of the New Credit Facility.
Operating Cash Flow Income (loss) from operations plus (i) depreciation and amortization and
(ii) non-cash incentive compensation. Although Operating Cash Flow is not
a measure of performance under generally accepted accounting principles,
the Company believes that Operating Cash Flow is accepted within the Company's
business segments as a generally recognized measure of performance and
is used by analysts who report publicly on the performance of companies
operating in such segments. Nevertheless, the measure should not be considered
in isolation or as a substitute for income from operations, net income,
net cash provided by operating activities or any other measure for determining
the Company's operating performance or liquidity which is calculated in
accordance with generally accepted accounting principles.
Parent Pegasus Communications Holdings, Inc., the direct parent of Pegasus.
Parent Non-Voting Stock The Class B Non-Voting Stock of the Parent.
Pegasus Pegasus Communications Corporation, the issuer of the Securities offered
hereby.
Pegasus Credit Facility Pegasus' $5.0 million credit facility which will be retired upon completion
of this Offering.
PM&C Pegasus Media & Communications, Inc., which became a direct subsidiary
of Pegasus upon completion of the Initial Public Offering and a wholly
owned subsidiary upon completion of the Registered Exchange Offer.
PM&C Class A Shares The Class A shares of PM&C which were transferred to Pegasus concurrently
with the completion of the Initial Public Offering.
PM&C Class B Shares The Class B shares of PM&C held by purchasers in the Notes offering, which
are being exchanged by Pegasus for shares of Class A Common Stock pursuant
to the Registered Exchange Offer.
Portland Acquisition The acquisition of WPXT.
Portland LMA The LMA relating to WWLA.
Registered Exchange Offer Pegasus' registered exchange offer to holders of PM&C Class B Shares for
approximately 191,792 shares in the aggregate of Class A Common Stock.
The Registered Exchange Offer terminated on December 30, 1996 and was accepted
by all holders of PM&C Class B Shares. This Prospectus gives effect to
the exchange of all of the PM&C Class B Shares for Class A Common Stock.
Securities The Units, the Series A Preferred Stock, the Warrants, the Exchange Notes
and the Warrant Shares.
Series A Preferred Stock The % Series A Cumulative Exchangeable Preferred Stock, which is being
offered hereby in connection with the offering of the Units.
Tallahassee Acquisition The acquisition of WTLH.
Towers Purchase The acquisition of certain tower properties from Towers, an affiliate of
the Company.
Towers Pegasus Towers, L.P.
</TABLE>
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<TABLE>
<CAPTION>
<S> <C>
Transactions The New Hampshire Cable Sale and borrowings, if any, under the Pegasus Credit Facility.
Units The units consisting of Series A Preferred Stock and Warrants being offered
hereby.
Virginia/West Virginia The acquisition of DIRECTV distribution rights for certain rural areas
DBS Acquisition of Virginia and West Virginia and related assets.
Warrants The warrants to purchase shares of Class A Common Stock being offered hereby
in connection with the offering of Units.
WDBD Station WDBD-TV in the Jackson, Mississippi DMA.
WDSI Station WDSI-TV in the Chattanooga, Tennessee DMA.
WILF Station WILF-TV in the Northeastern Pennsylvania DMA.
WOLF Station WOLF-TV in the Northeastern Pennsylvania DMA.
WPXT Station WPXT-TV in the Portland, Maine DMA.
WTLH Station WTLH-TV in the Tallahassee, Florida DMA.
WTLH Warrants Warrants to purchase 71,429 shares of Class A Common Stock at an exercise
price of $14.00 per share, which were issued in connection with the Tallahassee
Acquisition.
WWLA Station WWLA-TV to be constructed to serve the Portland, Maine DMA.
WWLF Station WWLF-TV in the Northeastern Pennsylvania DMA.
</TABLE>
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RISK FACTORS
Many of the statements in this Prospectus are forward-looking in nature
and, accordingly, whether they prove to be accurate is subject to many risks
and uncertainties. The actual results that the Company achieves may differ
materially from any forward-looking statements in this Prospectus. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed below and those contained in "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business," as well as those discussed elsewhere in this Prospectus.
SUBSTANTIAL INDEBTEDNESS AND LEVERAGE
The Company is highly leveraged. As of September 30, 1996, on a pro forma
basis after giving effect to this Offering and the use of the proceeds
thereof, the Completed Transactions, the Transactions and the DBS
Acquisitions, the Company would have had Indebtedness of $86.1 million, total
stockholders' equity of $50.4 million and Preferred Stock of $95.8 million
and, assuming certain conditions are met, $50.0 million available under the
New Credit Facility. For the year ended December 31, 1995 and the nine months
ended September 30, 1996, on a pro forma basis after giving effect to this
Offering and the use of the proceeds thereof, the Completed Transactions, the
Transactions and the DBS Acquisitions, the Company's earnings would have been
inadequate to cover its combined fixed charges and dividends on Series A
Preferred Stock by approximately $23.3 million and $18.6 million,
respectively. The ability of Pegasus to repay its existing Indebtedness and
to pay dividends on the Series A Preferred Stock and to redeem the Series A
Preferred Stock upon its maturity or to pay interest on the Exchange Notes,
if issued, will depend upon future operating performance, which is subject to
the success of the Company's business strategy, prevailing economic
conditions, regulatory matters, levels of interest rates and financial,
business and other factors, many of which are beyond the Company's control.
There can be no assurance that the Company's growth strategy will be
successful in generating the substantial increases in cash flow from
operations that will be necessary for Pegasus to meet its obligations on the
Series A Preferred Stock following , 2002 when such obligations will
be required to be paid in cash or, if the Exchange Notes are issued, to
service its obligations under the Exchange Notes. The current and future
leverage of the Company could have important consequences, including the
following: (i) the ability of the Company to obtain additional financing for
future working capital needs or financing for possible future acquisitions or
other purposes may be limited, (ii) a substantial portion of the Company's
cash flow from operations will be dedicated to payment of the principal and
interest on its Indebtedness, and to payment of dividends on the Series A
Preferred Stock or interest on the Exchange Notes, if issued, thereby
reducing funds available for other purposes, and (iii) the Company will be
more vulnerable to adverse economic conditions than some of its competitors
and, thus, may be limited in its ability to withstand competitive pressures.
The agreements with respect to the Company's Indebtedness, the Certificate of
Designation and the Exchange Note Indenture contain numerous financial and
operating covenants, including, among others, restrictions on the ability of
the Company to incur additional Indebtedness, to create liens or other
encumbrances, to pay dividends and to make certain other payments and
investments, and to sell or otherwise dispose of assets or merge or
consolidate with another entity. These covenants may have the effect of
impeding the Company's growth opportunities, which may affect its cash flow
and the value of any of the Securities. There can be no assurance that future
cash flows of the Company will be sufficient to meet all of the Company's
obligations and commitments. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" "Description of Securities" and "Description of Indebtedness."
LIMITATIONS ON ACCESS TO CASH FLOW OF SUBSIDIARIES; HOLDING COMPANY STRUCTURE
Pegasus is a holding company, and its ability to pay dividends is
dependent upon the receipt of dividends from its direct and indirect
subsidiaries. PM&C and its subsidiaries are parties to the New Credit
Facility and the Indenture each of which imposes substantial restrictions on
PM&C's ability to pay dividends to Pegasus. The New Credit Facility prohibits
all payments of dividends by PM&C without lender consent. Under the terms of
the Indenture, PM&C is prohibited from paying dividends prior to July 1,
1998. The payment of dividends subsequent to July 1, 1998 will be subject to
the satisfaction of certain financial conditions set forth in the Indenture
and the consent of the lenders under the New Credit Facility. The ability of
PM&C and its
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subsidiaries to comply with such conditions in the Indenture may be affected
by events that are beyond the Company's control. The breach of any such
conditions could result in a default under the Indenture and/or the New
Credit Facility, and in the event of any such default, the holders of the
Notes or the lenders under the New Credit Facility could elect to accelerate
the maturity of all the Notes or the loans under such facility. If the
maturity of the Notes or the loans under the New Credit Facility were to be
accelerated, all such outstanding Indebtedness would be required to be paid
in full before PM&C or its subsidiaries would be permitted to distribute any
assets or cash to Pegasus. There can be no assurance that the assets of the
Company would be sufficient to repay all of such outstanding Indebtedness and
to meet its obligations under the Series A Preferred Stock or the Exchange
Notes, as the case may be. Future borrowings by Pegasus or its subsidiaries
can be expected to contain restrictions or prohibitions on the payment of
dividends by such subsidiaries to Pegasus, and neither the Certificate of
Designation nor the Exchange Note Indenture will prohibit Pegasus or its
subsidiaries from agreeing to such restrictions or prohibitions. In addition,
under Delaware law, Pegasus is permitted to pay dividends on its capital
stock, including the Series A Preferred Stock, only out of its surplus or, in
the event that it has no surplus, out of its net profits for the year in
which a dividend is declared or for the immediately preceding fiscal year.
Surplus is defined as the excess of a company's total assets over the sum of
its total liabilities plus the par value of its outstanding capital stock. In
order to pay dividends in cash, Pegasus must have surplus or net profits
equal to the full amount of the cash dividend at the time such dividend is
declared. In determining Pegasus' ability to pay dividends, Delaware law
permits the Board of Directors of Pegasus to revalue Pegasus' assets and
liabilities from time to time to their fair market values in order to create
surplus. The Company cannot predict what the value of its assets or the
amount of its liabilities will be in the future and, accordingly, there can
be no assurance that Pegasus will be able to pay cash dividends on the Series
A Preferred Stock. For all Dividend Payment Dates through and including
, 2002, Pegasus may, at its option, pay dividends or interest in the
Exchange Notes by issuing additional shares of Series A Preferred Stock with
an aggregate Liquidation Preference, or additional Exchange Notes with an
aggregate principal amount, as applicable, equal to the amount of such
dividend or interest, as applicable. In order to meet its payment obligations
on the Series A Preferred Stock or the Exchange Notes offered hereby, the
Company will need to restructure or amend the terms of the existing
Indebtedness of Pegasus' subsidiaries. There can be no assurance that
Pegasus' existing creditors or any future lenders will permit Pegasus'
subsidiaries to make distributions to Pegasus in amounts sufficient to allow
Pegasus to meet its obligations on the Series A Preferred Stock or Exchange
Notes, if issued, or at all. See "Description of Indebtedness" and
"Description of Securities."
All of the assets of the Company are held by subsidiaries of Pegasus, and
all of the Company's operating revenues are derived from operations of such
subsidiaries. In addition, future acquisitions may be made using the proceeds
of this Offering and additional borrowings through present or future
subsidiaries of the Company. Therefore, Pegasus' ability to pay the
Liquidation Preference of and dividends and redemption payments when due on
the Series A Preferred Stock or interest on, principal of and redemption
payments when due on the Exchange Notes, if issued, is dependent upon the
earnings of its subsidiaries and the distribution of sufficient funds from
its direct and indirect subsidiaries to Pegasus. Pegasus' subsidiaries will
have no obligation, contingent or otherwise, to make any funds available to
the Company for payment of the aggregate Liquidation Preference and dividends
and mandatory redemption payments on the Series A Preferred Stock and will
not be guarantors of the Exchange Notes. In addition, Pegasus' subsidiaries
are subject to state-law restrictions on their ability to pay dividends to
Pegasus such as those set forth with respect to the Company in the preceding
paragraph.
RANKING OF SERIES A PREFERRED STOCK AND EXCHANGE NOTES
The Series A Preferred Stock will rank junior in right of payment upon
liquidation to all existing and future Indebtedness of Pegasus and to all
shares of Preferred Stock of Pegasus other than Preferred Stock which by its
terms ranks on a parity with or junior to the Series A Preferred Stock. The
Series A Preferred Stock will rank senior in right of payment upon
liquidation to the Common Stock. The Exchange Notes will be unsecured, senior
subordinated obligations of Pegasus that will be subordinated to all existing
and future Senior Debt of Pegasus. The Exchange Notes will not be guaranteed
by any of Pegasus' subsidiaries. The Exchange Notes will be effectively
subordinated to all Indebtedness and other liabilities of Pegasus'
subsidiaries. As of September 30, 1996, on a pro forma basis after giving
effect to this Offering and the use of
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<PAGE>
proceeds thereof, the Completed Transactions, the Transactions and the DBS
Acquisitions, approximately $86.1 million of Indebtedness would have been
outstanding and the Company would have had $50.0 million of borrowing
availability under the New Credit Facility. In the event of the insolvency,
liquidation, reorganization, dissolution or other winding-up of Pegasus'
subsidiaries, Pegasus will not receive funds available to pay to the Holders
of the Series A Preferred Stock or the Exchange Notes until after the payment
in full of the claims of the creditors of Pegasus' subsidiaries and all other
Senior Debt of the Company. See "Description of Securities -- Description of
Series A Preferred Stock -- Ranking."
DEPENDENCE ON FOX NETWORK AFFILIATION
Certain of the Company's TV stations are affiliated with the Fox Network,
which provides the stations with up to 40 hours of programming time per week,
including 15 hours of prime time programming, in return for the broadcasting
of Fox-inserted commercials by the stations during such programming. As a
result, the successful operation of the Company's TV stations is highly
dependent on the Company's relationship with Fox and on Fox's success as a
broadcast network. All of the Company's affiliation agreements with Fox
expire on October 31, 1998 with the exception of the affiliation agreement
with respect to WTLH, which expires on December 31, 2000. Thereafter, the
affiliation agreements may be extended for additional two-year terms by Fox
in its sole discretion. Fox has, in the past, changed affiliates in certain
markets where it acquired a significant ownership position in a station in
such market. In the event that Fox, directly or indirectly, acquires any
significant ownership and/or controlling interest in any TV station licensed
to any community within the Company's TV markets, Fox has the right to
terminate the affiliation agreement of the Company's TV station serving that
market. As a consequence, there is no assurance that Fox could not enter into
such an arrangement in one of the Company's markets. There can also be no
assurance that Fox programming will continue to be as successful as in the
past or that Fox will continue to provide programming to its affiliates on
the same basis as it currently does, all of which matters are beyond the
Company's control. The non-renewal or termination of the Fox affiliation of
one or more of the Company's stations could have a material adverse effect on
the Company's operations. See "Business -- TV" and "Business -- Licenses,
LMAs, DBS Agreements and Cable Franchises."
RELIANCE ON DBS TECHNOLOGY AND DIRECTV
The Company's DBS business is a new business with unproven potential.
There are numerous risks associated with DBS technology, in general, and
DIRECTV, in particular. DBS technology is highly complex and requires the
manufacture and integration of diverse and advanced components that may not
function as expected. Although the DIRECTV satellites are estimated to have
orbital lives at least through the year 2007, there can be no assurance as to
the longevity of the satellites or that loss, damage or changes in the
satellites as a result of acts of war, anti-satellite devices, electrostatic
storms or collisions with space debris will not occur and have a material
adverse effect on DIRECTV and the Company's DBS business. Furthermore, the
digital compression technology used by DBS providers is not standardized and
is undergoing rapid change. Since the Company serves as an intermediary for
DIRECTV, the Company would be adversely affected by material adverse changes
in DIRECTV's financial condition, programming, technological capabilities or
services, and such effect could be material to the Company's prospects. There
can also be no assurance that there will be sufficient demand for DIRECTV
services since such demand depends upon consumer acceptance of DBS, the
availability of equipment and related components required to access DIRECTV
services and the competitive pricing of such equipment. See "Business -- DBS"
and "Business -- Competition."
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to agreements between Hughes and the
NRTC (the "NRTC Agreement") and between the NRTC and participating NRTC
members (the "Member Agreement" and, together with the NRTC Agreement, the
"DBS Agreements"), participating NRTC members acquired the exclusive right to
provide DIRECTV programming services to residential and commercial
subscribers in certain service areas. The DBS Agreements authorize the NRTC
and participating NRTC members to provide all commercial services offered by
DIRECTV that are transmitted from the frequencies that the FCC has authorized
for DIRECTV's use at its present orbital location for a term running through
the life of the current satellites. The NRTC has advised the Company that
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the NRTC Agreement also provides the NRTC a right of first refusal to acquire
comparable rights in the event that DIRECTV elects to launch successor
satellites upon the removal of the present satellites from active service.
The financial terms of any such purchase are likely to be the subject of
negotiations. Any exercise of such right is uncertain and will depend, in
part, on DIRECTV's costs of constructing, launching and placing in service
such successor satellites. The Company is, therefore, unable to predict
whether substantial additional expenditures by the NRTC and its members,
including the Company, will be required in connection with the exercise of
such right of first refusal.
RISKS ATTENDANT TO ACQUISITION STRATEGY
The Company regularly considers the acquisition of media and communications
properties and, at any given time, is in various stages of considering such
opportunities. Since January 1, 1996, the Company has acquired or entered into
agreements to acquire a number of properties, including the DBS Acquisitions.
Each of the DBS Acquisitions is subject to the negotiation of a definitive
agreement and, among other conditions, the prior approval of Hughes. In addition
to these conditions, each of the DBS Acquisitions is also expected to be subject
to conditions typical in acquisitions of this nature, certain of which
conditions, like the Hughes consent, may be beyond the Company's control. There
can be no assurance that definitive agreements will be entered into with respect
to all or any of the DBS Acquisitions or, if entered into, that all or any of
the DBS Acquisitions will be completed. The Company sometimes structures its
acquisitions, like the Indiana DBS Acquisition and the Virginia/West Virginia
DBS Acquisition, to qualify for tax-free treatment. There is no assurance that
such treatment will be respected by the Internal Revenue Service. There can also
be no assurance that the anticipated benefits of any of the acquisitions
described herein or future acquisitions will be realized. The process of
integrating acquired operations into the Company's operations may result in
unforeseen operating difficulties, could absorb significant management attention
and may require significant financial resources that would otherwise be
available for the ongoing development or expansion of the Company's existing
operations. The Company's acquisition strategy may be unsuccessful since the
Company may be unable to identify acquisitions in the future or, if identified,
to arrive at prices and terms comparable to past acquisitions. The successful
completion of an acquisition may depend on consents from third parties,
including federal, state and local regulatory authorities or private parties
such as Fox, the NRTC and Hughes, all of whose consents are beyond the Company's
control. Possible future acquisitions by the Company could result in dilutive
issuances of equity securities, the incurrence of additional debt and contingent
liabilities, and additional amortization expenses related to goodwill and other
intangible assets, which could materially adversely affect the Company's
financial condition and operating results.
DISCRETION OF MANAGEMENT CONCERNING USE OF PROCEEDS
A portion of the net proceeds of this Offering is anticipated to be
contributed to current or future subsidiaries of Pegasus or to be used to
fund acquisitions, such as the DBS Acquisitions. It is anticipated that
pending such use, such proceeds will be invested in certain short-term
investments. Such funds, together with the Company's existing working
capital, funds that may be available to the Company under the New Credit
Facility and the net proceeds the Company may receive from the New Hampshire
Cable Sale, will represent a significant amount of funds over which
management will have substantial discretion as to their application. There
can be no assurance the Company will deploy such funds in a manner that will
enhance the financial condition of the Company. See "Use of Proceeds."
INABILITY TO MANAGE GROWTH EFFECTIVELY
The Company has experienced a period of rapid growth primarily as a result
of its acquisition strategy. In order to achieve its business objectives, the
Company expects to continue to expand largely through acquisitions, which
could place a significant strain on its management, operating procedures,
financial resources, employees and other resources. The Company's ability to
manage its growth may require it to continue to improve its operational,
financial and management information systems, and to motivate and effectively
manage its employees. If the Company's management is unable to manage growth
effectively, the Company's results of operations could be materially
adversely affected.
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DEPENDENCE ON KEY PERSONNEL
The Company's future success may depend to a significant extent upon the
performance of a number of the Company's key personnel, including Marshall W.
Pagon, Pegasus' President and Chief Executive Officer. See "Management and
Certain Transactions." The loss of Mr. Pagon or other key management
personnel or the failure to recruit and retain personnel could have a
material adverse effect on the Company's business. The Company does not
maintain "key-man" insurance and has not entered into employment agreements
with respect to any such individuals.
COMPETITION IN THE TV, DBS AND CABLE BUSINESSES
Each of the markets in which the Company operates is highly competitive.
Many of the Company's competitors have substantially greater resources than
the Company and may be able to compete more effectively than the Company in
the Company's markets. In addition, the markets in which the Company operates
are in a constant state of change due to technological, economic and
regulatory developments. The Company is unable to predict what forms of
competition will develop in the future, the extent of such competition or its
possible effects on the Company's businesses. The Company's TV stations
compete for audience share, programming and advertising revenue with other
television stations in their respective markets, and compete for advertising
revenue with other advertising media, such as newspapers, radio, magazines,
outdoor advertising, transit advertising, yellow page directories, direct
mail and local cable systems. The Company's DBS business faces competition
from other current or potential multichannel programming distributors,
including other DBS operators, other direct to home ("DTH") providers, cable
operators, wireless cable operators and local exchange and long-distance
telephone companies, which may be able to offer more competitive packages or
pricing than the Company or DIRECTV. The Company's Cable systems face
competition from television stations, SMATV systems, wireless cable systems,
DTH and DBS systems. See "Business -- Competition."
GOVERNMENT LEGISLATION, REGULATION, LICENSES AND FRANCHISES
The Company's businesses are subject to extensive and changing laws and
regulations, including those of the FCC and local regulatory bodies. Many of
the Company's operations are subject to licensing and franchising
requirements of federal, state and local law and are, therefore, subject to
the risk that material licenses and franchises will not be obtained or
renewed in the future. The United States Congress and the FCC have in the
past, and may in the future, adopt new laws, regulations and policies
regarding a wide variety of matters, including rulemakings arising as a
result of the Telecommunications Act of 1996 (the "1996 Act"), that could,
directly or indirectly, affect the operations of the Company's businesses.
The business prospects of the Company could be materially adversely affected
by the application of current FCC rules or policies in a manner leading to
the denial of pending applications by the Company, by the adoption of new
laws, policies and regulations, or changes in existing laws, policies and
regulations, including changes to their interpretations or applications, that
modify the present regulatory environment or by the failure of certain rules
or policies to change in the manner anticipated by the Company. See "Business
- -- Licenses, LMAs, DBS Agreements and Cable Franchises" and "Business --
Legislation and Regulation."
To the extent that the Company expects to program stations through the use
of LMAs, there can be no assurance that the licensees of such stations will
not unreasonably exercise rights to preempt the programming of the Company,
or that the licensees of such stations will continue to maintain the
transmission facilities of the stations in a manner sufficient to broadcast a
high quality signal over the station. As the licensees must also maintain all
of the qualifications necessary to be a licensee of the FCC, and as the
principals of the licensees are not under the control of the Company, there
can be no assurance that these licenses will be maintained by the entities
which currently hold them.
Pursuant to the 1996 Act, the continued performance of then existing LMAs
was generally grandfathered. The Portland LMA has been entered into but its
performance is currently pending completion of construction of the station.
The FCC suggested in a recent rulemaking proposal that LMAs entered into
after November 6, 1996 will not be grandfathered. The Company cannot predict
if the Portland LMA will be grandfathered. Currently, television LMAs are not
considered attributable interests under the FCC's multiple ownership rules.
However, the FCC is considering proposals which would make such LMAs
attributable, as they generally are in the radio broadcasting industry. If
the FCC were to adopt a rule that makes such interests attributable,
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without modifying its current prohibitions against the ownership of more than
one television station in a market, the Company could be prohibited from
entering into such arrangements with other stations in markets in which it
owns television stations and could be required to modify any then existing
LMAs.
Additionally, irrespective of the FCC rules, the Department of Justice and
the Federal Trade Commission (the "Antitrust Agencies") have the authority to
determine that a particular transaction presents antitrust concerns. The
Antitrust Agencies have recently increased their scrutiny of the television
and radio industry, and have indicated their intention to review matters
related to the concentration of ownership within markets (including through
LMAs) even when the ownership or LMA in question is permitted under the
regulations of the FCC. There can be no assurance that future policy and
rulemaking activities of the Antitrust Agencies will not affect the Company's
operations (including existing stations or markets) or expansion strategy.
CONCENTRATION OF SHARE OWNERSHIP AND VOTING CONTROL BY MARSHALL W. PAGON
Pegasus' Common Stock is divided into two classes with different voting
rights. Holders of Class A Common Stock are entitled to one vote per share on
all matters submitted to a vote of stockholders generally and holders of
Class B Common Stock are entitled to ten votes per share. Both classes vote
together as a single class on all matters except in connection with certain
amendments to Pegasus' Amended and Restated Certificate of Incorporation, the
authorization or issuance of additional shares of Class B Common Stock, and
except where class voting is required under the Delaware General Corporation
Law. See "Description of Capital Stock." As a result of his beneficial
ownership of all the outstanding voting stock of the sole general partner of
a limited partnership that indirectly controls the Parent and of his control
of the only other holder of Class B Common Stock, Marshall W. Pagon, the
President and Chief Executive Officer of Pegasus, beneficially owns all of
the Class B Common Stock of Pegasus. After giving effect to the greater
voting rights attached to the Class B Common Stock, Mr. Pagon will be able to
effectively vote 90.8% of the combined voting power of the outstanding Common
Stock and will have sufficient power (without the consent of the holders of
the Class A Common Stock) to elect the entire Board of Directors of Pegasus
and, in general, to determine the outcome of matters submitted to the
stockholders for approval. See "Ownership and Control" and "Description of
Capital Stock -- Common Stock." Except as required under the Delaware General
Corporation Law and the Certificate of Designation, Holders of the Series A
Preferred Stock will have no voting rights. See "Description of Securities --
Description of Series A Preferred Stock -- Voting Rights."
ABSENCE OF PRIOR PUBLIC MARKET
Prior to this Offering, there has been no public market for the Securities
(with the exception of the Warrant Shares) and there can be no assurance that
an active trading market will develop or be sustained in the future. There
may be significant volatility in the market price of the Securities due to
factors that may or may not relate to the Company's performance. The Company
does not intend to list any of the Securities (with the exception of the
Warrant Shares) on any securities exchange, and there can be no assurance
that a trading market for the Securities will develop and continue after this
Offering. The Underwriters have advised the Company that they currently
intend to make a market in the Securities but they are not obligated to do so
and may discontinue market making activities at any time. If a market for the
Securities were to develop, the Securities could trade at prices that may be
lower than the initial offering price and could be significantly affected by
various factors such as economic forecasts, financial market conditions,
reorganizations and acquisitions and quarterly variations in the Company's
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Pegasus has outstanding 4,663,229 shares of Class A Common Stock and
4,581,900 shares of Class B Common Stock, all of which shares of Class B
Common Stock are convertible into shares of Class A Common Stock on a share
for share basis. In addition, following completion of this Offering, the
Company will have outstanding 100,000 shares of Series A Preferred Stock. Of
these shares, the 3,000,000 shares of Class A Common Stock sold in the
Initial Public Offering and all of the Series A Preferred Stock to be sold
25
<PAGE>
hereby will be tradeable without restriction (except that the Units will not
be separately transferable until the Separation Date) unless they are
purchased by affiliates of the Company. All shares received pursuant to the
Registered Exchange Offer are tradeable without restriction, subject to the
agreement of each exchanging holder not to sell, otherwise dispose of or
pledge any shares of Class A Common Stock received in the Registered Exchange
Offer until April 3, 1997 without the prior written consent of Lehman
Brothers Inc. The approximately 1,471,437 remaining shares of Class A Common
Stock and all of the 4,581,900 shares of Class B Common Stock and any
securities issued in connection with the DBS Acquisitions will be "restricted
securities" under the Securities Act of 1933, as amended (the "Securities
Act"). These "restricted securities" and any shares purchased by affiliates
of the Company may be sold only if they are registered under the Securities
Act or pursuant to an applicable exemption from the registration requirements
of the Securities Act, including Rule 144 and Rule 701 thereunder. The
holders of 4,944,564 of the 6,053,337 shares constituting restricted
securities have agreed not to sell, otherwise dispose of or pledge any shares
of the Company's Common Stock or securities convertible into or exercisable
or exchangeable for such Common Stock until April 3, 1997 without the prior
written consent of Lehman Brothers Inc. Such holders have also agreed to
certain restrictions on their ability to transfer their Common Stock until
, 1997 without the written consent of CIBC Wood Gundy Securities
Corp. No prediction can be made as to the effect, if any, that market sales
of such shares or the availability of such shares for future sale will have
on the market price of shares of Class A Common Stock prevailing from time to
time. Up to an additional 720,000, 3,385 and 193,600 shares of Class A Common
Stock are reserved for issuance under the Incentive Program, for outstanding
stock options and for issuance upon exercise of the Warrants, respectively.
In connection with the Michigan/Texas DBS Acquisition, the Portland
Acquisition and the acquistion of the Portland LMA, holders of the Class A
Common Stock have been granted certain piggyback registration rights in
connection with the issuance of their shares. It is anticipated that piggyback
registration rights will also be granted in connection with the issuance of
certain securities in the Indiana DBS Acquisition and the Virginia/West Virginia
DBS Acquisition. See "Shares Eligible for Future Sale."
POTENTIAL ANTI-TAKEOVER PROVISIONS; CHANGE OF CONTROL
Pegasus' Amended and Restated Certificate of Incorporation contains, among
other things, provisions authorizing the issuance of "blank check" preferred
stock and two classes of Common Stock with different voting rights. See
"Description of Capital Stock." In addition, the Company is subject to the
provisions of Section 203 of the Delaware General Corporation Law. These
provisions could delay, deter or prevent a merger, consolidation, tender
offer, or other business combination or change of control involving the
Company that some or a majority of the Company's stockholders might consider
to be in their best interests, including tender offers or attempted takeovers
that might otherwise result in such stockholders receiving a premium over the
market price for the Class A Common Stock.
Upon a Change of Control, Pegasus will be required to offer to purchase
all of the shares of Series A Preferred Stock or Exchange Notes, as the case
may be, then outstanding at 101% of, in the case of Series A Preferred Stock,
the Liquidation Preference thereof plus, without duplication, accumulated and
unpaid dividends to the repurchase date or, in the case of Exchange Notes,
the aggregate principal amount, plus accrued and unpaid interest, if any. The
repurchase price is payable in cash. There can be no assurance that, were a
Change of Control to occur, Pegasus would have sufficient funds to pay the
purchase price for all the shares of Series A Preferred Stock or Exchange
Notes, as the case may be, which Pegasus might be required to purchase. There
can also be no assurance that the subsidiaries of Pegasus would be permitted
by the terms of their outstanding Indebtedness, including pursuant to the
Indenture and the New Credit Facility, to pay dividends to Pegasus to permit
Pegasus to purchase shares of Series A Preferred Stock or Exchange Notes. Any
such dividends are currently prohibited. See "Description of Indebtedness."
In addition, any such Change of Control transaction may also be a change of
control under the New Credit Facility and the Indenture, which would require
PM&C to prepay all amounts owing under the New Credit Facility and to reduce
the commitments thereunder to zero and to offer to purchase all outstanding
Notes at a price of 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest thereon to the date of purchase. In the event
Pegasus does not have sufficient funds to pay the purchase price of the
Series A Preferred Stock or the Exchange Notes, as the case may be, upon a
Change of Control, Pegasus could be required to seek third party
26
<PAGE>
financing to the extent it did not have sufficient funds available to meet
its purchase obligations, and there can be no assurance that Pegasus would be
able to obtain such financing on favorable terms, if at all. See "Description
of Indebtedness." In addition, any Change of Control would be subject to the
prior approval of the FCC.
CERTAIN TAX CONSIDERATIONS
Distributions on the Series A Preferred Stock, whether paid in cash or in
additional shares of Series A Preferred Stock, will be taxable as ordinary
dividend income to the extent of the Company's current and accumulated
earnings and profits. A Holder's initial tax basis in any additional shares
of Series A Preferred Stock distributed by Pegasus in lieu of cash dividend
payments on the Series A Preferred Stock ("Dividend Shares") will equal the
fair market value of such Dividend Shares on their date of distribution. In
addition, depending on the fair market value of shares of Series A Preferred
Stock on the date of their issuance, Holders may be required to include
additional amounts of income based on the difference between (x) the fair
market value of such shares on the date of their issuance and (y) the amount
payable in redemption of such shares, unless the difference is de minimis
under the applicable standard (such difference being referred to as "Series A
Preferred Stock Discount"). See "Certain Federal Income Tax Considerations --
Series A Preferred Stock Discount." If shares of Series A Preferred Stock
(including Dividend Shares) bear Series A Preferred Stock Discount, such
shares generally will have different tax characteristics from other shares of
Series A Preferred Stock and might trade separately, which might adversely
affect the liquidity of such shares.
Upon an exchange of Series A Preferred Stock for Exchange Notes, the
Holder generally should have capital gain or loss equal to the difference
between the issue price of the Exchange Notes received and the Holder's
adjusted basis in the Series A Preferred Stock redeemed. For a discussion of
how to determine the issue price of the Exchange Notes, see "Certain Federal
Income Tax Considerations -- Sale, Redemption and Exchange of Series A
Preferred Stock." Holders should also note that if shares of Series A
Preferred Stock are exchanged for Exchange Notes and the stated redemption
price at maturity of such Exchange Notes exceeds their issue price by more
than a de minimis amount, the Exchange Notes will be treated as having
original issue discount ("OID") equal to the entire amount of such excess.
For a discussion of these and other relevant tax issues, see "Certain
Federal Income Tax Considerations."
FRAUDULENT CONVEYANCE
Various fraudulent conveyance laws have been enacted for the protection of
creditors and may be utilized by a court to subordinate or avoid the Exchange
Notes (if and when issued) in favor of other existing or future creditors of
Pegasus. If a court in a lawsuit on behalf of any unpaid creditor of Pegasus
or a representative of Pegasus' creditors were to find that, at the time
Pegasus issued the Exchange Notes, Pegasus (x) intended to hinder, delay or
defraud any existing or future creditor or contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part
of others or (y) did not receive fair consideration or reasonably equivalent
value for issuing such Exchange Notes and Pegasus (i) was insolvent, (ii) was
rendered insolvent by reason of such issuance, (iii) was engaged or about to
engage in a business or transaction for which its remaining assets
constituted unreasonably small capital to carry on its business or (iv)
intended to incur, or believed that it would incur, debts beyond its ability
to pay such debts as they matured, such court could void Pegasus' obligations
under the Exchange Notes and void such transactions. Alternatively, in such
event, claims of the Holders of such Exchange Notes could be subordinated to
claims of the other creditors of Pegasus.
27
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the Units in this Offering,
after deducting underwriting discounts and commissions and estimated fees and
expenses of this Offering, are estimated to be approximately $95.8 million. The
Company intends to apply (i) $28.6 million of the net proceeds of this Offering
to the repayment of all outstanding Indebtedness under the New Credit Facility,
(ii) $14.0 million for the Mississippi DBS Acquisition, (iii) $8.7 million for
the cash portion of the Indiana DBS Acquisition, (iv) $7.0 million for the cash
portion of the purchase price of the Virginia/West Virginia DBS Acquisition and
(v) $2.4 million for the Arkansas DBS Acquisition. The remaining net proceeds
together with available borrowings under the New Credit Facility and proceeds
from the New Hampshire Cable Sale will be used for working capital, general
corporate purposes and to finance future acquisitions. The Company engages in
discussions with respect to acquisition opportunities in media and
communications businesses on a regular basis. Although the Company is in various
stages of discussions in connection with potential acquisitions, the Company has
not entered into any letters of intent, except in connection with the DBS
Acquisitions, or any definitive agreements with respect to any acquisitions at
this time. The Company anticipates entering into definitive agreements with
respect to each of the DBS Acquisitions prior to or shortly after the
consummation of this Offering. See "Risk Factors -- Risks Attendant to
Acquisition Strategy" and "-- Discretion of Management Concerning Use of
Proceeds." The Company intends to temporarily invest the remaining net proceeds
in short-term, investment grade securities. If any of the DBS Acquisitions are
not consummated, the Company intends to use the net proceeds designated for any
such acquisition for working capital, general corporate purposes and to finance
future acquisitions.
On August 29, 1996, all outstanding indebtedness under the Old Credit
Facility, which amounted to $8.8 million, was repaid from borrowings under
the New Credit Facility. In addition, $22.8 million was drawn on August 29,
1996 under the New Credit Facility to fund the Cable Acquisition. On October
8, 1996, $3.0 million of the proceeds from the Initial Public Offering were
used to repay indebtedness under the New Credit Facility resulting in an
outstanding balance of $28.6 million. Borrowings under the New Credit
Facility bear interest, payable monthly, at LIBOR or the prime rate (as
selected by the Company) plus spreads that vary with PM&C's ratio of total
debt to adjusted operating cash flow (as defined therein). As of November 30,
1996, the New Credit Facility bore interest at a blended rate of 8.375%.
Borrowings under the New Credit Facility mature on June 30, 2003, when all
outstanding principal and accrued interest is due and payable. To date, no
amounts have been drawn under the Pegasus Credit Facility. Any amounts drawn
under the Pegasus Credit Facility will be repaid upon consummation of this
Offering and the Pegasus Credit Facility will be retired at such time. See
"Description of Indebtedness -- Pegasus Credit Facility."
28
<PAGE>
DIVIDEND POLICY
Pegasus has not paid any cash dividends on its Common Stock. The Company
currently intends to retain future earnings for use in its business, and,
therefore, does not anticipate paying any cash dividends on its Common Stock for
the foreseeable future. Under the terms of the Series A Preferred Stock, Pegasus
will be required to pay dividends on the Series A Preferred Stock in cash or in
additional shares of Series A Preferred Stock. The payment of future dividends,
if any, will depend, among other things, on the Company's results of operations
and financial condition, any restriction in the Company's loan agreements and on
such other factors as Pegasus' Board of Directors may, in its discretion,
consider relevant. Since Pegasus is a holding company, its ability to pay
dividends is dependent upon the receipt of dividends from its direct and
indirect subsidiaries. PM&C, which is a direct subsidiary of Pegasus, is a party
to the New Credit Facility and the Indenture that restrict its ability to pay
dividends. Under the terms of the Indenture, PM&C is prohibited from paying
dividends prior to July 1, 1998. The payment of dividends by PM&C subsequent to
July 1, 1998 will be subject to the satisfaction of certain financial conditions
set forth in the Indenture and will also be subject to lender consent under the
terms of the New Credit Facility. See "Risk Factors -- Limitations on Access to
Cash Flow of Subsidiaries," "Description of Indebtedness" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources."
CLASS A COMMON STOCK INFORMATION
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "PGTV." The following table sets forth the high and low sale prices
per share of Class A Common Stock, as reported by Nasdaq for the 1996 fiscal
year subsequent to Pegasus' Initial Public Offering on October 3, 1996 and
for the 1997 fiscal year. These quotations and sales prices do not include
retail mark-ups, mark-downs or commissions.
<TABLE>
<CAPTION>
1996 Fiscal Year High Low
--------------------------------------- -------- --------
<S> <C> <C>
Fourth Quarter ........................ $16.00 $11.25
1997 Fiscal Year
First Quarter (through January 20, 1997) $14.00 $12.00
</TABLE>
On January 20, 1997, the last reported sales price for the Class A Common
Stock was $12.50 per share. As of January 20, 1997, Pegasus had approximately
155 holders of record.
29
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company (i) as of
September 30, 1996, (ii) as adjusted to reflect the Initial Public Offering
and the other Completed Transactions, and (iii) on a pro forma basis to
reflect the Initial Public Offering, the other Completed Transactions, the
Transactions, the DBS Acquisitions and the sale by the Company of the Units
offered hereby and the use of proceeds thereof. See "Use of Proceeds,"
"Selected Historical and Pro Forma Combined Financial Data," and "Pro Forma
Combined Financial Information." The table does not give pro forma effect to
the exercise of the Warrants because the timing of any such exercise is
uncertain.
<TABLE>
<CAPTION>
As of September 30, 1996
-----------------------------------------
Actual As Adjusted Pro Forma
---------- ------------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Cash and cash equivalents ...................................... $ 5,668 $ 4,490 $ 46,547
========== ============= ===========
Total debt:
New Credit Facility(1) ....................................... 31,600 28,600 --
12 1/2 % Series B Senior Subordinated Notes due 2005(2) ...... 81,490 81,490 81,490
Capital leases and other ..................................... 4,579 4,579 4,579
---------- ------------- -----------
Total debt .................................................. 117,669 114,669 86,069
---------- ------------- -----------
Series A Preferred Stock, $1,000 liquidation preference per
share; 100,000 shares authorized and outstanding pro forma(3) -- -- 95,750
Minority interest(4) ........................................... -- -- 3,000
Total stockholders' equity:
Class A Common Stock, $0.01 par value, 30,000,000 shares
authorized; 4,663,229 shares issued and outstanding as
adjusted; 5,063,229 shares issued and outstanding pro
forma(5) .................................................. 2 47 51
Class B Common Stock, $0.01 par value, 15,000,000 shares
authorized; 4,581,900 shares issued and outstanding as
adjusted and pro forma .................................... -- 46 46
Additional paid-in capital(5) ................................ 7,881 57,136 62,617
Retained earnings (deficit) .................................. (3,204) (3,204) 1,070
Partners' deficit ............................................ (13,393) (13,393) (13,393)
---------- ------------- -----------
Total stockholders' equity (deficit) ........................ (8,714) 40,632 50,391
---------- ------------- -----------
Total capitalization ........................................... $108,955 $155,301 $235,210
========== ============= ===========
</TABLE>
- ------
(1) For a description of the New Credit Facility, see "Description of
Indebtedness -- New Credit Facility."
(2) For a description of the principal terms of the Notes, see "Description
of Indebtedness -- Notes."
(3) For a description of the principal terms of the Series A Preferred Stock
and the Warrants, see "Description of Securities."
(4) Represents preferred stock of a subsidiary of Pegasus to be issued in
connection with the Virginia/West Virginia DBS Acquisition.
(5) Pro forma shares issued and outstanding include an assumed issuance of
400,000 shares of Class A Common Stock in connection with the Indiana DBS
Acquisition based on an assumed value of $14.00 per share.
30
<PAGE>
PRO FORMA COMBINED FINANCIAL INFORMATION
Pro forma combined statement of operations and other data for the year
ended December 31, 1995, the nine months ended September 30, 1996 and the
twelve months ended September 30, 1996 give effect to (i) the Portland
Acquisition, which closed on January 29, 1996, (ii) the Tallahassee
Acquisition, which closed on March 8, 1996, (iii) the Michigan/Texas DBS
Acquisition, which closed on October 8, 1996, (iv) the Cable Acquisition,
which closed on August 29, 1996, (v) the Ohio DBS Acquisition, which closed
on November 8, 1996, (vi) the New Hampshire Cable Sale, which is a pending
sale, (vii) the Initial Public Offering, which was consummated on October 8,
1996, and (viii) this Offering, all as if such events had occurred at the
beginning of each period. The Company believes that the historical income
statement data and other data for the DBS Acquisitions would not materially
impact the Company's historical and pro forma income statement data and other
data.
The pro forma condensed combined balance sheet as of September 30, 1996
gives effect to (i) payments in connection with the Portland Acquisition
which were made on October 8, 1996, (ii) the Michigan/Texas DBS Acquisition,
which closed on October 8, 1996, (iii) the Ohio DBS Acquisition, which closed
on November 8, 1996, (iv) the Registered Exchange Offer, which was completed
on December 30, 1996, (v) the New Hampshire Cable Sale, which is a pending
sale, (vi) the Initial Public Offering, which was consummated on October 8,
1996, (vii) the DBS Acquisitions, which are pending acquisitions, and (viii)
this Offering, as if such events had occurred on such date.
These acquisitions are accounted for using the purchase method of
accounting. The total costs of such acquisitions are allocated to the
tangible and intangible assets acquired and liabilities assumed based upon
their respective fair values. The allocation of the purchase price included
in the pro forma financial statements is preliminary. The Company does not
expect that the final allocation of the purchase price will materially differ
from the preliminary allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. The pro forma
combined financial information should be read in conjunction with the
Company's Combined Financial Statements and notes thereto, as well as the
financial statements and notes thereto of the acquisitions, included
elsewhere in this Prospectus. The pro forma combined financial information is
not necessarily indicative of the Company's future results of operations.
There can be no assurance whether or when the New Hampshire Cable Sale or
each of the DBS Acquisitions will be consummated. See "Risk Factors -- Risks
Attendant to Acquisition Strategy."
31
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA
<TABLE>
<CAPTION>
Acquisitions
----------------------------------------------------------
MI/TX OH
Actual Portland(1) Tallahassee(2) DBS(3) Cable(4) DBS(5)
-------- --------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ............................. $19,973 $ 4,409 $2,784 $ -- $ -- $ --
DBS ............................ 1,469 -- -- 2,513 -- 942
Cable .......................... 10,606 -- -- -- 5,777 --
Other .......................... 100 -- -- -- -- --
-------- --------- ------------ ---------- ------- -------
Total net revenues ............ 32,148 4,409 2,784 2,513 5,777 942
Location operating expenses
TV ............................. 13,933 3,441 2,133 -- -- --
DBS ............................ 1,379 -- -- 3,083 -- 956
Cable .......................... 5,791 -- -- -- 3,353 --
Other .......................... 38 -- -- -- -- --
Incentive compensation ........... 528 -- -- -- -- --
Corporate expenses ............... 1,364 147 40 139 132 --
Depreciation and amortization .... 8,751 212 107 559 501 183
-------- --------- ------------ ---------- ------- -------
Income (loss) from operations .... 364 609 504 (1,268) 1,791 (197)
Interest expense ................. (8,817) (1,138) (163) (631) (850) --
Interest income .................. 370 -- -- -- -- --
Other income (expense), net ...... (44) (542) (64) -- 50 --
Provision (benefit) for income
taxes .......................... 30 -- 105 -- (189) --
-------- --------- ------------ ---------- ------- -------
Income (loss) before extraordinary
items .......................... (8,157) (1,071) 172 (1,899) 1,180 (197)
Dividends on Series A Preferred
Stock .......................... -- -- -- -- -- --
-------- --------- ------------ ---------- ------- -------
Income (loss) applicable to
common shares before
extraordinary items ............ $(8,157) $(1,071) $ 172 $(1,899) $1,180 $(197)
======== ========= ============ ========== ======= =======
Income (loss) per share:
Loss before extraordinary items
Weighted average shares
outstanding .................
Other Data:
Location Cash Flow (22) .......... $11,007 $ 968 $ 651 $ (570) $2,424 $ (14)
Operating Cash Flow (22) ......... 9,287 821 611 (709) 2,292 (14)
Capital expenditures ............. 2,640 139 28 58 304 --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
The NH Unit Pro
Adjustments IPO Sub-Total Cable Sale(6) Total Offering Forma(23)
----------- ---------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ............................. $139(7) $-- $27,305 $ -- $27,305 $-- $27,305
DBS ............................ -- -- 4,924 -- 4,924 -- 4,924
Cable .......................... -- -- 16,383 (1,464) 14,919 -- 14,919
Other .......................... -- -- 100 -- 100 -- 100
----------- ---------- --------- ----------- --------- --------- ---------
Total net revenues ............ 139 -- 48,712 (1,464) 47,248 -- 47,248
Location operating expenses
TV ............................. (186)(8)
(111)(9) -- 19,210 -- 19,210 -- 19,210
DBS ............................ (341)(10) -- 5,077 -- 5,077 -- 5,077
Cable .......................... (332)(11) -- 8,812 (768) 8,044 -- 8,044
Other .......................... -- -- 38 -- 38 -- 38
Incentive compensation ........... -- -- 528 (17) 511 -- 511
Corporate expenses ............... (458)(12) -- 1,364 -- 1,364 -- 1,364
Depreciation and amortization .... 5,544 (13) 129 (18) 15,986 (618) 15,368 -- 15,368
----------- ---------- --------- ----------- --------- --------- ---------
Income (loss) from operations .... (3,977) (129) (2,303) (61) (2,364) -- (2,364)
Interest expense ................. (2,893)(14) 2,919 (19) (11,573) -- (11,573) 2,538(20) (9,035)
Interest income .................. (241)(15) -- 129 -- 129 -- 129
Other income (expense), net ...... 542 (16) -- (58) -- (58) -- (58)
Provision (benefit) for income
taxes .......................... 84 (17) -- 30 -- 30 -- 30
----------- ---------- --------- ----------- --------- --------- ---------
Income (loss) before extraordinary
items .......................... (6,653) 2,790 (13,835) (61) (13,896) 2,538(21) (11,358)
Dividends on Series A Preferred
Stock .......................... -- -- -- -- -- (12,000) (12,000)
----------- ---------- --------- ----------- --------- --------- ---------
Income (loss) applicable to
common shares before
extraordinary items ............ $ (6,653) $2,790 $(13,835) $ (61) $(13,896) $ (9,462) $(23,358)
=========== ========== ========= =========== ========= ========= =========
Income (loss) per share:
Loss before extraordinary items $ (1.50) $ (2.53)
========= =========
Weighted average shares
outstanding ................. 9,245,129 9,245,129
========= =========
Other Data:
Location Cash Flow (22) .......... $ 1,109 $ -- $15,575 $ (696) $ 14,879 $ -- $ 14,879
Operating Cash Flow (22) ......... 1,567 -- 13,855 (696) 13,159 -- 13,159
Capital expenditures ............. -- -- 3,169 (147) 3,022 -- 3,022
32
</TABLE>
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Acquisitions
---------------------------------------------------------
Actual Portland(1) Tallahassee(2) MI/TX DBS(3) Cable(4) OH DBS(5)
-------- --------- ------------ ----------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ............................. $18,363 $ 247 $404 $ -- $ -- $ --
DBS ............................ 2,601 -- -- 2,965 -- 1,304
Cable .......................... 9,073 -- -- -- 4,056 --
Other .......................... 83 -- -- -- -- --
-------- --------- ------------ ---------- ------ -------
Total net revenues ............ 30,120 247 404 2,965 4,056 1,304
Location operating expenses
TV ............................. 12,753 294 243 -- --
-- --
DBS ............................ 2,371 -- -- 2,672 -- 1,294
Cable .......................... 4,915 -- -- -- 2,448 --
Other .......................... 17 -- -- -- -- --
Incentive compensation ........... 605 -- -- -- -- --
Corporate expenses ............... 1,074 12 21 115 88 21
Depreciation and amortization .... 8,479 6 11 436 365 143
-------- --------- ------------ ---------- ------ -------
Income (loss) from operations .... (94) (65) 129 (258) 1,155 (154)
Interest expense ................. (8,929) (565) (20) (465) (482) --
Interest income .................. 172 -- -- -- -- --
Other income (expense), net ...... (77) 20 (17) -- -- --
Provision (benefit) for income
taxes .......................... (110) -- 35 -- 20 --
-------- --------- ------------ ---------- ------ -------
Income (loss) before extraordinary
items .......................... (8,818) (610) 57 (723) 653 (154)
-------- --------- ------------ ---------- ------ -------
Dividends on Series A Preferred
Stock .......................... -- -- -- -- -- --
-------- --------- ------------ ---------- ------ -------
Income (loss) applicable to
common shares before
extraordinary items ............ $(8,818) $(610) $ 57 $ (723) $ 653 $ (154)
======== ========= ============ ========== ====== =======
Income (loss) per share:
Loss before extraordinary items .
Weighted average shares
outstanding ...................
Other Data:
Location Cash Flow (22) .......... $10,064 $ (47) $161 $ 293 $1,608 $ 10
Operating Cash Flow (22) ......... 8,990 (59) 140 178 1,520 (11)
Capital expenditures ............. 2,607 -- -- -- 96 --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
The NH Unit Pro
Adjustments IPO Sub-Total Cable Sale(6) Total Offering Forma(23)
----------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues
TV ............................. $ 17(7) $ -- $19,031 $ -- $19,031 $ -- $19,031
DBS ............................ -- -- 6,870 -- 6,870 -- 6,870
Cable .......................... -- -- 13,129 (1,262) 11,867 -- 11,867
Other .......................... -- -- 83 -- 83 -- 83
----------- --------- --------- ----------- --------- --------- ---------
Total net revenues ............ 17 -- 39,113 (1,262) 37,851 -- 37,851
Location operating expenses
TV ............................. (28)(8)
(15)(9) -- 13,247 -- 13,247 -- 13,247
DBS ............................ (297)(10) -- 6,040 -- 6,040 -- 6,040
Cable .......................... (249)(11) -- 7,114 (682) 6,432 -- 6,432
Other .......................... -- -- 17 -- 17 -- 17
Incentive compensation ........... -- -- 605 (67) 538 -- 538
Corporate expenses ............... (148)(12) -- 1,183 -- 1,183 -- 1,183
Depreciation and amortization .... 3,155 (13) 96(18) 12,691 (468) 12,223 -- 12,223
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) from operations .... (2,401) (96) (1,784) (45) (1,829) -- (1,829)
Interest expense ................. (1,546)(14) 2,190(19) (9,817) -- (9,817) 1,904(20) (7,913)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
The NH Unit Pro
Adjustments IPO Sub-Total Cable Sale(6) Total Offering Forma(23)
----------- --------- --------- ----------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Interest income .................. -- -- 172 -- 172 -- 172
Other income (expense), net ...... -- -- (74) -- (74) -- (74)
Provision (benefit) for income
taxes .......................... (55)(17) -- (110) -- (110) -- (110)
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) before extraordinary
items .......................... (3,892) 2,094 (11,393) (45) (11,438) 1,904(21) (9,534)
----------- --------- --------- ----------- --------- --------- ---------
Dividends on Series A Preferred
Stock .......................... -- -- -- -- -- (9,000) (9,000)
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) applicable to
common shares before
extraordinary items ............ $(3,892) $2,094 $(11,393) $ (45) $ (11,438) $(7,096) $ (18,534)
=========== ========= ========= =========== ========= ========= =========
Income (loss) per share:
Loss before extraordinary items . $ (1.24) $ (2.00)
========= =========
Weighted average shares
outstanding ................... 9,245,129 9,245,129
========= =========
Other Data:
Location Cash Flow (22) .......... $ 606 $ -- $ 12,695 $(580) $ 12,115 $ -- $ 12,115
Operating Cash Flow (22) ......... 754 -- 11,512 (580) 10,932 -- 10,932
Capital expenditures ............. -- -- 2,703 (183) 2,520 -- 2,520
</TABLE>
33
<PAGE>
PRO FORMA COMBINED STATEMENT OF OPERATIONS
TWELVE MONTHS ENDED SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Acquisitions
----------------------------------------------------------
Actual Portland(1) Tallahassee(2) MI/TX DBS(3) Cable(4) OH DBS(5)
--------- --------- ------------ ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data :
Net revenues
TV ............................. $ 24,773 $1,468 $1,464 $ -- $ -- $ --
DBS ............................ 3,117 -- -- 4,153 -- 1,634
Cable .......................... 11,766 -- -- -- 5,611 --
Other .......................... 128 -- -- -- -- --
--------- --------- ------------ ---------- ------- -------
Total net revenues .......... 39,784 1,468 1,464 4,153 5,611 1,634
Location operating expenses
TV ............................. 16,626 1,340 1,123 -- --
--
DBS ............................ 2,836 -- -- 4,179 -- 1,584
Cable .......................... 6,317 -- -- -- 3,390 --
Other .......................... 36 -- -- -- -- --
Incentive compensation ........... 689 -- -- -- -- --
Corporate expenses ............... 1,413 13 61 149 121 2
Depreciation and amortization .... 10,990 38 36 584 240 188
--------- --------- ------------ ---------- ------- -------
Income (loss) from operations .... 877 77 244 (759) 1,860 (140)
Interest expense ................. (11,776) (761) (117) (636) (727) --
Interest income .................. 357 -- -- -- -- --
Other income (expense), net ...... (51) (117) (18) -- 50 --
Provision (benefit) for income
taxes .......................... (110) -- 140 -- (169) --
--------- --------- ------------ ---------- ------- -------
Income (loss) before extraordinary
items .......................... (10,483) (801) (31) (1,395) 1,352 (140)
Dividends on Series A Preferred
Stock .......................... -- -- -- -- -- --
--------- --------- ------------ ---------- ------- -------
Income (loss) applicable to
common shares before
extraordinary items ............ $(10,483) $ (801) $ (31) $(1,395) $1,352 $ (140)
========= ========= ============ ========== ======= =======
Income (loss) per share:
Loss before extraordinary items .
Weighted average shares
outstanding ...................
Other Data:
Location Cash Flow (22) .......... $ 13,969 $ 128 $ 341 $ (26) $2,221 $ 50
Operating Cash Flow (22) ......... 12,556 115 280 (175) 2,100 48
Capital expenditures ............. 3,183 50 14 2 341 --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
The NH Unit Pro
Adjustments IPO Sub-Total Cable Sale(6) Total Offering Forma(23)
----------- --------- --------- ----------- --------- --------- ---------
Income Statement Data :
Net revenues
<S> <C> <C> <C> <C> <C> <C> <C>
TV ............................. $ 92(7) $ -- $ 27,797 $ -- $ 27,797 $ -- $27,797
DBS ............................ -- -- 8,904 -- 8,904 -- 8,904
Cable .......................... -- -- 17,377 (1,632) 15,745 -- 15,745
Other .......................... -- -- 128 -- 128 -- 128
----------- --------- --------- ----------- --------- --------- ---------
Total net revenues .......... 92 -- 54,206 (1,632) 52,574 -- 52,574
Location operating expenses
TV ............................. (61)(8)
(56)(9) -- 18,972 -- 18,972 -- 18,972
DBS ............................ (449)(10) -- 8,150 -- 8,150 -- 8,150
Cable .......................... (527)(11) -- 9,180 (861) 8,319 -- 8,319
Other .......................... -- -- 36 -- 36 -- 36
Incentive compensation ........... -- -- 689 (70) 619 -- 619
Corporate expenses ............... (336)(12) -- 1,423 -- 1,423 -- 1,423
Depreciation and amortization .... 5,610(13) 129(18) 17,815 (618) 17,197 -- 17,197
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) from operations .... (4,089) (129) (2,059) (83) (2,142) -- (2,142)
Interest expense ................. (2,770)(14) 2,919(19) (13,868) -- (13,868) 2,538(20) (11,330)
Interest income .................. -- -- 357 -- 357 -- 357
Other income (expense), net ...... (104)(16) -- (240) -- (240) -- (240)
Provision (benefit) for income
taxes .......................... (29)(17) -- (110) -- (110) -- (110)
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) before extraordinary
items .......................... (6,992) 2,790 (15,700) (83) (15,783) 2,538(21) (13,245)
Dividends on Series A Preferred
Stock .......................... -- -- -- -- -- (12,000) (12,000)
----------- --------- --------- ----------- --------- --------- ---------
Income (loss) applicable to
common shares before
extraordinary items ............ $(6,992) $2,790 $(15,700) $ (83) $ (15,783) $ (9,462) $(25,245)
=========== ========= ========= =========== ========= ========= =========
Income (loss) per share:
Loss before extraordinary items . $ (1.71) $ (2.73)
========= =========
Weighted average shares
outstanding ................... 9,245,129 9,245,129
========= =========
Other Data:
Location Cash Flow (22) .......... $ 1,185 -- $ 17,868 $(771) $ 17,097 -- $ 17,097
Operating Cash Flow (22) ......... 1,521 -- 16,445 (771) 15,674 -- 15,674
Capital expenditures ............. -- -- 3,590 (183) 3,407 -- 3,407
</TABLE>
34
<PAGE>
NOTES TO PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(1) Financial results of Portland Broadcasting, Inc.
(2) Financial results of WTLH, Inc.
(3) Financial results of the DBS Operations of Harron Communications Corp.
(4) Financial results of Dom's Tele Cable, Inc.
(5) Financial results of the DBS Operations of the Chillicothe Telephone
Company.
(6) Financial results of the New Hampshire Operations of Pegasus Cable
Television.
(7) To reduce the commissions paid by WPXT and WTLH to their national
advertising sales representative to conform to the Company's contract.
(8) To eliminate payroll expense related to staff reductions implemented
upon the consummation of the Portland Acquisition.
(9) To eliminate rent expenses incurred by WTLH, Inc. for the tower site
acquired and office property to be acquired by the Company in connection
with the Tallahassee Acquisition.
(10) To eliminate rent and other overhead expenses incurred by the prior
owner that will not be incurred by the Company for certain office
properties in connection with the Michigan/Texas DBS Acquisition.
(11) To reflect expense reductions, such as redundant staff, rent,
professional fees and utilities to be implemented in connection with the
Cable Acquisition and interconnection of its Puerto Rico Cable systems.
(12) To eliminate corporate expenses charged by prior owners.
(13) To record additional depreciation and amortization resulting from the
purchase accounting treatment of the acquisitions outlined above. Such
amounts are based on a preliminary allocation of the total
consideration. The actual depreciation and amortization may change based
upon the final allocation of the total consideration to be paid to the
tangible and intangible assets acquired.
(14) To record the increase in net interest expense associated with the
borrowings incurred in connection with the acquisitions described above.
(15) To eliminate interest income earned on funds escrowed and used for
acquisitions.
(16) To eliminate certain nonrecurring expenses, primarily comprised of legal
and professional expenses incurred by the prior owners of the businesses
in connection with the acquisitions.
(17) To eliminate net tax benefit in connection with the acquisitions.
(18) To eliminate amortization of deferred costs related to the Old Credit
Facility and record amortization of costs incurred in connection with
the New Credit Facility.
(19) To remove interest expense on the debts to be retired with the proceeds
of the Initial Public Offering.
(20) To remove interest expense on the debt to be retired with the proceeds
of this Offering.
(21) Upon the repurchase of outstanding notes in 1995, the Company recorded
an extraordinary gain on the extinguishment of debt of $10.2 million,
which is not included in these pro forma statements. Upon repayment of
the Old Credit Facility, the Company incurred an extraordinary expense
in connection with the write-down of deferred financing costs of
approximately $251,000, which is not included in these pro forma
statements. Upon consummation of the New Hampshire Cable Sale, the
Company will recognize a one time gain of approximately $4.3 million,
which is not included in these pro forma statements.
(22) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. Operating Cash Flow is defined as income
(loss) from operations plus (i) depreciation and amortization and (ii)
non-cash incentive compensation. The difference between Location Cash
Flow and Operating Cash Flow is that Operating Cash Flow includes cash
incentive compensation and corporate expenses. Although Location Cash
Flow and Operating Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that
Location Cash Flow and Operating Cash Flow are accepted within the
Company's business segments as generally recognized measures of
performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with
generally accepted accounting principles.
(23) Pro forma income statement data, income (loss) per share data and other
data does not give effect to the DBS Acquisitions. The Company believes
that the historical income statement and other data for the DBS
Acquisitions in the aggregate would not materially impact the Company's
historical and pro forma income statement data, income (loss) per share
data and other data.
35
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF SEPTEMBER 30, 1996
(DOLLARS IN THOUSANDS)
Acquisitions
-----------------------------------------------
Portland
Actual Portland(1) LMA(2) MI/TX DBS(3) OH DBS(4)
--------- --------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $ 5,668 (3,550) $ -- $(17,894) $(12,000)
Accounts receivable, net 4,468 -- -- -- --
Inventories ............. 234 -- -- -- --
Prepaid expenses and
other current assets . 3,009 -- -- -- --
Property and equipment,
net .................. 26,015 -- -- -- --
Intangibles ............. 80,781 4,100 1,000 29,824 12,000
Other assets ............ 2,394 -- -- -- --
--------- --------- -------- ---------- ----------
Total assets .......... $122,569 $ 550 $1,000 $ 11,930 $ --
========= ========= ======== ========== ==========
Liabilities and Equity:
Current liabilities ..... $ 7,166 $ (600) $ -- $ -- $ --
Notes payable ........... 52 -- -- -- --
Accrued interest ........ 3,190 -- -- -- --
Current portion of
long-term debt ....... 376 -- -- -- --
Current portion of
program
liabilities .......... 1,581 -- -- -- --
Long-term debt .......... 117,241 -- -- -- --
Long-term program
liabilities .......... 1,540 -- -- -- --
Other long-term
liabilities .......... 137 -- -- -- --
--------- --------- -------- ---------- ----------
Total liabilities .... 131,283 (600) -- -- --
Series A Preferred Stock .. -- -- -- -- --
Minority interest(12) ..... -- -- -- -- --
Class A Common Stock(13) .. 2 1 1 8 --
Class B Common Stock ...... -- -- -- -- --
Additional paid-in
capital ................. 7,881 1,149 999 11,922 --
Retained earnings (deficit) (3,204) -- -- -- --
Partners deficit .......... (13,393) -- -- -- --
--------- --------- -------- ---------- ----------
Total equity ............ (8,714) 1,150 1,000 11,930 --
--------- --------- -------- ---------- ----------
Total liabilities and
equity ............. $122,569 $ 550 $1,000 $ 11,930 $ --
========= ========= ======== ========== ==========
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
NH
The Cable MS VA/WV IN AR Unit
IPO(5) Sub-Total Sale(6) DBS(7) DBS(8) DBS(9) DBS(10) Total Offering(11) Pro Forma
------- --------- ----------- --------- -------- -------- -------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Cash and cash equivalents $32,151 $ 4,375 $ 7,122 $(14,000) $(7,000) $(8,700) $(2,400) $(20,603) $ 67,150 $ 46,547
Accounts receivable, net -- 4,468 -- -- -- -- -- 4,468 -- 4,468
Inventories ............. -- 234 -- -- -- -- -- 234 -- 234
Prepaid expenses and
other current assets . -- 3,009 -- -- -- -- -- 3,009 -- 3,009
Property and equipment,
net .................. -- 26,015 (1,888) -- -- -- -- 24,127 -- 24,127
Intangibles ............. -- 127,705 (960) 14,000 10,000 14,300 2,400 167,445 -- 167,445
Other assets ............ -- 2,394 -- -- -- -- -- 2,394 -- 2,394
------- --------- ----------- --------- -------- -------- -------- --------- ---------- ---------
Total assets .......... $32,151 $168,200 $ 4,274 $ -- $ 3,000 $ 5,600 $ -- $181,074 $ 67,150 $248,224
======= ========= =========== ========= ======== ======== ======== ========= ========== =========
Liabilities and Equity:
Current liabilities ..... $ -- $ 6,566 $ -- -- -- -- -- $ 6,566 $ -- $ 6,566
Notes payable ........... -- 52 -- -- -- -- -- 52 -- 52
Accrued interest ........ -- 3,190 -- 3,190 -- 3,190
Current portion of
long-term debt ....... -- 376 -- 376 -- 376
Current portion of
program liabilities .. -- 1,581 -- -- -- -- -- 1,581 -- 1,581
Long-term debt .......... (3,000) 114,241 -- -- -- -- -- 114,241 (28,600) 85,641
Long-term program
liabilities .......... -- 1,540 -- -- -- -- -- 1,540 -- 1,540
Other long-term
liabilities .......... -- 137 -- -- -- -- -- 137 -- 137
------- --------- ----------- --------- -------- -------- -------- --------- ---------- ---------
Total liabilities .... (3,000) 127,683 -- -- -- -- -- 127,683 (28,600) 99,083
Series A Preferred Stock .. -- -- -- -- -- -- -- -- 95,750 95,750
Minority interest(12) ..... -- -- -- -- 3,000 -- -- 3,000 -- 3,000
Class A Common Stock(13) .. 35 47 -- -- -- 4 -- 51 -- 51
Class B Common Stock ...... 46 46 -- -- -- -- -- 46 -- 46
Additional paid-in
capital ................. 38,004 -- -- -- -- -- -- -- --
(1,400)
(1,534) 57,021 5,596 62,617 -- 62,617
Retained earnings (deficit) -- (3,204) 4,274 -- -- -- -- 1,070 -- 1,070
Partners deficit .......... -- (13,393) -- -- -- -- -- (13,393) -- (13,393)
------- --------- ----------- --------- -------- -------- -------- --------- ---------- ---------
Total equity ............ 35,151 40,517 4,274 -- -- 5,600 -- 50,391 -- 50,506
------- --------- ----------- --------- -------- -------- -------- --------- ---------- ---------
Total liabilities and
equity ............. $32,151 $168,200 $4,274 $-- $3,000 $5,600 $-- $181,074 $ 67,150 $248,224
======= ========= =========== ========= ======== ======== ======== ========= ========== =========
36
</TABLE>
<PAGE>
NOTES TO PRO FORMA CONDENSED COMBINED BALANCE SHEET
(1) To record the acquisition of WPXT's license and Fox Affiliation
Agreement, the noncompetition agreement with the prior owner of WPXT and
satisfaction of amounts due to the prior owner of WPXT for accrued
compensation for aggregate consideration of $4.7 million. The aggregate
consideration consists of $3.6 million in cash, $1.0 million of Class B
Common Stock (valued at the price to the public in the Initial Public
Offering) and $150,000 of Class A Common Stock (valued at the price to
the public in the Initial Public Offering). Of the total consideration,
$4.1 million is allocated to intangible assets consisting of broadcast
licenses, network affiliation agreements and noncompetition agreements
and $600,000 is applied as a reduction of current liabilities.
(2) To record the acquisition of the Portland LMA for $1.0 million of Class
A Common Stock (valued at the price to the public in the Initial Public
Offering), all of which is allocated to LMAs.
(3) To record the Michigan/Texas DBS Acquisition for total consideration of
approximately $29.8 million consisting of $17.9 million in cash and
$11.9 million in Class A Common Stock (valued at the price to the public
in the Initial Public Offering), all of which is allocated to DBS
rights.
(4) To record the Ohio DBS Acquisition for $12.0 million in cash, all of
which is allocated to DBS rights.
(5) To record the net proceeds from the Initial Public Offering and the uses
of such proceeds.
(6) To record the New Hampshire Cable Sale for $7.1 million, net of
commission.
(7) To record the Mississippi DBS Acquisition for $14.0 million, all of
which is allocated to DBS rights.
(8) To record the Virginia/West Virginia DBS Acquisition for total
consideration of approximately $10.0 million, consisting of $7.0 million
in cash, $3.0 million of preferred stock of a subsidiary of Pegasus and
warrants to purchase 30,000 shares of Class A Common Stock, all of which
is allocated to DBS rights.
(9) To record the Indiana DBS Acquisition for total consideration of
approximately $14.3 million, consisting of $8.7 million in cash and $5.6
million in Class A Common Stock at an assumed value of $14.00 per share,
all of which is allocated to DBS rights.
(10) To record the Arkansas DBS Acquisition for $2.4 million in cash, all of
which is allocated to DBS rights.
(11) To record the net proceeds from this Offering and the intended uses of
such proceeds (dollars in thousands).
Source of proceeds:
Gross proceeds from this Offering ........................ $100,000
=========
Intended uses of proceeds:
Repay indebtedness under the New Credit Facility ......... $ 28,600
General corporate purposes ............................... 35,050
Cash pending Mississippi DBS Acquisition ................. 14,000
Cash pending Virginia/West Virginia DBS Acquisition ...... 7,000
Cash pending Indiana DBS Acquisition ..................... 8,700
Cash pending Arkansas DBS Acquisition .................... 2,400
Underwriters' discount and transaction costs related to the
Unit Offering .......................................... 4,250
---------
Total intended uses of proceeds ..................... $100,000
=========
(12) Represents preferred stock of a subsidiary of Pegasus to be issued in
connection with the Virginia/West Virginia DBS Acquisition.
(13) Pegasus is a newly-formed subsidiary of the Parent that prior to the
consummation of the Initial Public Offering had no material assets or
operating history. Prior to the Initial Public Offering, PM&C conducted
through subsidiaries the Company's operations as described herein.
Simultaneously with the consummation of the Initial Public Offering, the
Parent contributed to Pegasus all of its stock in PM&C, which consisted
of 161,500 PM&C Class A Shares in exchange for 3,380,435 shares of Class
B Common Stock.
37
<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 nine months ended September 30, 1995 and 1996 have been derived from
unaudited combined financial information, which in the opinion of the
Company's management, contain all adjustments necessary for a fair
presentation of this information. The selected historical combined financial
data for the nine months ended September 30, 1996 should not be regarded as
indicative of the results that may be expected for the entire year. The
information should be read in conjunction with the Combined Financial
Statements and the notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and "Pro Forma Combined
Financial Information," which are included elsewhere herein.
38
<PAGE>
SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1991(1) 1992 1993 (1) 1994 1995
---------- ---------- ---------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ....................... $ -- $ -- $10,307 $17,808 $19,973
DBS ...................... -- -- -- 174 1,469
Cable .................... 2,095 5,279 9,134 10,148 10,606
Other .................... 9 40 46 61 100
---------- ---------- ---------- ---------- ---------
Total net revenues ..... 2,104 5,319 19,487 28,191 32,148
---------- ---------- ---------- ---------- ---------
Location operating expenses:
TV ....................... -- -- 7,564 12,380 13,933
DBS ...................... -- -- -- 210 1,379
Cable .................... 1,094 2,669 4,655 5,545 5,791
Other .................... 3 12 16 18 38
Incentive compensation (3) .. -- 36 192 432 528
Corporate expenses .......... 206 471 1,265 1,506 1,364
Depreciation and amortization 1,175 2,541 5,978 6,940 8,751
---------- ---------- ---------- ---------- ---------
Income (loss) from operations (374) (410) (183) 1,160 364
Interest expense ............ (621) (1,255) (4,402) (5,973) (8,817)
Interest income ............. -- -- -- -- 370
Other expense, net .......... (21) (21) (220) (65) (44)
Provision (benefit) for taxes -- -- -- 140 30
Extraordinary gain (loss)
from extinguishment of
debt ..................... -- -- -- (633) 10,211
---------- ---------- ---------- ---------- ---------
Net income (loss) ........... (1,016) (1,686) (4,805) (5,651) 2,054
Dividends on Series A
Preferred Stock .......... -- -- -- -- --
---------- ---------- ---------- ---------- ---------
Net income (loss) applicable
to common shares ......... $(1,016) $(1,686) $(4,805) $(5,651) $ 2,054
========== ========== ========== ========== =========
Income (loss) per share:
Loss before extraordinary
item ..................... $ (1.56)
Extraordinary item .......... 1.95
---------
Net income (loss) per share . $ 0.39
=========
Weighted average shares
outstanding (000's) ...... 5,236
=========
Other Data:
Location Cash Flow (5) ...... $ 1,007 $ 2,638 $ 7,252 $10,038 $11,007
Operating Cash Flow (5) ..... 801 2,131 5,795 8,100 9,287
Capital expenditures ........ 213 681 885 1,264 2,640
Ratio of earnings to combined
fixed charges and
preferred stock dividends
(6) ...................... -- -- -- -- --
</TABLE>
<PAGE>
(RESTUBBED TABLE CONTINUED FROM ABOVE)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------------------------
Pro Pro
Forma Forma
1995 (2) 1995 1996 1996 (2)
----------- --------- ---------- -----------
<S> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
TV ....................... $ 27,305 $13,563 $18,363 $ 19,031
DBS ...................... 4,924 953 2,601 6,870
Cable .................... 14,919 7,913 9,073 11,867
Other .................... 100 55 83 83
----------- --------- ---------- -----------
Total net revenues ..... 47,248 22,484 30,120 37,851
----------- --------- ---------- -----------
Location operating expenses:
TV ....................... 19,210 10,060 12,753 13,247
DBS ...................... 5,077 914 2,371 6,040
Cable .................... 8,044 4,389 4,915 6,432
Other .................... 38 19 17 17
Incentive compensation (3) .. 511 444 605 538
Corporate expenses .......... 1,364 1,025 1,074 1,183
Depreciation and amortization 15,368 6,240 8,479 12,223
----------- --------- ---------- -----------
Income (loss) from operations (2,364) (607) (94) (1,829)
Interest expense ............ (9,035) (5,970) (8,929) (7,913)
Interest income ............. 129 184 172 172
Other expense, net .......... (58) (68) (77) (74)
Provision (benefit) for taxes 30 30 (110) (110)
Extraordinary gain (loss)
from extinguishment of
debt ..................... -- (4) 6,931 (251) -- (4)
----------- --------- ---------- -----------
Net income (loss) ........... (11,358) 440 (9,069) (9,534)
Dividends on Series A
Preferred Stock .......... (12,000) -- -- (9,000)
----------- --------- ---------- -----------
Net income (loss) applicable
to common shares ......... $(23,358) $ 440 $(9,069) $ (18,534)
=========== ========= ========== ===========
Income (loss) per share:
Loss before extraordinary
item ..................... $ (2.53) $ (1.68) $ (2.00)
Extraordinary item .......... -- (4) (0.05) -- (4)
----------- ---------- -----------
Net income (loss) per share . $ (2.53) $ (1.73) $ (2.00)
=========== ========== ===========
Weighted average shares
outstanding (000's) ...... 9,245 5,236 9,245
=========== ========== ===========
Other Data:
Location Cash Flow (5) ...... $ 14,879 $ 7,102 $10,064 $ 12,115
Operating Cash Flow (5) ..... 13,159 5,721 8,990 10,932
Capital expenditures ........ 3,022 2,064 2,607 2,520
Ratio of earnings to combined
fixed charges and
preferred stock dividends
(6) ...................... -- -- -- --
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Pro Forma
Twelve Months
Ended September 30,
1996 (2)
-------------------
<S> <C>
Net revenues ..................................... $52,574
Location Cash Flow (5) ........................... 17,097
Operating Cash Flow (5) .......................... 15,674
Ratio of Operating Cash Flow to interest expense
(5) ........................................... 1.4x
Ratio of total debt to Operating Cash Flow (5) ... 5.5x
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
---------------------------------------------------------
1991 1992 1993 1994 1995
-------- -------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ... $ 901 $ 938 $ 1,506 $ 1,380 $21,856
Working capital (deficiency) 78 (52) (3,844) (23,074) 17,566
Total assets ................ 17,306 17,418 76,386 75,394 95,770
Total debt (including
current) ................. 13,675 15,045 72,127 61,629 82,896
Total liabilities ........... 14,572 16,417 78,954 68,452 95,521
Redeemable preferred stock .. -- -- -- -- --
Minority interest ........... -- -- -- -- --
Total equity (deficit) (7) .. 2,734 1,001 (2,427) 6,942 249
(RESTUBBED TABLE CONTINUED FROM ABOVE)
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1996
------------------------------
Actual Pro Forma (2)
--------- -------------
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents ... $ 5,668 $ 46,547
Working capital (deficiency) 1,014 42,493
Total assets ................ 122,569 248,224
Total debt (including
current) ................. 117,669 86,069
Total liabilities ........... 131,283 99,083
Redeemable preferred stock .. -- 95,750
Minority interest .............. -- 3,000
Total equity (deficit) (7) .. (8,714) 50,391
</TABLE>
(see footnotes on the following page)
39
<PAGE>
NOTES TO SELECTED HISTORICAL AND PRO FORMA COMBINED FINANCIAL DATA
(1) The Company's operations began in 1991. The 1991 data include the results
of the Massachusetts and New Hampshire Cable systems from June 26, 1991
(with the exception of the North Brookfield, Massachusetts Cable system,
which was acquired in July 1992), the Connecticut Cable system from
August 7, 1991 and the results of Towers from May 21, 1991. The 1993 data
include the results of the Mayaguez, Puerto Rico Cable system from March
1, 1993 and WOLF/WWLF/WILF, WDSI and WDBD from May 1, 1993.
(2) Pro forma income statement and other data for the year ended December 31,
1995, nine months ended September 30, 1996 and the twelve months ended
September 30, 1996 give effect to the Completed Transactions, the
Transactions and this Offering and the use of proceeds thereof (except
for the DBS Acquisitions) as if such events had occurred in the beginning
of such periods. The pro forma balance sheet data as of September 30,
1996 give effect to the acquisitions after September 30, 1996, the
Initial Public Offering and this Offering and the use of proceeds thereof
(including the DBS Acquisitions) as if such events had occurred on such
date. See "Pro Forma Combined Financial Information." The Company
believes that the historical income statement and other data for the DBS
Acquisitions in the aggregate would not materially impact the Company's
historical and pro forma income statement data and other data.
(3) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and 401(k) Plans. See "Management and Certain
Transactions -- Incentive Program."
(4) The pro forma income statement data for the year ended December 31, 1995
and the nine months ended September 30, 1996, do not include the
extraordinary gain on the extinguishment of debt of $10.2 million and the
$251,000 writeoff of deferred financing costs that were incurred in 1995
in connection with the creation of the Old Credit Facility, respectively.
(5) Location Cash Flow is defined as net revenues less location operating
expenses. Location operating expenses consist of programming, barter
programming, general and administrative, technical and operations,
marketing and selling expenses. Operating Cash Flow is defined as income
(loss) from operations plus (i) depreciation and amortization and (ii)
non-cash incentive compensation. The difference between Location Cash
Flow and Operating Cash Flow is that Operating Cash Flow includes cash
incentive compensation and corporate expenses. Although Operating Cash
Flow and Location Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that
Location Cash Flow and Operating Cash Flow are accepted within the
Company's business segments as generally recognized measures of
performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
(6) For purposes of this calculation, earnings are defined as net income
(loss) before income taxes and extraordinary items and fixed charges.
Fixed charges consist of interest expense, amortization of deferred
financing costs and the component of operating lease expense which
management believes represents an appropriate interest factor. Earnings
were inadequate to cover combined fixed charges and preferred stock
dividends by approximately $1.0 million, $1.7 million, $4.8 million, $4.9
million, $8.1 million, $6.5 million and $8.9 million, for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 and for the nine months
ended September 30, 1995 and 1996, respectively. On a pro forma basis,
earnings were insufficient to cover combined fixed charges and preferred
stock dividends by approximately $23.3 million and $18.6 million for the
year ended December 31, 1995, and the nine months ended September 30,
1996, respectively.
(7) The Company has not paid any cash dividends and does not anticipate
paying cash dividends on its Common Stock in the foreseeable future.
Payment of cash dividends on the Company's Common Stock will be
restricted by the terms of the Series A Preferred Stock and the Exchange
Notes. The terms of the Series A Preferred Stock and the Exchange Notes
will permit the Company to pay dividends and interest thereon by
issuance, in lieu of cash, of additional shares of Series A Preferred
Stock and additional Exchange Notes, respectively.
40
<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 or will be accounted for using the purchase method of
accounting. The following table presents information regarding completed
acquisitions, pending acquisitions 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
WPXT ................................. January 1996(9) $15.8 $14.2 cash, $0.4 assumed liabilities, $0.2 of Class
A Common Stock and $1.0 of Class B Common Stock(10)
WTLH ................................. March 1996 $ 8.1 $5.0 cash, $3.1 deferred obligation and the WTLH
Warrants
Portland LMA ......................... May 1996 $ 1.0 $1.0 of Class A Common Stock(10)
Cable Acquisition .................... August 1996 $26.4 $25.0 cash and $1.4 of assumed liabilities, net
Michigan/Texas DBS Acquisition ....... October 1996 $29.8 $17.9 cash and $11.9 of Class A Common Stock(10)
Ohio DBS Acquisition ................. November 1996 $12.0 $12.0 cash
Pending acquisitions:
Arkansas DBS Acquisition ............. (11) $ 2.4 $2.4 cash
Indiana DBS Acquisition .............. (11) $14.3 $8.7 cash and $5.6 of Class A Common Stock or
preferred stock of Pegasus convertible into Class A
Common Stock
Mississippi DBS Acquisition .......... (11) $14.0 $14.0 cash
Virginia/West Virginia DBS Acquisition (11) $10.0 $7.0 cash, $3.0 of preferred stock of a subsidiary
of Pegasus and warrants to purchase a total of
(a) 30,000 shares of Class A Common Stock and (b) the
number of shares of Class A Common Stock that could be
purchased for $3.0 million at the market price
determined at approximately the closing date of this
acquisition.
Pending sale:
New Hampshire Cable Sale ............. (12) $ 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.
<PAGE>
(9) The Company acquired WPXT's FCC license and Fox Affiliation Agreement in
October 1996.
(10) The number of shares of Common Stock issued in connection with these
acquisitions was based on the $14.00 price per share in the Initial
Public Offering.
(11) The Company anticipates that each of the DBS Acquisitions will occur
after the consummation of this Offering; however, there can be no
assurance that all or any of the DBS Acquisitions will be completed on
the terms described herein or at all. See "Risk Factors -- Risks
Attendant to Acquisition Strategy."
(12) The Company anticipates that the New Hampshire Cable Sale will occur in
the first quarter of 1997; however, there can be no assurance that the
New Hampshire Cable Sale will be completed on the terms described herein
or at all.
41
<PAGE>
CORPORATE STRUCTURE REORGANIZATION
The Company's Combined Financial Statements include the accounts of PM&C,
PM&C's subsidiaries, Towers and Pegasus Communications Management Company.
Concurrently with the consummation of the Initial Public Offering, the Parent
contributed all of the PM&C Class A Shares to Pegasus for 3,380,435 shares of
Class B Common Stock. As a result of the Registered Exchange Offer, Pegasus
obtained all 8,500 of the PM&C Class B Shares in exchange for approximately
191,792 shares of Class A Common Stock in the aggregate. Upon consummation of
the Initial Public Offering, the Company acquired the assets of Towers for
$1.4 million in cash. The Company also acquired the Management Agreement
together with certain net assets, including approximately $1.5 million of
accrued management fees, for $19.6 million of Class B Common Stock (valued at
the price to the public in the Initial Public Offering) and approximately
$1.5 million in cash.
RESULTS OF OPERATIONS
TV revenues are derived from the sale of broadcast air time to local and
national advertisers. DBS revenues are derived from monthly customer
subscriptions, pay-per-view services, DSS equipment rentals, leases and
installation charges. Cable revenues are derived from monthly subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping
commissions, advertising time sales and installation charges.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and
promotion expenses, local sales commissions, and ratings and research
expenditures, (iii) technical and operations costs, and (iv) general and
administrative expenses. TV programming expenses include the amortization of
long-term program rights purchases, music license costs and "barter"
programming expenses which represent the value of broadcast air time provided
to television program suppliers in lieu of cash. DBS programming expenses
consist of amounts paid to program suppliers, DSS authorization charges and
satellite control fees, each of which is paid on a per subscriber basis, and
DIRECTV royalties which are equal to 5% of program service revenues. Cable
programming expenses consist of amounts paid to program suppliers on a per
subscriber basis.
42
<PAGE>
SUMMARY COMBINED OPERATING RESULTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
---------------------------------- ----------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net revenues:
TV ................................. $10,307 $17,808 $19,973 $13,563 $18,363
DBS ................................ -- 174 1,469 953 2,601
Cable:
Puerto Rico Cable ................ 3,187 3,842 4,007 3,010 3,532
New England Cable ................ 5,947 6,306 6,599 4,903 5,541
--------- --------- --------- --------- ---------
Total Cable net revenues ........ 9,134 10,148 10,606 7,913 9,073
--------- --------- --------- --------- ---------
Other .............................. 46 61 100 55 83
--------- --------- --------- --------- ---------
Total ......................... 19,487 28,191 32,148 22,484 30,120
========= ========= ========= ========= =========
Location operating expenses:
TV ................................. 7,564 12,380 13,933 10,060 12,753
DBS ................................ -- 210 1,379 914 2,371
Cable:
Puerto Rico Cable ................ 1,654 2,319 2,450 1,856 2,069
New England Cable ................ 3,001 3,226 3,341 2,533 2,846
--------- --------- --------- --------- ---------
Total Cable location operating
expenses ......................... 4,655 5,545 5,791 4,389 4,915
--------- --------- --------- --------- ---------
Other .............................. 16 18 38 19 17
--------- --------- --------- --------- ---------
Total ......................... 12,235 18,153 21,141 15,382 20,056
========= ========= ========= ========= =========
Location Cash Flow(1):
TV ................................. 2,744 5,428 6,040 3,503 5,610
DBS ................................ -- (36) 90 39 230
Cable:
Puerto Rico Cable ................ 1,533 1,523 1,557 1,134 1,463
New England Cable ................ 2,945 3,080 3,258 2,390 2,695
--------- --------- --------- --------- ---------
Total Cable Location Cash Flow ... 4,478 4,603 4,815 3,524 4,158
--------- --------- --------- --------- ---------
Other .............................. 30 43 62 36 66
--------- --------- --------- --------- ---------
Total ......................... $ 7,252 $10,038 $11,007 $ 7,102 $10,064
========= ========= ========= ========= =========
Other data:
Growth in net revenues ............. 266% 45% 14% 14% 34%
Growth in Location Cash Flow ....... 175% 38% 10% 10% 42%
</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.
43
<PAGE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1995
The Company's net revenues increased by approximately $7.6 million or 34%
for the nine months ended September 30, 1996 as compared to the same period
in 1995 as a result of (i) a $4.8 million or 35% increase in TV revenues of
which $942,000 or 20% was due to ratings growth which the Company was able to
convert into higher revenues and $3.9 million or 80% was the result of
acquisitions made in the first quarter of 1996, (ii) a $1.6 million or 173%
increase in revenues from the increased number of DBS subscribers, (iii) a
$521,000 or 17% increase in Puerto Rico Cable revenues due primarily to
acquisitions effective September 1, 1996, (iv) a $638,000 or 13% increase in
New England Cable revenues due primarily to rate increases and new combined
service packages, and (v) a $28,000 increase in Tower rental income.
The Company's total location operating expenses increased by approximately
$4.7 million or 30% for the nine months ended September 30, 1996 as compared
to the same period in 1995 as a result of (i) a $2.7 million or 27% increase
in TV operating expenses as the net result of a $47,000 or 1% decrease in
same station direct operating expenses and a $2.6 million increase
attributable to stations acquired in the first quarter of 1996, (ii) a $1.5
million or 159% increase in operating expenses generated by the Company's DBS
operations due to an increase in programming costs of $857,000, royalty costs
of $87,000, marketing expenses of $246,000, customer support charges of
$119,000 and other DIRECTV costs such as security, authorization fees and
telemetry and tracking charges totaling $169,000, all associated with the
increased number of DBS subscribers, (iii) a $213,000 or 12% increase in
Puerto Rico Cable operating expenses as the net result of a $36,000 or 2%
decrease in same system direct operating expenses and a $248,000 increase
attributable to the system acquired effective September 1, 1996, (iv) a
$313,000 or 12% increase in New England Cable operating expenses due
primarily to increases in programming costs associated with the new combined
service packages, and (v) a $2,000 decrease in Tower administrative expenses.
As a result of these factors, Location Cash Flow increased by $3.0 million
or 42% for the nine months ended September 30, 1996 as compared to the same
period in 1995 as a result of (i) a $2.1 million or 60% increase in TV
Location Cash Flow of which $942,000 or 45% was due to an increase in same
station Location Cash Flow and $1.2 million or 55% was due to an increase
attributable to stations acquired in the first quarter of 1996, (ii) a
$191,000 increase in DBS Location Cash Flow, (iii) a $329,000 or 29% increase
in Puerto Rico Cable Location Cash Flow of which $73,000 or 24% was due to an
increase in same system Location Cash Flow and $236,000 or 76% was due to the
San German Cable System acquired effective September 1, 1996, (iv) a $305,000
or 13% increase in New England Cable Location Cash Flow, and (v) a $30,000
increase in Tower Location Cash Flow. The Company expects to continue to
report increases in Location Cash Flow in the fourth quarter of 1996 but does
not expect that such increases will continue at the same rate as was
experienced in the first three quarters of 1996.
As a result of these factors, incentive compensation which is calculated
from increases in Location Cash Flow increased by approximately $161,000 for
the nine months ended September 30, 1996 as compared to the same period in
1995 due mainly to the increases in revenues.
Corporate expenses increased by $49,000 or 5% for the nine months ended
September 30, 1996 as compared to the same period in 1995 primarily due to
the initiation of public reporting requirements for PM&C.
Depreciation and amortization expense increased by approximately $2.2
million for the nine months ended September 30, 1996 as compared to the same
period in 1995 as the Company increased its fixed and intangible assets as a
result of three completed acquisitions during 1996.
As a result of these factors, income from operations increased by
approximately $513,000 for the nine months ended September 30, 1996 as
compared to the same period in 1995.
Interest expense increased by approximately $3.0 million or 50% for the
nine months ended September 30, 1996 as compared to the same period in 1995
as a result of a combination of the Company's issuance of Notes on July 7,
1995 and an increase in debt associated with the Company's 1996 acquisitions.
A portion of the proceeds from the issuance of the Notes was used to retire
floating debt on which the effective interest rate was lower than the 12.5%
interest rate under the Notes.
44
<PAGE>
The Company's net loss increased by $9.5 million for the nine months ended
September 30, 1996 as compared to the same period in 1995 and was the net
result of an increase in income from operations of approximately $513,000, an
increase in interest expenses of $3.0 million, a decrease in extraordinary
items of $7.2 million from extinguishment of debt, a decrease in the
provision for income taxes of $140,000 and an increase in other expenses of
approximately $9,000.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
The Company's net revenues increased by approximately $4.0 million or 14%
in 1995 as compared to 1994 as a result of (i) a $2.2 million or 12% increase
in TV revenues due to ratings growth and improved economic conditions, within
the Company's markets, which the Company was able to convert into higher
revenues, (ii) a $1.3 million increase in revenues from DBS operations which
commenced in the fourth quarter of 1994, (iii) a $165,000 or 4% increase in
Puerto Rico Cable revenues due primarily to a rate increase implemented in
March 1995, (iv) a $293,000 or 5% increase in New England Cable revenues due
to an increase in the number of subscribers and rate increases in the third
quarter of 1995, and (v) a $39,000 increase in Tower rental income.
The Company's location operating expenses increased by approximately $3.0
million or 16% in 1995 as compared to 1994 as a result of (i) a $1.6 million
or 13% increase in TV operating expenses primarily due to increases in
programming, sales and promotion expenses, (ii) a $1.2 million increase in
DBS operating expenses primarily due to increases in programming costs which
are payable based on revenues and the number of subscribers, (iii) a $131,000
or 6% increase in Puerto Rico Cable operating expenses due primarily to an
increase in programming costs for existing channels, as well as increases in
the number of Spanish language channels offered by the system, (iv) a
$115,000 or 4% increase in New England Cable operating expenses due primarily
to increases in programming costs, and (v) a $20,000 increase in Tower
administrative expenses.
As a result of these factors, Location Cash Flow increased by
approximately $969,000 or 10% in 1995 as compared to 1994 as a result of (i)
a $612,000 or 11% increase in TV Location Cash Flow, (ii) a $126,000 or 350%
increase in DBS Location Cash Flow, (iii) a $34,000 or 2% increase in Puerto
Rico Cable Location Cash Flow, (iv) a $178,000 or 6% increase in New England
Cable Location Cash Flow, and (v) a $19,000 increase in Tower Location Cash
Flow.
As a result of the increase in Location Cash Flow, incentive compensation
increased by approximately $96,000 or 22% in 1995 as compared to 1994.
Corporate expenses decreased by approximately $142,000 or 9% in 1995 as
compared to 1994 primarily as a result of the transfer of certain functions
from corporate office staff to operating company staff.
Depreciation and amortization expense increased by approximately $1.8
million or 26% in 1995 as compared to 1994 primarily as a result of the
amortization of the Company's DBS rights and deferred financing costs.
As a result of these factors, income from operations decreased by
approximately $796,000 in 1995 as compared to 1994.
Interest expense increased by approximately $2.8 million or 48% in 1995 as
compared to 1994 as a result of the Company's issuance of the Notes on July
7, 1995. A portion of the proceeds from issuance of the Notes was used to
retire floating rate debt on which the effective interest rate was lower than
the 12.5% interest rate under the Notes.
The Company's net income increased by approximately $7.7 million in 1995
as compared to 1994 as a net result of a decrease in income from operations
of approximately $796,000, an increase in interest expense of $2.8 million,
an increase in interest income of $370,000, a decrease in income taxes of
$110,000, a decrease in other expenses of approximately $21,000 and an
increase in extraordinary items of $10.8 million for the reasons described in
"-- Liquidity and Capital Resources."
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
The Company's results for 1994 and 1993 are not directly comparable. The
1994 results include a full year of operations for all the Company's business
segments. The 1993 results include TV operations from May 1, 1993, Puerto
Rico Cable results from March 1, 1993 and full year results for New England
Cable.
45
<PAGE>
The Company's net revenues increased by approximately $8.7 million or 45%
in 1994 as compared to 1993 as a result of (i) a $7.5 million increase or 73%
increase in TV revenues, of which $4.0 million or 53% was due to aquisitions
made in May 1993 and $3.5 million or 47% was due to ratings growth that the
Company was able to convert into higher revenues, (ii) a $174,000 of DBS
revenues generated in 1994, the Company's first year of DBS operations, (iii)
a $655,000 or 21% increase in Puerto Rico Cable revenues, (iv) a $360,000 or
6% increase in New England Cable revenues, and (v) a $15,000 increase in
Tower rental income.
The Company's location operating expenses increased by approximately $5.9
million or 48% in 1994 as compared to 1993 as a result of (i) a $4.8 million
or 64% increase in TV operating expenses, of which $3.4 million or 71% was
due to operating the three TV stations for a full year and the remaining $1.4
million or 29% was due to the replacement of free programming such as
infomercials with syndicated programming and sales expense increases of 73%
which are a direct function of the increase in revenues, (ii) $210,000 of DBS
operating expenses incurred in 1994, the Company's first year of DBS
operations, (iii) a $665,000 or 40% increase in Puerto Rico Cable operating
expenses primarily from operating the system for a full year, but also due to
programming cost increases which were not passed on to subscribers due to
rate freezes imposed by the 1992 Cable Act (as defined), (iv) a $225,000 or
8% increase in New England Cable operating expenses, as a result of
subscriber growth and programming cost increases which were not passed on to
subscribers due to rate freezes imposed by the 1992 Cable Act, and (v) a
$2,000 increase in tower administrative expenses.
As a result of these factors, Location Cash Flow increased by $2.8 million
or 38% in 1994 as compared to 1993 as a result of (i) a $2.7 million or 98%
increase in TV Location Cash Flow, (ii) a negative DBS Location Cash Flow of
$36,000 in the Company's first year of DBS operations, (iii) a $10,000 or 1%
decrease in Puerto Rico Cable Location Cash Flow, (iv) a $135,000 or 5%
increase in New England Cable Location Cash Flow, and (v) a $13,000 increase
in Tower Location Cash Flow.
As a result of the increase in Location Cash Flow, incentive compensation
increased by approximately $240,000 or 125% for year ended December 31, 1994
as compared to the same period in 1993.
Corporate expenses increased by approximately $241,000 or 19% in 1994 as
compared to 1993 due primarily to corporate staff additions related to the
Company's 1993 acquisitions.
Depreciation and amortization increased by $962,000 or 16% in 1994 as
compared to 1993 due primarily to the acquisitions described above.
As a result of these factors, income from operations increased by
approximately $1.3 million in 1994 as compared to 1993.
Interest expense increased by approximately $1.6 million or 36% in 1994 as
compared to 1993 primarily as a result of increases in interest charges on
the Company's floating rate debt and the inclusion of a full year of interest
expense in 1994 on the indebtedness assumed by the Company in connection with
the acquisitions of the three television stations and the Mayaguez Cable
system.
Other expenses decreased by approximately $155,000 in 1994 as compared to
1993 as a result of a tax settlement made during 1993 with the Puerto Rico
Treasury Department in connection with withholding taxes on program payments
made by the Puerto Rico Cable system from 1987 through 1993 which was
recorded in other expenses in 1993.
Income taxes increased by approximately $140,000 in 1994 as compared to
1993 due principally to deferred income taxes recorded in connection with the
conversion of certain of the Company's subsidiaries from partnership to
corporate form during 1994.
As a result of certain refinancing transactions that occurred during 1994,
the Company recorded an extraordinary loss of approximately $633,000
representing the write-off of the balance of deferred finance costs related
to the refinanced indebtedness.
As a result of these factors, the Company's net loss increased by
approximately $845,000 in 1994 as compared to 1993.
46
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have been the net cash provided
by its TV and Cable operations and credit available under its credit
facilities. Additionally, the Company had $4.9 million in a restricted cash
account that was used to pay interest on the Company's Notes in July 1996.
The Company's principal uses of its cash have been to fund acquisitions, to
meet its debt service obligations, to fund investments in its TV and Cable
technical facilities and to fund investments in Cable and DBS customer
premises equipment that is rented or leased to subscribers.
During the nine months ended September 30, 1996, net cash provided by
operations was approximately $156,000 which, together with $12.0 million of
cash on hand, $9.9 million of restricted cash and $30.2 million of net cash
provided by the Company's financing activities was used to fund investing
activities of $46.5 million. Investment activities consisted of (i) the
Portland Acquisition and the Tallahassee Acquisition for approximately $17.1
million, (ii) the Cable Acquisition for $26.0 million, (iii) the purchase of
the Pegasus Cable Television of Connecticut, Inc. ("PCT-CT") office facility
and headend facility for $201,000, (iv) the fiber upgrade the PCT-CT Cable
system amounting to $323,000, (v) the purchase of DSS units used as rental
and lease units amounting to $832,000 and (vi) maintenance and other capital
expenditures and intangibles totaling approximately $2.4 million. As of
September 30, 1996, the Company's cash on hand approximated $5.7 million.
During 1995, net cash provided by operations was approximately $4.8
million, which together with $1.4 million of cash on hand and $11.1 million
of net cash provided by the Company's financing activities, was used to fund
a $12.5 million distribution to the Parent and to fund investment activities
totalling $5.2 million. Investment activities consisted of (i) the final
payment of the deferred purchase price for the Company's New England DBS
rights of approximately $1.9 million, (ii) the purchase of a new WDSI studio
and office facility for $520,000, (iii) the purchase of a LIBOR cap for
$300,000, (iv) the purchase of DSS units used as rental and lease units for
$157,000, and (v) maintenance and other capital expenditures totalling
approximately $2.3 million.
During 1994, net cash provided by operations amounted to $2.8 million,
which together with cash on hand and borrowings of $35.0 million was used to
fund capital expenditures of $1.3 million, to pay a portion of the deferred
purchase price of the DBS rights for $943,000, to repay debt totalling $34.0
million and to fund debt issuance costs of $1.6 million.
During 1993, net cash provided by operations amounted to $1.7 million,
which together with cash received in acquisitions of $804,000 and borrowings
of $15.1 million, was used to fund maintenance and other capital expenditures
of $885,000, to repay debt totalling $15.2 million and to fund debt issuance
costs of $843,000.
On October 8, 1996, the Company completed the Initial Public Offering in
which it sold 3,000,000 shares of its Class A Common Stock to the public at a
price of $14.00 per share resulting in net proceeds to the Company of
approximately $38.1 million. The Company applied the net proceeds from the
Initial Public Offering as follows: (i) $17.9 million for the payment of the
cash portion of the purchase price of the Michigan/Texas DBS Acquisition,
(ii) $12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay
indebtedness under the New Credit Facility, (iv) $1.9 million to make a
payment on account of the Portland Acquisition, (v) $1.5 million for the
payment of the cash portion of the purchase price of the Management Agreement
Acquisition, and (vi) $1.4 million for the Towers Purchase. The Management
Agreement Acquisition and the Towers Purchase were accounted for using the
pooling of interest method.
The net proceeds to the Company from the sale of the Units in this
Offering, after deducting underwriting discounts and commissions and
estimated fees and expenses of this Offering, are estimated to be
approximately $95.8 million. The Company intends to apply (i) $28.6 million
of the net proceeds of this Offering to the repayment of all outstanding
Indebtedness under the New Credit Facility, (ii) $14.0 million for the
Mississippi DBS Acquisition, (iii) $8.7 million for the cash portion of the
Indiana DBS Acquisition, (iv) $7.0 million for the cash portion of the
purchase price of the Virginia/West Virginia DBS Acquisition and (v) $2.4
million for the Arkansas DBS Acquisition. The remaining net proceeds together
with available borrowings under the New Credit Facility and proceeds from the
New Hampshire Cable Sale will be used for
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<PAGE>
working capital, general corporate purposes and to finance future acquisitions.
The Company engages in discussions with respect to acquisition opportunities in
media and communications businesses on a regular basis. Although the Company is
in various stages of discussions in connection with potential acqisitions, the
Company has not entered into any letters of intent, except in connection with
the DBS Acquisitions, or any definitive agreements with respect to any such
acquisitions at this time. The Company anticipates entering into definitive
agreements with respect to each of the DBS Acquisitions prior to or shortly
after the consummation of this Offering. See "Risk Factors -- Risks Attendant to
Acquisition Strategy" and "-- Discretion of Management Concerning Use of
Proceeds." The Company intends to temporarily invest the net remaining proceeds
in short-term, investment grade securities. If any of the DBS Acquisitions are
not consummated, the Company intends to use the net proceeds designated for any
such acquisition for working capital, general corporate purposes and to finance
future acquisitions.
The Company is highly leveraged. As of September 30, 1996, on a pro forma
basis after giving effect to this Offering and the use of the proceeds
therefrom, the Completed Transactions, the Transactions and the DBS
Acquisitions, the Company would have had Indebtedness of $86.1 million, total
stockholders' equity of $50.4 million and Preferred Stock of $95.8 million
and, assuming certain conditions are met, $50.0 million available under the
New Credit Facility. For the year ended December 31, 1995 and the nine months
ended September 30, 1996, on a pro forma basis after giving effect to this
Offering and the use of the proceeds therefrom, the Completed Transacations,
the Transactions and the DBS Acquisitions, the Company's earnings would have
been inadequate to cover its combined fixed charges and Series A Preferred
Stock dividends by approximately $23.3 million and $18.6 million,
respectively. The ability of the Company to repay its existing indebtedness
and to pay dividends on the Series A Preferred Stock and to redeem the Series
A Preferred Stock at maturity will depend upon future operating performance,
which is subject to the success of the Company's business strategy,
prevailing economic conditions, regulatory matters, levels of interest rates
and financial, business and other factors, many of which are beyond the
Company's control. See "Risk Factors -- Substantial Indebtedness and
Leverage" "--Inability to Access Cash Flow of Subsidiaries."
The Company completed the $85.0 million Notes offering on July 7, 1995.
The Notes were issued pursuant to an Indenture between PM&C and First Union
National Bank, as trustee. The Indenture restricts PM&C's ability to engage
in certain types of transactions including debt incurrence, payment of
dividends, investments in unrestricted subsidiaries and affiliate
transactions. See "Description of Indebtedness."
During July 1995, the Company entered into the Old Credit Facility in the
amount of $10.0 million from which $6.0 million was drawn in connection with
the Portland and Tallahassee Acquisitions in the first quarter of 1996 and
$2.8 million was drawn to fund deposits in connection with the Cable
Acquisition. The Old Credit Facility was retired in August 1996 from
borrowings under the New Credit Facility.
The New Credit Facility is a seven-year, senior collateralized revolving
credit facility for $50.0 million. The amount of the New Credit Facility will
reduce quarterly beginning March 31, 1998. As of September 30, 1996, $31.6
million had been drawn under the New Credit Facility in connection with the
retirement of the Old Credit Facility and the consummation of the Cable
Acquisition. The New Credit Facility is intended to be used for general
corporate purposes and to fund possible future acquisitions. Borrowings under
the New Credit Facility are subject to among other things, PM&C's ratio of
total funded debt to adjusted operating cash flow. Currently, no additional
funds may be drawn under the New Credit Facility. The Company repaid $3.0
million of indebtedness under the New Credit Facility with proceeds from the
Initial Public Offering. Upon repayment of $28.6 million of the New Credit
Facility from the proceeds of this Offering, the Company will be able to draw
down $50.0 million from the New Credit Facility, subject to certain
exceptions. See "Description of Indebtedness -- New Credit Facility."
The Pegasus Credit Facility was entered into by Pegasus in January 1997
and matures on December 31, 1997. Pegasus may borrow up to $5.0 million under
the Pegasus Credit Facility in connection with the acquisition of DBS
businesses until the consummation of this Offering. To date, no amounts have
been drawn under the Pegasus Credit Facility. Any amounts drawn under the
Pegasus Credit Facility will be repaid simultaneously with the completion of
this Offering from proceeds of this Offering. The Pegasus Credit Facility
will be retired upon consummation of this Offering.
The Company believes that following this Offering that it will have
adequate resources to meet its working capital, maintenance capital
expenditure and debt service obligations. The Company believes that the
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<PAGE>
net proceeds of this Offering together with available borrowings under the
New Credit Facility and future indebtedness which may be incurred by the
Company and its subsidiaries will give the Company the ability to fund
acquisitions and other capital requirements in the future. However, there can
be no assurance that the future cash flows of the Company will be sufficient
to meet all of the Company's obligations and commitments. See "Risk Factors
- -- Substantial Indebtedness and Leverage."
The Company closely monitors conditions in the capital markets to identify
opportunities for the effective and prudent use of financial leverage. In
financing its future expansion and acquisition requirements, the Company
would expect to avail itself of such opportunities and thereby increase its
indebtedness which could result in increased debt service requirements. There
can be no assurance that such debt financing can be completed on terms
satisfactory to the Company or at all. The Company may also issue additional
equity to fund its future expansion and acquisition requirements.
CAPITAL EXPENDITURES
The Company expects to incur capital expenditures in the aggregate for
1996 and 1997 of $15.9 million in comparison to $2.6 million in 1995. With
the exception of recurring renewal and refurbishment expenditures of
approximately $2.0 million per year, these capital expenditures are
discretionary and nonrecurring in nature. The Company believes that
substantial opportunities exist for it to increase Location Cash Flow through
implementation of several significant capital improvement projects. In
addition to recurring renewal and refurbishment expenditures, the Company's
capital expenditure plans for 1997, after giving effect to the DBS
Acquisitions, currently include (i) TV expenditures of approximately $6.1
million for broadcast television transmitter, tower and facility
constructions and upgrades, (ii) DBS expenditures of approximately $5.3
million for DSS equipment purchases for lease and rental to the Company's
DIRECTV subscribers and certain subscriber acquisition costs, and (iii) Cable
expenditures of approximately $1.3 million for the interconnection of the
Puerto Rico Cable systems and fiber upgrades in Puerto Rico and New England.
Beyond 1997, the Company expects its ongoing capital expenditures to consist
primarily of renewal and refurbishment expenditures totalling approximately
$2.0 million annually. There can be no assurance that the Company's capital
expenditure plans will not change in the future.
OTHER
As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Under the
terms of the Indenture, PM&C is prohibited from paying dividends prior to
July 1, 1998. The payment of dividends subsequent to July 1, 1998 will be
subject to the satisfaction of certain financial conditions set forth in the
Indenture, and will also be subject to lender consent under the terms of the
New Credit Facility. See "Risk Factors -- Limitations on Access to Cash Flow
Subsidiaries; Holding Company Structure."
PM&C's ability to incur additional indebtedness is limited under the terms
of the Indenture and the New Credit Facility. These limitations take the form
of certain leverage ratios and are dependent upon certain measures of
operating profitability. Under the terms of the New Credit Facility, capital
expenditures and business acquisitions that do not meet certain criteria will
require lender consent.
The Company's revenues vary throughout the year. As is typical in the
broadcast television industry, the Company's first quarter generally produces
the lowest revenues for the year, and the fourth quarter generally produces
the highest revenues for the year. The Company's operating results in any
period may be affected by the incurrence of advertising and promotion
expenses that do not necessarily produce commensurate revenues in the
short-term until the impact of such advertising and promotion is realized in
future periods.
The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of
the Company's indebtedness bear interest at a fixed rate.
The Company has reviewed the provisions of Statements of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities," and No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of," and believes that future
implementation of the above standards will not have a material impact on the
Company.
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<PAGE>
In October 1995, FASB issued Statement of Financial Accounting Standards
No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which
became effective for transactions entered into in fiscal years beginning
after December 15, 1995. SFAS No. 123 encourages a fair value based method of
accounting for employee stock options or similar equity instruments, but
allows continued use of the intrinsic value based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB No. 25"). Companies electing to continue to
use APB No. 25 must make pro forma disclosures of net income as if the fair
value based method of accounting had been applied. The new accounting
standard has not had an impact on the Company's net income or financial
position, as the Company has chosen to continue to utilize the accounting
guidance set forth in APB No. 25.
50
<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.
Pegasus was incorporated under the laws of the State of Delaware in May
1996. In October 1994, the assets of various affiliates of Pegasus,
principally limited partnerships that owned and operated the Company's TV and
New England Cable operations, were transferred to subsidiaries of PM&C. In
July 1995, the subsidiaries operating the Company's Mayaguez Cable systems
and the Company's New England DBS business became wholly owned subsidiaries
of PM&C. Upon consummation of the Initial Public Offering, PM&C became a
subsidiary of Pegasus. Management's principal executive offices are located
at Suite 454, 5 Radnor Corporate Center, 100 Matsonford Road, Radnor,
Pennsylvania 19087. Its telephone number is (610) 341-1801.
OPERATING AND ACQUISITION STRATEGY
The Company's operating strategy is to generate consistent revenue growth
and to convert this revenue growth into disproportionately greater increases
in Location Cash Flow. The Company seeks to achieve revenue growth (i) in TV
by attracting a dominant share of the viewing of underserved demographic
groups it believes to be attractive to advertisers and by developing
aggressive sales forces capable of "overselling" its stations' share of those
audiences, (ii) in DBS by identifying market segments in which DIRECTV
programming will have strong appeal, developing marketing and promotion
campaigns to increase consumer awareness of and demand for DIRECTV
programming within those market segments and building distribution networks
consisting of consumer electronics and satellite equipment dealers,
programming sales agents and the Company's own direct sales force, and (iii)
in Cable by increasing the number of its subscribers and revenue per
subscriber through improvements in signal reception, the quality and quantity
of its programming, line extensions and rate increases. The Company seeks to
convert increases in revenues into disproportionately greater increases in
Location Cash Flow through the use of incentive plans, which reward employees
in proportion to annual increases in Location Cash Flow, coupled with
rigorous budgeting and strict cost controls.
The Company's acquisition strategy is to identify media and communications
businesses in which significant increases in Location Cash Flow may be
realized and where the ratio of required investment to potential Location
Cash Flow is low. The Company seeks to acquire (i) new DIRECTV services
territories in order to maintain its position as the largest independent
provider of DIRECTV services and to capitalize on operating efficiencies and
economies of scale and (ii) new television and cable properties at attractive
prices for which the Company can improve its operating results. After giving
effect to the Completed Transactions and the Transactions, the Company would
have had pro forma net revenues and Operating Cash Flow of $52.6 million and
$15.7 million, respectively, for the twelve months ended September 30, 1996.
The Company's net revenues and Operating Cash Flow have increased at a
compound annual growth rate of 98% and 85%, respectively, from 1991 to 1995.
TV
BUSINESS STRATEGY
The Company's operating strategy in TV is focused on (i) developing strong
local sales forces and sales management to maximize the value of its
stations' inventory of advertising spots, (ii) improving the stations'
programming, promotion and technical facilities in order to maximize their
ratings in a cost-effective manner and (iii) maintaining strict control over
operating costs while motivating employees through the use of incentive
plans, which rewards Company employees in proportion to annual increases in
Location Cash Flow.
The Company seeks to maximize demand for each station's advertising
inventory and thereby increase its revenue per spot. Each station's local
sales force is incentivized to attract first-time television advertisers as
well as provide a high level of service to existing advertisers. Sales
management seeks to "oversell" the Company's share of the local audience. A
television station oversells its audience share if its share of its
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<PAGE>
market's television revenues exceeds its share of the viewing devoted to all
stations in the market. Historically, the Company's stations have achieved
oversell ratios ranging from 120% to 200%. The Company recruits and develops
sales managers and salespeople who are aggressive, opportunistic and highly
motivated.
In addition, the Company seeks to make cost-effective improvements in its
programming, promotion and transmitting and studio equipment in order to
enable its stations to increase audience ratings in its targeted demographic
segments. In purchasing programming, the Company seeks to avoid competitive
program purchases and to take advantage of group purchasing efficiencies
resulting from the Company's ownership of multiple stations. The Company also
seeks to counter-program its local competitors in order to target specific
audience segments which it believes are underserved.
The Company utilizes its own market research together with national
audience research from its national advertising sales representative and
program sources to select programming that is consistent with the demographic
appeal of the Fox network, the tastes and lifestyles characteristic of the
Company's markets and the counter-programming opportunities it has
identified. Examples of programs purchased by the Company's stations include
"Home Improvement," "Seinfeld," "The Simpsons," "Mad About You," and
"Frazier" (off-network); "Star Trek: The Next Generation" and "Baywatch"
(syndication); and "Jenny Jones," "Rosie O'Donnell," and various game shows
(first run). In addition, the Company's stations purchase children's programs
to complement the Fox Children's Network's Monday through Saturday programs.
Each of the Company's stations is its market leader in children's viewing
audiences, with popular syndicated programming such as Disney's "Aladdin" and
"Gargoyles" complementing Fox programs such as the "Mighty Morphin Power
Rangers" and "R.L. Stine's Goosebumps."
The Company's acquisition strategy in TV seeks to identify stations in
markets of between 200,000 and 600,000 television households (DMAs 40 to 120)
which have no more than four competitive commercial television stations
licensed to them and which have a stable and diversified economic base. The
Company has focused upon these markets because it believes that they have
exhibited consistent and stable increases in local advertising and that
television stations in them have fewer and less aggressive direct
competitors. In these markets, the Company seeks television stations whose
revenues and market revenue share can be substantially improved with limited
increases in their fixed costs.
The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction
permits in markets where it currently owns and operates Fox affiliates. The
Company has historically purchased Fox affiliates because (i) Fox affiliates
generally have had lower ratings and revenue shares than stations affiliated
with ABC, CBS and NBC and, therefore, greater opportunities for improved
performance, and (ii) Fox affiliated stations retain a greater share of their
inventory of advertising spots than do stations affiliated with ABC, CBS or
NBC, thereby enabling these stations to retain a greater share of any
increase in the value of their inventory. The Company is pursuing expansion
in its existing markets through LMAs because second stations can be operated
with limited additional fixed costs (resulting in high incremental operating
margins) and can allow the Company to create more attractive packages for
advertisers and program providers.
THE STATIONS
The following table sets forth general information for each of the
Company's stations.
<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>
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<PAGE>
(1) Represents total homes in a DMA for each TV station as estimated by BIA.
(2) Commercial stations not owned by the Company which are licensed to and
operating in the DMA.
(3) "Prime" represents local station rank in the 18 to 49 age category
during "prime time" based on Nielsen estimates for May 1996.
(4) "Access" indicates local station rank in the 18 to 49 age category
during "prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen
estimates for May 1996.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1995 BIA market data and 1995 Nielsen audience
share data.
(6) WOLF, WILF and WWLF are currently simulcast. Pending receipt of certain
FCC approvals and assuming no adverse change in current FCC regulatory
requirements, the Company intends to separately program WOLF as an
affiliate of UPN.
(7) The Company anticipates programming WWLA pursuant to an LMA as an
affiliate of UPN assuming no adverse change in current FCC regulatory
requirements.
NORTHEASTERN PENNSYLVANIA
Northeastern Pennsylvania is the 49th largest DMA in the United States
comprising 17 counties in Pennsylvania with a total of 553,000 television
households and a population of 1,465,000. In the past, the economy was
primarily based on steel and coal mining, but in recent years has diversified
to emphasize manufacturing, health services and tourism. In 1995, annual
retail sales in this market totaled approximately $11.4 billion and total
television advertising revenues in the Northeastern Pennsylvania DMA
increased 3.5% from approximately $42.5 million to approximately $44.0
million. Northeastern Pennsylvania is the only one among the top 50 DMAs in
the country in which all TV stations licensed to it are UHF. In addition to
WOLF, WWLF and WILF, which are licensed to Scranton, Hazelton and
Williamsport, respectively, there are three commercial stations and one
educational station operating in the Northeastern Pennsylvania DMA. The
Northeastern Pennsylvania DMA also has an allocation for an additional
channel, which is not operational.
<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 President of the subsidiary that operates the
Company's TV stations. He has been employed by the Company since it acquired
WOLF and WWLF. Historically, WOLF, WWLF and WILF have been commonly
programmed with WWLF and WILF operated as satellites of WOLF. However, the
Company believes that it can achieve over the air coverage of the
Northeastern Pennsylvania DMA comparable to that currently provided by WOLF,
WWLF and WILF together by moving WWLF to a tower site occupied by the other
stations in the market and by increasing the authorized power of WILF. The
Company has filed an application with the FCC, which if granted, will enable
the Company to accomplish this objective. This application is currently
pending. A competing station has filed a letter with the FCC objecting to
this application. If the Company's application is granted by the FCC, the
Company intends to relocate WWLF's transmitter and tower, to increase the
power of WILF and to separately program WOLF as an affiliate of UPN. The
continued ownership of WOLF by the Company following relocation of the WWLF
tower may depend on changes in the FCC's ownership rules. The ability of the
Company to program WOLF if a divestiture is necessary may also depend on no
adverse change in current FCC regulatory requirements regarding the
attribution of LMAs. See "-- Licenses, LMAs, DBS Agreements and Cable
Franchises" and "Risk Factors -- Government Legislation, Regulation, Licenses
and Franchises."
PORTLAND, MAINE
Portland is the 79th largest DMA in the United States, comprising 12
counties in Maine, New Hampshire and Vermont with a total of 344,000
television households and a population of 902,000. Portland's economy is
based on financial services, lumber, tourism, and its status as a
transportation and distribution gateway for central and northern Maine. In
1995, annual retail sales in the Portland market totaled approximately $8.9
billion and the total television revenues in this market increased 4.0% from
approximately $40.0 million to
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<PAGE>
approximately $41.6 million. In addition to WPXT, there are four VHF and two
UHF stations authorized in the Portland DMA, including one VHF and two UHF
educational stations. The Portland DMA has allocations for five other UHF
stations, four of which are educational.
<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. The Company
entered into the Portland LMA with the holder of a construction permit for
WWLA, a new TV station to operate UHF channel 35 in the Portland market.
Under the Portland LMA, the Company will lease facilities and provide
programming to WWLA, retain all revenues generated from advertising, and make
payments of $52,000 per year to the FCC license holder in addition to
reimbursement of certain expenses. Construction of WWLA is expected to be
completed in 1997. WWLA's offices, studio and transmission facilities will be
co-located with WPXT. In November 1996, the FCC granted an application to
increase significantly WWLA's authorized power and antenna height in order to
expand its potential audience coverage. See "Risk Factors -- Government
Legislation, Regulation, Licenses and Franchises."
CHATTANOOGA, TENNESSEE
Chattanooga is the 82nd largest DMA in the United States, comprising 18
counties in Tennessee, Georgia, North Carolina and Alabama with a total of
320,000 television households and a population of 842,000. Chattanooga's
economy is based on insurance and financial services in addition to
manufacturing and tourism. In 1995, annual retail sales in the Chattanooga
market totaled approximately $7.1 billion and total television revenues in
this market increased 2.4% from approximately $37.6 million to approximately
$38.5 million. In addition to WDSI, there are three VHF and four UHF stations
operating in the Chattanooga DMA, including one religious and two educational
stations. The Company acquired WDSI in May 1993. From October 1991 through
April 1993, the station was managed by the Company. See "Management and
Certain Transactions."
<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."
54
<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 VHF
station. An additional station licensed to Valdosta, Georgia broadcasts from
a transmission facility located in the Albany, Georgia DMA. The Tallahassee
DMA has allocations for four UHF stations that are not operational, one of
which is educational.
<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 in August 1996, the Company acquired WTLH's FCC licenses and its Fox
Affiliation Agreements. The FCC recently granted an application which will
enable the Company to move WTLH's tower and transmitter facilities to a site
approximately ten miles closer to Tallahassee and to increase its tower
height and power. The Company anticipates relocating WTLH's transmitter and
tower in 1997 to increase its audience coverage in the Tallahassee market. In
August 1996, the Company also acquired the license for translator station
W53HI, Valdosta, Georgia. In October 1996, the FCC consented to the
assignment of the construction permit for translator station W13BO, Valdosta,
Georgia. Special temporary authorities have been granted by the FCC for
continued operation of both translators at relocated facilities, W13BO until
May 7, 1997 and W53HI until June 4, 1997.
DBS
DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
United States television households in 1994. DIRECTV currently offers in
excess of 175 channels of near laser disc quality video and CD quality audio
programming and transmits via three high-power Ku band satellites, each
containing 16 transponders. As of December 31, 1996, there were over 2.3 million
DIRECTV subscribers. DIRECTV expects to have approximately ten million
subscribers by the year 2000.
The equipment required for reception of DIRECTV services (a DSS unit)
includes an 18-inch satellite antenna, a digital receiver approximately the
size of a standard VCR and a remote control, all of which are 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
55
<PAGE>
services and retains billing information on pay-per-view usage, which
information is sent at regular intervals from the DSS receiver telephonically
to DIRECTV's authorization and billing system. DSS units also enable
subscribers to receive United States Satellite Broadcasting Company, Inc.
("USSB") programming. USSB is a DBS service whose programming consists of 25
channels of video programming transmitted via five transponders it owns on
DIRECTV's first satellite. USSB primarily offers Time Warner and Viacom
satellite programming services, such as multiple channels of HBO and
Showtime, which are not available through DIRECTV but which are generally
complementary to DIRECTV programming.
A license to manufacture DSS units was initially awarded by Hughes to
Thomson Consumer Electronics, Inc., the manufacturer of RCA-branded products
("RCA/Thomson"). This license provided RCA/Thomson with an exclusivity
period, which ended in April 1995, covering the first one million DSS units.
RCA/Thomson's DSS units retail for as low as $399. Hughes awarded a second
license to Sony which provided Sony joint exclusivity with RCA/Thomson until
December 1995. Hughes has awarded additional licenses to Hughes Network
Systems, Toshiba Consumer Electronics, Samsung Electronics America, Inc.,
Sanyo Fisher Corporation, Daewoo Electronics Corporation of America, Uniden
Corporation and Philips Electronics, N.V., whose production and distribution
have commenced or are expected to commence in 1996. At the end of 1995, more
than 20,000 retailers were selling DSS equipment and DIRECTV programming
packages.
In September 1996, the price of DSS units offered by DIRECTV dropped to
$399 with a $200 rebate toward the first year of service. The Company
believes that this price reduction has helped increase the growth in
subscribers of DIRECTV services. There can be no assurance that DIRECTV will
continue this pricing program in the future.
In January 1996, DIRECTV entered into a strategic relationship with AT&T
that is designed to accelerate DIRECTV's market penetration. The agreement
calls for AT&T to invest $137.5 million for a 2.5% equity interest in DIRECTV
with rights to purchase up to 30% of DIRECTV based on subscriber acquisition
performance. The agreement gives AT&T an exclusive right to market, except in
NRTC territories, DIRECTV services to all residential customers. In May 1996,
AT&T began to offer DIRECTV programming and DSS receiving equipment to its 90
million customers utilizing its Universal Card to provide financing and its
True Rewards(R) frequent buyers program. Additionally, DIRECTV has recently
announced a joint venture with Microsoft to offer interactive programming and
data services to be introduced in early 1997.
THE COMPANY'S DBS OPERATIONS
The Company owns, through agreements with the NRTC, the exclusive right to
provide DIRECTV services in certain rural areas of Connecticut,
Massachusetts, Michigan, New Hampshire, New York, Ohio and Texas. The Company
is the largest independent provider of DIRECTV services not affiliated with
Hughes. The Company's New England DBS service area encompasses all of its New
England Cable systems except for its systems in central Massachusetts. Its
Michigan DBS service area covers nine counties in the Flint, Saginaw and
thumb regions of Michigan, its Texas DBS service area covers seven counties
approximately 45 miles south of the Dallas/Fort Worth metroplex and its Ohio
DBS service area covers 11 counties in southern Ohio. Upon the consummation
of the DBS Acquisitions, the Company will acquire exclusive rights to provide
DIRECTV services in rural areas of Arkansas, Indiana, Mississippi, Virginia
and West Virginia.
56
<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> <C>
Owned:
Western New
England ............. 288,273 41,465 246,808 6,119 2.1% 11.9% 0.5%
New Hampshire ........ 167,531 42,075 125,456 3,800 2.3% 7.6% 0.5%
Martha's Vineyard and
Nantucket ........... 20,154 1,007 19,147 755 3.7% 60.4% 0.8%
Michigan ............. 241,713 61,774 179,939 6,590 2.7% 7.9% 0.9%
Texas ................ 149,530 54,504 95,026 5,189 3.5% 7.0% 1.4%
Ohio ................. 167,558 32,180 135,378 5,010 3.0% 11.3% 1.0%
----------- --------- ----------- -------------- ------- ---------- --------
Owned ............... 1,034,759 233,005 801,754 27,463 2.7% 9.0% 0.8% $41.26
----------- --------- ----------- -------------- ------- ---------- -------- -------------
DBS Acquisitions:
Arkansas ............. 36,458 2,408 34,050 1,652 4.5% 37.4% 2.2%
Indiana .............. 131,025 34,811 96,214 5,959 4.5% 11.6% 1.8%
Mississippi .......... 101,799 38,797 63,002 6,500 6.4% 14.3% 1.5%
Virginia/West Virginia . 92,097 10,015 82,082 5,012 5.4% 38.8% 1.4%
----------- --------- ----------- -------------- ------- ---------- --------
DBS Acquisitions .... 361,379 86,031 275,348 19,123 5.3% 16.6% 1.8%
----------- --------- ----------- -------------- ------- ---------- --------
Total .............. 1,396,138 319,036 1,077,102 46,586 3.3% 11.1% 1.0% $40.45
=========== ========= =========== ============== ======= ========== ======== -------------
</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 24,400 seasonal
residences.
(2) Based on NRTC estimates of primary residences derived from 1990 U.S.
census data and after giving effect to a 1% annual housing growth rate
and seasonal residence data obtained from county offices. Does not
include business locations. Includes approximately 92,400 seasonal
residences.
(3) As of December 9, 1996.
(4) Based upon November 1996 revenues and average November 1996 subscribers.
THE PENDING DBS ACQUISITIONS
The Company has entered into letters of intent with respect to the DBS
Acquisitions. All of the DBS Acquisitions are subject to the negotiation of a
definitive agreement and, among other conditions, the prior approval of Hughes.
In addition to these conditions, each of the DBS Acquisitions is also expected
to be subject to conditions typical in acquisitions of this nature, certain of
which conditions like the Hughes and NRTC consents, may be beyond the Company's
control. There can be no assurance that definitive agreements will be entered
into with respect to all or any of the DBS Acquisitions or, if entered into,
that all or any of the DBS Acquisitions will be completed. See "Risk Factors --
Risks Attendant to Acquisition Strategy."
ARKANSAS DBS ACQUISITION
In November 1996, the Company entered into a letter of intent to acquire
DIRECTV distribution rights for portions of Arkansas and related assets. The
letter of intent contemplates a purchase price of approximately $2.4 million
in cash, terminates on February 15, 1997 if a definitive agreement is not
entered into by that date and provides for a closing to occur no later than
March 15, 1997.
INDIANA DBS ACQUISITION
In December 1996, the Company entered into a letter of intent to acquire
DIRECTV distribution rights for portions of Indiana and related assets. The
letter of intent contemplates the Company's payment of aggregate consideration
of approximately $14.3 million consisting of approximately $8.7 million in cash
(subject to adjustments based on the number of subscribers) and approximately
$5.6 million in either shares of Class A Common Stock or preferred stock of
Pegasus convertible into shares of Class A Common Stock. The letter of intent
terminates on January 31, 1997 if no definitive agreement has been entered into
by that date. It is anticipated that the Indiana DBS Acquisition will occur in
the first quarter of 1997.
57
<PAGE>
MISSISSIPPI DBS ACQUISITION
In November 1996, the Company entered into a letter of intent to acquire
DIRECTV distribution rights for portions of Mississippi and related assets.
The letter of intent contemplates a purchase price of approximately $14.0
million in cash (subject to possible adjustment). The letter of intent
terminates on January 22, 1997 if no definitive agreement has been entered
into by that date and provides for a closing to occur no later than March 31,
1997.
VIRGINIA/WEST VIRGINIA DBS ACQUISITION
In November 1996, the Company entered into a letter of intent to acquire
DIRECTV distribution rights for portions of Virginia and West Virginia and
related assets. The letter of intent contemplates that the seller will
contribute the acquired assets to a newly formed subsidiary of Pegasus in
exchange for (subject to adjustments based on the number of subscribers) (i)
$9.0 million in cash or (ii) at the seller's option, $10.0 million consisting of
$7.0 million in cash, $3.0 million in preferred stock of the subsidiary, and
warrants to purchase a total of (a) 30,000 shares of Class A Common Stock and
(b) the number of shares of Class A Common Stock that could be purchased for
$3.0 million at the market price determined at approximately the closing date of
the Virginia/West Virginia DBS Acquisition. It is anticipated that the seller
will opt for the latter consideration and, as a consequence, this Prospectus
assumes that the seller will make such election. The letter of intent terminates
on January 31, 1997 if no definitive agreement has been entered into by that
date and provides for a closing to occur no later than March 31, 1997.
BUSINESS STRATEGY
As the exclusive provider of DIRECTV services in its purchased
territories, the Company provides a full range of services, including
installation, authorization and financing of equipment for new subscribers as
well as billing, collections and customer service support for existing
subscribers. The Company's operating strategy in DBS is to (i) establish
strong relationships with retailers, (ii) build its own direct sales and
distribution channels, (iii) develop local and regional marketing and
promotion to supplement DIRECTV's national advertising, and (iv) offer
equipment rental, lease and purchase options.
The Company anticipates continued growth in subscribers and operating
profitability in DBS through increased penetration of DIRECTV territories it
currently owns and will acquire pursuant to the DBS Acquisitions. The
Company's New England DBS Territory achieved positive Location Cash Flow in
1995, its first full year of operations. The Company's DIRECTV subscribers
currently generate revenues of approximately $41 per month at an average
gross margin of 34%. The Company's remaining expenses consist of marketing
costs incurred to build its growing base of subscribers and overhead costs
which are predominantly fixed. As a result, the Company believes that future
increases in its DBS revenues will result in disproportionately greater
increases in Location Cash Flow. For the first eleven months of 1996, the
Company has added 5,163 new DIRECTV subscribers as compared to 3,630 for the
same period in 1995 in its New England DBS Territory.
The Company also believes that there is an opportunity for additional
growth through the acquisition of DIRECTV territories held by other NRTC
members. NRTC members are the only independent providers of DIRECTV services.
Approximately 245 NRTC members collectively own DIRECTV territories
consisting of approximately 7.7 million television households in
predominantly rural areas of the United States, which the Company believes
are among the most likely to subscribe to DBS services. These territories
comprise 8% of United States television households, but represent
approximately 23% of DIRECTV's existing subscriber base. As the largest, and
only publicly held, independent provider of DIRECTV services, the Company
believes that it is well positioned to achieve economies of scale through the
acquisition of DIRECTV territories held by other NRTC members.
DIRECTV PROGRAMMING
DIRECTV programming includes (i) cable networks, broadcast networks and
audio services available for purchase in tiers for a monthly subscription,
(ii) premium services available a la carte or in tiers for a monthly
subscription, (iii) sports programming (including regional sports networks
and seasonal college and major professional league sports packages) available
for a yearly, seasonal or monthly subscription and (iv) movies and events
available for purchase on a pay-per-view basis. Satellite and premium
services available a la carte or for a monthly subscription are priced
comparably to cable. Pay-per-view movies are generally $2.99 per movie.
Movies recently released for pay-per-view are available for viewing on
multiple channels at staggered
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<PAGE>
starting times so that a viewer generally would not have to wait more than 30
minutes to view a particular pay-per-view movie. The following is a summary
of some of the more popular programming packages currently available from the
Company's DIRECTV operations:
Plus DIRECTV: Package of 45 channels (including 29 CD audio channels) which
retails for $14.95 per month and includes a $2.50 coupon for purchase of
pay-per-view movies or events. Plus DIRECTV consists of channels not
typically offered on most cable systems and is intended to be sold to
existing cable subscribers to augment their cable satellite and basic
services.
Economy or Select Choice: Two packages of 19 to 33 channels which retail for
between $16.95 and $19.95 per month and include a $2.50 coupon for purchase
of pay-per-view movies or events. The Economy service is available only in
DIRECTV territories held by NRTC members. Economy and Select Choice are often
offered in conjunction with DSS rental or leasing options to create a total
monthly payment comparable to the price of cable.
Total Choice: Package of 74 channels (including 29 CD audio channels, two
Disney channels, Encore Multiplex and an in-market regional sports network)
which retails for $29.95 per month and includes a $2.50 coupon for purchase
of pay-per-view movies or events. This is DIRECTV's flagship package.
DIRECTV Limited: Package comprising Bloomberg Information Television and the
DIRECTV Preview Channel which retails for $4.95 per month and includes a
$2.50 coupon for purchase of pay-per-view movies or events. This is intended
for subscribers who are principally interested in DIRECTV's pay-per-view
movies, sports and events.
Playboy: Adult service available monthly for $9.95 or 12 hours for $4.99.
Encore Multiplex: Seven theme movie services (Love Stories, Westerns,
Mystery, Action, True Stories, WAM! and Encore) for $5.95 per month (free
with Total Choice).
Networks: ABC (East and West), NBC (East and West), CBS (East and West), Fox
and PBS available individually for $0.99 per month or together for $4.95 per
month. (Available only to subscribers unable to receive networks over-the-air
and who have not subscribed to cable in the last 90 days.)
Sports Choice: Package of 24 channels (including 19 regional networks) and
five general sports networks (the Golf channel, NewSport, Speedvision,
Classic Sports Network and Outdoor Life) for $12.00 per month on a stand
alone basis.
NBA League Pass: Out-of-market NBA games for $149.00 per season.
NHL Center Ice: Out-of-market NHL games for $119.00 per season.
NFL Sunday Ticket: All out-of-market NFL Sunday games for $159.00 per season.
MLB Extra Innings: Up to 1,000 out-of-market major league baseball games for
$139.00 per season.
DIRECT Ticket: Movies available for pay-per-view from all major Hollywood
studios at $2.99 and special events at a range of $14.99 to $30.00.
STARZ! Package: Package of 3 channels which include STARZ! (East and West)
and the Independent Film Channel for $5.00 per month.
DISTRIBUTION, MARKETING AND PROMOTION
In general, subscriptions to DIRECTV programming are offered through
commissioned sales representatives who are also authorized by the
manufacturers to sell DSS units. DIRECTV programming is offered (i) directly
through national retailers (e.g. Sears, Circuit City and Best Buy) selected
by DIRECTV, (ii) through consumer electronics dealers authorized by DIRECTV
to sell DIRECTV programming, (iii) through satellite dealers and consumer
electronics dealers authorized by five regional sales management agents
("SMAs") selected by DIRECTV, (iv) through members of the NRTC who, like the
Company, have
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<PAGE>
agreements with the NRTC to provide DIRECTV services, and (v) by AT&T, which
has the exclusive right to market, except in NRTC territories, DIRECTV
services to all residential customers. All programming packages currently
must be authorized by the Company in its service areas. See "Business --
Licenses, LMAs, DBS Agreements, and Cable Franchises."
The Company markets DIRECTV programming services and DSS units in its
distribution area in three separate but overlapping ways. In residential
market segments where authorized DSS dealers offer the purchase, inventory
and sale of the DSS unit, the Company seeks to develop close, cooperative
relationships with these dealers and provides marketing, subscriber
authorization, installation and customer service support. In these
circumstances, the dealer earns a profit on the sale of the DSS unit and from
a commission payable by the Company for the sale of DIRECTV programming,
while the Company may receive a profit from a subscriber's initial
installation and receives the programming service revenues payable by the
subscriber. Many DSS dealers are also authorized to offer the Company's lease
program.
In addition, the Company has developed a network of its own sales agents
("Programming Sales Agents") from among local satellite dealers, utilities,
cable installation companies, retailers and other contract sales people or
organizations. Programming Sales Agents earn commissions on the lease or sale
of DSS units, as well as on the sale of DIRECTV programming.
In residential market segments in which a significant number of potential
subscribers wish to lease DSS units and in all commercial market segments,
the Company utilizes its own telemarketing and direct sales agents to sell
DIRECTV residential and commercial programming packages, to sell or lease DSS
units and to provide subscriber installations. In these instances, the
Company earns a profit from the sale, lease or rental of the DSS unit, from a
subscriber's initial installation and from the programming service revenues
payable by the subscriber.
The Company offers a lease program in which subscribers may lease DSS
units for $15 per month. The initial lease term is 36 months, at the end of
which the subscriber has the option to continue to pay $15 a month for an
additional 12 months to purchase the unit or continue on a month-to-month
basis. Subscribers that lease equipment must also select a monthly
programming package from DIRECTV throughout the term of the lease. Additional
receivers can be leased for an additional $15 per month. Programming
authorizations for additional outlets are $1.95 per month. There is a
one-time charge of $199 for standard installations. The lease program is
available only to subscribers that reside in the Company's service area.
The Company seeks to identify and target market segments within its
service area in which it believes DIRECTV programming services will have
strong appeal. Depending upon their individual circumstances, potential
subscribers may subscribe to DIRECTV services as a source of multichannel
television where no other source currently exists, as a substitute for
existing cable service due to its high price or poor quality or as a source
of programming which is not available via cable but which is purchased as a
supplement to existing cable service. The Company seeks to develop
promotional campaigns, marketing methods and distribution channels designed
specifically for each market segment.
The Company's primary target market consists of residences which are not
passed by cable or which are passed by older cable systems with fewer than 40
channels. The Company estimates that its exclusive DIRECTV territories
contain approximately 233,000 television households which are not passed by
cable and approximately 488,000 television households which are passed by
older cable systems with fewer than 40 channels. The Company actively markets
DIRECTV services as a primary source of television programming to potential
subscribers in this market segment since the Company believes that it will
achieve its largest percentage penetration in this segment.
The Company also targets potential subscribers who are likely to be
attracted by specific DIRECTV programming services. This market segment
includes (i) residences in which a high percentage of the viewing is devoted
to movie rentals or sports, (ii) residences in which high fidelity audio or
video systems have been installed and (iii) commercial locations (such as
bars, restaurants, hotels and private offices) which currently subscribe to
pay television or background music services. The Company estimates that its
exclusive DIRECTV territories contain approximately 83,000 commercial
locations.
The Company also targets seasonal residences in which it believes that the
capacity to start and discontinue DIRECTV programming seasonally or at the
end of a rental term has significant appeal. These
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<PAGE>
subscribers are easily accommodated on short notice without the requirement
of a service call because DIRECTV programming is a fully "addressable"
digital service. The Company estimates that after giving effect to the DBS
Acquisitions, its exclusive DIRECTV territories will contain approximately
117,000 seasonal residences in this market segment.
Additional target markets include apartment buildings, multiple dwelling
units and private housing developments. RCA/Thomson has recently begun
commercial sales of DSS units designed specifically for use in such
locations.
Finally, DIRECTV has announced its intention to utilize a portion of the
additional capacity from its third satellite and improved compression to
offer, in a joint venture with Microsoft, one or more data services to
residences and businesses in 1997. When this occurs, the Company believes
that additional market segments will develop for data services within its
service areas.
The Company benefits from national promotion expenditures incurred by
DIRECTV, USSB and licensed manufacturers of DSS, such as RCA/Thomson and
Sony, to increase consumer awareness and demand for DIRECTV programming and
DSS units. The Company benefits as well from national, regional and local
advertising placed by national retailers, satellite dealers and consumer
electronics dealers authorized to sell DIRECTV programming and DSS units. The
Company also undertakes advertising and promotion cooperatively with local
dealers designed for specific market segments in its distribution area, which
are placed through local newspapers, television, radio and yellow pages. The
Company supplements its advertising and promotion campaigns with direct mail,
telemarketing and door-to-door direct sales.
CABLE
BUSINESS STRATEGY
The Company operates cable systems whose revenues and Location Cash Flow
it believes can be increased with limited increases in fixed costs. In
general, the Company's Cable systems (i) have the capacity to offer in excess
of 50 channels of programming, (ii) are "addressable" and (iii) serve
communities where off-air reception is poor. The Company's business strategy
in cable is to achieve revenue growth by (i) adding new subscribers through
improved signal quality, increases in the quality and the quantity of
programming, housing growth and line extensions and (ii) increasing revenues
per subscriber through new program offerings and rate increases. The Company
emphasizes the development of strong engineering management and the delivery
of a reliable, high-quality signal to subscribers. The Company adds new
programming (including new cable services, premium services and pay-per-view
movies and events) and invests in additional channel capacity, improved
signal delivery and line extensions to the extent it believes that it can add
subscribers at a low incremental fixed cost.
The Company believes that significant opportunities for growth in revenues
and Location Cash Flow exist in Puerto Rico from the delivery of traditional
cable services. Cable penetration in Puerto Rico averages 34% (versus a
United States average of 65% to 70%). The Company believes that this low
penetration is due principally to the limited amount of Spanish language
programming offered on Puerto Rico's cable systems. In contrast, Spanish
language programming represents virtually all of the programming offered by
television stations in Puerto Rico. The Company believes that cable
penetration in its Puerto Rico Cable systems will increase over the next five
years as it substitutes Spanish language programming for much of the English
language cable programming currently offered. The Company may also
selectively expand its presence in Puerto Rico.
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THE CABLE SYSTEMS
The following table sets forth general information for the Company's Cable
systems.
<TABLE>
<CAPTION>
Average
Monthly
Homes in Homes Basic Revenue
Channel Franchise Passed Basic Service per
Cable Systems Capacity Area(1) by Cable(2) Subscribers(3) Penetration(4) Subscriber
- ------------------- ---------- ----------- ----------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Owned:
New England ....... (5) 29,400 28,600 19,600 69% $33.04
Mayaguez .......... 62 38,300 34,000 10,800 32% $32.22
San German(6) ..... 50(7) 72,400 47,700 16,100 34% $29.09
----------- ----------- -------------- -------------- ------------
Total Puerto Rico 110,700 81,700 26,900 33% $30.35
----------- ----------- -------------- -------------- ------------
To Be Sold:
New Hampshire ..... (8) 6,500 6,100 4,300 70% $33.01
----------- ----------- -------------- -------------- ------------
Total ........... 133,600 104,200 42,200 40% $31.33
=========== =========== ============== ============== ============
</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 November
30, 1996.
(3) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly charge
for a single outlet in the area. This information is as of November 30,
1996.
(4) Basic subscribers as a percentage of homes passed by cable.
(5) The channel capacities of New England Cable systems are 36, 50 and 62 and
represent 22%, 24% and 54% of the Company's New England Cable
subscribers, respectively.
(6) The San German Cable System was acquired upon consummation of the Cable
Acquisition in August 1996.
(7) After giving effect to certain system upgrades which are anticipated to
be completed during the first quarter of 1997, this system will be
capable of delivering 62 channels.
(8) The channel capacities of the New Hampshire Cable systems are 36 and 50
and represent 16% and 84% of the Company's New Hampshire Cable
subscribers, respectively.
PUERTO RICO CABLE SYSTEMS
Mayaguez. The Mayaguez Cable system serves the port city of Mayaguez,
Puerto Rico's third largest municipality and the economic hub of the western
coast of Puerto Rico. The economy is based largely on pharmaceuticals,
canning, textiles and electronics. Key employers include Eli Lilly, Bristol
Laboratories, Bumble Bee, Neptune, Allergan, Hewlett-Packard, Digital
Equipment, Wrangler and Levi Strauss. At November 30, 1996, the system passed
approximately 34,000 homes with 260 miles of plant and had 10,800 basic
subscribers, representing a basic penetration rate of 32%. The system
currently has a 62-channel capacity and offers 58 channels of programming.
The system is fully addressable.
San German. The San German Cable System serves a franchised area
comprising ten communities and approximately 72,400 households. The system
currently serves eight of these communities (two towns are unbuilt) with 480
miles of plant from two headends. At November 30, 1996, the system had 16,100
subscribers. The economy is based largely on tourism, light manufacturing,
pharmaceuticals and electronics. Key employers include Baxter Laboratories,
General Electric, OMJ Pharmaceuticals, White Westinghouse and Allergan
Medical Optics. The system currently offers 45 channels of programming and
has a 52 channel capacity. The system is fully addressable.
Consolidation of Puerto Rico Systems. As a result of the Cable
Acquisition, the Company serves contiguous franchise areas of approximately
111,000 households. The Company plans to increase the channel capacity of the
San German Cable System to 62 channels and to consolidate the headends,
offices, billing systems, channel lineup, and rates of the Mayaguez and San
German Cable systems. The consolidated system will consist of one headend
serving approximately 26,900 subscribers and passing approximately 82,000
homes with 740 miles of plant. The Company estimates that the consolidation
will result in significant expense savings and will also enable it to
increase revenues in the San German Cable System from the addition of
pay-per-view movies, additional programming (including Spanish language
channels) and improvements in picture quality. The Company also plans to
expand the system to pass an additional 8,950 homes in the San German
franchise.
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NEW ENGLAND CABLE SYSTEMS
The Company's New England Cable systems consist of seven headends serving
19 towns in Connecticut, Massachusetts and New Hampshire. At November 30,
1996, these systems had approximately 19,600 basic subscribers. From 1990 to
1995, these systems experienced compound annual growth rates of 10% in the
number of their subscribers and 37% in Location Cash Flow. This growth has
been principally achieved as a result of line extensions and housing growth.
New England Cable systems historically have had higher than national average
basic penetration rates due to the region's higher household income levels
and poor off air reception. The Company's systems offer addressable
converters to all premium and pay-per-view customers, which allow the Company
to activate these services without the requirement of a service call. The
Massachusetts and New Hampshire systems were acquired in June 1991 (with the
exception of the North Brookfield, Massachusetts Cable system, which was
acquired in July 1992), and the Connecticut system was acquired in August
1991.
In November 1996, the Company entered into a definitive agreement with
respect to the sale of its New Hampshire Cable systems. The Company's New
Hampshire Cable systems consist of two headends serving six towns. At
November 30, 1996, these systems had approximately 4,300 basic subscribers.
It is anticipated that the New Hampshire Cable Sale will be consummated in
the first quarter of 1997 and will result in net proceeds to the company of
approximately $7.1 million.
COMPETITION
The Company's TV stations compete for audience share, programming and
advertising revenue with other television stations in their respective
markets, and compete for advertising revenue with other advertising media,
such as newspapers, radio, magazines, outdoor advertising, transit
advertising, yellow page directories, direct mail and local cable systems.
Competition for audience share is primarily based on program popularity,
which has a direct effect on advertising rates. Advertising rates are based
upon the size of the market in which the station operates, a program's
popularity among the viewers that an advertiser wishes to attract, the number
of advertisers competing for the available time, the demographic composition
of the market served by the station, the availability of alternative
advertising media in the market area, aggressive and knowledgeable sales
forces and the development of projects, features and programs that tie
advertiser messages to programming. The Company believes that its focus on a
limited number of markets and the strength of its programming allows it to
compete effectively for advertising within its markets.
Cable operators face competition from television stations, private
satellite master antenna television ("SMATV") systems that serve
condominiums, apartment complexes and other private residential developments,
wireless cable, direct-to-home ("DTH") and DBS systems. As a result of the
passage of the 1996 Act, electric utilities and telephone companies will be
allowed to compete directly with cable operators both inside and outside of
their telephone service areas. In September 1996, an affiliate of Southern
New England Telephone Company, which is the dominant provider of local
telephone service in Connecticut, was granted a non-exclusive franchise to
provide cable television service throughout Connecticut. Currently, there is
only limited competition from SMATV, wireless cable, DTH and DBS systems in
the Company's franchise areas. The only DTH and DBS systems with which the
Company's cable systems currently compete are DIRECTV, USSB, EchoStar
Communications Corp. ("EchoStar"), PrimeStar Partners ("PrimeStar") and
AlphaStar Digital Television. The Company is the exclusive provider of
DIRECTV services to areas encompassing over 60% of its cable subscribers in
New England. However, the Company cannot predict whether additional
competition will develop in its service areas in the future. Additionally,
cable systems generally operate pursuant to franchises granted on a
non-exclusive basis and, thus, more than one applicant could secure a cable
franchise for an area at any time. It is possible that a franchising
authority might grant a second franchise to another cable company containing
terms and conditions more favorable than those afforded the Company. Although
the potential for "overbuilds" exists, there are presently no overbuilds in
any of the Company's franchise areas and, except as noted above with respect
to its Connecticut franchise, the Company is not aware of any other company
that is actively seeking franchises for areas currently served by the
Company.
Both the television and cable industries are continuously faced with
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media, and governmental
restrictions or actions of federal regulatory bodies, including the FCC, any
of which could possibly have a material effect on the Company's operations
and results.
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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 DIRECTV and USSB is generally
recognized as the most centrally located for coverage of the contiguous
United States; however, EchoStar has launched, and a joint venture of MCI and
News Corp. has announced its intention to launch DBS services from the other
two orbital locations with full coverage of the contiguous United States.
MCI/News Corp. was the successful bidder for the transponder slot auctioned
by the FCC at 110o west longitude. MCI/News Corp. has announced that it
anticipates being operational within two years.
Two other entities plan to initiate DBS service within the next few years, in
competition with DIRECTV. Continental Satellite Corporation ("CSC") has been
assigned a total of 22 DBS channels. Eleven of these DBS channels can serve the
eastern and central United States, and the other eleven can serve the western
and central United States. Dominion Video Satellite, Inc. ("Dominion") has been
assigned eight DBS channels that can be used to serve the eastern and central
United States, and eight DBS channels that can be used to serve the western and
central United States.
In addition, two entities, Western Tele-Communications, Inc., a
wholly-owned subsidiary of Tele-Communications, Inc. ("TCI"), and another
company, TeleQuest Ventures, L.L.C., applied for authority from the FCC to
operate earth stations that would be used to communicate with Canadian DBS
satellites that have service coverage of the United States. This application
was recently denied by the FCC and the denial was upheld on appeal. If these
entities ultimately obtain the necessary authorizations, they could enter the
United States multichannel television programming distribution market and
compete with DIRECTV.
The Company also competes with PrimeStar, owned primarily by a consortium
of cable companies, including TCI, that currently offers medium-power Ku-band
programming service to customers using dishes approximately three feet in
diameter. The other current DBS competitors to DIRECTV are USSB, EchoStar and
AlphaStar.
INDUSTRY BACKGROUND
TV
Commercial television began in the United States on a regular basis in the
1940s. Initially, television stations operated only in the larger cities on a
portion of the broadcast spectrum commonly known as the "VHF" band.
Additional television channels were subsequently assigned to cities
throughout the country for use on the "UHF" band. There are 12 channels in
the VHF band, numbered 2 through 13, and 56 channels in the UHF band,
numbered 14 through 69. UHF band channels differ from VHF channels in that
UHF channels broadcast at higher frequencies and thus are more affected by
terrain and obstructions to line-of-sight transmission. There are only a
limited number of channels available for broadcasting in any one geographic
area, with the license to operate a station being granted by the FCC.
The majority of commercial television stations in the United States are
affiliated with the major national networks (ABC, CBS, NBC, and Fox). Two
newer networks, UPN and the Warner Brothers Network ("WB"), are affiliated
with many of the remainder. Stations that operate without network
affiliations are commonly referred to as "independent" stations. Each
national network offers its affiliates a wide variety of television 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
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average, which represents approximately two-thirds of the typical
broadcasting day. UPN and WB program up to six hours per week in prime time.
Since its inception in 1986, Fox has increased the amount of programming
available to its affiliates. Fox currently provides its affiliates with six
hours of programming a day on average. The Fox network currently consists of
173 primary affiliates, and Fox programming is available in more than 94% of
the television households in the United States.
Advertising and Ratings
Most television station revenues are derived from the sale of time to
national, regional and local advertisers for commercials which are inserted
in or adjacent to the programming shown on the station. These commercials are
commonly referred to as "spot" advertising. Network-affiliated stations are
required to carry the advertising sold by the network during the network
programming broadcast by the station. This reduces the amount of spot
advertising available for sale by the station. The networks generally
compensate their affiliates for network carriage according to a formula based
on coverage as well as other qualitative factors. Independent stations retain
all of the revenues received from the sale of advertising time.
The advertising sales market consists of national network advertising,
national spot advertising and local spot advertising. An advertiser wishing
to reach a nationwide audience usually purchases advertising time directly
from the major networks, including Fox, or nationwide ad hoc networks (groups
of otherwise unrelated stations that combine to show a particular program or
series of programs). A national advertiser wishing to reach a particular
regional or local audience usually buys advertising time directly from local
stations through national advertising sales representative firms. Local
businesses purchase advertising directly from the stations' local sales
staffs. In addition, television stations derive significant revenues from the
sale of time (usually in the early morning time blocks) for the broadcast of
"infomercials" and other programs supplied by advertisers.
Programming that is not supplied to stations by a network is acquired from
programming syndicators either for cash, in exchange for advertising time
("barter") or a combination of cash and barter. Typically, television
stations acquiring syndicated programs are given the exclusive right to show
the program in the station's market for the number of times and during the
period of time agreed upon by the station and the syndicator. Over the last
several years, there has been an increase in programming available through
barter or a combination of cash and barter and a decrease in cash
transactions in the syndication market.
Nielsen periodically publishes data on estimated audiences for television
stations in all DMAs throughout the United States. The estimates are
expressed in terms of the station's share of the total potential audience in
the market (the station's "rating") and of the audience actually watching
television (the station's "share"). The ratings service provides such data on
the basis of total television households and of selected demographic
groupings in the market. Nielsen uses one of two methods to measure the
station's actual viewership. In larger markets, ratings are determined by a
combination of meters connected directly to selected television sets (the
results of which are reported on a daily basis) and periodic surveys of
television viewing (diaries), while in smaller markets only periodic surveys
are conducted. Generally, ratings for Fox affiliates and independent stations
are lower in diary (non-metered) markets than in metered markets. Most
analysts believe that this is a result of the greater accuracy of measurement
that meters allow.
DBS
The widespread use of satellites for television developed in the 1970s, as
a means to distribute news and entertainment programming to and from
broadcast television stations and to the headends of cable systems. The use
of satellites by cable systems permitted low cost networking of cable
systems, thereby promoting the growth of satellite-delivered pay channel
services (such as HBO and Showtime) and enhanced basic services (such as CNN,
ESPN and C-SPAN).
The DTH satellite market developed as consumers in rural markets without
access to cable or broadcast television programming purchased home satellite
television receive only ("TVRO") products to receive programming directed
towards broadcast television stations and cable headends. The DTH business
has grown as satellite-delivered services have been developed and marketed
specifically for TVRO system owners. Currently, there are estimated to be
approximately 2.3 million TVRO systems authorized to receive DTH programming
in the United States.
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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 1980s, the FCC began licensing additional radio spectrum within a
portion of the Ku band for broadcast satellite service ("BSS") or DBS
service. Unlike traditional FSS satellites, BSS satellites are designed
specifically for transmitting television signals directly to consumers. These
satellites have significantly higher effective radiated power, operate at
higher frequencies and are deployed at wider orbital spacing than FSS
satellites. As a result, they allow for reception using antennas as small as
18 inches in diameter.
Pursuant to international agreements governing the use of the radio
spectrum, there are eight orbital positions allocated for use by the United
States within the BSS band with 32 frequencies licensed to each orbital
position. The FCC initially awarded frequencies at these eight orbital
locations to nine companies, including Hughes and USSB. See "Business --
Competition."
Of the eight orbital locations for United States-licensed DBS satellites,
only three enable full coverage of the contiguous United States. The
remaining orbital positions are situated to provide coverage to either the
eastern or western United States, but not to both. The orbital location used
by DIRECTV is one of the three locations with full coverage and is considered
to be the most centrally located. Companies awarded frequencies at the three
locations with full coverage have a significant competitive advantage in
providing nationwide service.
CABLE
A cable system receives television, radio and data signals that are
transmitted to the system's headend site by means of off-air antennas,
microwave relay systems and satellite earth stations. These signals are then
modulated, amplified and distributed, through coaxial and fiber optic cable,
to customers who pay a fee for this service. Cable systems may also originate
their own television programming and other information services. Cable
systems generally are constructed and operated pursuant to non-exclusive
franchises or similar licenses granted by local governmental authorities for
a specified term.
The cable industry developed in the United States in the late 1940s and
1950s in response to the needs of residents in predominantly rural and
mountainous areas of the country where the quality of off-air television
reception was inadequate due to factors such as topography and remoteness
from television broadcast towers. In the 1960s and 1970s, cable systems also
developed in small and medium-sized cities and suburban areas that had a
limited availability of clear off-air television station signals. All of
these markets are regarded within the cable industry as "classic" cable
system markets. In the 1980s, cable systems were constructed in large cities
and nearby suburban areas, where good off-air reception from multiple
television stations usually was already available, in order to offer
satellite-delivered channels which were not available via broadcast
television reception.
Cable systems offer customers multiple channels of television
entertainment and information. The selection of programming varies from
system to system due to differences in channel capacity and customer
interest. Cable systems typically offer a "broadcast basic" service
consisting of local broadcast stations, local origination channels and
public, educational and governmental ("PEG") access channels and an "enhanced
basic service" or satellite service consisting of satellite delivered
non-broadcast cable networks (such as CNN, MTV, USA, ESPN and TNT) as well as
satellite-delivered signals from broadcast "superstations" (such as WTBS, WGN
and WWOR). For an extra monthly charge, cable systems also generally offer
premium television services to their customers. These services (such as Home
Box Office, Showtime, The Disney Channel and regional sports networks) are
satellite-delivered channels consisting principally of feature films, live
sports events, concerts and other special entertainment features, usually
presented without commercial interruption. In addition to customer revenues
from these services, cable systems generate revenues from additional fees
paid by customers for pay-per-view programming of movies, concerts, sporting
and special
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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. Application has been filed with the FCC for
renewal of the WTLA license. See "Business -- TV."
Fox Affiliation Agreement. Each of the Company's TV stations which are
affiliated with Fox is a party to a substantially identical station
affiliation agreement with Fox (as amended, the "Fox Affiliation
Agreements"). Each Fox Affiliation Agreement provides the Company's
Fox-affiliated stations with the right to broadcast all programs transmitted
by Fox, on behalf of itself and its wholly-owned subsidiary, the Fox
Children's Network, Inc. ("FCN"), which include programming from Fox as well
as from FCN. In exchange, Fox has the right to sell a substantial portion of
the advertising time associated with such programs and to retain the revenue
from the advertising it has sold. The stations are entitled to sell the
remainder of the advertising time and retain the associated advertising
revenue. The stations are also compensated by Fox according to a
ratings-based formula for Fox programming and a share of the programming net
profits of FCN programming, as specified in the Fox Affiliation Agreements.
Each Fox Affiliation Agreement is for a term ending October 31, 1998 with
the exception of the WTLH Fox Affiliation Agreement, which expires on
December 31, 2000. The Fox Affiliation Agreements are renewable for a
two-year extension, at the discretion of Fox and upon acceptance by the
Company. The Fox Affiliation Agreements may be terminated generally (a) by
Fox upon (i) a material change in the station's transmitter location, power,
frequency, programming format or hours of operation, with 30 days' written
notice, (ii) acquisition by Fox, directly or indirectly, of a significant
ownership and/or controlling interest in any television station in the same
market, with 60 days' written notice, (iii) assignment or attempted
assignment by the Company of the Fox Affiliation Agreements, with 30 days
written notice, (iv) three or more unauthorized preemptions of Fox
programming within a 12-month period, with 30 days written notice, or (b) by
either Fox or the affiliate station upon occurrence of a force majeure event
which substantially interrupts Fox's ability to provide programming or the
station's ability to broadcast the programming. The Company's Fox Affiliation
Agreements have been renewed in the past. The Company believes that it enjoys
good relations with Fox.
Each Fox Affiliation Agreement provides the Company's Fox-affiliated
stations with all programming which Fox and FCN make available for
broadcasting in the community to which the station is licensed by the FCC.
Fox has committed to supply approximately six hours of programming per day
during specified time periods. Each of the Company's stations have agreed to
broadcast all such Fox programs in their entirety, including all commercial
announcements. In return for a station's full performance of its obligations
under its respective affiliation agreement, Fox will pay such station
compensation determined in accordance with Fox's current, standard,
performance-based station compensation formula.
As part of the agreement with Fox to extend the stations' Fox Affiliation
Agreements, each of the stations granted Fox the right to negotiate with the
cable operators in their respective markets for retransmission
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consent agreements. Under the Fox "Win/Win Plan," the cable operators
received the right to retransmit the programming of the Company's TV stations
in exchange for the carriage by the cable operators of a new cable channel
owned by Fox. The Company's TV stations are to receive consideration from Fox
based on the number of subscribers carrying the new Fox channel within the
stations' market. Fox has reached agreements in principle with most of the
largest cable operators in the country.
LMAs. Current FCC rules preclude the ownership of more than one television
station in a market, unless such stations are operated as a satellite of a
primary station, initially duplicating the programming of the primary station
for a significant portion of their broadcast day. WWLF and WILF are currently
authorized as satellites of WOLF. In recent years, in a number of markets
across the country, certain television owners have entered into arrangements
to provide the bulk of the broadcast programming on stations owned by other
licensees, and to retain the advertising revenues generated from such
programming.
When operating pursuant to an LMA, while the bulk of the programming is
provided by someone other than the licensee of the station, the station
licensee must retain control of the station for FCC purposes. Thus, the
licensee has the ultimate responsibility for the programming broadcast on the
station and for the station's compliance with all FCC rules, regulations, and
policies. The licensee must retain the right to preempt programming supplied
pursuant to the LMA where the licensee determines, in its sole discretion,
that the programming does not promote the public interest or where the
licensee believes that the substitution of other programming would better
serve the public interest. The licensee must also have the primary
operational control over the transmission facilities of the station.
The Company expects to program television stations through the use of
LMAs, but there can be no assurance that the licensee of such stations will
not unreasonably exercise its right to preempt the programming of the
Company, or that the licensees of such stations will continue to maintain the
transmission facilities of the stations in a manner sufficient to broadcast a
high quality signal over the station. As the licensee must also maintain all
of the qualifications necessary to be a licensee of the FCC, and as the
principals of the licensee are not under the control of the Company, there
can be no assurances that these licenses will be maintained by the entities
which currently hold them.
Pursuant to the 1996 Act, the continued performance of then existing LMAs
was generally grandfathered. The Portland LMA has been entered into but its
performance is pending completion of construction of the station. The FCC
suggested in a recent rulemaking proposal that LMAs entered into after
November 6, 1996 will not be grandfathered. The Company cannot predict
whether the Portland LMA will be grandfathered. Currently, television LMAs
are not considered attributable interests under the FCC's multiple ownership
rules. However, the FCC is considering proposals which would make LMAs
attributable, as they generally are in the radio broadcasting industry. If
the FCC were to adopt a rulemaking that makes such interests attributable,
without modifying its current prohibitions against the ownership of more than
one television station in a market, the Company could be prohibited from
entering into such arrangements with other stations in markets in which it
owns television stations and could be required to modify existing LMA
arrangements.
DBS AGREEMENTS
Prior to the launch of the first DIRECTV satellite in 1993, Hughes entered
into various agreements intended to assist it in the introduction of DIRECTV
services, including agreements with RCA/Thomson for the development and
manufacture of DSS units and with USSB for the sale of five transponders on
the first satellite. At this time, Hughes also offered the NRTC and its
members the opportunity to become the exclusive providers of DIRECTV services
in rural areas of the United States in which an NRTC member purchased such a
right. The NRTC is a cooperative organization whose members are engaged in
the distribution of telecommunications and other services in predominantly
rural areas of the United States. Pursuant to the DBS Agreements,
participating NRTC members acquired the exclusive right to provide DIRECTV
programming services to residential and commercial subscribers in certain
service areas. Service areas purchased by participating NRTC members comprise
approximately 7.7 million television households and were acquired for
aggregate purchase payments exceeding $100 million.
The DBS Agreements provide the NRTC and participating NRTC members in
their service areas substantially all of the rights and benefits otherwise
retained by DIRECTV in other areas, including the right
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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 DIRECTV that are transmitted from
the frequencies that the FCC has authorized for DIRECTV's use at its present
orbital location for a term running through the life of DIRECTV's current
satellites. The NRTC has advised the Company that the NRTC Agreement also
provides the NRTC a right of first refusal to acquire comparable rights in
the event that DIRECTV elects to launch successor satellites upon the removal
of the present satellites from active service. The financial terms of any
such purchase are likely to be the subject of negotiation and the Company is
unable to predict whether substantial additional expenditures of the NRTC
will be required in connection with the exercise of such right of first
refusal. Finally, under a separate agreement with Hughes (the "Dealer
Agreement"), the Company is an authorized agent for sale of DIRECTV
programming services to subscribers outside of its service area on terms
comparable to those of DIRECTV's other authorized sales agents.
The Member Agreement terminates when the DIRECTV satellites are removed
from their orbital location, although under the Dealer Agreement the right of
the Company to serve as a DIRECTV sales agent outside of its designated
territories may be terminated upon 60 days' notice by either party. If the
satellites are removed earlier than June 2004, the tenth anniversary of the
commencement of DIRECTV services, the Company will receive a prorated refund
of its original purchase price for the DIRECTV rights. The Member Agreement
may be terminated prior to the expiration of its term as follows: (a) if the
NRTC Agreement is terminated because of a breach by DIRECTV, the NRTC may
terminate the Member Agreement, but the NRTC will be responsible for paying
to the Company its pro rata portion of any refunds that the NRTC receives
from DIRECTV, (b) if the Company fails to make any payment due to the NRTC or
otherwise breaches a material obligation of the Member Agreement, the NRTC
may terminate the Member Agreement in addition to exercising other rights and
remedies against the Company and (c) if the NRTC Agreement is terminated
because of a breach by the NRTC, DIRECTV is obligated to continue to provide
DIRECTV services to the Company (i) by assuming the NRTC's rights and
obligations under the Member Agreement or (ii) under a new agreement
containing substantially the same terms and conditions as the Member
Agreement.
The Company is not permitted under the Member Agreement or the Dealer
Agreement to assign or transfer, directly or indirectly, its rights under
these agreements without the prior written consent of the NRTC and Hughes,
which consent cannot be unreasonably withheld.
The NRTC has informally notified the Company that the NRTC's board of
directors recently adopted a policy requiring that any party acquiring
DIRECTV distribution rights post a letter of credit to secure payment of
NRTC's billings if the acquiring party's monthly billings would exceed $500,000
after completion of the acquisition. The Company understands that the new
policy will require that the Company post a letter of credit of approximately
$3.5 million in connection with the DBS Acquisitions, which amount may be
subject to increase in the future when the Company's NRTC billings double in
size and will be subject to increase to secure NRTC billings related to future
acquisitions by the Company. Although this new policy can be expected to reduce
acquisition capacity by the amount of the letter of credit, the Company expects
this reduction to be manageable. There can be no assurance, however, that the
NRTC will not in the future seek to institute other policies, or to change
this policy, in ways that would be material to the Company.
CABLE FRANCHISES
Cable systems are generally constructed and operated under non-exclusive
franchises granted by state or local governmental authorities. The franchise
agreements may contain many conditions, such as the payment of franchise
fees; time limitations on commencement and completion of construction;
conditions of service, including the number of channels, the carriage of
public, educational and governmental access channels, the carriage of broad
categories of programming agreed to by the cable operator, and the provision
of free service to schools and certain other public institutions; and the
maintenance of insurance and indemnity bonds. Certain provisions of local
franchises are subject to limitations under the 1992 Cable Act.
After giving effect to the New Hampshire Cable Sale, the Company will hold
11 cable franchises, all of which are non-exclusive. The Cable Communications
Policy Act of 1984 (the "1984 Cable Act") prohibits franchising authorities
from imposing annual franchise fees in excess of 5% of gross revenues and
permits the cable system operator to seek renegotiation and modification of
franchise requirements if warranted by changed circumstances.
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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 November 30,
1996, after giving effect to the New Hampshire Cable Sale.
<TABLE>
<CAPTION>
Number of Basic Percent of Basic
Year of Franchise Expiration Number of Franchises Subscribers Subscribers
---------------------------- -------------------- --------------- ----------------
<S> <C> <C> <C>
1996-1998 .................. 1 2,800 7%
1999-2002 .................. 2 9,700 23%
2003 and thereafter ........ 8 29,700 70%
-------------------- --------------- ----------------
Total .................... 11 42,200 100%
</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
On February 1, 1996, the Congress passed the 1996 Act. On February 8,
1996, the President signed it into law. This new law will alter federal,
state and local laws and regulations regarding telecommunications providers
and services, including the Company and the cable television and other
telecommunications services provided by the Company. There are numerous
rulemakings undertaken and to be undertaken by the FCC which will interpret
and implement the provisions of the 1996 Act. It is not possible at this time
to predict the outcome of such rulemakings.
TV
The ownership, operation and sale of television stations, including those
licensed to subsidiaries of the Company, are subject to the jurisdiction of
the FCC under authority granted it pursuant to the Communications Act.
Matters subject to FCC oversight include, but are not limited to, the
assignment of frequency bands for broadcast television; the approval of a
television station's frequency, location and operating power; the issuance,
renewal, revocation or modification of a television station's FCC license;
the approval of changes in the ownership or control of a television station's
licensee; the regulation of equipment used by television stations; and the
adoption and implementation of regulations and policies concerning the
ownership, operation and employment practices of television stations. The FCC
has the power to impose penalties, including fines or license revocations,
upon a licensee of a television station for violations of the FCC's rules and
regulations.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies affecting
broadcast television. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC for further information
concerning the nature and extent of FCC regulation of broadcast television
stations.
License Renewal. Under law in effect prior to the 1996 Act, television
station licenses were granted for a maximum allowable period of five years
and were renewable thereafter for additional five year periods. The 1996 Act,
however, authorizes the FCC to grant television broadcast licenses, and
renewals thereof, for terms of up to eight years. The FCC is currently
conducting a rulemaking to determine if television station licenses will be
extended to the full eight year term. The FCC may revoke or deny licenses,
after a hearing, for serious violations of its regulations. Petitions to deny
renewal of a license may be filed on or before the first day of the last
month of a license term. Generally, however, in the absence of serious
violations of FCC rules or policies, license renewal is expected in the
ordinary course. The 1996 Act prohibits the FCC from considering competing
applications for the frequency used by the renewal applicant if the FCC finds
that the station seeking renewal has served the public interest, convenience
and necessity, that there have been no serious violations by the licensee of
the Communications Act or the rules and regulations of the FCC, and that
there
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have been no other violations by the licensee of the Communications Act or
the rules and regulations of the FCC that, when taken together, would
constitute a pattern of abuse. The Company's licenses with respect to TV
stations WOLF/WWLF/WILF, WDSI and WDBD are scheduled to expire on August 1,
1999, August 1, 1997 and June 1, 1997, respectively. In addition, the
licenses with respect to television stations WTLH and WPXT are scheduled to
expire on April 1, 1997 and April 1, 1999, respectively. The Company is not
aware of any facts or circumstances that might reasonably be expected to
prevent any of its stations from having its current license renewed at the
end of its respective term.
Ownership Matters. The Communications Act contains a number of
restrictions on the ownership and control of broadcast licenses. The
Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a broadcast licensee without the prior approval of the
FCC. The Communications Act and the FCC's rules also place limitations on
alien ownership; common ownership of broadcast, cable and newspaper
properties; ownership by those not having the requisite "character"
qualifications and those persons holding "attributable" interests in the
licensee.
Attribution Rules. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations holding (or through
subsidiaries controlling) broadcast licenses, the interests of officers,
directors and those who, directly or indirectly, have the right to vote 5% or
more of the corporation's stock (or 10% or more of such stock in the case of
insurance companies, investment companies and bank trust departments that are
passive investors) are generally attributable, except that, in general, no
minority voting stock interest will be attributable if there is a single
holder of more than 50% of the outstanding voting power of the corporation.
The FCC has outstanding a notice of proposed rulemaking that, among other
things, seeks comment on whether the FCC should modify its attribution rules
by (i) restricting the availability of the single majority shareholder
exemption and (ii) attributing under certain circumstances certain interests
such as non-voting stock or debt. The Company cannot predict the outcome of
this proceeding or how it will affect the Company's business.
Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licenses. Foreign
governments, representatives of foreign governments, non-citizens and
representatives of non-citizens, corporations and partnerships organized
under the laws of a foreign nation are barred from holding broadcast
licenses. Non-citizens, foreign governments, foreign corporations and
representatives of any of the foregoing, collectively, may directly or
indirectly own or vote up to 20% of the capital stock of a broadcast
licensee. In addition, a broadcast license may not be granted to or held by
any corporation that is controlled, directly or indirectly, by any other
corporation more than one-fourth of whose capital stock is owned or voted by
non-citizens or their representatives, by foreign governments or their
representatives, or by non-United States corporations, if the FCC finds that
the public interest will be served by the refusal or the revocation of such
license. The FCC has interpreted this provision of the Communications Act to
require an affirmative public interest finding before a broadcast license may
be granted to or held by any such corporation. To the Company's knowledge,
the Commission has made such a finding in only one case involving a broadcast
licensee. Because of these provisions, Pegasus may be prohibited from having
more than one-fourth of its stock owned or voted directly or indirectly by
non-citizens, foreign governments, foreign corporations or representatives of
any of the foregoing.
Multiple Ownership Rules. FCC rules limit the number of television
stations any one entity can acquire or own. The FCC's television national
multiple ownership rule limits the combined audience of television stations
in which an entity may hold an attributable interest to 35% of total United
States audience reach. The FCC's television multiple ownership local contour
overlap rule generally prohibits ownership of attributable interests by a
single entity in two or more television stations which serve the same
geographic market; however, changes in these rules are under consideration,
but the Company cannot predict the outcome of the proceeding in which such
changes are being considered.
Cross-Ownership Rules. FCC rules have generally prohibited or restricted
the cross-ownership, operation or control of a radio station and a television
station serving the same geographic market, of a television station and a
cable system serving the same geographic market, and of a television station
and a daily newspaper serving the same geographic market. As required by the
1996 Act, the FCC has amended its rules to allow a person or entity to own or
control a network of broadcast stations and a cable system. In addition,
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the 1996 Act eliminates the statutory prohibition against the ownership of
television stations and cable systems in the same geographic market, although
FCC rules prohibiting such ownership are still in place. The 1996 Act also
directs the FCC to presumptively waive, in the top 50 markets, its
prohibition on ownership of television and radio stations in the same
geographic market. Under these rules, absent waivers, the Company would not
be permitted to acquire any daily newspaper, radio broadcast station or cable
system in a geographic market in which it now owns or controls any TV
properties. The FCC is currently considering a rulemaking to change the
radio/television cross-ownership restrictions. The Company cannot predict the
outcome of that rulemaking.
Programming and Operation. The Communications Act requires broadcasters to
serve the "public interest." Since the late 1970s, the FCC gradually has
relaxed or eliminated many of the formal procedures it had developed to
promote the broadcast of certain types of programming responsive to the needs
of a station's community of license. However, broadcast station licensees
continue to be required to present programming that is responsive to local
community problems, needs and interests and to maintain certain records
demonstrating such responsiveness. Complaints from viewers concerning a
station's programming often will be considered by the FCC when it evaluates
license renewal applications, although such complaints may be filed at any
time and generally may be considered by the FCC at any time. Stations also
must follow various rules promulgated under the Communications Act that
regulate, among other things, political advertising, sponsorship
identifications, the advertisements of contests and lotteries, programming
directed to children, obscene and indecent broadcasts and technical
operations, including limits on radio frequency radiation. In August 1996,
the FCC adopted new children's television rules mandating, among other
things, that as of January 1, 1997 stations must identify and provide
information concerning children's programming to publishers of program guides
and listings and as of September 1, 1997 stations must broadcast three hours
each week of educational and informational programming directed to children.
The 1996 Act contains a number of provisions relating to television violence,
which, among other things, direct the television industry or the FCC to
develop a television ratings system and require commercial television
stations to report on complaints concerning violent programming in their
license renewal applications. In addition, most broadcast licensees,
including the Company's licensees, must develop and implement affirmative
action programs designed to promote equal employment opportunities and must
submit reports to the FCC with respect to these matters on an annual basis
and in connection with a license renewal application.
Must Carry and Retransmission Consent. The 1992 Cable Act requires each
television broadcaster to make an election to exercise either certain "must
carry" or, alternatively, "retransmission consent" rights in connection with
its carriage by cable systems in the station's local market. If a broadcaster
chooses to exercise its must carry rights, it may demand carriage on a
specified channel on cable systems within its defined market. Must carry
rights are not absolute, and their exercise is dependent on variables such as
the number of activated channels on, and the location and size of, the cable
system and the amount of duplicative programming on a broadcast station.
Under certain circumstances, a cable system may decline carriage of a given
station. If a broadcaster chooses to exercise its retransmission consent
rights, it may prohibit cable systems from carrying its signal, or permit
carriage under a negotiated compensation arrangement. The FCC's must carry
requirements took effect on June 2, 1993; however, stations had until June
17, 1993 to make their must carry/retransmission consent elections. Under the
Company's Fox Affiliation Agreements, the Company appointed Fox as its
irrevocable agent to negotiate such retransmission consents with the major
cable operators in the Company's respective markets. Fox exercised the
Company's stations' retransmission consent rights. Television stations must
make a new election between must carry and retransmission consent rights
every three years. The last required election date was October 1, 1996.
Although the Company expects the current retransmission consent agreements to
be renewed upon their expiration, there can be no assurance that such
renewals will be obtained.
In April 1993, the United States District Court for the District of
Columbia upheld the constitutionality of the legislative must carry
provision. This decision was vacated by the United States Supreme Court in
June 1994, and remanded to the District Court for further development of a
factual record. The District Court has again upheld the must carry rules, and
the matter is currently being considered by the Supreme Court. The Company
cannot predict the outcome of the case. In the meantime, the must carry
provisions and the FCC's regulations implementing those provisions are in
effect.
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Pending or Proposed Legislation and FCC Rulemakings. The FCC has proposed
rules for implementing advanced (including high-definition) television
("ATV") service in the United States. Implementation of ATV is intended to
improve the technical quality of television. Under certain circumstances,
however, conversion to ATV operations may reduce a station's coverage area.
The FCC is considering an implementation proposal that would allot a second
broadcast channel to each full-power commercial television station for ATV
operation. Under the proposal, stations would be required to phase in their
ATV operations on the second channel at some point after the ATV operations
have commenced. Recently, there has been consideration by the FCC of
shortening further this transition period. In August 1995, the FCC commenced
a further rulemaking proceeding to address ATV transition issues. In August
1996, the FCC adopted a further notice of proposed rulemaking presenting a
proposed table of allotments for television stations for ATV operations. The
table is only a draft proposal and may differ significantly from the final
table. Implementation of ATV service may impose additional costs on
television stations providing the new service, due to increased equipment
costs, and may affect the competitive nature of the markets in which the
Company operates if competing stations adopt and implement the new technology
before the Company's stations. Various proposals have been put forth in
Congress to auction the new ATV channels, which could preclude the Company
from obtaining such channels if better financed companies were to participate
in such auction. The FCC's current proposal that television stations obtain
ATV channels and subsequently surrender their existing channels appears to
have stalled the auction effort, although the Company cannot predict the
ultimate outcome of the legislative consideration of these matters.
The FCC is now conducting a rulemaking proceeding to consider changes to
the multiple ownership rules that could, under certain limited circumstances,
permit common ownership of television stations with overlapping service
areas, while imposing restrictions on television LMAs. Certain of these
changes, if adopted, could allow owners of television stations who currently
cannot buy a television station or an additional television station in the
Company's markets to acquire television properties in such markets. This may
increase competition in such markets, but may also work to the Company's
advantage by permitting it to acquire additional stations in its present
markets and by enhancing the value of the Company's stations by increasing
the number of potential buyers. Alternatively, if no changes are made in the
multiple ownership rules relating to local ownership, and LMAs are made
attributable, certain plans of the Company may be prohibited. Proposed
changes in the FCC's "attribution" rules may also limit the ability of
certain investors to invest in the Company. The FCC also is conducting a
rulemaking proceeding to consider the adoption of more restrictive standards
for the exposure of the public and workers to potentially harmful radio
frequency radiation emitted by broadcast station transmitting facilities.
Other matters which could affect the Company's broadcast properties include
technological innovations affecting the mass communications industry and
technical allocation matters, including assignment by the FCC of channels for
additional broadcast stations, low-power television stations and wireless
cable systems and their relationship to and competition with full power
television service, as well as possible spectrum fees or other changes
imposed on broadcasters for the use of their channels. The ultimate outcome
of these pending proceedings cannot be predicted at this time.
The FCC has initiated a Notice of Inquiry proceeding seeking comment on
whether the public interest would be served by establishing limits on the
amount of commercial matter broadcast by television stations. No prediction
can be made at this time as to whether the FCC will impose any commercial
limits at the conclusion of its deliberations. The Company is unable to
determine what effect, if any, the imposition of limits on the commercial
matter broadcast by television stations would have upon the Company's
operations.
The FCC recently lifted its financial interest/syndication ("FIN/SYN")
rules that prohibited ABC, CBS and NBC from engaging in syndication for the
sale, licensing, or distribution of television programs for non-network
broadcast exhibition in the United States. Further, these rules prohibited
networks from sharing profits from any syndication and from acquiring any new
financial or proprietary interest in programs of which they were not the sole
producer. The Company cannot predict the effect of the elimination of the
FIN/SYN rules on the Company's ability to acquire desirable programming at
reasonable prices.
The FCC also recently eliminated the prime time access rule ("PTAR"),
effective August 30, 1996. PTAR limited a station's ability to broadcast
network programming (including syndicated programming previously broadcast
over a network) during prime time hours. The elimination of PTAR could
increase the amount of
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network programming broadcast over a station affiliated with ABC, CBS or NBC.
Such elimination also could result in (i) an increase in the compensation
paid by the network (due to the additional prime time hours during which
network programming could be aired by a network-affiliated station) and (ii)
increased competition for syndicated network programming that previously was
unavailable for broadcast by network affiliates during prime time. For
purposes of PTAR, the FCC defines "network" to include those entities that
deliver more than 15 hours of "prime time programming" (a term defined in
those rules) to affiliates reaching 75% of the nation's television homes.
Neither Fox nor its affiliates, including the Company's TV stations, are
subject to the prime time access rule. The Company cannot predict the effect
that the repeal many ultimately have on the market for syndicated
programming.
The Congress and the FCC have considered in the past and may consider and
adopt in the future, (i) other changes to existing laws, regulations and
policies or (ii) new laws, regulations and policies regarding a wide variety
of matters that could affect, directly or indirectly, the operation,
ownership, and profitability of the Company's broadcast stations, result in
the loss of audience share and advertising revenues for these stations or
affect the ability of the Company to acquire additional broadcast stations or
finance such acquisitions.
Additionally, irrespective of the FCC rules, the Antitrust Agencies have
the authority to determine that a particular transaction presents antitrust
concerns. The Antitrust Agencies have recently increased their scrutiny of
the television and radio industries, and have indicated their intention to
review matters related to the concentration of ownership within markets
(including LMAs) even when the ownership or LMA in question is permitted
under the regulations of the FCC. There can be no assurance that future
policy and rulemaking activities of the Antitrust Agencies will not impact
the Company's operations (including existing stations or markets) or
expansion strategy.
DBS
Unlike a common carrier, such as a telephone company, or a cable operator,
DBS operators such as DIRECTV are free to set prices and serve customers
according to their business judgment, without rate of return or other
regulation or the obligation not to discriminate among customers. However,
there are laws and regulations that affect DIRECTV and, therefore, affect the
Company. As an operator of a privately owned United States satellite system,
DIRECTV is subject to the regulatory jurisdiction of the FCC, primarily with
respect to (i) the licensing of individual satellites (i.e., the requirement
that DIRECTV meet minimum financial, legal and technical standards), (ii)
avoidance of interference with radio stations and (iii) compliance with rules
that the FCC has established specifically for DBS satellite licenses. As a
distributor of television programming, DIRECTV is also affected by numerous
other laws and regulations, including in particular the 1992 Cable Act's
program access and exclusivity provisions. In addition to regulating pricing
practices and competition within the cable television industry, the 1992
Cable Act is intended to establish and support alternative multichannel video
distribution services, such as wireless cable and DBS. The United States
Court of Appeals for the District of Columbia Circuit recently upheld a
provision of the 1992 Cable Act requiring DBS providers to reserve not less
than four nor more than seven percent of their channel capacity exclusively
for noncommercial programming of an educational or informational nature. A
rulemaking is pending to implement this requirement.
State and local authorities in some jurisdictions restrict or prohibit the
use of satellite dishes pursuant to zoning and other regulations. The FCC has
recently adopted new rules that preempt state and local regulations that
affect receive-only satellite dishes that are two meters or less in diameter,
in any area where commercial or industrial uses are generally permitted by
local land use regulation, or that are one meter or less in diameter in any
area. Satellite dishes for the reception of DIRECTV's services are less than
one meter in diameter, and thus the FCC's rules are expected to ease local
regulatory burdens on the use of those dishes. On August 6, 1996, the FCC
released a Further Notice of Proposed Rulemaking to determine whether to
prohibit restrictions against the placement on rental property of DBS dishes
and devices used for reception of over-the-air broadcast and MMDS services.
CABLE
1984 Cable Act and 1992 Cable Act. The Cable Communications Policy Act of
1984 (the "1984 Cable Act") created uniform national standards and guidelines
for the regulation of cable systems. Among other
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things, the 1984 Cable Act generally preempted local control over cable rates
in most areas. In addition, the 1984 Cable Act affirmed the right of
franchising authorities (state or local, depending on the practice in
individual states) to award one or more franchises within their
jurisdictions. It also prohibited non-grandfathered cable systems from
operating without a franchise in such jurisdictions.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") amended the 1984 Cable Act in many respects and
significantly changed the legislative and regulatory environment in which the
cable industry operates. The 1992 Cable Act allows for a greater degree of
regulation with respect to, among other things, cable system rates for both
basic and certain nonbasic services; programming access and exclusivity
arrangements; access to cable channels by unaffiliated programming services;
leased access terms and conditions; horizontal and vertical ownership of
cable systems; customer service requirements; franchise renewals; television
broadcast signal carriage and retransmission consent; technical standards;
subscriber privacy; consumer protection issues; cable equipment
compatibility; obscene or indecent programming; and cable system requirements
that subscribers subscribe to tiers of service other than basic service as a
condition of purchasing premium services. Additionally, the legislation
encourages competition with existing cable systems by allowing municipalities
to own and operate their own cable systems without having to obtain a
franchise; preventing franchising authorities from granting exclusive
franchises or unreasonably refusing to award additional franchises covering
an existing cable system's service area; and prohibiting the common ownership
of cable systems and co-located wireless systems known as MMDS and private
SMATV.
The 1992 Cable Act also precludes video programmers affiliated with cable
television companies from favoring cable operators over competitors and
requires such programmers to sell their programming to other multichannel
video distributors. This provision may limit the ability of cable program
suppliers to offer exclusive programming arrangements to cable television
companies. The FCC, the principal federal regulatory agency with jurisdiction
over cable television, has adopted many regulations to implement the
provisions of the 1992 Cable Act.
The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders
and/or the imposition of other administrative sanctions, such as the
revocation of FCC licenses needed to operate transmission facilities often
used in connection with cable operations.
Cable Rate Regulation. In June 1995, the FCC adopted rules which provide
significant rate relief for small cable operators, which include operators
the size of the Company. The Company's current rates are below the maximum
presumed reasonable under the FCC's rules for small operators, and the
Company may use this new rate relief to justify current rates, rates already
subject to pending rate proceedings and new rates. The 1996 Act eliminates
cable programming service tier ("CPST") rate regulation effective March 31,
1999, for all cable operators. In the interim, CPST rate regulation can be
triggered only by a local unit of government (commonly referred to as local
franchising authorities or "LFA") complaint to the FCC. Since the Company is
a small cable operator within the meaning of the 1996 Act, CPST rate
regulation for the Company ended upon the enactment of the 1996 Act. The
Company's status as a small cable operator may be affected by future
acquisitions. The 1996 Act does not disturb existing rate determinations of
the FCC. The Company's basic tier of cable service ("BST") rates remain
subject to LFA regulation under the 1996 Act.
Rate regulation is precluded wherever a cable operator faces "effective
competition." The 1996 Act expands the definition of effective competition to
include any franchise area where a local exchange carrier ("LEC") (or
affiliate) provides video programming services to subscribers by any means
other than through DBS. There is no penetration minimum for the local
exchange carrier to qualify as an effective competitor, but it must provide
"comparable" programming services in the franchise area.
Under the 1996 Act, the Company will be allowed to aggregate, on a
franchise, system, regional or company level, its equipment costs into broad
categories, such as converter boxes, regardless of the varying levels of
functionality of the equipment within each such broad category. The 1996 Act
will allow the Company to average together costs of different types of
converters (including non-addressable, addressable, and digital). The
statutory changes will also facilitate the rationalizing of equipment rates
across jurisdictional boundaries. These favorable cost-aggregation rules do
not apply to the limited equipment used by "BST-only" subscribers.
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Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations
pursuant to the 1992 Cable Act which require cable systems to permit
customers to purchase video programming on a per channel or a per program
basis without the necessity of subscribing to any tier of service, other than
the basic service tier, unless the cable system is technically incapable of
doing so. Generally, this exemption from compliance with the statute for
cable systems that do not have such technical capability is available until a
cable system obtains the capability, but not later than December 2002. The
Company's systems have the necessary technical capability and have complied
with this regulation.
Indecent Programming on Leased Access Channels. FCC regulations pursuant
to the 1992 Cable Act permit cable operators to restrict or refuse the
carriage of indecent programming on so-called "leased access" channels, i.e.,
channels the operator must set aside for commercial use by persons
unaffiliated with the operator. Operators were also permitted to prohibit
indecent programming on public access channels. In June 1996, the Supreme
Court ruled unconstitutional the indecency prohibitions on public access
programming as well as the "segregate and block" restriction on indecent
leased access programming.
Scrambling. The 1996 Act requires that upon the request of a cable
subscriber, the cable operator must, free of charge, fully scramble or
otherwise fully block the audio and video programming of each channel
carrying adult programming so that a non-subscriber does not receive it.
Cable operators must also fully scramble or otherwise fully block the
video and audio portion of sexually explicit or other programming that is
indecent on any programming channel that is primarily dedicated to sexually
oriented programming so that a non-subscriber to such channel may not receive
it. Until full scrambling or blocking occurs, cable operators must limit the
carriage of such programming to hours when a significant number of children
are not likely to view the programming. The Company's systems do not
presently have the necessary technical capability to comply with the
scrambling requirement. However, the effective date of these requirements has
been stayed by the United States District Court for the District of Delaware.
Cable Entry Into Telecommunications. The 1996 Act declares that no state
or local laws or regulations may prohibit or have the effect of prohibiting
the ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. The 1996 Act further provides that
cable operators and affiliates providing telecommunications services are not
required to obtain a separate franchise from LFAs for such services. The 1996
Act prohibits LFAs from requiring cable operators to provide
telecommunications service or facilities as a condition of a grant of a
franchise, franchise renewal, or franchise transfer, except that LFAs can
seek "institutional networks" as part of franchise negotiations.
The 1996 Act clarifies that traditional cable franchise fees may only be
based on revenues related to the provision of cable television services.
However, when cable operators provide telecommunications services, LFAs may
require reasonable, competitively neutral compensation for management of the
public rights-of-way.
Interconnection and Other Telecommunications Carrier Obligations. To
facilitate the entry of new telecommunications providers including cable
operators, the 1996 Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks
with other carriers and may not deploy network features and functions that
interfere with interoperability. On August 8, 1996, the FCC released its
first Report and Order to implement the interconnection provisions of the
1996 Act. Several parties have sought reconsideration of the order by the
FCC, and a number of parties also have petitioned for review of the order in
several federal courts of appeal. Those petitions have been consolidated
before the United States Court of Appeals for the Eighth Circuit, which on
October 15, 1996 stayed substantial portions of the FCC order pending
judicial review. On November 1, 1996, the Eighth Circuit modified the stay to
exclude certain non-pricing portions of the rules that primarily relate to
wireless telecommunications providers. One Justice of the U.S. Supreme Court
rejected requests to vacate the stay, and the parties that sought to have the
stay lifted sought review by other Justices. On November 12, 1996, the
Supreme Court denied the application to lift the stay.
Telephone Company Entry Into Cable Television. The 1996 Act allows
telephone companies to compete directly with cable operators by repealing the
telephone company-cable cross-ownership ban and the FCC's video dialtone
regulations. This will allow LECs, including the Bell Operating Companies, to
compete with cable both inside and outside their telephone service areas.
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The 1996 Act replaces the FCC's video dialtone rules with an "open video
system" ("OVS") plan by which LECs can provide cable service in their
telephone service area. LECs complying with FCC OVS regulations will receive
relaxed oversight. Only the program access, negative option billing
prohibition, subscriber privacy, Equal Employment Opportunity, PEG,
must-carry and retransmission consent provisions of the Communications Act
will apply to LECs providing OVS. Franchising, rate regulation, consumer
service provisions, leased access and equipment compatibility will not apply.
Cable copyright provisions will apply to programmers using OVS. LFAs may
require OVS operators to pay "franchise fees" only to the extent that the OVS
provider or its affiliates provide cable services over the OVS. OVS operators
will be subject to LFA general right-of-way management regulations. Such fees
may not exceed the franchise fees charged to cable operators in the area, and
the OVS provider may pass through the fees as a separate subscriber bill
item.
As required by the 1996 Act, the FCC has adopted regulations prohibiting
an OVS operator from discriminating among programmers, and ensuring that OVS
rates, terms, and conditions for service are reasonable and
nondiscriminatory. Further, the FCC has adopted regulations prohibiting a
LEC-OVS operator, or its affiliates, from occupying more than one-third of a
system's activated channels when demand for channels exceeds supply, although
there are no numeric limits. The FCC also has adopted OVS regulations
governing channel sharing; extending the FCC's sports exclusivity, network
nonduplication, and syndex regulations; and controlling the positioning of
programmers on menus and program guides. The 1996 Act does not require LECs
to use separate subsidiaries to provide incidental inter Local Access and
Transport Area ("interLATA") video or audio programming services to
subscribers or for their own programming ventures.
Cable and Broadcast Television Cross-Ownership. As required by the 1996
Act, the FCC has amended its rules to allow a person or entity to own or
control a network of broadcast stations and a cable system. In addition, the
1996 Act eliminates the statutory prohibition against the ownership of cable
systems and television stations in the same geographic market, although FCC
rules prohibiting such ownership are still in place.
Signal Carriage. The 1992 Cable Act imposed obligations and restrictions
on cable operator carriage of non-satellite delivered television stations.
Under the must-carry provision of the 1992 Cable Act, a cable operator,
subject to certain restrictions, must carry, upon request by the station, all
commercial television stations with adequate signals which are licensed to
the same market as the cable system. Cable operators are also obligated to
carry all local non-commercial stations. If a non-satellite delivered
commercial broadcast station does not request carriage under the must-carry
provisions of the 1992 Cable Act, a cable operator may not carry that station
without that station's explicit written consent for the cable operator to
retransmit its programming. The Company is carrying all television stations
that have made legitimate requests for carriage. All other television
stations are carried pursuant to written retransmission consent agreements.
Copyright Licensing. Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a blanket license to retransmit
broadcast signals. Bills have been introduced in Congress over the past
several years that would eliminate or modify the cable compulsory license.
The 1992 Cable Act's retransmission consent provisions expressly provide that
retransmission consent agreements between television stations and cable
operators do not obviate the need for cable operators to obtain a copyright
license for the programming carried on each broadcaster's signal.
Electric Utility Entry Into Telecommunications. The 1996 Act provides that
registered utility holding companies and subsidiaries may provide
telecommunications services (including cable) notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and must apply
to the FCC for operating authority. It is anticipated that large utility
holding companies will become significant competitors to both cable
television and other telecommunications providers.
State and Local Regulation. Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local
officials are usually involved in franchisee selection, system design and
construction, safety, consumer relations, billing practices and
community-related programming and services among other matters. Cable systems
generally are operated pursuant to nonexclusive franchises, permits or
licenses granted by a
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<PAGE>
municipality or other state or local government entity. Franchises generally
are granted for fixed terms and in many cases are terminable if the franchise
operator fails to comply with material provisions. The 1992 Cable Act
prohibits the award of exclusive franchises and allows franchising
authorities to exercise greater control over the operation of franchised
cable systems, especially in the area of customer service and rate
regulation. The 1992 Cable Act also allows franchising authorities to operate
their own multichannel video distribution system without having to obtain a
franchise and permits states or LFAs to adopt certain restrictions on the
ownership of cable systems. Moreover, franchising authorities are immunized
from monetary damage awards arising from regulation of cable systems or
decisions made on franchise grants, renewals, transfers and amendments. Under
certain circumstances, LFAs may become certified to regulate basic cable
service rates.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of
the cable system. Cable franchises generally contain provisions governing
fees to be paid to the franchising authority, length of the franchise term,
renewal, sale or transfer of the franchise, territory of the franchise,
design and technical performance of the system, use and occupancy of public
streets and number and types of cable services provided.
Although federal law has established certain procedural safeguards to
protect incumbent cable television franchisees against arbitrary denials of
renewal, the renewal of a franchise cannot be assured unless the franchisee
has met certain statutory standards. Moreover, even if a franchise is
renewed, a franchising authority may impose new and stricter requirements,
such as the upgrading of facilities and equipment or higher franchise fees
(subject, however, to limits set by federal law). To date, however, no
request of the Company for franchise renewals or extensions has been denied.
Despite favorable legislation and good relationships with its franchising
authorities, there can be no assurance that franchises will be renewed or
extended.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable systems, and several states have adopted
legislation subjecting cable systems to the jurisdiction of centralized state
governmental agencies, some that impose regulation similar to that of a
public utility. Attempts in other states to regulate cable systems are
continuing and can be expected to increase. Such proposals and legislation
may be preempted by federal statute and/or FCC regulation. Massachusetts and
Connecticut have adopted state level regulation.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
industry. Other existing federal regulations, copyright licensing and, in
many jurisdictions, state and local franchise requirements currently are the
subject of a variety of judicial proceedings, legislative hearings and
administrative and legislative proposals which could change, in varying
degrees, the manner in which cable systems operate. Neither the outcome of
these proceedings nor the impact upon the cable industry or the Company's
Cable systems can be predicted at this time.
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<PAGE>
PROPERTIES
The Company's TV stations own and lease studio, tower, transmitter and
antenna facilities and the Company's Cable systems own and lease studio,
parking, storage, headend, tower, earth station and office facilities in the
localities in which they operate. The Company leases office space in
Marlboro, Massachusetts for its DBS operations. The television transmitter
and antenna sites are generally located so as to provide optimum market
coverage. The cable headend and tower sites are located at strategic points
within the cable system franchise area to support the distribution system.
The Company believes that its facilities are in good operating condition and
are satisfactory for their present and intended uses. The following table
contains certain information describing the general character of the
Company's properties:
<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 3/31/98
TV Stations
Jackson, MS (TV transmitting equipment) Leased 1,125 foot tower 2/28/04
Jackson, MS (television station and Lease-Purchase (1) 5,600 square foot building; N/A
transmitter building) 900 square foot building
West Mountain, PA (tower and Leased 9.6 acres 1/31/00
transmitter)
916 Oak Street, Scranton, PA Leased 8,600 square feet 4/30/00
(television
station)
Bald Eagle Mountain, PA (transmitting) Leased 400 square feet 9/30/97
(Williamsport Tower)
Nescopec Mountain, PA (transmitting) Owned 400 foot tower N/A
Williamsport, PA (tower) Owned 175 foot tower N/A
Chattanooga, TN (transmitting) Owned 577 foot tower N/A
2401 East Main St., Chattanooga, TN Owned 2 acres N/A
(former television station)
1201 East Main St., Chattanooga, TN Owned 16,240 square foot building N/A
(present television station) on 3.17 acres
2320 Congress Street, Portland, ME Leased 8,000 square feet 12/31/97
(television station)
Gray, ME (tower) Owned 18.6 acres N/A
1203 Governor's Square, Tallahassee, FL Leased 5,012 square feet 9/30/97
(television station)
Leon County, FL Leased(2) 30 acres 2/28/98
Nickleville, GA (tower) Owned 22.5 acres N/A
DBS Systems
Marlboro, MA (office) Leased 1,310 square feet 7/31/99
Charlton, MA (warehouse) Leased 1,750 square foot area monthly
Cable Systems
Winchester, CT (headend) Owned 15.22 acres N/A
140 Willow Street, Winsted, CT (office) Owned 1,900 square feet N/A
Charlton, MA (office, headend site) Leased 38,223 square feet 5/9/99
Hinsdale, MA (headend site) Leased 30,590 square feet 2/1/04
Lanesboro, MA (headend site) Leased 62,500 square feet 4/13/97
West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05
Bethlehem, NH (headend site)(3) Leased 1.84 acres 5/1/03
Moultonboro, NH (office)(3) Leased 1,250 square feet 12/31/02
Tuftonboro, NH (headend site)(3) Leased 58,789 square feet 6/30/03
Route #2, Puerto Rico (office) Leased 2,520 square foot building 8/30/98
Mayaguez, Puerto Rico (headend) Leased 530 square foot building 8/30/98
Mayaguez, Puerto Rico (warehouse) Leased 1,750 square foot area monthly
San German, Puerto Rico (headend site) Owned 1,200 square feet; 200 foot tower N/A
San German, Puerto Rico (tower and Owned 60 foot tower; 192 square meters N/A
transmitter)
San German, Puerto Rico (office) Leased 2,928 square feet 2/1/01
Anasco, Puerto Rico (office) Leased 500 square feet 2/28/99
Anasco, Puerto Rico (headend site) Leased 1,200 square meters 3/24/97
Anasco, Puerto Rico (headend) Owned 59 foot tower N/A
Guanica, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 2/28/04
Cabo Rojo, Puerto Rico (headend site) Leased 40 foot tower; 121 square meters 11/10/04
Hormigueros, Puerto Rico (warehouse) Leased 2,000 square feet monthly
</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.
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<PAGE>
EMPLOYEES
As of December 31, 1996, the Company had 271 full-time and 34 part-time
employees. The Company is not a party to any collective bargaining agreement
and considers its relations with its employees to be good.
LEGAL AND OTHER PROCEEDINGS
Pursuant to the 1992 Cable Act and related regulations and orders, the
Connecticut Department of Public Utility Control (the "DPUC") initiated
proceedings in 1994 to review the basic service rates and certain related
charges of certain cable systems in Connecticut, including those of the
Company. In addition, pursuant to complaints received in accordance with the
1992 Cable Act and related regulations and orders, the FCC initiated a review
of rates for CPST services (comprising traditional cable networks) provided
by certain of the Company's New England Cable systems. In connection with the
state and FCC proceedings, the Company has made filings to justify its
existing service rates and to request further rate increases. In March and
April 1996, the FCC approved the CPST rates that had been in effect for the
Company's Connecticut Cable system, and in July 1996, the final rate
complaint affecting the Company's Massachusetts Cable System was dismissed.
The Connecticut DPUC issued two adverse rate orders on November 28, 1994
concerning the cost-of-service rate justification filed by the Company,
requiring the Company to issue refunds for two different time periods. The
first order ("Phase One") covers the period September 1, 1993 through May 14,
1994. The second order ("Phase Two") covers the period after May 14, 1994. In
its rate orders, the Connecticut DPUC ordered refunds of basic service and
equipment charges totalling $90,000 and $51,000 as of December 31, 1994 for
the Phase One and Phase Two periods, respectively. The Company appealed the
Connecticut DPUC order to the FCC arguing that in ordering refunds, the
Connecticut DPUC misapplied its own and the FCC's cost-of-service standards
by ignoring past precedent, by failing to consider the Company's unique
circumstances and by failing to make appropriate exceptions to
cost-of-service presumptions. The FCC has stayed the Connecticut DPUC orders.
To date, the FCC has not yet issued sufficient rulings to predict how it will
decide the issues raised by the Company on appeal. Although no decision with
respect to the Company's Connecticut DPUC appeal has been reached, in the
event the FCC issues an adverse ruling, the Company expects to make refunds
in kind rather than in cash.
The 1996 Act immediately eliminates rate regulation for CPST for small
cable operators, such as the Company. Pursuant to the 1996 Act, a small cable
operator is one that directly or through an affiliate serves in the aggregate
less than one percent of the subscribers in the United States and is not
affiliated with any entity or entities whose gross annual revenues in the
aggregate exceeds $250,000,000. In June 1995 the FCC released an order
providing rate regulation relief to small cable operators which serve 400,000
or fewer subscribers in any system with 15,000 or fewer subscribers. As a
result of this order, such small cable operators are now eligible to justify
their basic rates based on a four-element rate calculation. If the per
channel rate resulting from this calculation is $1.24 or less, the rate is
presumed reasonable. If the rate is higher than $1.24, the cable operator
bears the burden of justifying the higher rate. The current per channel rate
for each of the Company's Cable systems is less than $1.24. This new rate
regulation option is available regardless of whether the operator has used
another option previously. If a small system is later acquired by a larger
company, the system will continue to have this regulatory option. In
addition, small systems, as defined by this ruling, are now permitted to use
all previously available small system and small operator relief, which
includes the ability to pass through certain headend upgrade costs, and the
ability to enter into alternative rate regulation agreements with franchising
authorities.
Acting pursuant to the FCC's June 1995 order with respect to small cable
systems, in early 1996, the Company filed with the Massachusetts Community
Antenna Television Commission (the "Massachusetts Cable Commission") and the
Connecticut DPUC proposed new rates for the Company's revised basic service
for its Massachusetts and Connecticut cable systems. In March 1996, the
Massachusetts Cable Commission approved the proposed higher rates for the
Massachusetts systems, and those rates went into effect on April 1, 1996. On
December 31, 1996, the Connecticut DPUC issued a decision approving the new
rates.
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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. ..... 41 Chairman of the Board, President, Chief Executive Officer
and Treasurer
Robert N. Verdecchio. .. 40 Senior Vice President, Chief Financial Officer and
Assistant Secretary
Ted S. Lodge ........... 40 Senior Vice President, General Counsel, Chief
Administrative Officer and Assistant Secretary
Howard E. Verlin ....... 35 Vice President and Secretary
Guyon W. Turner ........ 54 Vice President
James J. McEntee, III(1) 39 Director
Mary C. Metzger(2) ..... 50 Director
Donald W. Weber(1)(2) .. 60 Director
</TABLE>
- --------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee.
Marshall W. Pagon has served as President, Chief Executive Officer,
Treasurer and Chairman of the Board of Pegasus since its incorporation. Mr.
Pagon also serves as Chief Executive Officer and Director of each of Pegasus'
subsidiaries. From 1991 to October 1994, when the assets of various
affiliates of PM&C, principally limited partnerships that owned and operated
the Company's TV and Cable operations, were transferred to PM&C's
subsidiaries, Mr. Pagon or entities controlled or affiliated with Mr. Pagon
served as the general partner of these partnerships and conducted the
business of the Company. Mr. Pagon's background includes over 15 years of
experience in the media and communications industry.
Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief
Financial Officer and Assistant Secretary since its inception. He has also
served similar functions for PM&C's affiliates and predecessors in interest
since 1990. Mr. Verdecchio is a certified public accountant and has over ten
years of experience in the media and communications industry.
Ted S. Lodge has served as Senior Vice President, General Counsel, Chief
Administrative Officer and Assistant Secretary of Pegasus since July 1, 1996.
From June 1992 through May 1996, Mr. Lodge practiced law with the law firm of
Lodge & Company. During such period, Mr. Lodge was engaged by the Company as
its outside legal counsel in connection with several of the Company's
acquisitions. Prior to founding Lodge & Company, Mr. Lodge served as Vice
President, Legal Department of SEI Corporation from May 1991 to June 1992 and
as Vice President, General Counsel of Vik Brothers Insurance, Inc. from March
1989 to May 1991.
Howard E. Verlin is a Vice President and Secretary of Pegasus and is
responsible for operating activities of the Company's Cable and DBS
subsidiaries, including supervision of their general managers. Mr. Verlin has
served similar functions with respect to the Company's predecessors in
interest and affiliates since 1987 and has over 14 years of experience in the
media and communications industry.
Guyon W. Turner is a Vice President of Pegasus and is responsible for the
Company's broadcast television subsidiary. From 1984 to 1993, Mr. Turner was
the managing general partner of Scranton TV Partners, Ltd., from which the
Company acquired WOLF and WWLF in 1993. Mr. Turner was also chairman
81
<PAGE>
and director of Empire Radio Partners, Ltd. from March 1991 to December 1993.
In November 1992, Empire filed for protection under Chapter 11 of the
Bankruptcy Code. Mr. Turner's background includes over 20 years of experience
in the media and communications industry.
James J. McEntee, III has been a Director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle &
McErlane, P.C. for the past five years and a principal of that law firm for
the past three years.
Mary C. Metzger has been a Director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications L.L.C. and
its predecessor company, Personalized Media Communications Corp. since
February 1989. Ms. Metzger has also been Managing Director of Video
Technologies International, Inc. since June 1986.
Donald W. Weber has been a Director of Pegasus since its incorporation and
a director of PM&C since November 1995. Mr. Weber has been the President and
Chief Executive Officer of Viewstar Entertainment Services, Inc., an NRTC
member that distributes DIRECTV services in North Georgia, since August 1993.
From November 1991 through August 1993, Mr. Weber was a private investor and
consultant to various communication companies. Prior to that time, Mr. Weber
was President and Chief Operating Officer of Contel Corporation until its
merger with GTE Corporation in 1991. Mr. Weber is currently a member of the
boards of directors of InterCel, Inc. and Healthdyne Information Enterprises,
Inc., which are publicly-traded companies.
In connection with the Michigan/Texas DBS Acquisition, the Parent agreed
to nominate a designee of Harron as a member of Pegasus' Board of Directors.
Effective October 8, 1996, James J. McEntee, III was appointed to Pegasus'
Board of Directors as Harron's designee.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Prior to the Initial Public Offering, Pegasus did not have a compensation
committee or any other committee of the Board of Directors performing similar
functions. Decisions concerning compensation of executive officers were made
by the Board of Directors, which included Mr. Pagon, the President and Chief
Executive Officer of Pegasus. Pegasus' compensation committee currently
consists of Messrs. McEntee and Weber.
COMPENSATION OF DIRECTORS
Under Pegasus' By-laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the Board of
Directors. Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $5,000 plus $500 for each Board
meeting attended in person and $250 for each Board meeting held by telephone.
Pegasus also reimburses each director for all reasonable expenses incurred in
traveling to and from the place of each meeting of the Board or committee of
the Board.
As additional remuneration for joining the Board, Mr. Weber was granted in
April 1996 an option to purchase 3,385 shares of Class A Common Stock at an
exercise price of $14.00 per share. Mr. Weber's option vested upon issuance,
is exercisable until November 2000 and, at the time of grant, was issued at
an exercise price equal to fair market value at the time Mr. Weber was
elected a director.
MANAGEMENT AGREEMENT
The Management Company performed various management and accounting
services for the Company pursuant to the Management Agreement between the
Management Company and the Company. Mr. Pagon controls and is the majority
owner of the Management Company. Upon the consummation of the Initial Public
Offering, the Management Agreement was transferred to the Company, and the
employees of the Management Company became employees of the Company. In
consideration for the transfer of this agreement together with certain net
assets, including approximately $1.5 million of accrued management fees, the
Management Company received $19.6 million of Class B Common Stock (1,400,000
shares of Class B Common Stock) and approximately $1.5 million in cash. Of
the 1,400,000 shares, 182,652 were exchanged for an equal number of shares of
Class A Common Stock and transferred to certain members of management who
were participants in the Management Share Exchange. The fair market value of
the Management Agreement was
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<PAGE>
determined by Kane Reece Associates, Inc. ("Kane Reece"), an independent
appraiser, based upon a discounted cash flow approach using historical
financial results and management's financial projections. In return for Kane
Reece's services, the Company incurred a fee of approximately $15,000 plus
expenses.
Under the Management Agreement, the Management Company provided specified
executive, administrative and management services to PM&C and its operating
subsidiaries. These services included: (i) selection of personnel; (ii)
review, supervision and control of accounting, bookkeeping, recordkeeping,
reporting and revenue collection; (iii) supervision of compliance with legal
and regulatory requirements; and (iv) conduct and control of daily
operational aspects of the Company. In consideration for the services
performed by the Management Company under the Management Agreement, the
Company was charged management fees, which represented 5% of the Company's
net revenues, and reimbursements for the Management Company's accounting
department costs. The Management Company's offices are located at 5 Radnor
Corporate Center, Suite 454, Radnor, Pennsylvania 19087.
MANAGEMENT SHARE EXCHANGE
Certain members of the Company's management, including all of the
Company's executive officers with the exception of Marshall W. Pagon and Ted
S. Lodge, held prior to the consummation of the Initial Public Offering 5,000
shares in the aggregate of Parent Non-Voting Stock. Upon consummation of the
Initial Public Offering, all shares of the Parent Non-Voting Stock were
exchanged for an aggregate of 263,606 shares of Class A Common Stock and the
Parent Non-Voting Stock was distributed to the Parent.
TOWERS PURCHASE
Simultaneously with the completion of the Initial Public Offering, the
Company purchased Towers' assets for total consideration of approximately
$1.4 million. Towers is beneficially owned by Marshall W. Pagon. The Towers
Purchase consisted of ownership and leasehold interests in three tower
properties. Towers leased space on each of its towers to the Company and to
unaffiliated companies. The purchase price was determined by an independent
appraisal.
SPLIT DOLLAR AGREEMENT
In December 1996, the Company entered into a Split Dollar Agreement with
the trustees of an insurance trust established by Marshall W. Pagon. Under
the Split Dollar Agreement, the Company agreed to pay a portion of the
premiums for certain life insurance policies covering Mr. Pagon owned by the
insurance trust. The Agreement will provide that the Company will be repaid
for all amounts it expends for such premiums, either from the cash surrender
value or the proceeds of the insurance policies.
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<PAGE>
EXECUTIVE COMPENSATION
The salaries of the Company's executive officers were historically paid by
the Management Company. Upon the closing of the Initial Public Offering, the
Management Agreement was transferred to the Company and the salaries of the
Company's executive officers began to be paid for by the Company. The
following table summarizes the compensation paid for the last two fiscal
years to the Chief Executive Officer and to each of the Company's most highly
compensated officers whose total annual salary and bonus for the fiscal year
ended December 31, 1996 exceeded $100,000.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
Long-Term
Annual Compensation(1) Compensation
--------------------------- --------------
Restricted All
Other Annual Stock Other
Name Principal Position Year Salary Compensation Awards(3) Compensation(4)
- --------------------- -------------------------------------- ------ ---------- -------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon ... President and Chief Executive Officer 1996 $150,000 -- -- --
1995 $150,000 -- -- --
1994 $150,000 -- -- --
Robert N. Verdecchio Senior Vice President, Chief Financial 1996 $125,000 -- $1,746,794 --
Officer and Assistant Secretary 1995 $122,083 -- $ 133,450 --
1994 $ 90,000 -- -- --
Howard E. Verlin .... Vice President, Cable and Satellite 1996 $100,000 -- $ 89,166 --
Television, and Secretary 1995 $100,000 -- $ 95,321 --
1994 $ 65,000 -- -- --
Guyon W. Turner ..... Vice President, Broadcast Television 1996 $130,717 $18,200(2) $1,738,674 --
1995 $130,486 $18,200(2) $ 95,321 --
1994 $140,364 $20,480(2) -- --
</TABLE>
- -------------
(1) Prior to the consummation of the Initial Public Offering, the Company's
executive officers never received any salary or bonus compensation from
the Company. The salary amounts presented above for 1994 and 1995 and for
January 1, 1996 through October 8, 1996 were paid by the Management Company.
After October 8, 1996, the Company's executive officers' salaries were paid
by the Company. There are no employment agreements between the Company and
its executive officers.
(2) Includes $18,000 housing allowance paid by the Company.
(3) Represents grants of the Parent's Non-Voting Common Stock in 1995 (875
shares to Mr. Verdecchio and 625 shares each to Messrs. Verlin and
Turner). Amounts shown in the table for 1995 are based on a valuation
prepared for the Parent at the time of the grants. One-fourth of the shares
vest on December 31 of each of 1995, 1996, 1997 and 1998. Upon the
completion of the Initial Public Offering, all of the Parent's Non-Voting
Common Stock were exchanged for shares of Class A Common Stock pursuant to
the Management Share Exchange resulting in 46,132, 32,952 and 32,952 shares
of Class A Common Stock, respectively, to Messrs. Verdecchio, Verlin and
Turner. In 1996, 123,868, 6,369 and 124,191 shares were granted to Messrs.
Verdecchio, Verlin and Turner which vested in accordance with the same
vesting schedule. An additional 903 shares were granted to Mr. Verdecchio
pursuant to the Restricted Stock Plan. As of December 31, 1996, Messrs.
Verdecchio, Verlin and Turner had an aggregate of 170,903, 39,321 and
157,143 shares of Class A Common Stock with an aggregate value as of
December 31, 1996 of $2,349,916, $540,664, and $2,160,716, respectively.
(4) Amounts listed for fiscal 1996 do not include the Company's contributions
under the 401(k) Plans since such contributions have not been determined as
of the date of this Prospectus.
INCENTIVE PROGRAM
GENERAL
The Incentive Program, which includes the Restricted Stock Plan (as
defined), the 401(k) Plans (as defined) and the Stock Option Plan (as
defined), is designed to promote growth in stockholder value by providing
employees with restricted stock awards in the form of Class A Common Stock
and grants of options to purchase Class A Common Stock. Awards under the
Restricted Stock Plan and the 401(k) Plans are in proportion to annual
increases in Location Cash Flow. For this purpose Location Cash Flow is
automatically adjusted for acquisitions such that, for the purpose of
calculating the annual increase in Location Cash Flow, the Location Cash Flow
of the acquired properties is included as if it had been a part of the
Company's financial results for the comparable period of the prior year. The
Company has authorized up to 720,000 shares of Class A Common Stock in
connection with the 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.
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<PAGE>
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) Plans 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. The Restricted Stock Plan will terminate in
September 2006. Under the Restricted Stock Plan, 270,000 shares of Class A
Common Stock (subject to adjustment to reflect stock dividends, stock splits,
recapitalizations, and similar changes in the capitalization of Pegasus) are
available for granting restricted stock awards to eligible employees of the
Company who have completed at least one year of service. The Restricted Stock
Plan provides for three types of restricted stock awards that are made in the
form of Class A Common Stock as shown in the table above: (i) profit sharing
awards to general managers, department managers and corporate managers (other
than executive officers); (ii) special recognition awards for consistency
(team award), initiative (a team or individual award), problem solving (a
team or individual award) and individual excellence; and (iii) awards that
are made to the extent that an employee does not receive a matching
contribution under the U.S. 401(k) Plan because of restrictions of the Code.
To date, 3,614 shares of Class A Common Stock have been granted as special
recognition awards. Restricted Stock Awards vest 34% after two years of
service with the Company (including years before the Restricted Stock Plan
was established), 67% after three years of service and 100% after four years
of service.
STOCK OPTION PLAN
In September 1996, Pegasus adopted the Pegasus Communications 1996 Stock
Option Plan (the "Stock Option Plan"), which was also approved by Pegasus'
stockholders in September 1996. The Stock Option Plan terminates in September
2006. Under the Stock Option Plan, up to 450,000 shares of Class A Common
Stock
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(subject to adjustment to reflect stock dividends, stock splits,
recapitalizations, and similar changes in the capitalization of Pegasus) are
available for the granting of nonqualified stock options ("NQSOs") and
options qualifying as incentive stock options ("ISOs") under Section 422 of
the Code. Executive officers, who are not eligible to receive profit sharing
awards under the Restricted Stock Plan, are eligible to receive NQSOs or ISOs
under the Stock Option Plan, but no executive officer may be granted options
covering more than 275,000 shares of Class A Common Stock under the Stock
Option Plan. Directors of Pegasus who are not employees of the Company are
eligible to receive NQSOs under the Stock Option Plan. Currently, five
executive officers and three non-employee directors are eligible to receive
options under the Stock Option Plan.
401(K) PLANS
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "U.S. 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the
Pegasus Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k)
Plan" and, together with the U.S. 401(k) Plan, the "401(k) Plans") for
eligible employees of the Company's Puerto Rico subsidiaries. Substantially
all Company employees who, as of the enrollment date under the 401(k) Plans,
have completed at least one year of service with the Company are eligible to
participate in one of the 401(k) Plans. Participants may make salary deferral
contributions of 2% to 6% of salary to the 401(k) Plans.
The Company may make three types of contributions to the 401(k) Plans,
each allocable to a participant's account if the participant completes at
least 1,000 hours of service in the applicable plan year, and is employed on
the last day of the applicable plan year: (i) the Company matches 100% of a
participant's salary deferral contributions to the extent the participant
invested his or her salary deferral contributions in Class A Common Stock at
the time of his or her initial contribution to the 401(k) Plans; (ii) the
Company, in its discretion, may contribute an amount that equals up to 10% of
the annual increase in Company-wide Location Cash Flow (these Company
discretionary contributions, if any, are allocated to eligible participants'
accounts based on each participant's salary for the plan year); and (iii) the
Company also matches a participant's rollover contribution, if any, to the
401(k) Plans, to the extent the participant invests his or her rollover
contribution in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the form of Class A Common Stock, or in cash used
to purchase Class A Common Stock. Company contributions to the 401(k) Plans
are subject to limitations under applicable laws and regulations.
All employee contributions to the 401(k) Plans are fully vested at all
times and all Company contributions, if any, vest 34% after two years of
service with the Company (including years before the 401(k) Plans were
established); 67% after three years of service and 100% after four years of
service. A participant also becomes fully vested in Company contributions to
the 401(k) Plans upon attaining age 65 or upon his or her death or
disability.
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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 Exchange Act,
of more than 5% of the Class A Common Stock and Class B Common Stock. The
information does not give effect to the Warrant Shares issuable upon exercise
of the Warrants offered hereby. Holders of Class A Common Stock are entitled
to one vote per share on all matters submitted to a vote of stockholders
generally, and holders of Class B Common Stock are entitled to ten votes per
share. Shares of Class B Common Stock are convertible immediately into shares
of Class A Common Stock on a one-for-one basis, and accordingly, holders of
Class B Common Stock are deemed to own the same number of shares of Class A
Common Stock. The Parent and Pegasus Capital, L.P. hold in the aggregate all
shares of Class B Common Stock, representing 49.6% of the Common Stock (and
90.8% of the combined voting power of all voting stock) of Pegasus on a fully
diluted basis. Marshall W. Pagon is deemed to be the beneficial owner of all
of the Class B Common Stock. The outstanding capital stock of the Parent
consists of 64,119 shares of Class A Voting Common Stock and 5,000 shares of
Parent Non-Voting Stock, all of which are beneficially owned by Marshall W.
Pagon. See "Risk Factors -- Concentration of Share Ownership and Voting
Control by Marshall W. Pagon."
<TABLE>
<CAPTION>
Pegasus Class A Pegasus Class B
Common Stock Common Stock
Beneficially Owned Beneficially Owned
------------------------- -----------------------
Beneficial Owner Shares % Shares %
- -------------------------------------------- -------------- ------- ----------- --------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon(1)(2) ................... 4,581,900(3) 49.6% 4,581,900 100.0%
Guyon W. Turner ........................... 157,143 3.4% -- --
Robert N. Verdecchio ...................... 170,903 3.7% -- --
Howard E. Verlin .......................... 39,321 (4) -- --
James J. McEntee, III ..................... 500 (4) -- --
Mary C. Metzger ........................... 500 (4) -- --
Donald W. Weber(5) ........................ 5,385 (4) -- --
Harron Communications Corp.(6)
70 East Lancaster Avenue
Frazer, PA 19355 ......................... 852,110 18.3% -- --
Directors and Executive Officers as a Group
(8 persons)(7) ........................... 4,957,152 53.6% 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) Represents less than 1% of the outstanding shares of the class of Common
Stock.
(5) Includes 3,385 shares of Class A Common Stock issuable upon the exercise
of the vested portion of outstanding stock options.
(6) Under the terms of a stockholder's agreement entered into by the Company
in connection with the Michigan/Texas DBS Acquisition, the Company has a
right of first offer to purchase any shares sold by Harron in a private
transaction exempt from registration under the Securities Act.
(7) See footnotes (2), (3) and (5). Also includes 1,500 shares of Class A
Common Stock owned by Ted S. Lodge's wife, for which Mr. Lodge disclaims
beneficial ownership.
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DESCRIPTION OF INDEBTEDNESS
NEW CREDIT FACILITY
Pegasus Media & Communicaitons, Inc. ("PM&C") entered into a seven-year,
senior secured revolving credit facility for $50.0 million. Proceeds of
borrowings under the New Credit Facility may be used for acquisitions
approved by the lenders in the TV, DBS or Cable businesses and for general
corporate purposes. All subsidiaries of PM&C (other than Pegasus Cable
Television of Connecticut, Inc. and subsidiaries that hold certain of the
Company's broadcast licenses) are guarantors of the New Credit Facility,
which is collateralized by a security interest in all assets of, and all
stock in, Pegasus' subsidiaries (other than the assets of Pegasus Cable
Television of Connecticut, Inc. and the assets and stock of certain of the
Company's license-holding subsidiaries).
Borrowings under the New Credit Facility bear interest, payable monthly,
at LIBOR or the prime rate (as selected by the Company) plus spreads that
vary with PM&C's ratio of total debt to operating cash flow. The New Credit
Facility required payment of a closing fee of approximately $1.3 million and
an annual commitment fee of 0.5% of the unused portion of the commitment
payable quarterly in arrears and requires PM&C to purchase an interest rate
hedging contract covering an amount equal to at least 50% of the total amount
of borrowings from the reducing revolving facility for a minimum period of at
least two years.
The New Credit Facility requires prepayments and concurrent reductions of
the commitment from asset sales or other transactions outside the ordinary
course of business (subject to provisions permitting the proceeds of certain
sales to be used to make approved acquisitions within stated time periods
without reducing the commitments of the lenders) and contains covenants
limiting the amounts of indebtedness that PM&C may incur, requiring the
maintenance of minimum fixed charge coverage, interest coverage and debt
service coverage ratios and limiting capital expenditures and other
restricted payments and disallowing dividends without the express consent of
the lenders. The New Credit Facility also contains other customary covenants,
representations, warranties, indemnities, conditions precedent to closing and
borrowing, and events of default.
Beginning March 31, 1998, commitments under the New Credit Facility will
reduce in quarterly amounts ranging from $1.3 million per quarter in 1998 to
$2.3 million in 2002.
All indebtedness under the New Credit Facility will constitute Senior Debt
(as defined in the Indenture). See "Description of Indebtedness -- Notes."
PEGASUS CREDIT FACILITY
Pegasus has entered into a credit facility under which it may borrow up to
$5.0 million to make deposits and other advance payments in connection with
acquisitions of DBS businesses until the completion of this Offering. The
Pegasus Credit Facility is secured by the pledge of the stock of the
subsidiaries of Pegasus that own and operate its Michigan, Ohio and Texas DBS
businesses.
The Pegasus Credit Facility matures on December 31, 1997, and is subject
to mandatory prepayment simultaneously with the completion of this Offering
and out of its proceeds, whereupon the Pegasus Credit Facility will be
retired. Until the Pegasus Credit Facility is retired and repaid, the
amount available to be borrowed under the New Credit Facility has been
reduced by $5.0 million.
Borrowings under the Pegasus Credit Facility bear interest, payable
quarterly at LIBOR or the prime rate (as selected by Pegasus) plus
agreed-upon spreads. The Pegasus Credit Facility requires payment of a
closing fee of $62,500.
NOTES
PM&C, which became the direct subsidiary of Pegasus upon completion of the
Initital Public Offering, has outstanding $85.0 million in aggregate
principal amount of its 12 1/2 % Series B Senior Subordinated Notes due 2005
(the "Notes"). The Notes are subject to the terms and conditions of an
Indenture dated as of July 7, 1995 among PM&C, certain of its direct and
indirect subsidiaries, as guarantors (the "Guarantors"), and First Union
National Bank, as trustee, a copy of which is filed as an exhibit to the
registration statement of which this Prospectus is a part. The Notes are
subject to all of the terms and conditions of the Indenture. The following
summary of the material provisions of the Indenture does not purport to be
complete, and is subject
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to, and qualified in its entirety by reference to, all of the provisions of
the Indenture and those terms made a part of the Indenture by the Trust
Indenture Act of 1939, as amended. All terms defined in the Indenture and not
otherwise defined in this section are used below with the meanings set forth
in the Indenture.
General. The Notes will mature on July 1, 2005 and bear interest at 12 1/2%
per annum, payable semi-annually on January 1 and July 1 of each year. The
Notes are general unsecured obligations of PM&C and are subordinated in right
of payment to all existing and future Senior Debt of PM&C. The Notes are
unconditionally guaranteed, on an unsecured senior subordinated basis,
jointly and severally, by the Guarantors.
Optional Redemption. The Notes are subject to redemption at any time, at
the option of PM&C, in whole or in part, on or after July 1, 2000 at
redemption prices (plus accrued interest and Liquidated Damages, if any)
starting at 106.25% of principal during the 12-month period beginning July 1,
2000 and declining annually to 100% of principal on July 1, 2003 and
thereafter.
In addition, prior to July 1, 1998, PM&C may redeem up to 33 1/3 % of the
aggregate principal amount of the Notes with the net proceeds of one or more
public offerings of its common equity or the common equity of PM&C's direct
parent, to the extent such proceeds are contributed (within 120 days of any
such offering) to PM&C as common equity, at a price equal to 112.5% of the
principal amount thereof plus accrued interest and Liquidated Damages, if
any, provided that at least 66 2/3 % of the original aggregate principal
amount of the Notes remains outstanding thereafter.
Change of Control. Upon the occurrence of a Change of Control, each holder
of the Notes may require PM&C to repurchase all or a portion of such holder's
Notes at a purchase price equal to 101% of the principal amount thereof,
together with accrued and unpaid interest and Liquidated Damages thereon, if
any, to the date of repurchase. Generally, a Change of Control, means the
occurrence of any of the following: (i) the disposition of all or
substantially all of PM&C's assets to any person other than Marshall W. Pagon
or his Related Parties, (ii) the adoption of a plan relating to the
liquidation or dissolution of PM&C, (iii) the consummation of any transaction
in which a person becomes the beneficial owner of more of the voting stock of
PM&C than is beneficially owned at such time by Mr. Pagon and his Related
Parties, or (iv) the first day on which a majority of the members of the
Board of Directors of PM&C or the Parent are not Continuing Directors.
Subordination. The Notes are general unsecured obligations of PM&C and are
subordinate to all existing and future Senior Debt of PM&C. The Notes will
rank senior in right of payment to all junior subordinated Indebtedness of
PM&C. The Subsidiary Guarantees are general unsecured obligations of the
Guarantors and are subordinated to the Senior Debt and to the guarantees of
Senior Debt of such Guarantors. The Subsidiary Guarantees rank senior in
right of payment to all junior subordinated Indebtedness of the Guarantors.
Certain Covenants. The Indenture contains a number of covenants
restricting the operations of PM&C, which, among other things, limit the
ability of PM&C to incur additional Indebtedness, pay dividends or make
distributions, sell assets, issue subsidiary stock, restrict distributions
from Subsidiaries, create certain liens, enter into certain consolidations or
mergers and enter into certain transactions with affiliates.
Events of Default. Events of Default under the Indenture include the
following: (i) a default for 30 days in the payment when due of interest on,
or Liquidated Damages with respect to, the Notes; (ii) default in payment
when due of the principal of or premium, if any, on the Notes; (iii) failure
by PM&C to comply with certain provisions of the Indenture (subject, in some
but not all cases, to notice and cure periods); (iv) default under certain
items of Indebtedness for money borrowed by PM&C or any of its Restricted
Subsidiaries; (v) failure by PM&C or any Restricted Subsidiary that would be
a Significant Subsidiary to pay final judgments aggregating in excess of $2.0
million, which judgments are not paid, discharged or stayed for a period of
60 days; (vi) except as permitted by the Indenture, any Subsidiary Guarantee
shall be held in any judicial proceeding to be unenforceable or invalid or
shall cease for any reason to be in full force and effect or any Guarantor,
or any Person acting on behalf of any Guarantor, shall deny or disaffirm its
obligations under its Subsidiary Guarantee; or (vii) certain events of
bankruptcy or insolvency with respect to PM&C or any of its Restricted
Subsidiaries.
Upon the occurrence of an Event of Default, with certain exceptions, the
Trustee or the holders of at least 25% in principal amount of the then
outstanding Notes may accelerate the maturity of all the Notes as provided in
the Indenture.
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DESCRIPTION OF SECURITIES
As used in this Description of Securities, the term "Company" refers to
Pegasus Communications Corporation, excluding its Subsidiaries.
DESCRIPTION OF THE UNITS
Each Unit being offered will consist of one share of Series A Preferred
Stock and one Warrant to purchase 1.936 shares of Class A Common Stock. The
Series A Preferred Stock and Warrants will not be separately transferable
until the earlier to occur of (i) April 3, 1997 and (ii) in the event of a
Change of Control, the date the Company mails notice thereof (the "Separation
Date").
DESCRIPTION OF SERIES A PREFERRED STOCK
GENERAL
The following is a summary of certain terms of the Series A Preferred
Stock offered hereby. The terms of the Series A Preferred Stock will be set
forth in the Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof (the "Certificate of
Designation"). This summary is not intended to be complete and is subject to,
and qualified in its entirety by reference to, the Company's Amended and
Restated Certificate of Incorporation and the Certificate of Designation,
including the definitions therein of certain terms used below. The
definitions of certain terms used in the following summary are set forth
below under "--Certain Definitions."
Substantially all operations of the Company are conducted through its
Subsidiaries and, therefore, the Company is dependent upon the cash flow of
its Subsidiaries to meet its obligations, including its obligations under the
Series A Preferred Stock. Any right of the Company to receive assets of any
of its Subsidiaries will be effectively subordinated to the claims of that
Subsidiary's creditors. On a pro forma basis, as of September 30, 1996, after
giving effect to this Offering and the use of proceeds therefrom, the
Completed Transactions and the Transactions, the aggregate amount of
Indebtedness and other obligations of the Company's Subsidiaries (including
trade payables, borrowings under the New Credit Facility, Capital Lease
Obligations and the PM&C Notes), that would effectively rank senior in right
of payment to the obligations of the Company under the Series A Preferred
Stock would have been approximately $88.5 million. See "Risk
Factors--Substantial Indebtedness and Leverage," "--Limitations on Ability to
Pay Dividends; Holding Company Structure," and "--Ranking of Series A
Preferred Stock and Exchange Notes."
Pursuant to the Certificate of Designation, 100,000 shares of Series A
Preferred Stock with a liquidation preference of $1,000 per share (the
"Liquidation Preference") will be authorized for issuance in this Offering.
The Series A Preferred Stock will, when issued, be fully paid and
nonassessable, and Holders thereof will have no preemptive rights in
connection therewith.
The Liquidation Preference of the Series A Preferred Stock is not
necessarily indicative of the price at which shares of the Series A Preferred
Stock will actually trade at or after the time of their issuance, and the
Series A Preferred Stock may trade at prices below its Liquidation
Preference. The market price of the Series A Preferred Stock can be expected
to fluctuate with changes in the financial markets and economic conditions,
the financial condition and prospects of the Company and other factors that
generally influence the market prices of securities. See "Risk Factors."
The transfer agent for the Series A Preferred Stock will be First Union
National Bank unless and until a successor is selected by the Company (the
"Transfer Agent").
RANKING
The Series A Preferred Stock will rank senior in right of payment to all
other classes or series of Capital Stock of the Company as to dividends and
upon liquidation, dissolution or winding up of the Company. The Certificate
of Designation will provide that the Company may not, without the consent of
the Holders of a majority of the then outstanding shares of Series A
Preferred Stock, authorize, create (by way of reclassification or otherwise)
or issue any class or series of Capital Stock of the Company ranking on a
parity
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with the Series A Preferred Stock ("Parity Securities") or any Obligation or
security convertible or exchangeable into or evidencing a right to purchase,
shares of any class or series of Parity Securities. The Certificate of
Designation will provide that the Company may not, without the consent of the
Holders of at least two-thirds of the then outstanding shares of Series A
Preferred Stock, authorize, create (by way of reclassification or otherwise)
or issue any class or series of capital stock of the Company ranking senior
to the Series A Preferred Stock ("Senior Securities") or any Obligation or
security convertible or exchangeable into or evidencing a right to purchase,
shares of any class or series of Senior Securities.
DIVIDENDS
The Holders of shares of the Series A Preferred Stock will be entitled to
receive, when, as and if dividends are declared by the Board of Directors out
of funds of the Company legally available therefor, cumulative preferential
dividends from the issue date of the Series A Preferred Stock accruing at the
rate per share of $ per annum, payable semi-annually in arrears on each
and or, if any such date is not a Business Day, on the next
succeeding Business Day (each, a "Dividend Payment Date"), to the Holders of
record as of the next preceding and (each, a "Record Date").
Dividends will be payable in cash, except that on each Dividend Payment Date
occurring on or prior to , 2002, dividends may be paid, at the
Company's option, by the issuance of additional shares of Series A Preferred
Stock (including fractional shares) having an aggregate Liquidation
Preference equal to the amount of such dividends. The issuance of such
additional shares of Series A Preferred Stock will constitute "payment" of
the related dividend for all purposes of the Certificate of Designation. The
first dividend payment of $ per share of Series A Preferred Stock will
be payable on , 1997. Dividends payable on the Series A Preferred Stock
will be computed on the basis of a 360-day year consisting of twelve 30-day
months and will be deemed to accrue on a daily basis. For a discussion of
certain federal income tax considerations relevant to the payment of
dividends on the Series A Preferred Stock, see "Certain Federal Income Tax
Considerations--Distributions on Series A Preferred Stock."
Dividends on the Series A Preferred Stock will accrue whether or not the
Company has earnings or profits, whether or not there are funds legally
available for the payment of such dividends and whether or not dividends are
declared. Dividends will accumulate to the extent they are not paid on the
Dividend Payment Date for the period to which they relate. Accumulated unpaid
dividends will bear interest at a per annum rate 200 basis points in excess
of the annual dividend rate on the Series A Preferred Stock. The Certificate
of Designation will provide that the Company will take all actions required
or permitted under the Delaware General Corporation Law (the "DGCL") to
permit the payment of dividends on the Series A Preferred Stock, including,
without limitation, through the revaluation of its assets in accordance with
the DGCL, to make or keep funds legally available for the payment of
dividends.
No dividend whatsoever shall be declared or paid upon, or any sum set
apart for the payment of dividends upon, any outstanding share of the Series
A Preferred Stock with respect to any dividend period unless all dividends
for all preceding dividend periods have been declared and paid, or declared
and a sufficient sum set apart for the payment of such dividend, upon all
outstanding shares of Series A Preferred Stock. Unless full cumulative
dividends on all outstanding shares of Series A Preferred Stock for all past
dividend periods shall have been declared and paid, or declared and a
sufficient sum for the payment thereof set apart, then: (i) no dividend
(other than a dividend payable solely in shares of any class of stock ranking
junior to the Series A Preferred Stock as to the payment of dividends and as
to rights in liquidation, dissolution or winding up of the affairs of the
Company ("Junior Securities") shall be declared or paid upon, or any sum set
apart for the payment of dividends upon, any shares of Junior Securities;
(ii) no other distribution shall be declared or made upon, or any sum set
apart for the payment of any distribution upon, any shares of Junior
Securities, other than a distribution consisting solely of Junior Securities;
(iii) no shares of Junior Securities shall be purchased, redeemed or
otherwise acquired or retired for value (excluding an exchange for shares of
other Junior Securities) by the Company or any of its Subsidiaries; and (iv)
no monies shall be paid into or set apart or made available for a sinking or
other like fund for the purchase, redemption or other acquisition or
retirement for value of any shares of Junior Securities by the Company or any
of its Subsidiaries. Holders of the Series A Preferred Stock will not be
entitled to any dividends, whether payable in cash, property or stock, in
excess of the full cumulative dividends as herein described.
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Any future credit agreements or other agreements relating to Indebtedness
to which the Company becomes a party may contain restrictions on the ability
of the Company to pay dividends on the Series A Preferred Stock.
VOTING RIGHTS
Holders of record of shares of the Series A Preferred Stock will have no
voting rights, except as required by law and as provided in the Certificate
of Designation. The Certificate of Designation will provide that upon (a) the
accumulation of accrued and unpaid dividends on the outstanding Series A
Preferred Stock in an amount equal to three full semi-annual dividends
(whether or not consecutive); (b) the failure of the Company to satisfy any
mandatory redemption or repurchase obligation (including, without limitation,
pursuant to any required Change of Control Offer) with respect to the Series
A Preferred Stock; (c) the failure of the Company to make a Change of Control
Offer on the terms and in accordance with the provisions described below
under the caption "--Change of Control;" (d) the failure of the Company to
comply with any of the other covenants or agreements set forth in the
Certificate of Designation and the continuance of such failure for 60
consecutive days or more; or (e) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be secured
or evidenced any Indebtedness for money borrowed by the Company or any of its
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Subsidiaries) whether such Indebtedness or Guarantee now exists, or is
created after the Closing Date, which default (i) is caused by a failure to
pay principal of or premium, if any, or interest on such Indebtedness prior
to the expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (ii) results in the
acceleration of such Indebtedness prior to its express maturity and, in each
case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more (each of the events described in clauses (a), (b), (c),
(d) and (e) being referred to herein as a "Voting Rights Triggering Event"),
then the number of members of the Company's Board of Directors will be
immediately and automatically increased by two, and the Holders of a majority
of the outstanding shares of Series A Preferred Stock, voting as a separate
class, will be entitled to elect two members to the Board of Directors of the
Company. Voting rights arising as a result of a Voting Rights Triggering
Event will continue until such time as all dividends in arrears on the Series
A Preferred Stock are paid in full and all other Voting Rights Triggering
Events have been cured or waived.
In addition, as provided above under "--Ranking," the Company may not
authorize, create (by way of reclassification or otherwise) or issue (i) any
Parity Securities, or any Obligation or security convertible into or
evidencing the right to purchase any Parity Securities, without the
affirmative vote or consent of the Holders of a majority of the then
outstanding shares of Series A Preferred Stock and (ii) any Senior
Securities, or any Obligation or security convertible into or evidencing the
right to purchase Senior Securities, without the affirmative vote or consent
of the Holders of at least two-thirds of the then outstanding shares of
Series A Preferred Stock, in each case voting as a separate class.
EXCHANGE
The Company may, at its option, on any Dividend Payment Date occurring
after the Separation Date, exchange, in whole, but not in part, the then
outstanding shares of Series A Preferred Stock for Exchange Notes; provided,
that (i) on the date of such exchange there are no accumulated and unpaid
dividends on the Series A Preferred Stock (including the dividend payable on
such date) or other contractual impediments to such exchange; (ii) there
shall be legally available funds sufficient therefor; (iii) no Voting Rights
Triggering Event has occurred and is contnuing at the time of such exchange;
(iv) immediately after giving effect to such exchange, no Default or Event of
Default (each as defined in the Exchange Note Indenture) would exist under
the Exchange Note Indenture, no default or event of default would exist under
any material instrument governing Indebtedness outstanding at the time would
be caused thereby; (v) the Exchange Note Indenture has been qualified under
the Trust Indenture Act, if such qualification is required at the time of
exchange; and (vi) the Company shall have delivered a written opinion to the
Exchange Note Trustee (as defined herein) to the effect that all conditions
to be satisfied prior to such exchange have been satisfied.
The Exchange Notes will be issuable in principal amounts of $1,000 and
integral multiples thereof to the extent possible, and will also be issuable
in principal amounts less than $1,000 so that each Holder of Series
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A Preferred Stock will receive certificates representing the entire amount of
Exchange Notes to which such Holder's shares of Series A Preferred Stock
entitle such Holder; provided that the Company may pay cash in lieu of
issuing an Exchange Note having a principal amount less than $1,000. Notice
of the intention to exchange will be sent by or on behalf of the Company not
more than 60 days nor less than 30 days prior to the Exchange Date, by first
class mail, postage prepaid, to each Holder of record of Series A Preferred
Stock at its registered address. In addition to any information required by
law or by the applicable rules of any exchange upon which Series A Preferred
Stock may be listed or admitted to trading, such notice will state: (i) the
Exchange Date; (ii) the place or places where certificates for such shares
are to be surrendered for exchange, including any procedures applicable to
exchanges to be accomplished through book-entry transfers; and (iii) that
dividends on the shares of Series A Preferred Stock to be exchanged will
cease to accrue on the Exchange Date. If notice of any exchange has been
properly given, and if on or before the Exchange Date the Exchange Notes have
been duly executed and authenticated and an amount in cash or additional
shares of Series A Preferred Stock (as applicable) equal to all accrued and
unpaid dividends, if any, thereon to the Exchange Date has been deposited
with the Transfer Agent, then on and after the close of business on the
Exchange Date, the shares of Series A Preferred Stock to be exchanged will no
longer be deemed to be outstanding and may thereafter be issued in the same
manner as the other authorized but unissued preferred stock, but not as
Series A Preferred Stock, and all rights of the Holders thereof as
stockholders of the Company will cease, except the right of the Holders to
receive upon surrender of their certificates the Exchange Notes and all
accrued and unpaid dividends, if any, thereon to the Exchange Date.
REDEMPTION
MANDATORY REDEMPTION
On , 2007 (the "Mandatory Redemption Date"), the Company will be
required to redeem (subject to the legal availability of funds therefor) all
outstanding shares of Series A Preferred Stock at a price in cash equal to
the Liquidation Preference thereof, plus accrued and unpaid dividends, if
any, to the date of redemption. The Company will not be required to make
sinking fund payments with respect to the Series A Preferred Stock. The
Certificate of Designation will provide that the Company will take all
actions required or permitted under Delaware law to permit such redemption.
OPTIONAL REDEMPTION
The Series A Preferred Stock may not be redeemed at the option of the
Company on or prior to , 2002. The Series A Preferred Stock may be
redeemed, in whole or in part, at the option of the Company on or after
, 2002, at the redemption prices specified below (expressed as
percentages of the Liquidation Preference thereof), in each case, together
with accrued and unpaid dividends, if any, to the date of redemption, upon
not less than 30 nor more than 60 days' prior written notice, if redeemed
during the 12-month period commencing on of each of the years set forth
below:
Redemption
Year Rate
---- --------------
2002 ................... %
2003 ................... %
2004 ................... %
2005 and thereafter .... 100.00%
Notwithstanding the foregoing, during the first 36 months after the Closing
Date, the Company may, on any one or more occasions, use the net proceeds of one
or more offerings of its Class A Common Stock to redeem up to 25% of the shares
of Series A Preferred Stock then outstanding (whether initially issued or issued
in lieu of cash dividends) at a redemption price of 110% of the Liquidation
Preference thereof plus, without duplication, accumulated and unpaid dividends
to the date of redemption; provided that, after any such redemption, at least
$75.0 million in aggregate Liquidation Preference of Series A Preferred Stock
remains outstanding; and provided further, that any such redemption shall occur
within 90 days of the date of closing of such offering of Class A Common Stock
of the Company.
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LIQUIDATION RIGHTS
Upon any voluntary or involuntary liquidation, dissolution or winding up
of the affairs of the Company or reduction or decrease in its capital stock
resulting in a distribution of assets to the holders of any class or series
of the Company's capital stock (a "reduction or decrease in capital stock"),
each Holder of shares of the Series A Preferred Stock will be entitled to
payment out of the assets of the Company available for distribution of an
amount equal to the Liquidation Preference per share of Series A Preferred
Stock held by such Holder, plus accrued and unpaid dividends, if any, to the
date fixed for liquidation, dissolution, winding up or reduction or decrease
in capital stock, before any distribution is made on any Junior Securities,
including, without limitation, common stock of the Company. After payment in
full of the Liquidation Preference and all accrued dividends, if any, to
which Holders of Series A Preferred Stock are entitled, such Holders will not
be entitled to any further participation in any distribution of assets of the
Company. However, neither the voluntary sale, conveyance, exchange or
transfer (for cash, shares of stock, securities or other consideration) of
all or substantially all of the property or assets of the Company nor the
consolidation or merger of the Company with or into one or more corporations
will be deemed to be a voluntary or involuntary liquidation, dissolution or
winding up of the Company or reduction or decrease in capital stock, unless
such sale, conveyance, exchange or transfer shall be in connection with a
liquidation, dissolution or winding up of the business of the Company or
reduction or decrease in capital stock.
The Certificate of Designation will not contain any provision requiring
funds to be set aside to protect the Liquidation Preference of the Series A
Preferred Stock, although such Liquidation Preference will be substantially
in excess of the par value of the shares of the Series A Preferred Stock.
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of shares of
Series A Preferred Stock will have the right to require the Company to
repurchase all or any part (but not, in the case of any Holder requiring the
Company to purchase less than all of the shares of Series A Preferred Stock
held by such Holder, any fractional shares) of such Holder's Series A
Preferred Stock pursuant to the offer described below (the "Change of Control
Offer") at an offer price in cash equal to 101% of the aggregate Liquidation
Preference thereof plus accrued and unpaid dividends, if any, thereon to the
date of purchase (the "Change of Control Payment").
The Certificate of Designation will provide that within 30 days following
any Change of Control, the Company will mail a notice to each Holder
describing the transaction or transactions that constitute the Change of
Control and offering to repurchase all outstanding shares of Series A
Preferred Stock pursuant to the procedures required by the Certificate of
Designation and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Series A Preferred Stock
as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all shares of Series A Preferred Stock or
portions thereof properly tendered pursuant to the Change of Control Offer,
(2) deposit with the Paying Agent an amount equal to the Change of Control
Payment in respect of all shares of Series A Preferred Stock or portions
thereof so tendered and (3) deliver or cause to be delivered to the Transfer
Agent the shares of Series A Preferred Stock so accepted together with an
Officers' Certificate stating the aggregate Liquidation Preference of the
shares of Series A Preferred Stock or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Series A
Preferred Stock so tendered the Change of Control Payment for such Series A
Preferred Stock, and the Transfer Agent will promptly authenticate and mail
(or cause to be transferred by book entry) to each Holder a new certificate
representing the shares of Series A Preferred Stock equal in Liquidation
Preference amount to any unpurchased portion of the shares of Series A
Preferred Stock surrendered, if any. The Certificate of Designation will
provide that, prior to complying with the provisions of this covenant, but in
any event within 90 days following a Change of Control, the Company will
either repay all outstanding Indebtedness or obtain the requisite consents,
if any, under all agreements governing outstanding Indebtedness to permit the
repurchase of Series A Preferred Stock required by this covenant. The Company
will publicly announce the results of the Change of Control Offer on or as
soon as practicable after the Change of Control Payment Date.
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The Change of Control provisions described above will be applicable
whether or not any other provisions of the Certificate of Designation are
applicable. Except as described above with respect to a Change of Control,
the Certificate of Designation does not contain provisions that permit the
Holders of the Series A Preferred Stock to require that the Company
repurchase or redeem the Series A Preferred Stock in the event of a takeover,
recapitalization or similar transaction.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of the Company and its Restricted
Subsidiaries taken as a whole. Although there is a developing body of case
law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a Holder of Series A Preferred Stock to require the Company to
repurchase such Series A Preferred Stock as a result of a sale, lease,
transfer, conveyance or other disposition of less than all of the assets of
the Company and its Restricted Subsidiaries taken as a whole to another
Person or group may be uncertain.
The New Credit Facility and the PM&C Notes each restrict most of the
Company's current Subsidiaries from paying any dividends or making any other
distribution to the Company. Thus, in the event a Change of Control occurs,
the Company could seek the consent of its Subsidiaries' lenders to the
purchase of the Series A Preferred Stock or could attempt to refinance the
borrowings that contain such restrictions. If the Company does not obtain
such a consent or repay such borrowings, the Company will likely not have the
financial resources to purchase Series A Preferred Shares and the
Subsidiaries will be restricted in paying dividends to the Company for the
purpose of such purchase. In any event, there can be no assurance that the
Company's Subsidiaries will have the resources available to make any such
dividend or distribution. In such case, the Company's failure to make a
Change of Control Offer when required or to purchase tendered shares of
Series A Preferred Stock would constitute a Voting Rights Triggering Event
under the Certificate of Designation. See "Risk Factors--Substantial
Indebtedness and Leverage," "--Limitations on Access to Cash Flow of
Subsidiaries; Holding Company Structure," and "--Ranking of Series A
Preferred Stock and Exchange Notes."
Any future credit agreements or other agreements relating to Indebtedness
to which the Company becomes a party may prohibit the Company from purchasing
any Series A Preferred Stock prior to its maturity, and may also provide that
certain change of control events with respect to the Company would constitute
a default thereunder. In the event a Change of Control occurs at a time when
the Company is prohibited from purchasing Series A Preferred Stock, the
Company could seek the consent of its lenders to the purchase of Series A
Preferred Stock or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Series A
Preferred Stock. In such case, the Holders of a majority of the outstanding
shares of Series A Preferred Stock, voting as a separate class, may be
entitled to elect two members to the Board of Directors of the Company. See
"Risk Factors--Potential Anti-Takeover Provisions; Change of Control."
The Company will not be required to make a Change of Control Offer to the
Holders of Series A Preferred Stock upon a Change of Control if a third party
makes the Change of Control Offer described above in the manner, at the times
and otherwise in compliance with the requirements set forth in the
Certificate of Designation and purchases all shares of Series A Preferred
Stock validly tendered and not withdrawn under such Change of Control Offer.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Certificate of Designation will provide that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or
indirectly, (i) declare or pay any dividend or make any payment or
distribution on account of the Company's Parity Securities or Junior
Securities (including, without limitation, any payment in connection with any
merger or consolidation involving the Company) or on account of any Qualified
Subsidiary Stock or make any payment or distribution to or for the benefit of
the direct or indirect holders of the Company's Parity Securities or Junior
Securities or the direct or indirect holders of any Qualified Subsidiary
Stock in their capacities as such (other than dividends or distributions
payable in Equity Interests (other than Disqualified Stock) of the Company);
(ii) purchase, redeem or otherwise acquire or retire
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for value any Parity Securities or Junior Securities of the Company or any
direct or indirect parent of the Company or other Affiliate of the Company
(other than any such Equity Interests owned by the Company or any of its
Restricted Subsidiaries and other than the acquisition of Equity Interests in
Subsidiaries of the Company solely in exchange for Equity Interests (other
than Disqualified Stock) of the Company); (iii) make any payment on, or
purchase, redeem, defease or otherwise acquire or retire for value any Junior
Securities, except payments of the Liquidation Preference thereof at final
maturity; (iv) make any loan, advance, capital contribution to or other
investment in, or guarantee any obligation of, any Affiliate of the Company
other than a Permitted Investment; (v) forgive any loan or advance to or
other obligation of any Affiliate of the Company (other than a loan or
advance to or other obligation of a Wholly Owned Restricted Subsidiary) which
at the time it was made was not a Restricted Payment that was permitted to be
made; or (vi) make any Restricted Investment (all such payments and other
actions set forth in clauses (i) through (vi) above being collectively
referred to as "Restricted Payments"), unless, at the time of and immediately
after giving effect to such Restricted Payment:
(A) no Voting Rights Triggering Event shall have occurred and be
continuing or would occur as a consequence thereof, and
(B) the Company would be permitted to incur $1.00 of additional
Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow
Ratio described in the first paragraph of the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(C) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Closing Date, is less than the sum of (i) an amount equal to the
Cumulative Operating Cash Flow for the period (taken as one accounting
period) from the beginning of the first full month commencing after the
Closing Date to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (the "Basket Period") less 1.4 times the
Company's Cumulative Total Interest Expense for the Basket Period, plus
(ii) 100% of the aggregate net cash proceeds and, in the case of proceeds
consisting of assets constituting or used in a Permitted Business, 100% of
the fair market value of the aggregate net proceeds other than cash
received since the Closing Date (1) by the Company as capital
contributions to the Company (other than from a Subsidiary) or (2) from
the sale by the Company (other than to a Subsidiary) of its Equity
Interests (other than Disqualified Stock), plus (iii) without duplication,
to the extent that any Restricted Investment that was made after the
Closing Date is sold for cash or otherwise liquidated or repaid for cash,
the Net Proceeds received by the Company or a Wholly Owned Restricted
Subsidiary of the Company upon the sale of such Restricted Investment,
plus (iv) without duplication, to the extent that any Unrestricted
Subsidiary is designated by the Company as a Restricted Subsidiary, an
amount equal to the fair market value of such Investment at the time of
such designation, plus (v) $2.5 million.
The foregoing provisions shall not prohibit (1) the payment of any
dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of
the Certificate of Designation; (2) the redemption, repurchase, retirement or
other acquisition of any Equity Interests of the Company in exchange for, or
out of the net proceeds of, the substantially concurrent sale (other than to
a Subsidiary of the Company) of other Equity Interests of the Company (other
than any Disqualified Stock); provided that the amount of any such net
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (C)(ii) of the preceding
paragraph; (3) the payment by the Company of advances under the Split Dollar
Agreement in an amount not to exceed $250,000 in any four-quarter period; (4)
the repurchase or redemption from employees of the Company and its
Subsidiaries (other than the Principal) of Capital Stock of the Company in an
amount not to exceed an aggregate of $3.0 million; (5) the payment of
dividends on the Series A Preferred Stock in accordance with the terms
thereof as in effect on the Closing Date; (6) the issuance of Exchange Notes
in exchange for shares of the Series A Preferred Stock; provided that such
issuance is permitted by the covenant described below under the caption
"--Certain Covenants--Incurrence of Indebtedness and Issuance of
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Preferred Stock;" and (7) in the event that the Company elects to issue
Exchange Notes in exchange for Series A Preferred Stock, cash payments made
in lieu of the issuance of Exchange Notes having a face amount less than
$1,000 and any cash payments representing accrued and unpaid dividends in
respect thereof, not to exceed $100,000 in the aggregate in any fiscal year.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) proposed
to be transferred by the Company or the applicable Restricted Subsidiary, as
the case may be, net of any liabilities proposed to be assumed by the
transferee and novated pursuant to a written agreement releasing the Company
and its Subsidiaries. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Board of Directors an Officers'
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by this covenant were
computed, which calculations may be based upon the Company's latest available
financial statements.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Voting Rights
Triggering Event. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries in the Subsidiary
so designated shall be deemed to be Restricted Payments at the time of such
designation (valued as set forth below) and shall reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments shall be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at the time of such
designation. Such designation shall be permitted only if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
would otherwise meet the definition of an Unrestricted Subsidiary.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Certificate of Designation will provide that the Company may not, and
may not permit any of its Subsidiaries to, directly or indirectly, create,
incur, issue, assume, guarantee or otherwise become directly or indirectly
liable, contingently or otherwise, with respect to (collectively, "incur")
any Indebtedness (including Acquired Debt) and shall not issue any
Disqualified Stock and shall not permit any of its Subsidiaries to issue any
shares of preferred stock (other than Qualified Subsidiary Stock); provided,
however, that (a) the Company may incur Indebtedness (including Acquired
Debt) or issue shares of Disqualified Stock and (b) a Restricted Subsidiary
of the Company may incur Indebtedness (including Acquired Debt) or issue
shares of preferred stock (including Disqualified Stock) if, in each case,
the Company's Indebtedness to Adjusted Operating Cash Flow Ratio as of the
date on which such Indebtedness is incurred or such Disqualified Stock or
preferred stock is issued would have been 7.0 to 1 or less, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or preferred stock had been issued, as the case may be, as
of the date of such calculation.
The foregoing provisions shall not apply to:
(i) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of
preferred stock; provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary or any such
preferred stock becomes preferred stock (other than Qualified Subsidiary
Stock) of a Restricted Subsidiary, as the case may be, such event shall be
deemed to constitute an incurrence of Indebtedness by or an issuance of
preferred stock (other than Qualified Subsidiary Stock) of, as the case
may be, a Restricted Subsidiary of the Company;
(ii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so
long as the aggregate principal amount of all Indebtedness outstanding
under all Bank Facilities does not, at the time of incurrence, exceed an
amount equal to $50.0 million;
(iii) the incurrence by the Company or any of its Restricted
Subsidiaries of the Existing Indebtedness;
(iv) the incurrence by the Company of Indebtedness under the Exchange
Notes;
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(v) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Wholly Owned Restricted Subsidiaries; provided, however, that (A) any
subsequent issuance or transfer of Equity Interests that result in any
such Indebtedness being held by a Person other than the Company or a
Wholly Owned Restricted Subsidiary of the Company and (B) any sale or
other transfer of such Indebtedness to a Person that is not either the
Company or a Wholly Owned Restricted Subsidiary of the Company shall be
deemed, in each case, to constitute an incurrence of such Indebtedness by
the Company or such Restricted Subsidiary, as the case may be;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount
not to exceed $5.0 million at any time outstanding;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease
or refund, Indebtedness that was permitted by the Certificate of
Designation to be incurred; and
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any
other clause of this paragraph) in an aggregate principal amount at any
time outstanding not to exceed $5.0 million.
If an item of Indebtedness is permitted to be incurred on the basis of the
first paragraph of this covenant and also on the basis of one or more of
clauses (i) through (viii) above, or is permitted to be incurred on the basis
of two or more of clauses (i) through (viii) above, then the Company shall
classify the basis on which such item of Indebtedness is incurred. If an item
of Indebtedness is repaid with the proceeds of an incurrence of other
Indebtedness (whether from the same or a different creditor), the Company may
classify such other Indebtedness as having been incurred on the same basis as
the Indebtedness being repaid or on a different basis permitted under this
covenant. For purposes of this paragraph, "Indebtedness" includes
Disqualified Stock and preferred stock of Subsidiaries. Accrual of interest
and the accretion of accreted value will not be deemed to be an incurrence of
Indebtedness for purposes of this covenant.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Certification of Designation will provide that the Company may not
consolidate or merge with or into (whether or not the Company is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or
more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) the Series A Preferred Stock shall be converted into or
exchanged for and shall become shares of such successor, transferee or
resulting Person, having in respect of such successor, transferee or
resulting Person the same powers, preferences and relative participating,
optional or other special rights and the qualifications, limitations or
restrictions thereon, that the Series A Preferred Stock had immediately prior
to such transaction; (iii) immediately after such transaction no Voting
Rights Triggering Event exists; and (iv) the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such transaction
and after giving pro forma effect thereto as if such transaction had occurred
at the beginning of the applicable four-quarter period, be permitted to incur
at least $1.00 of additional Indebtedness pursuant to the Indebtedness to
Adjusted Operating Cash Flow Ratio set forth in the first paragraph of the
covenant described under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
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TRANSACTIONS WITH AFFILIATES
The Certificate of Designation will provide that the Company may not, and
may not permit any of its Restricted Subsidiaries to, sell, lease, transfer
or otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the
Holders (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and a majority of the
Independent Directors and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Company or such
Restricted Subsidiary of such Affiliate Transaction from a financial point of
view issued by an investment banking firm of national standing; provided that
the Company shall not, and shall not permit any of its Restricted
Subsidiaries to, engage in any Affiliate Transaction involving aggregate
consideration in excess of $1.0 million at any time that there is not at
least one Independent Director on the Company's Board of Directors; and
provided further that (w) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Restricted Subsidiary, (x) transactions between or among the Company and/or
its Restricted Subsidiaries, (y) the payment of any dividend on, or the
issuance of the Exchange Notes in exchange for, the Series A Preferred Stock,
provided that such dividends are paid on a pro rata basis and the Exchange
Notes are issued in accordance with the Certificate of Designation, and (z)
transactions permitted by the provisions of the covenant described under the
caption "--Certain Covenants--Restricted Payments," in each case, shall not
be deemed Affiliate Transactions.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Certificate of Designation will provide that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary to
(i)(a) pay dividends or make any other distributions to the Company or any of
its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to
any other interest or participation in, or measured by, its profits, or (b)
pay any indebtedness owed to the Company or any of its Restricted
Subsidiaries, (ii) make loans or advances to the Company or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) the terms of
any Indebtedness permitted by the Certificate of Designation to be incurred
by any Subsidiary of the Company, (b) Existing Indebtedness as in effect on
the Closing Date, (c) applicable law, (d) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of
its Restricted Subsidiaries as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred in connection with or in
contemplation of such acquisition), which encumbrance or restriction is not
applicable to any Person, or the properties or assets of any Person, other
than the Person and its Subsidiaries, or the property or assets of the Person
and its Subsidiaries, so acquired or (e) by reason of customary
non-assignment provisions in leases and other contracts entered into in the
ordinary course of business and consistent with past practices.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
RESTRICTED SUBSIDIARIES
The Certificate of Designation will provide that the Company (i) will not,
and will not permit any Wholly Owned Restricted Subsidiary of the Company to,
transfer, convey, sell or otherwise dispose of any Capital Stock (other than
Qualified Subsidiary Stock) of any Wholly Owned Restricted Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Restricted
Subsidiary of the Company), unless such transfer, conveyance, sale, lease or
other disposition is of all the Capital Stock of such Wholly
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Owned Restricted Subsidiary and (ii) shall not permit any Wholly Owned
Restricted Subsidiary of the Company to issue any of its Equity Interests
(other than Qualified Subsidiary Stock and, if necessary, shares of its
Capital Stock constituting directors' qualifying shares) to any Person other
than to the Company or a Wholly Owned Restricted Subsidiary of the Company.
REPORTS
The Certificate of Designation will provide that, whether or not required
by the rules and regulations of the Commission, so long as any shares of
Series A Preferred Stock are outstanding, the Company will furnish to the
Holders of Series A Preferred Stock (i) all quarterly and annual financial
information that would be required to be contained in a filing with the
Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only,
a report thereon by the Company's certified independent accountants and (ii)
all current reports that would be required to be filed with the Commission on
Form 8-K if the Company were required to file such reports. In addition,
whether or not required by the rules and regulations of the Commission, the
Company will file a copy of all such information and reports with the
Commission for public availability (unless the Commission will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition to the financial information
required by the Exchange Act, each such quarterly and annual report shall be
required to contain "summarized financial information" (as defined in Rule
1-02(aa)(1) of Regulation S-X under the Exchange Act) showing Adjusted
Operating Cash Flow for the Company and its Restricted Subsidiaries, on a
consolidated basis, where Adjusted Operating Cash Flow for the Company is
calculated in a manner consistent with the manner described under the
definition of "Adjusted Operating Cash Flow" contained herein. The summarized
financial information required pursuant to the preceding sentence may, at the
election of the Company, be included in the footnotes to audited consolidated
financial statements or unaudited quarterly financial statements of the
Company and shall be as of the same dates and for the same periods as the
consolidated financial statements of the Company and its Subsidiaries
required pursuant to the Exchange Act.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Series A Preferred Stock in accordance
with the Certificate of Designation if the requirements of the Transfer Agent
for such transfer or exchange are met. The Transfer Agent may require a
Holder, among other things, to furnish appropriate endorsements and transfer
documents and the Company may require a Holder to pay any taxes and fees
required by law or permitted by the Certificate of Designation.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, and subject to
the DGCL, the Certificate of Designation may be amended with the consent of
the Holders of a majority in aggregate Liquidation Preference of the Series A
Preferred Stock then outstanding, and any existing Voting Rights Triggering
Event or compliance with any provision of the Certificate of Designation may
be waived with the consent of the Holders of a majority in aggregate
Liquidation Preference of the then outstanding shares of Series A Preferred
Stock.
Notwithstanding the foregoing, without the consent of each Holder
affected, an amendment or waiver may not (with respect to any shares of
Series A Preferred Stock held by a non-consenting Holder): (i) alter the
voting rights with respect to the Series A Preferred Stock or reduce the
number of shares of Series A Preferred Stock whose Holders must consent to an
amendment, supplement or waiver, (ii) reduce the Liquidation Preference of or
change the Mandatory Redemption Date of any share of Series A Preferred Stock
or alter the provisions with respect to the redemption of the Series A
Preferred Stock (other than provisions relating to the covenant described
above under the caption "--Change of Control"), (iii) reduce the rate of or
change the time for payment of dividends on any share of Series A Preferred
Stock, (iv) waive the consequences of any failure to pay dividends on the
Series A Preferred Stock, (v) make any share of Series A Preferred Stock
payable in any form other than that stated in the Certificate of Designation,
(vi) make any change in the
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provisions of the Certificate of Designation relating to waivers of the
rights of Holders of Series A Preferred Stock to receive the Liquidation
Preference and dividends on the Series A Preferred Stock, (vii) waive a
redemption payment with respect to any share of Series A Preferred Stock
(other than a payment required by the covenant described above under the
caption "--Change of Control") or (viii) make any change in the foregoing
amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Series
A Preferred Stock, the Company may (to the extent permitted by Delaware law)
amend or supplement the Certificate of Designation to cure any ambiguity,
defect or inconsistency, to provide for uncertificated Series A Preferred
Stock in addition to or in place of certificated Series A Preferred Stock or
to make any change that would provide any additional rights or benefits to
the Holders of Series A Preferred Stock or that does not adversely affect the
legal rights under the Certificate of Designation of any such Holder.
REISSUANCE
Shares of the Series A Preferred Stock redeemed or otherwise acquired by
the Company will assume the status of authorized but unissued preferred stock
and may thereafter be reissued in the same manner as the other authorized but
unissued preferred stock, but not as Series A Preferred Stock.
DESCRIPTION OF EXCHANGE NOTES
The Exchange Notes will, if and when issued, be issued pursuant to an
indenture (the "Exchange Note Indenture") between the Company and First Union
National Bank, as trustee (the "Exchange Note Trustee"). The terms of the
Exchange Notes include those stated in the Exchange Note Indenture and those
made part of the Exchange Note Indenture by reference to the Trust Indenture
Act of 1939, as amended (the "Trust Indenture Act"). The Exchange Notes will
be subject to all such terms, and Holders of Exchange Notes are referred to
the Exchange Note Indenture and the Trust Indenture Act for a statement
thereof. The following summary of certain provisions of the Exchange Note
Indenture does not purport to be complete and is qualified in its entirety by
reference to the Exchange Note Indenture, including the definitions therein
of certain terms used below. The definitions of certain terms used in the
Exchange Note Indenture and in the following summary are set forth below
under "--Certain Definitions."
The Exchange Notes will be subordinated in right of payment to all
existing and future Senior Debt of the Company. In addition, the Exchange
Notes will be effectively subordinated to all Indebtedness of the Company's
Subsidiaries.
Substantially all operations of the Company are conducted through its
Subsidiaries and, therefore, the Company is dependent upon the cash flow of
its Subsidiaries to meet its obligations, including its obligations under the
Exchange Notes. Any right of the Company to receive assets of any of its
Subsidiaries will be effectively subordinated to the claims of that
Subsidiary's creditors. On a pro forma basis, as of September 30, 1996, after
giving effect to this Offering and the use of proceeds therefrom, the
Completed Transactions and the Transactions, the aggregate amount of
Indebtedness and other obligations of the Company's Subsidiaries (including
trade payables, borrowings under the New Credit Facility, Capital Lease
Obligations and the PM&C Notes), that would effectively rank senior in right
of payment to the obligations of the Company under the Exchange Notes would
have been approximately $88.5 million. See "Risk Factors--Substantial
Indebtedness and Leverage," "--Limitations on Ability to Pay Dividends;
Holding Company Structure," and "--Ranking of Series A Preferred Stock and
Exchange Notes."
PRINCIPAL, MATURITY AND INTEREST
The Exchange Notes will be limited in aggregate principal amount to $100.0
million and will mature on , 2007. Interest on the Exchange Notes will
accrue at the rate of % per annum and will be payable semi-annually in
arrears on each and (each, an "Interest Payment Date") to Holders
of record on the immediately preceding and (each, an "Exchange
Note Record Date"). Interest will be payable in cash, except that on each
Interest Payment Date occurring prior to , 2002, interest may be paid,
at the Company's option, by the issuance of additional Exchange Notes having
an aggregate principal amount equal to the amount of such interest. The
issuance of such
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additional Exchange Notes will constitute "payment" of the related interest
for all purposes of the Exchange Note Indenture. Interest on the Exchange
Notes will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from the date of original issuance.
Interest will be computed on the basis of a 360-day year consisting of twelve
30-day months. The Exchange Notes will be issuable in principal amounts of
$1,000 and integral multiples thereof to the extent possible, and will also
be issuable in principal amounts less than $1,000 so that each Holder of
Series A Preferred Stock will receive certificates representing the entire
amount of Exchange Notes to which such Holder's shares of Series A Preferred
Stock entitle such Holder; provided that the Company may pay cash in lieu of
an Exchange Note in principal amount less than $1,000.
SUBORDINATION
The payment of principal of, premium, if any, and interest on the Exchange
Notes will be subordinated in right of payment, as set forth in the Exchange
Note Indenture, to the prior payment in full of all Senior Debt, whether
outstanding on the date of the Exchange Note Indenture or thereafter
incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property,
or in an assignment for the benefit of creditors or any marshalling of
Company's assets and liabilities, the holders of Senior Debt will be entitled
to receive payment in full of all Obligations due in respect of such Senior
Debt (including interest after the commencement of any such proceeding at the
rate specified in the applicable Senior Debt, whether or not an allowable
claim) before the Holders will be entitled to receive any payment with
respect to the Exchange Notes; and until all Obligations with respect to
Senior Debt are paid in full, any distribution to which the Holders would be
entitled will be made to the holders of Senior Debt (except that, in either
case, Holders may receive (i) securities that are subordinated at least to
the same extent as the Exchange Notes to Senior Debt and any securities
issued in exchange for Senior Debt and (ii) payments made from the trust
described below under "--Legal Defeasance and Covenant Defeasance").
The Company also may not make any payment upon or in respect of the
Exchange Notes (except as described above) if (i) a default in the payment of
the principal of, premium, if any, or interest on Designated Senior Debt
occurs and is continuing or (ii) any other default occurs and is continuing
with respect to Designated Senior Debt that permits holders of Designated
Senior Debt as to which such default relates to accelerate its maturity and
the trustee receives a notice of such default (a "Payment Blockage Notice")
from the Company or the holders of any Designated Senior Debt. Payments on
the Exchange Notes may and shall be resumed (a) in the case of a payment
default, upon the date on which such default is cured or waived and (b) in
the case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated. No new period of payment
blockage may be commenced unless and until (1) 360 days have elapsed since
the effectiveness of the immediately prior Payment Blockage Notice and (2)
all scheduled payments of principal, premium, if any, interest on the
Exchange Notes that have come due have been paid in full. No nonpayment
default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Exchange Trustee shall be, or be made, the basis for a
subsequent Payment Blockage Notice.
The Exchange Note Indenture will further require that the Company promptly
notify the holders of Senior Debt if payment of the Exchange Notes is
accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency, Holders may recover less ratably than
creditors of the Company who are holders of Senior Debt or other creditors of
the Company who are not subordinated to holders of Senior Debt. As of
September 30, 1996, after giving pro forma effect to this Offering and the
use of proceeds therefrom, the Completed Transactions and the Transactions,
the Company would have had approximately $227,000 of Senior Debt. The
Exchange Note Indenture will limit, subject to certain financial tests, the
amount of additional Indebtedness, including Senior Debt, that the Company
and its Subsidiaries may incur. See "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock."
"Designated Senior Debt" means any Senior Debt permitted under the
Exchange Note Indenture the principal amount of which is $10.0 million or
more and that has been designated by the Company as "Designated Senior Debt."
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"Senior Bank Debt" means any Indebtedness of the Company (including
letters of credit) outstanding under, and any other Obligations of the
Company with respect to, Bank Facilities, to the extent that any such
Indebtedness and other Obligations are permitted by the Exchange Note
Indenture to be incurred.
"Senior Debt" means (a) the Senior Bank Debt (to the extent it constitutes
Indebtedness of the Company) and (b) any other Indebtedness of the Company
permitted to be incurred by the Company under the terms of the Exchange Note
Indenture, unless the instrument under which such Indebtedness is incurred
expressly provides that it is on a parity with or subordinated in right of
payment to the Exchange Notes. Notwithstanding anything to the contrary in
the foregoing, Senior Debt will not include (w) any liability for federal,
state, local or other taxes owed or owing by the Company, (x) any
Indebtedness of the Company to any of its Subsidiaries or other Affiliates,
(y) any trade payables or (z) any Indebtedness that is incurred in violation
of the Exchange Note Indenture.
OPTIONAL REDEMPTION
The Exchange Notes will not be redeemable at the Company's option prior to
, 2002. The Exchange Notes may be redeemed, in whole or in part, at
the option of the Company on or after , 2002, at the redemption
prices specified below (expressed as percentages of the principal amount
thereof), in each case, together with accrued and unpaid interest, if any,
thereon to the date of redemption, upon not less than 30 nor more than 60
days' notice, if redeemed during the twelve-month period beginning on
of the years indicated below:
Redemption
Year Rate
---- --------------
2002 ................... %
2003 ................... %
2004 ................... %
2005 and thereafter .... 100.00%
Notwithstanding the foregoing, during the first 36 months after the Closing
Date, the Company may, on any one or more occasions, use the net proceeds of
one or more offerings of its Class A Common Stock to redeem up to 25% of the
aggregate principal amount of the Exchange Notes (whether issued in exchange
for Series A Preferred Stock or in lieu of cash interest payments) at the
redemption price of 110% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption; provided that, after any such
redemption, the aggregate principal amount of the Exchange Notes outstanding
must equal at least $75.0 million; and provided further, that any such
redemption shall occur within 90 days of the date of closing of such offering
of Class A Common Stock of the Company.
SELECTION AND NOTICE
If less than all of the Exchange Notes are to be redeemed at any time,
selection of Exchange Notes for redemption will be made by the Exchange Note
Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Exchange Notes are listed, or, if
the Exchange Notes are not so listed, on a pro rata basis, by lot or by such
method as the Exchange Note Trustee shall deem fair and appropriate. Notices
of redemption shall be mailed by first class mail at least 30 but not more
than 60 days before the redemption date to each Holder of Exchange Notes to
be redeemed at its registered address. If any Exchange Note is to be redeemed
in part only, the notice of redemption that relates to such Exchange Note
shall state the portion of the principal amount thereof to be redeemed. A new
Exchange Note in principal amount equal to the unredeemed portion thereof
will be issued in the name of the Holder thereof upon cancellation of the
original Exchange Note. On and after the redemption date, interest ceases to
accrue on Exchange Notes or portions of them called for redemption.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Exchange Notes
will have the right to require the Company to repurchase all or any part (but
not, in the case of any Holder requiring the Company to purchase less than
all of the Exchange Notes held by such Holder, any Exchange Note in principal
amount
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less than $1,000) of such Holder's Exchange Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash
equal to 101% of the aggregate principal amount thereof plus accrued and
unpaid interest, if any, thereon to the date of purchase (the "Change of
Control Payment"). Within ten days following any Change of Control, the
Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offering to repurchase
Exchange Notes pursuant to the procedures required by the Exchange Note
Indenture and described in such notice. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities
laws and regulations thereunder to the extent such laws and regulations are
applicable in connection with the repurchase of the Exchange Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Exchange Notes or portions thereof
properly tendered pursuant to the Change of Control Offer, (2) deposit with
the Paying Agent an amount equal to the Change of Control Payment in respect
of all Exchange Notes or portions thereof so tendered and (3) deliver or
cause to be delivered to the Exchange Note Trustee the Exchange Notes so
accepted together with an Officers' Certificate stating the aggregate
principal amount of Exchange Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Exchange Notes
so tendered the Change of Control Payment for such Exchange Notes, and the
Exchange Note Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Exchange Note equal in
principal amount to any unpurchased portion of the Exchange Notes
surrendered, if any. The Company will publicly announce the results of the
Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
The Change of Control provisions described above will be applicable
whether or not any other provisions of the Exchange Note Indenture are
applicable. Except as described above with respect to a Change of Control,
the Exchange Note Indenture does not contain provisions that permit the
Holders of the Exchange Notes to require that the Company repurchase or
redeem the Exchange Notes in the event of a takeover, recapitalization or
similar transaction.
The definition of Change of Control includes a phrase relating to the
sale, lease, transfer, conveyance or other disposition of "all or
substantially all" of the assets of the Company and its Restricted
Subsidiaries taken as a whole. Although there is a developing body of case
law interpreting the phrase "substantially all," there is no precise
established definition of the phrase under applicable law. Accordingly, the
ability of a Holder of Exchange Notes to require the Company to repurchase
such Exchange Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to another Person or group may be
uncertain.
The New Credit Facility and the PM&C Notes each restrict most of the
Company's current Subsidiaries from paying any dividends or making any other
distribution to the Company. Thus, in the event a Change of Control occurs,
the Company could seek the consent of its Subsidiaries' lenders to the
purchase of the Exchange Notes or could attempt to refinance the borrowings
that contain such restrictions. If the Company does not obtain such a consent
or repay such borrowings, the Company will likely not have the financial
resources to purchase Exchange Notes and the Subsidiaries will be restricted
in paying dividends to the Company for the purpose of such purchase. In any
event, there can be no assurance that the Company's Subsidiaries will have
the resources available to make any such dividend or distribution. In
addition, it is expected that the terms of any Senior Debt incurred by the
Company would restrict the Company's ability to make a Change of Control
Offer or Change of Control Payment. In any such case, the Company's failure
to make a Change of Control Offer when required or to purchase tendered
Exchange Notes would constitute an Event of Default under the Exchange Note
Indenture. See "Risk Factors--Substantial Indebtedness and Leverage,"
"--Limitations on Acess to Cash Flow of Subsidiaries; Holding Company
Structure," and "-- Ranking of Series A Preferred Stock and Exchange Notes."
The Exchange Note Indenture will provide that, prior to complying with the
provisions of this covenant, but in any event within 90 days following a
Change of Control, the Company will either repay all outstanding Senior Debt
or obtain the requisite consents, if any, under all agreements covering
outstanding Senior Debt to permit the repurchase of Exchange Notes as
required by this covenant.
Any future credit agreements or other agreements relating to Indebtedness
to which the Company becomes a party may prohibit the Company from purchasing
any Exchange Note prior to its maturity, and
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may also provide that certain change of control events with respect to the
Company would constitute a default thereunder. In the event a Change of
Control occurs at a time when the Company is prohibited from purchasing
Exchange Notes, the Company could seek the consent of its lenders to the
purchase of Exchange Notes or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or
repay such borrowings, the Company will remain prohibited from purchasing
Exchange Notes. In such case, the Company's failure to purchase tendered
Exchange Notes would constitute an Event of Default under the Exchange Note
Indenture. In such circumstances, the subordination provisions in the
Exchange Note Indenture would likely restrict payments to the Holders of
Exchange Notes. See "Risk Factors--Potential Anti-Takeover Provisions; Change
of Control."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set
forth in the Exchange Note Indenture applicable to a Change of Control Offer
made by the Company and purchases all Exchange Notes validly tendered and not
withdrawn under such Change of Control Offer.
ASSET SALES
The Exchange Note Indenture will provide that the Company will not, and
will not permit any of its Restricted Subsidiaries to, engage in an Asset
Sale unless (i) the Company (or the Restricted Subsidiary, as the case may
be) receives consideration at the time of such Asset Sale at least equal to
the fair value (evidenced by a resolution of the Board of Directors set forth
in an Officers' Certificate delivered to the Exchange Note Trustee) of the
assets or Equity Interests issued or sold or otherwise disposed of and (ii)
at least 85% of the consideration therefor received by the Company or such
Restricted Subsidiary is in the form of cash; provided that the amount of (x)
any liabilities (as shown on the Company's or such Restricted Subsidiary's
most recent balance sheet or in the notes thereto), of the Company or any
Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Exchange Notes or any guarantee thereof) that are assumed
by the transferee of any such assets and (y) any notes or other obligations
received by the Company or any such Restricted Subsidiary from such
transferee that are immediately converted by the Company or such Restricted
Subsidiary into cash (to the extent of the cash received), shall be deemed to
be cash for purposes of this provision. Notwithstanding the foregoing, the
Company and its Restricted Subsidiaries may engage in Asset Swaps (which
shall not be deemed to be Asset Sales for purposes of this covenant);
provided that, immediately after giving effect to such Asset Swap, the
Company would be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Indebtedness to Adjusted Operating Cash Flow Ratio set forth
in the first paragraph of the covenant described under the caption
"--Incurrence of Indebtedness and Issuance of Preferred Stock."
Within 180 days after the receipt of any Net Proceeds from an Asset Sale,
the Company or the applicable Restricted Subsidiary may, at its option, apply
such Net Proceeds (a) to permanently reduce Indebtedness outstanding pursuant
to any Senior Debt (and to permanently reduce the commitments thereunder by a
corresponding amount), (b) to permanently reduce Indebtedness of any of the
Company's Restricted Subsidiaries or (c) to the acquisition of another
business, the making of a capital expenditure or the acquisition of other
long-term assets, in each case, in a Permitted Business; provided, however,
that if the Company or the applicable Restricted Subsidiary enters into a
binding agreement to reinvest such Net Proceeds in accordance with this
clause (c) within 180 days after the receipt thereof, the provisions of this
covenant will be satisfied so long as such binding agreement is consummated
within one year after the receipt of such Net Proceeds. If any such legally
binding agreement to reinvest such Net Proceeds is terminated, then the
Company may, within 90 days of such termination, or within 180 days of such
Asset Sale, whichever is later, apply such Net Proceeds as provided in
clauses (a), (b) or (c) above (without regard to the proviso contained in
clause (c) above). Pending the final application of any such Net Proceeds,
the Company or the applicable Restricted Subsidiary may temporarily reduce
Indebtedness pursuant to any Bank Facility or otherwise invest such Net
Proceeds in any manner that is not prohibited by the Exchange Note Indenture.
A reduction of Indebtedness pursuant to any Bank Facility is not "permanent"
for purposes of clause (a) of this paragraph if an amount equal to the amount
of such reduction is reborrowed and used to make an acquisition described in
clause (c) of this paragraph within the time period specified in this
covenant. Any Net Proceeds
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from Asset Sales that are not applied or invested as provided in the first
sentence of this paragraph will be deemed to constitute "Excess Proceeds."
Within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company will be required to make an offer
to all Holders of Exchange Notes and the holders of Pari Passu Debt, to the
extent required by the terms thereof (an "Asset Sale Offer"), to purchase the
maximum principal amount of Exchange Notes and Pari Passu Debt that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus, in each case, accrued and
unpaid interest thereon, if any, to the date of purchase, in accordance with
the procedures set forth in the Exchange Note Indenture or the agreements
governing Pari Passu Debt, as applicable; provided, however, that the Company
may only purchase Pari Passu Debt in an Asset Sale Offer that was issued
pursuant to an indenture having a provision substantially similar to the
Asset Sale Offer provision contained in the Exchange Note Indenture. To the
extent that the aggregate amount of Exchange Notes and Pari Passu Debt
tendered pursuant to an Asset Sale Offer is less than the Excess Proceeds,
the Company may use any remaining Excess Proceeds for general corporate
purposes. If the aggregate principal amount of Exchange Notes and Pari Passu
Debt surrendered exceeds the amount of Excess Proceeds, the Exchange Note
Trustee shall select the Exchange Notes and Pari Passu Debt to be purchased
on a pro rata basis, based upon the principal amount thereof surrendered in
such Asset Sale Offer. Upon completion of such offer to purchase, the amount
of Excess Proceeds shall be reset at zero.
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Exchange Note Indenture will provide that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or
indirectly, (i) declare or pay any dividend or make any payment or
distribution on account of the Company's Equity Interests (including, without
limitation, any payment in connection with any merger or consolidation
involving the Company) or on account of any Qualified Subsidiary Stock or
make any payment or distribution (other than compensation paid to, or
reimbursement of expenses of, employees in the ordinary course of business)
to or for the benefit of the direct or indirect holders of the Company's
Equity Interests or the direct or indirect holders of any Qualified
Subsidiary Stock in their capacities as such (other than dividends or
distributions payable in Equity Interests (other than Disqualified Stock) of
the Company); (ii) purchase, redeem or otherwise acquire or retire for value
any Equity Interests of the Company or any direct or indirect parent of the
Company or other Affiliate of the Company (other than any such Equity
Interests owned by the Company or any of its Restricted Subsidiaries and
other than the acquisition of Equity Interests in Subsidiaries of the Company
solely in exchange for Equity Interests (other than Disqualified Stock) of
the Company); (iii) make any payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Indebtedness that is subordinated
to the Exchange Notes, except at final maturity; (iv) make any loan, advance,
capital contribution to or other investment in, or guarantee any obligation
of, any Affiliate of the Company other than a Permitted Investment; (v)
forgive any loan or advance to or other obligation of any Affiliate of the
Company (other than a loan or advance to or other obligation of a Wholly
Owned Restricted Subsidiary) which at the time it was made was not a
Restricted Payment that was permitted to be made; or (vi) make any Restricted
Investment (all such payments and other actions set forth in clauses (i)
through (vi) above being collectively referred to as "Restricted Payments"),
unless, at the time of and immediately after giving effect to such Restricted
Payment:
(A) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof, and
(B) the Company would be permitted to incur $1.00 of additional
Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow
Ratio described in the first paragraph of the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" and
(C) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Closing Date (excluding Restricted Payments permitted by clause
(3) of the next succeeding paragraph), is less than the sum of (i) an
amount equal to the Cumulative Operating Cash Flow for the period (taken
as one accounting period) from the beginning of the first full month
commencing after the Closing Date to the end of the Company's most
recently
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ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (the "Basket Period") less 1.4
times the Company's Cumulative Total Interest Expense for the Basket
Period, plus (ii) 100% of the aggregate net cash proceeds and, in the case
of proceeds consisting of assets constituting or used in a Permitted
Business, 100% of the fair market value of the aggregate net proceeds
other than cash received since the Closing Date (1) by the Company as
capital contributions to the Company (other than from a Subsidiary) or (2)
from the sale by the Company (other than to a Subsidiary) of its Equity
Interests (other than Disqualified Stock), plus (iii) without duplication,
to the extent that any Restricted Investment that was made after the
Closing Date is sold for cash or otherwise liquidated or repaid for cash,
the Net Proceeds received by the Company or a Wholly Owned Restricted
Subsidiary of the Company upon the sale of such Restricted Investment,
plus (iv) without duplication, to the extent that any Unrestricted
Subsidiary is designated by the Company as a Restricted Subsidiary, an
amount equal to the fair market value of such Investment at the time of
such designation, plus (v) $2.5 million.
The foregoing provisions shall not prohibit (1) the payment of any
dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of
the Exchange Note Indenture; (2) the redemption, repurchase, retirement or
other acquisition of any Equity Interests of the Company in exchange for, or
out of the net proceeds of, the substantially concurrent sale (other than to
a Subsidiary of the Company) of other Equity Interests of the Company (other
than any Disqualified Stock); provided that the amount of any such net
proceeds that are utilized for any such redemption, repurchase, retirement or
other acquisition shall be excluded from clause (c)(ii) of the preceding
paragraph; (3) the defeasance, redemption or repurchase of Indebtedness with
the proceeds of a substantially concurrent issuance of Permitted Refinancing
Debt in accordance with the provisions of the covenant described under the
caption "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock;" (4) the payment by the Company of advances under the Split
Dollar Agreement in an amount not to exceed $250,000 in any four-quarter period;
(5) the repurchase or redemption from employees of the Company and its
subsidiaries (other than the Principal) of Capital Stock of the Company in an
amount not to exceed an aggregate of $3.0 million and (6) cash payments made in
lieu of the issuance of additional Exchange Notes having a face amount less than
$1,000 and any cash payments representing accrued and unpaid interest in respect
thereof, not to exceed $100,000 in the aggregate in any fiscal year.
The amount of all Restricted Payments (other than cash) shall be the fair
market value on the date of the Restricted Payment of the asset(s) proposed
to be transferred by the Company or the applicable Restricted Subsidiary, as
the case may be, net of any liabilities proposed to be assumed by the
transferee and novated pursuant to a written agreement releasing the Company
and its Subsidiaries. Not later than the date of making any Restricted
Payment, the Company shall deliver to the Exchange Note Trustee an Officers'
Certificate stating that such Restricted Payment is permitted and setting
forth the basis upon which the calculations required by this covenant were
computed, which calculations may be based upon the Company's latest available
financial statements.
The Board of Directors may designate any Restricted Subsidiary to be an
Unrestricted Subsidiary if such designation would not cause a Default or an
Event of Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries in the Subsidiary
so designated shall be deemed to be Restricted Payments at the time of such
designation (valued as set forth below) and shall reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments shall be deemed to constitute Investments in an
amount equal to the fair market value of such Investments at the time of such
designation. Such designation shall be permitted only if such Restricted
Payment would be permitted at such time and if such Restricted Subsidiary
would otherwise meet the definition of an Unrestricted Subsidiary.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Exchange Note Indenture will provide that the Company may not, and may
not permit any of its Subsidiaries to, directly or indirectly, create, incur,
issue, assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including
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Acquired Debt) and shall not issue any Disqualified Stock and shall not
permit any of its Subsidiaries to issue any shares of preferred stock (other
than Qualified Subsidiary Stock); provided, however, that (a) the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock and (b) a Restricted Subsidiary of the Company may incur Indebtedness
(including Acquired Debt) or issue shares of preferred stock (including
Disqualified Stock) if, in each case, the Company's Indebtedness to Adjusted
Operating Cash Flow Ratio as of the date on which such Indebtedness is
incurred or such Disqualified Stock or preferred stock is issued would have
been 7.0 to 1 or less, determined on a pro forma basis (including a pro forma
application of the net proceeds therefrom), as if the additional Indebtedness
had been incurred, or the Disqualified Stock or preferred stock had been
issued, as the case may be, as of the date of such calculation.
The foregoing provisions shall not apply to:
(i) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of
preferred stock; provided, however, that if any such Indebtedness ceases
to be Non-Recourse Debt of an Unrestricted Subsidiary or any such
preferred stock becomes preferred stock (other than Qualified Subsidiary
Stock) of a Restricted Subsidiary, as the case may be, such event shall be
deemed to constitute an incurrence of Indebtedness by or an issuance of
preferred stock (other than Qualified Subisdiary Stock) of, as the case
may be, a Restricted Subsidiary of the Company;
(ii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so
long as the aggregate principal amount of all Indebtedness outstanding
under all Bank Facilities does not, at the time of incurrence, exceed an
amount equal to $50.0 million;
(iii) the incurrence by the Company or any of its Restricted
Subsidiaries of the Existing Indebtedness;
(iv) Indebtedness under the Exchange Notes (including any Exchange
Notes issued to pay interest on outstanding Exchange Notes);
(v) the incurrence by the Company or any of its Restricted Subsidiaries
of intercompany Indebtedness between or among the Company and any of its
Wholly Owned Restricted Subsidiaries; provided, however, that (i) if the
Company is the obligor on such Indebtedness, such Indebtedness is
expressly subordinated to the prior payment in full in cash of all
obligations with respect to the Exchange Notes and (ii)(A) any subsequent
issuance or transfer of Equity Interests that result in any such
Indebtedness being held by a Person other than the Company or a Wholly
Owned Restricted Subsidiary of the Company and (B) any sale or other
transfer of such Indebtedness to a Person that is not either the Company
or a Wholly Owned Restricted Subsidiary of the Company shall be deemed, in
each case, to constitute an incurrence of such Indebtedness by the Company
or such Restricted Subsidiary, as the case may be;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations,
mortgage financings or purchase money obligations, in each case incurred
for the purpose of financing all or any part of the purchase price or cost
of construction or improvement of property used in the business of the
Company or such Restricted Subsidiary, in an aggregate principal amount
not to exceed $5.0 million at any time outstanding;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease
or refund, Indebtedness that was permitted by the Exchange Note Indenture
to be incurred; and
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any
other clause of this paragraph) in an aggregate principal amount at any
time outstanding not to exceed $5.0 million.
If an item of Indebtedness is permitted to be incurred on the basis of the
first paragraph of this covenant and also on the basis of one or more of
clauses (i) through (viii) above, or is permitted to be incurred on the basis
of two or more of clauses (i) through (viii) above, then the Company shall
classify the basis on which
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such item of Indebtedness is incurred. If an item of Indebtedness is repaid
with the proceeds of an incurrence of other Indebtedness (whether from the
same of a different creditor), the Company may classify such other
Indebtedness as having been incurred on the same basis as the Indebtedness
being repaid or on a different basis permitted under this covenant. For
purposes of this paragraph, "Indebtedness" includes Disqualified Stock and
preferred stock of Subsidiaries. Accrual of interest and the accretion of
accreted value will not be deemed to be an incurrence of Indebtedness for
purposes of this covenant.
LIENS
The Exchange Note Indenture will provide that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or indirectly
create, incur, assume or suffer to exist any Lien on any asset now owned or
hereafter acquired, or any income or profits therefrom, or assign or convey
any right to receive income therefrom, except Permitted Liens.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Exchange Note Indenture will provide that the Company will not, and
will not permit any of its Restricted Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective
any encumbrance or restriction on the ability of any Restricted Subsidiary to
(i)(a) pay dividends or make any other distributions to the Company or any of
its Restricted Subsidiaries (1) on its Capital Stock or (2) with respect to
any other interest or participation in, or measured by, its profits, or (b)
pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries, (ii) make loans or advances to the Company or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except for such
encumbrances or restrictions existing under or by reason of (a) the terms of
any Indebtedness permitted by the Exchange Note Indenture to be incurred by
any Subsidiary of the Company, (b) Existing Indebtedness as in effect on the
Closing Date, (c) the Exchange Note Indenture and the Exchange Notes, (d)
applicable law, (e) any instrument governing Indebtedness or Capital Stock of
a Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such
Indebtedness was incurred in connection with or in contemplation of such
acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person and
its Subsidiaries, or the property or assets of the Person and its
Subsidiaries, so acquired or (f) by reason of customary non-assignment
provisions in leases and other contracts entered into in the ordinary course
of business and consistent with past practices.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Exchange Note Indenture will provide that the Company may not
consolidate or merge with or into (whether or not the Company is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or
more related transactions, to another corporation, Person or entity unless
(i) the Company is the surviving corporation or the entity or the Person
formed by or surviving any such consolidation or merger (if other than the
Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (ii) the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company) or the entity or Person
to which such sale, assignment, transfer, lease, conveyance or other
disposition shall have been made assumes all the Obligations of the Company
under the Exchange Notes and the Exchange Note Indenture pursuant to a
supplemental indenture in a form reasonably satisfactory to the Exchange Note
Trustee; (iii) immediately after such transaction no Default or Event of
Default exists; and (iv) the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made will, at the time of such transaction and after giving
pro forma effect thereto as if such transaction had occurred at the beginning
of the applicable four-quarter period, be permitted to incur at least $1.00
of additional Indebtedness pursuant to the Indebtedness to Adjusted Operating
Cash Flow Ratio set forth in the first paragraph of the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock."
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TRANSACTIONS WITH AFFILIATES
The Exchange Note Indenture will provide that the Company may not, and may
not permit any of its Restricted Subsidiaries to, sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the
Company or the relevant Restricted Subsidiary than those that would have been
obtained in a comparable transaction by the Company or such Restricted
Subsidiary with an unrelated Person and (ii) the Company delivers to the
Holders (a) with respect to any Affiliate Transaction or series of related
Affiliate Transactions involving aggregate consideration in excess of $1.0
million, a resolution of the Board of Directors set forth in an Officers'
Certificate certifying that such Affiliate Transaction complies with clause
(i) above and that such Affiliate Transaction has been approved by a majority
of the disinterested members of the Board of Directors and a majority of the
Independent Directors and (b) with respect to any Affiliate Transaction or
series of related Affiliate Transactions involving aggregate consideration in
excess of $5.0 million, an opinion as to the fairness to the Company or such
Restricted Subsidiary of such Affiliate Transaction from a financial point of
view issued by an investment banking firm of national standing; provided that
the Company shall not, and shall not permit any of its Restricted
Subsidiaries to, engage in any Affiliate Transaction involving aggregate
consideration in excess of $1.0 million at any time that there is not at
least one Independent Director on the Company's Board of Directors; and
provided further that (w) any employment agreement entered into by the
Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such
Restricted Subsidiary, (x) transactions between or among the Company and/or
its Restricted Subsidiaries, (y) the payment of any dividend on, or the
issuance of additional Exchange Notes in exchange for, the Series A Preferred
Stock, provided that such dividends are paid on a pro rata basis and the
additional Exchange Notes are issued in accordance with the Certificate of
Designation, and (z) transactions permitted by the provisions of the covenant
described under the caption "--Certain Covenants-- Restricted Payments," in
each case, shall not be deemed Affiliate Transactions.
NO SENIOR SUBORDINATED DEBT
The Exchange Note Indenture will provide that, notwithstanding the
provisions of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock," the
Company shall not incur, create, issue, assume, guarantee or otherwise become
liable for any Indebtedness that is subordinate or junior in right of payment
to any Senior Debt and senior in any respect in right of payment to the
Exchange Notes.
LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
RESTRICTED SUBSIDIARIES
The Exchange Note Indenture will provide that the Company (i) will not,
and will not permit any Wholly Owned Restricted Subsidiary of the Company to,
transfer, convey, sell or otherwise dispose of any Capital Stock (other than
Qualified Subsidiary Stock) of any Wholly Owned Restricted Subsidiary of the
Company to any Person (other than the Company or a Wholly Owned Restricted
Subsidiary of the Company), unless (a) such transfer, conveyance, sale, lease
or other disposition is of all the Capital Stock of such Wholly Owned
Restricted Subsidiary and (b) the cash Net Proceeds from such transfer,
conveyance, sale, lease or other disposition are applied in accordance with
the covenant described under the caption "--Repurchase at the Option of
Holders--Asset Sales," and (ii) shall not permit any Wholly Owned Restricted
Subsidiary of the Company to issue any of its Equity Interests (other than
Qualified Subsidiary Stock and, if necessary, shares of its Capital Stock
constituting directors' qualifying shares) to any Person other than to the
Company or a Wholly Owned Restricted Subsidiary of the Company.
REPORTS
The Exchange Note Indenture will provide that, whether or not required by
the rules and regulations of the Commission, so long as any Exchange Notes
are outstanding, the Company will furnish to the Holders of Exchange Notes
(i) all quarterly and annual financial information that would be required to
be contained in a filing with the Commission on Forms 10-Q and 10-K if the
Company were required to file such Forms, including "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and,
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with respect to the annual information only, a report thereon by the
Company's certified independent accountants and (ii) all current reports that
would be required to be filed with the Commission on Form 8-K if the Company
were required to file such reports. In addition, whether or not required by
the rules and regulations of the Commission, the Company will file a copy of
all such information and reports with the Commission for public availability
(unless the Commission will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request. In addition to the financial information required by the Exchange
Act, each such quarterly and annual report shall be required to contain
"summarized financial information" (as defined in Rule 1-02(aa)(1) of
Regulation S-X under the Exchange Act) showing Adjusted Operating Cash Flow
for the Company and its Restricted Subsidiaries, on a consolidated basis,
where Adjusted Operating Cash Flow for the Company is calculated in a manner
consistent with the manner described under the definition of "Adjusted
Operating Cash Flow" contained herein. The summarized financial information
required pursuant to the preceding sentence may, at the election of the
Company, be included in the footnotes to audited consolidated financial
statements or unaudited quarterly financial statements of the Company and
shall be as of the same dates and for the same periods as the consolidated
financial statements of the Company and its Subsidiaries required pursuant to
the Exchange Act.
EVENTS OF DEFAULT AND REMEDIES
The Exchange Note Indenture will provide that each of the following
constitutes an Event of Default: (1) default by the Company in the payment of
interest on the Exchange Notes when the same becomes due and payable and the
Default continues for a period of 30 days (whether or not such payment is
prohibited by the subordination provisions of the Exchange Note Indenture);
(2) default by the Company in the payment of the principal of or premium, if
any, on the Exchange Notes when the same becomes due and payable at maturity,
upon redemption or otherwise (whether or not such payment is prohibited by
the subordination provisions of the Exchange Note Indenture); (3) failure by
the Company to comply with the provisions described under the captions
"--Repurchase at the Option of Holders--Change of Control," "--Repurchase at
the Option of Holders--Asset Sales," "--Certain Covenants--Restricted
Payments, "--Certain Covenants--Incurrence of Indebtedness and Issuance of
Preferred Stock" or "--Certain Covenants--Merger, Consolidation or Sale of
Assets;" (4) failure by the Company for 60 days after notice to comply with
any of its other agreements in the Exchange Note Indenture or the Exchange
Notes; (5) default under any mortgage, indenture or instrument under which
there may be issued or by which there may be secured or evidenced any
Indebtedness for money borrowed by the Company or any of its Restricted
Subsidiaries (or the payment of which is guaranteed by the Company or any of
its Restricted Subsidiaries), whether such Indebtedness or Guarantee now
exists, or shall be created hereafter, which default (a) is caused by a
failure to pay principal of or premium, if any, or interest on such
Indebtedness prior to the expiration of the grace period provided in such
Indebtedness on the date of such default (a "Payment Default") or (b) results
in the acceleration of such Indebtedness prior to its express maturity and,
in each case, the principal amount of such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated, aggregates
$5.0 million or more; (6) a final judgment or final judgments for the payment
of money are entered by a court or courts of competent jurisdiction against
the Company or any Restricted Subsidiary that would be a Significant
Subsidiary and such judgment or judgments remain unpaid, undischarged or
unstayed for a period of 60 days, provided that the aggregate of all such
undischarged judgments exceeds $5.0 million; and (7) certain events of
bankruptcy or insolvency with respect to the Company, any Restricted
Subsidiary that would constitute a Significant Subsidiary or any group of
Restricted Subsidiaries that, taken together, would constitute a Significant
Subsidiary.
If any Event of Default occurs and is continuing, the Exchange Note
Trustee or the Holders of at least 25% in principal amount of the then
outstanding Exchange Notes may declare all the Exchange Notes to be due and
payable immediately. Notwithstanding the foregoing, in the case of an Event
of Default arising from certain events of bankruptcy or insolvency with
respect to the Company, any Restricted Subsidiary that would constitute a
Significant Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary, all outstanding Exchange
Notes will become due and payable without further action or notice. Holders
of the Exchange Notes may not enforce the Exchange Note Indenture or the
Exchange Notes except as provided in the Exchange Note Indenture. Subject to
certain limitations, Holders of a majority in principal amount of the then
outstanding Exchange Notes may direct the Exchange Note Trustee
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in its exercise of any trust or power. The Exchange Note Trustee may withhold
from Holders of the Exchange Notes notice of any continuing Default or Event
of Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful
action (or inaction) taken (or not taken) by or on behalf of the Company with
the intention of avoiding payment of the premium that the Company would have
had to pay if the Company then had elected to redeem the Exchange Notes
pursuant to the optional redemption provisions of the Exchange Note
Indenture, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Exchange
Notes. If an Event of Default occurs prior to , 2002 by reason of
any willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding the prohibition on redemption of the
Exchange Notes prior to , 2002, then the premium specified in the
Exchange Note Indenture shall also become immediately due and payable to the
extent permitted by law upon the acceleration of the Exchange Notes.
The Holders of a majority in aggregate principal amount of the Exchange
Notes then outstanding by notice to the Exchange Note Trustee may on behalf
of the Holders of all of the Exchange Notes waive any existing Default or
Event of Default and its consequences under the Exchange Note Indenture
except a continuing Default or Event of Default in the payment of interest
on, or the principal of, the Exchange Notes.
The Company is required to deliver to the Exchange Note Trustee annually a
statement regarding compliance with the Exchange Note Indenture, and the
Company is required upon becoming aware of any Default or Event of Default,
to deliver to the Exchange Note Trustee a statement specifying such Default
or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the
Company, as such, shall have any liability for any obligations of the Company
under the Exchange Notes or the Exchange Note Indenture or for any claim
based on, in respect of, or by reason of, such obligations or their creation.
Each Holder of Exchange Notes by accepting a Exchange Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Notes. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is
the view of the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Exchange Notes ("Legal
Defeasance") except for (i) the rights of Holders of outstanding Exchange
Notes to receive payments in respect of the principal of, premium, if any,
and interest on such Exchange Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the
Exchange Notes concerning issuing temporary Exchange Notes, registration of
Exchange Notes, mutilated, destroyed, lost or stolen Exchange Notes and the
maintenance of an office or agency for payment and to hold money for security
payments held in trust, (iii) the rights, powers, trusts, duties and
immunities of the Exchange Note Trustee, and the Company's obligations in
connection therewith and (iv) the Legal Defeasance provisions of the Exchange
Note Indenture. In addition, the Company may, at its option and at any time,
elect to have the obligations of the Company released with respect to certain
covenants that are described in the Exchange Note Indenture ("Covenant
Defeasance") and thereafter any omission to comply with such obligations
shall not constitute a Default or Event of Default with respect to the
Exchange Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and
insolvency events) described under "Events of Default" will no longer
constitute an Event of Default with respect to the Exchange Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Exchange Note Trustee, in
trust, for the benefit of the Holders of the Exchange Notes, cash in United
States Dollars, non-callable Government Securities, or a combination thereof,
in such amounts as will be sufficient, in the opinion of a nationally
recognized firm of independent public accountants, to pay the
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principal of, premium, if any, interest on the outstanding Exchange Notes on
the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Exchange Notes are being defeased to
maturity or to a particular redemption date; (ii) in the case of Legal
Defeasance, the Company shall have delivered to the Exchange Note Trustee an
opinion of counsel in the United States reasonably acceptable to the Exchange
Note Trustee confirming that (A) the Company has received from, or there has
been published by, the Internal Revenue Service a ruling or (B) since the
date of the Exchange Note Indenture, there has been a change in the
applicable federal income tax law, in either case to the effect that, and
based thereon such opinion of counsel shall confirm that, the Holders of the
outstanding Exchange Notes will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at
the same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company shall have
delivered to the Exchange Note Trustee an opinion of counsel in the United
States reasonably acceptable to the Exchange Note Trustee confirming that the
Holders of the outstanding Exchange Notes will not recognize income, gain or
loss for federal income tax purposes as a result of such Covenant Defeasance
and will be subject to federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such Covenant
Defeasance had not occurred; (iv) no Default or Event of Default shall have
occurred and be continuing on the date of such deposit (other than a Default
or Event of Default resulting from the borrowing of funds to be applied to
such deposit) or insofar as Events of Default from bankruptcy or insolvency
events are concerned, at any time in the period ending on the 91st day after
the date of deposit (or greater period of time in which any such deposit of
trust funds may remain subject to bankruptcy or insolvency laws insofar as
those apply to the deposit by the Company); (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or
constitute a default under any material agreement or instrument (other than
the Exchange Note Indenture) to which the Company or any of its Subsidiaries
is a party or by which the Company or any of its Subsidiaries is bound; (vi)
the Company must have delivered to the Exchange Note Trustee an opinion of
counsel to the effect that, as of the date of such opinion, (A) the trust
funds will not be subject to rights of holders of Indebtedness other than the
Exchange Notes and (B) assuming no intervening bankruptcy of the Company
between the date of deposit and the 91st day following the deposit and
assuming no Holder of Exchange Notes is an insider of the Company, after the
91st day following the deposit, the trust funds will not be subject to the
effects of any applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally under any applicable United States
or state law; (vii) the Company must deliver to the Exchange Note Trustee an
Officers' Certificate stating that the deposit was not made by the Company
with the intent of preferring the Holders of Exchange Notes over the other
creditors of the Company or with the intent of defeating, hindering, delaying
or defrauding creditors of the Company or others; and (viii) the Company must
deliver to the Exchange Note Trustee an Officers' Certificate and an opinion
of counsel, each stating that all conditions precedent provided for relating
to the Legal Defeasance or the Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Exchange Notes in accordance with the
Exchange Note Indenture. The Registrar and the Exchange Note Trustee may
require a Holder, among other things, to furnish appropriate endorsements and
transfer documents and the Company may require a Holder to pay any taxes and
fees required by law or permitted by the Exchange Note Indenture. The Company
is not required to transfer or exchange any Exchange Note selected for
redemption. Also, the Company is not required to transfer or exchange any
Exchange Note for a period of 15 days before a selection of Exchange Notes to
be redeemed.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Exchange
Note Indenture or the Exchange Notes may be amended or supplemented with the
consent of the Holders of at least a majority in principal amount of the
Exchange Notes then outstanding (including, without limitation, consents
obtained in connection with a purchase of, or tender offer or exchange offer
for, Exchange Notes), and any existing
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default or compliance with any provision of the Exchange Note Indenture or
the Exchange Notes may be waived with the consent of the Holders of a
majority in principal amount of the then outstanding Exchange Notes
(including consents obtained in connection with a purchase of, or tender
offer or exchange offer for, Exchange Notes).
Without the consent of each Holder affected, an amendment or waiver may
not (with respect to any Exchange Notes held by a non-consenting Holder): (i)
reduce the principal amount of Exchange Notes whose Holders must consent to
an amendment, supplement or waiver, (ii) reduce the principal of or change
the fixed maturity of any Exchange Note or alter the provisions with respect
to the redemption of the Exchange Notes (other than provisions relating to
the covenants described above under the caption "--Repurchase at the Option
of Holders"), (iii) reduce the rate of or change the time for payment of
interest on any Exchange Note, (iv) waive a Default or Event of Default in
the payment of principal of or premium, if any, or interest on the Exchange
Notes (except a rescission of acceleration of the Exchange Notes by the
Holders of a majority in aggregate principal amount of the Exchange Notes and
a waiver of the payment default that resulted from such acceleration), (v)
make any Exchange Note payable in money other than that stated in the
Exchange Notes, (vi) make any change in the provisions of the Exchange Note
Indenture relating to waivers of past Defaults or the rights of Holders of
Exchange Notes to receive payments of principal of or premium, if any, or
interest on the Exchange Notes, (vii) waive a redemption payment with respect
to any Exchange Note (other than a payment required by one of the covenants
described above under the caption "--Repurchase at the Option of Holders") or
(viii) make any change in the foregoing amendment and waiver provisions. In
addition, any amendment to the provisions of Article 10 of the Exchange Note
Indenture (which relates to subordination), including the related
definitions, will require the consent of the Holders of at least 75% in
aggregate principal amount of the Exchange Notes then outstanding if such
amendment would adversely affect the rights of Holders of Exchange Notes.
Notwithstanding the foregoing, without the consent of any Holder of
Exchange Notes, the Company and the Exchange Note Trustee may amend or
supplement the Exchange Note Indenture or the Exchange Notes to cure any
ambiguity, defect or inconsistency, to provide for uncertificated Exchange
Notes in addition to or in place of certificated Exchange Notes, to provide
for the assumption of the Company's obligations to Holders of Exchange Notes
in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of Exchange Notes or
that does not adversely affect the legal rights under the Exchange Note
Indenture of any such Holder, or to comply with requirements of the
Commission in order to maintain the qualification of the Exchange Note
Indenture under the Trust Indenture Act.
CONCERNING THE EXCHANGE NOTE TRUSTEE
The Exchange Note Indenture contains certain limitations on the rights of
the Exchange Note Trustee, should it become a creditor of the Company, to
obtain payment of claims in certain cases, or to realize on certain property
received in respect of any such claim as security or otherwise. The Exchange
Note Trustee will be permitted to engage in other transactions; however, if
it acquires any conflicting interest it must eliminate such conflict within
90 days, apply to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding
Exchange Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Exchange
Note Trustee, subject to certain exceptions. The Exchange Note Indenture
provides that in case an Event of Default shall occur (which shall not be
cured), the Exchange Note Trustee will be required, in the exercise of its
power, to use the degree of care of a prudent man in the conduct of his own
affairs. Subject to such provisions, the Exchange Note Trustee will be under
no obligation to exercise any of its rights or powers under the Exchange Note
Indenture at the request of any Holder of Exchange Notes, unless such Holder
shall have offered to the Exchange Note Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Certificate of
Designation and Exchange Note Indenture. Reference is made to the Certificate
of Designation and the Exchange Note Indenture for a full disclosure of all
such terms, as well as any other capitalized terms used herein for which no
definition is provided.
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"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Indebtedness incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Adjusted Operating Cash Flow" means, for the four most recent fiscal
quarters for which internal financial statements are available, Operating
Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow
for the most recent four-quarter period plus DBS Cash Flow for the most
recent quarterly period, multiplied by four.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or
otherwise; provided that beneficial ownership of 10% or more of the voting
securities of a Person shall be deemed to be control.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback)
other than in the ordinary course of business consistent with past practices
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries taken as
a whole will be governed by the provisions described above under the caption
"--Repurchase at the Option of Holders--Change of Control" and/or the
provisions described above under the caption "--Certain Covenants--Merger,
Consolidation or Sale of Assets" and not by the provision of the Asset Sale
covenant) and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following transactions will not
be deemed to be Asset Sales: (i) a transfer of assets by the Company to a
Wholly Owned Restricted Subsidiary of the Company or by a Wholly Owned
Restricted Subsidiary of the Company to the Company or to another Wholly
Owned Restricted Subsidiary of the Company, (ii) an issuance of Equity
Interests by a Wholly Owned Restricted Subsidiary of the Company to the
Company or to another Wholly Owned Restricted Subsidiary of the Company and
(iii) a Restricted Payment that is permitted by the provisions of the
covenant described above under the caption "--Certain Covenants--Restricted
Payments."
"Asset Swap" means an exchange of assets by the Company or a Restricted
Subsidiary of the Company for one or more Permitted Businesses or for a
controlling equity interest in any Person whose assets consist primarily of
one or more Permitted Businesses.
"Bank Facilities" means, with respect to the Company or any of its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale
of receivables to such lenders or to special purpose entities formed to
borrow from such lenders against such receivables) or letters of credit, in
each case, as amended, restated, modified, renewed, refunded, replaced or
refinanced in whole or in part from time to time.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that
would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated)
of corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation
that confers on a Person the right to receive a share of the profits and
losses of, or distributions of assets of, the issuing Person.
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"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government
or any agency or instrumentality thereof having maturities of not more than
six months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days or on demand for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above and
(v) commercial paper having the highest rating at acquisition obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition.
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all
or substantially all of the assets of the Company and its Restricted
Subsidiaries taken as a whole to any "person" (as such term is used in
Section 13(d)(3) of the Exchange Act) other than the Principal or his Related
Parties (as defined below), (ii) the adoption of a plan relating to the
liquidation or dissolution of the Company, (iii) the consummation of any
transaction (including, without limitation, any merger or consolidation) the
result of which is that (A) any "person" (as defined above) becomes the
"beneficial owner" (as such term is defined in Rule 13d-3 and Rule 13d-5
under the Exchange Act, except that a person shall be deemed to have
"beneficial ownership" of all securities that such person has the right to
acquire, whether such right is exercisable immediately or only after the
passage of time, upon the happening of an event or otherwise), directly or
indirectly, of more of the Class A Common Stock of the Company than is
beneficially owned (as defined above) at such time by the Principal and his
Related Parties in the aggregate, (B) the Principal and his Related Parties
collectively cease to beneficially own (as defined above) Voting Stock of the
Company having at least 30% of the combined voting power of all classes of
Voting Stock of the Company then outstanding or (C) the Principal and his
Affiliates acquire, in the aggregate, beneficial ownership (as defined above)
of more than 66 2/3% of the shares of Class A Common Stock at the time
outstanding or (iv) the first day on which a majority of the members of the
Board of Directors of the Company are not Continuing Directors.
"Closing Date" means the date on which shares of Series A Preferred Stock
are first issued.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Subsidiary or that is accounted for by the equity method
of accounting shall be included only to the extent of the amount of dividends
or distributions paid in cash to the referent Person or a Wholly Owned
Restricted Subsidiary thereof, (ii) the Net Income of any Person acquired in
a pooling of interests transaction for any period prior to the date of such
acquisition shall be excluded, (iii) the cumulative effect of a change in
accounting principles shall be excluded and (iv) the Net Income of any
Unrestricted Subsidiary shall be excluded, whether or not distributed to the
Company or one of its Subsidiaries.
"Continuing Directors" means, as of any date of determination, any member
of the Board of Directors of the Company who (i) was a member of such Board
of Directors on the Closing Date or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Cumulative Operating Cash Flow" means, as of any date of determination,
Operating Cash Flow for the Company and its Restricted Subsidiaries for the
period (taken as one accounting period) from the beginning of the first full
month commencing after the Closing Date to the end of the most recently ended
fiscal quarter for which internal financial statements are available at such
date of determination, plus all cash dividends received by the Company or a
Wholly Owned Restricted Subsidiary of the Company from any Unrestricted
Subsidiary of the Company or Wholly Owned Restricted Subsidiary of the
Company to the extent that such dividends are not included in the calculation
of permitted Restricted Payments under paragraph (C) of the covenant
described under the caption "--Certain Covenants--Restricted Payments" by
virtue of clause (iii) of such paragraph.
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"Cumulative Total Interest Expense" means, with respect to the Company and
its Restricted Subsidiaries, as of any date of determination, Total Interest
Expense for the period (taken as one accounting period) from the beginning of
the first full month commencing after the Closing Date to the end of the most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination.
"DBS Cash Flow" means income from operations (before depreciation,
amortization and Non-Cash Incentive Compensation to the extent deducted in
arriving at income from operations) for the Satellite Segment determined on a
basis consistent with the segment data contained in the Company's
consolidated audited financial statements.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock (other than the Series A
Preferred Stock) that, by its terms (or by the terms of any security into
which it is convertible or for which it is exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the
Holder thereof, in whole or in part, on or prior to the mandatory redemption
date of the Series A Preferred Stock unless, in any such case, the issuer's
obligation to pay, purchase or redeem such Capital Stock is expressly
conditioned on its ability to do so in compliance with the provisions of the
covenant described under the caption "--Certain Covenants--Restricted
Payments."
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Notes" means the Company's ___% Senior Subordinated Exchange
Notes due 2007 issuable in exchange for the Company's Series A Preferred
Stock.
"Existing Indebtedness" means all Indebtedness of the Company and its
Subsidiaries in existence on the Closing Date, until such amounts are repaid.
"fair market value" means, with respect to assets or aggregate net
proceeds having a fair market value (a) of less than $5.0 million, the fair
market value of such assets or proceeds determined in good faith by the Board
of Directors of the Company (including a majority of the Independent
Directors thereof) and evidenced by a board resolution and (b) equal to or in
excess of $5.0 million, the fair market value of such assets or proceeds as
determined by an independent appraisal firm with experience in the valuation
of the classes and types of assets in question; provided that the fair market
value of the assets purchased in an arms'-length transaction by an Affiliate
of the Company (other than a Subsidiary) from a third party that is not also
an Affiliate of the Company or of such purchaser and contributed to the
Company within five Business Days of the consummation of the acquisition of
such assets by such Affiliate shall be deemed to be the aggregate
consideration paid by such Affiliate (which may include the fair market value
of any non-cash consideration to the extent that the valuation requirements
of this definition are complied with as to any such non-cash consideration).
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant
segment of the accounting profession, which are in effect on the Closing
Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States for the payment of which guarantee or
obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, co-borrowing
arrangements, letters of credit and reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations
of such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and (ii) other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates.
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"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced
by bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing any Capital Lease Obligations or the balance deferred and unpaid
of the purchase price of any property or representing any Hedging
Obligations, except any such balance that constitutes an accrued expense or
trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability
upon a balance sheet of such Person prepared in accordance with GAAP, as well
as all indebtedness of others secured by a Lien on any asset of such Person
(whether or not such indebtedness is assumed by such Person) and, to the
extent not otherwise included, the Guarantee by such Person of any
indebtedness of any other Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, upon the occurrence
of the contingency giving rise to the obligation, of any contingent
obligations at such date; provided that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the full amount of
such Indebtedness less the remaining unamortized portion of the original
issue discount of such Indebtedness at such time as determined in conformity
with GAAP.
"Indebtedness to Adjusted Operating Cash Flow Ratio" means, as of any date
of determination, the ratio of (a) the aggregate principal amount of all
outstanding Indebtedness of a Person and its Restricted Subsidiaries as of
such date on a consolidated basis, plus the aggregate liquidation preference
of all outstanding preferred stock (other than Qualified Subsidiary Stock) of
the Restricted Subsidiaries of such Person as of such date (excluding any
such preferred stock held by such Person or a Wholly Owned Restricted
Subsidiary of such Person), plus the aggregate liquidation preference or
redemption amount of all Disqualified Stock of such Person (excluding any
Disqualified Stock held by such Person or a Wholly Owned Restricted
Subsidiary of such Person) as of such date to (b) Adjusted Operating Cash
Flow of such Person and its Restricted Subsidiaries for the most recent
four-quarter period for which internal financial statements are available
determined on a pro forma basis after giving effect to all acquisitions and
dispositions of assets (notwithstanding clause (ii) of the definition of
"Consolidated Net Income") (including, without limitation, Asset Swaps) made
by such Person and its Restricted Subsidiaries since the beginning of such
four-quarter period through such date as if such acquisitions and
dispositions had occurred at the beginning of such four-quarter period.
"Independent Director" means a member of the Board of Directors who is
neither an officer nor an employee of the Company or any of its Affiliates.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with
GAAP; provided that an acquisition of assets, Equity Interests or other
securities by the Company for consideration consisting of common equity
securities, or preferred stock which is not Disqualified Stock, of the
Company shall not be deemed to be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but
not loss), together with any related provision for taxes on such gain (but
not loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b)
the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any
of its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring
gain (but not loss), together with any related provision for taxes on such
extraordinary or nonrecurring gain (but not loss).
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"Net Proceeds" means the aggregate cash proceeds received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting, investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied
to the repayment of Indebtedness in connection with such Asset Sale and any
reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"Non-Cash Incentive Compensation" means incentive compensation paid to any
officer, employee or director of the Company or any of its Subsidiaries in
the form of Class A Common Stock of the Company or options to purchase Class
A Common Stock of the Company pursuant to the Pegasus Restricted Stock Plan
and the Pegasus 1996 Stock Option Plan.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides credit support of any
kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a
guarantor or otherwise) or (c) constitutes the lender; and (ii) no default
with respect to which (including any rights that the holders thereof may have
to take enforcement action against an Unrestricted Subsidiary) would permit
(upon notice, lapse of time or both) any holder of any other Indebtedness of
the Company or any of its Restricted Subsidiaries to declare a default on
such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity; and (iii) as to which the lenders have
been notified in writing that they will not have any recourse to the stock or
assets of the Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Operating Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period, (A) plus (i)
extraordinary net losses and net losses on sales of assets outside the
ordinary course of business during such period, to the extent such losses
were deducted in computing such Consolidated Net Income, plus (ii) provision
for taxes based on income or profits, to the extent such provision for taxes
was included in computing such Consolidated Net Income, and any provision for
taxes utilized in computing the net losses under clause (i) hereof, plus
(iii) consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued and whether or not capitalized
(including, without limitation, amortization of original issue discount,
non-cash interest payments, the interest component of any deferred payment
obligations, the interest component of all payments associated with Capital
Lease Obligations, commissions, discounts and other fees and charges incurred
in respect of letter of credit or bankers' acceptance financings, and net
payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus
(iv) depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were
paid in a prior period) and other non-cash charges (excluding any such
non-cash charge to the extent that it represents an accrual of or reserve for
cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period) of such Person and its Subsidiaries for such
period to the extent that such depreciation, amortization and other non-cash
charges were deducted in computing such Consolidated Net Income, plus (v)
Non-Cash Incentive Compensation to the extent such compensation expense was
deducted in computing such Consolidated Net Income and to the extent not
included in clause (iv) of this definition and (B) less all non-cash income
for such period (excluding any such non-cash income to the extent it
represents an accrual of cash income in any future period or amortization of
cash income received in a prior period).
"Pari Passu Debt" means senior subordinated Indebtedness of the Company
permitted by the covenant described under the caption "--Certain Covenants--
Incurrence of Indebtedness and Issuance of Preferred Stock," other than the
Exchange Notes, which is pari passu in right of payment with the Exchange
Notes.
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"Permitted Businesses" means (i) any media or communications business,
including but not limited to, any broadcast television station, cable
franchise or other business in the television broadcasting, cable or
direct-to-home satellite television industries and (ii) any business
reasonably related or ancillary to any of the foregoing businesses.
"Permitted Investments" means (a) any Investments in the Company or in a
Wholly Owned Restricted Subsidiary of the Company; (b) any Investments in
Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary
of the Company in a Person, if as a result of such Investment (i) such Person
becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such
Person is merged, consolidated or amalgamated with or into, or transfers or
conveys substantially all of its assets to, or is liquidated into, the
Company or a Wholly Owned Restricted Subsidiary of the Company; (d)
Investments made as a result of the receipt of non-cash consideration from an
Asset Sale that was made pursuant to and in compliance with the provisions of
the covenant described under the caption "--Description of Exchange
Notes--Repurchase at the Option of Holders--Asset Sales;" and (e) other
Investments (measured as of the time made and without giving effect to
subsequent changes in value) that do not exceed an amount equal to $5.0
million plus, to the extent any such Investments are sold for cash or are
otherwise liquidated or repaid for cash, any gains less any losses realized
on the disposition of such Investments.
"Permitted Liens" means (i) Liens securing Senior Debt; (ii) Liens
securing Indebtedness of a Subsidiary that was permitted to be incurred under
the Exchange Note Indenture, (iii) Liens on property of a Person existing at
the time such Person is merged into or consolidated with the Company or any
Subsidiary of the Company; provided that such Liens were not created in
contemplation of such merger or consolidation and do not extend to any assets
other than those of the Person merged into or consolidated with the Company
or any Restricted Subsidiary of the Company; (iv) Liens on property existing
at the time of acquisition thereof by the Company or any Subsidiary of the
Company; provided that such Liens were not created in contemplation of such
acquisition; (v) Liens to secure the performance of statutory obligations,
surety or appeal bonds, performance bonds or other obligations of a like
nature incurred in the ordinary course of business; (vi) Liens existing on
the Closing Date; (vii) Liens to secure Indebtedness represented by Capital
Lease Obligations, mortgage financings or purchase money obligations
permitted by clause (vi) of the second paragraph of the covenant described
under the caption "--Certain Covenants--Incurrence of Indebtedness and
Issuance of Preferred Stock," covering only the assets acquired with such
Indebtedness; (viii) Liens for taxes, assessments or governmental charges or
claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently concluded;
provided that any reserve or other appropriate provision as shall be required
in conformity with GAAP shall have been made therefor; (ix) Liens incurred in
the ordinary course of business of the Company or any Subsidiary of the
Company with respect to obligations that do not exceed $1.0 million at any
one time outstanding and (x) Liens on assets of or Equity Interests in
Unrestricted Subsidiaries that secure Non-Recourse Debt of Unrestricted
Subsidiaries.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided
that (i) the principal amount of such Permitted Refinancing Debt does not
exceed the principal amount of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus (a) the amount of reasonable
expenses incurred in connection therewith and (b) the amount of any premium
required to be paid in connection with such refinancing pursuant to the terms
of such refinancing or deemed by the Company or such Restricted Subsidiary
necessary to be paid in order to effectuate such refinancing); (ii) such
Permitted Refinancing Debt has a final maturity date not earlier than the
final maturity date of, and has a Weighted Average Life to Maturity equal to
or greater than the Weighted Average Life to Maturity of, the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; (iii) if
the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded is subordinated in right of payment to the Exchange Notes, such
Permitted Refinancing Debt has a final maturity date later than the final
maturity date of the Exchange Notes, and is subordinated in right of payment
to the Exchange Notes on terms at least as favorable to the Holders of
Exchange Notes as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; and (iv) such Indebtedness is incurred either by the Company or by
the Restricted Subsidiary who is the obligor on the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded.
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"PM&C" means Pegasus Media & Communications, Inc., a Delaware corporation
and a direct Subsidiary of the Company.
"PM&C Notes" means PM&C's 12 1/2% Series B Senior Subordinated Notes due
2005.
"Principal" means Marshall W. Pagon.
"Qualified Subsidiary Stock" means Capital Stock of a Subsidiary of the
Company which by its terms (a) does not mature, or is not mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, and is not
redeemable at the option of the Holder thereof, in whole or in part, prior to
, 2008 (in each case, whether automatically or upon the happening of any
event) (unless, in any such case, the issuer's obligation to pay, purchase or
redeem such Capital Stock is expressly conditioned on its ability to do so in
compliance with the provisions of the covenant described under the caption
"--Certain Covenants--Restricted Payments"), (b) is automatically
exchangeable into shares of Capital Stock of the Company that is not
Disqualified Stock upon the earlier to occur of (i) the occurrence of a
Voting Rights Triggering Event or an Event of Default and (ii) , 2006,
(c) has no voting or remedial rights and (d) does not permit the payment of
cash dividends prior to , 2007 (unless, in the case of this clause (d),
the issuer's ability to pay cash dividends is expressly conditioned on its
ability to do so in compliance with the provisions of the covenant described
under the caption "--Certain Covenants--Restricted Payments").
"Related Party" with respect to the Principal means (A) any immediate
family member of the Principal or (B) any trust, corporation, partnership or
other entity, more than 50% of the voting equity interests of which are owned
directly or indirectly by, and which is controlled by, the Principal and/or
such other Persons referred to in the immediately preceding clause (A). For
purposes of this definition, (i) "immediate family member" means spouse,
parent, step-parent, child, sibling or step-sibling and (ii) "control" has
the meaning specified in the definition of "Affiliate" contained under the
caption "--Certain Definitions." In addition, the Principal's estate shall be
deemed to be a Related Party until such time as such estate is distributed in
accordance with the Principal's will or applicable state law.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the referent
Person that is not an Unrestricted Subsidiary.
"Satellite Segment" means the business involved in the marketing of video
and audio programming and data information services through transmission
media consisting of space-based satellite broadcasting services, the assets
related to the conduct of such business held by the Company and its
Restricted Subsidiaries on the Closing Date, plus all other assets acquired
by the Company or any of its Restricted Subsidiaries that are directly
related to such business (excluding, without limitation, the terrestrial
television broadcasting business and the assets related thereto and the cable
television business and the assets related thereto); provided that any assets
acquired by the Company or any of its Restricted Subsidiaries after the
Closing Date that are not directly related to such business shall not be
included for purposes of this definition.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Securities Act, as such Regulation is in effect on the
Closing Date.
"Split Dollar Agreement" means the Split Dollar Agreement between the
Company and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan, as
trustees of an insurance trust established by Marshall W. Pagon, as in effect
on the Closing Date.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total
voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers
or trustees thereof is at the time owned or controlled, directly or
indirectly, by such Person or one or more of the other Subsidiaries of that
Person (or a combination thereof) and (ii) any partnership (a) the sole
general partner or the managing general partner of which is such Person or a
Subsidiary of such Person or (b) the only general partners of which are such
Person or of one or more Subsidiaries of such Person (or any combination
thereof).
"Total Interest Expense" means, with respect to any Person for any period,
the sum of (i) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or
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accrued (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings,
and net payments (if any) pursuant to Hedging Obligations) and (ii) the
consolidated interest expense of such Person and its Restricted Subsidiaries
that was capitalized during such period, to the extent such amounts are not
included in clause (i) of this definition, and (iii) any interest expense for
such period on Indebtedness of another Person that is Guaranteed by such
Person or one of its Restricted Subsidiaries or secured by a Lien on assets
(other than Equity Interests in Unrestricted Subsidiaries securing
Indebtedness of Unrestricted Subsidiaries) of such Person or one of its
Restricted Subsidiaries (whether or not such Guarantee or Lien is called
upon) and (iv) all cash and non-cash dividend payments during such period on
any series of preferred stock of a Restricted Subsidiary of such Person.
"Unrestricted Subsidiary" means any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board
Resolution; but only to the extent that such Subsidiary (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company; (c) is a Person with respect
to which neither the Company nor any of its Restricted Subsidiaries has any
direct or indirect obligation (x) to subscribe for additional Equity
Interests or (y) to maintain or preserve such Person's financial condition or
to cause such Person to achieve any specified levels of operating results;
(d) has not guaranteed or otherwise directly or indirectly provided credit
support for any Indebtedness of the Company or any of its Restricted
Subsidiaries; and (e) has at least one executive officer that is not a
director or executive officer of the Company or any of its Restricted
Subsidiaries. Any such designation made by the Board of Directors at a time
when any Exchange Notes are outstanding shall be evidenced to the Trustee by
filing with the Trustee a certified copy of the Board Resolution giving
effect to such designation and an Officers' Certificate certifying that such
designation complied with the foregoing conditions and was permitted by the
provisions of the covenant described under the caption "--Certain
Covenants--Restricted Payments." If, at any time, any Unrestricted Subsidiary
would fail to meet the foregoing requirements as an Unrestricted Subsidiary,
it shall thereafter cease to be an Unrestricted Subsidiary for purposes of
the Certificate of Designation or the Exchange Note Indenture, as the case
may be, and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of the Company as of such date (and, if
such Indebtedness is not permitted to be incurred as of such date under the
provisions of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
(treating such Subsidiary as a Restricted Subsidiary for such purpose for the
period relevant to such covenant), the Company shall be in default of such
covenant); provided, however, that in the event an Unrestricted Subsidiary
ceases to meet the requirement set forth in clause (e) of this definition,
such Unrestricted Subsidiary shall have 60 days to meet such requirement
before such Unrestricted Subsidiary shall cease to be an Unrestricted
Subsidiary. The Board of Directors of the Company may at any time designate
any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a
Restricted Subsidiary of the Company of any outstanding Indebtedness of such
Unrestricted Subsidiary and such designation shall be permitted only if (i)
such Indebtedness is permitted under the covenant described under the
provisions of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Preferred Stock"
(treating such Subsidiary as a Restricted Subsidiary for such purpose for the
period relevant to such covenant) and (ii) no Voting Rights Triggering Event,
or no Default or Event of Default, as the case may be, would be in existence
following such designation.
"Voting Stock" means with respect to any specified Person, Capital Stock
with voting power, under ordinary circumstances and without regard to the
occurrence of any contingency, to elect the directors or other managers or
trustees of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the
sum of the products obtained by multiplying (a) the amount of each then
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remaining installment, sinking fund, serial maturity or other required
payments of principal, including payment at final maturity, in respect
thereof, by (b) the number of years (calculated to the nearest one-twelfth)
that will elapse between such date and the making of such payment, by (ii)
the then outstanding principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock (other than
Qualified Subsidiary Stock) or other ownership interests of which (other than
directors' qualifying shares) shall at the time be owned by such Person
and/or by one or more Wholly Owned Restricted Subsidiaries of such Person.
DESCRIPTION OF WARRANTS
GENERAL
The Warrants will be issued pursuant to a Warrant Agreement (the "Warrant
Agreement") between the Company and First Union National Bank, as Warrant
Agent (the "Warrant Agent"). The following summary of certain provisions of
the Warrant Agreement, including the definitions therein of certain terms
used below, does not purport to be complete and is qualified in its entirety
by reference to the Warrant Agreement and the warrant certificate attached
thereto, the forms of which have been filed as exhibits to the Registration
Statement of which this Prospectus is a part.
Each Warrant, when exercised, will entitle the Holder thereof to receive
1.936 fully paid and non-assessable shares of Class A Common Stock at an
exercise price of at least $14.00 per share, subject to adjustment (the
"Exercise Price"). The Exercise Price and the number of Warrant Shares are
both subject to adjustment in certain cases referred to below. The Warrants
will entitle the Holders thereof to purchase in the aggregate 193,600 Warrant
Shares, or approximately 2.0% of the Common Stock, on a fully diluted basis
as of the closing of this Offering.
The Warrants will be exercisable on or after the Separation Date and prior
to 5:00 p.m., New York City time, on , 2007 (the "Expiration
Date"). The exercise and transfer of the Warrants will be subject to
applicable federal and state securities laws.
The Warrants may be exercised by surrendering to the Company the warrant
certificates evidencing the Warrants to be exercised with the accompanying
form of election to purchase properly completed and executed, together with
payment of the Exercise Price. Payment of the Exercise Price may be made on
or after the Separation Date (A) by tendering shares of Series A Preferred
Stock having an aggregate liquidation preference, plus, without duplication,
accumulated and unpaid dividends, at the time of tender equal to the Exercise
Price, (B) by tendering Exchange Notes having an aggregate principal amount,
plus accrued and unpaid interest, if any, at the time of tender equal to the
Exercise Price, (C) by tendering Warrants having a fair market value equal to
the Exercise Price, (D) in the form of cash or by certified or official bank
check payable to the order of the Company or (E) by any combination of shares
of Series A Preferred Stock, Warrants and cash or Exchange Notes, Warrants
and cash. Upon surrender of the Warrant certificate and payment of the
Exercise Price, the Company will deliver or cause to be delivered, to or upon
the written order of such Holder, stock certificates representing the number
of whole shares of Class A Common Stock to which such Holder is entitled. If
less than all of the Warrants evidenced by a warrant certificate are to be
exercised, a new warrant certificate will be used for the remaining number of
Warrants.
No fractional shares of Class A Common Stock will be issued upon the
exercise of the Warrants. The Company will pay to the Holder of the Warrant
at the time of exercise an amount in cash equal to the current market value
of any such fractional share of Class A Common Stock less a corresponding
fraction of the Exercise Price.
The Holders of the Warrants will have no right to vote on matters
submitted to the stockholders of the Company and will have no right to
receive dividends. The Holders of the Warrants will not be entitled to share
in the assets of the Company in the event of liquidation, dissolution or
winding up of the Company. In the event a bankruptcy or reorganization is
commenced by or against the Company, a bankruptcy court may hold that
unexercised Warrants are executory contracts which may be subject to
rejection by the Company
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with approval of the bankruptcy court, and the Holders of the Warrants may,
even if sufficient funds are available, receive nothing or a lesser amount as
a result of any such bankruptcy case than they would be entitled to if they
had exercised their Warrants prior to the commencement of any such case.
In the event of a taxable distribution to holders of Common Stock that
results in an adjustment to the number of shares of Common Stock or other
consideration for which a Warrant may be exercised, the Holders of the
Warrants may, in certain circumstances, be deemed to have received a
distribution subject to United States federal income tax as a dividend. See
"Certain United States Federal Income Tax Considerations."
ADJUSTMENTS
The number of shares of Class A Common Stock purchasable upon exercise of
Warrants and payment of the Exercise Price will be subject to adjustment in
certain events, including: (i) the issuance by the Company of dividends (and
other distributions) on its Common Stock payable in Common Stock, (ii)
subdivisions, combinations and reclassifications of Common Stock, (iii) the
issuance to all holders of Common Stock of rights, options or warrants
entitling them to subscribe for Common Stock or securities convertible into,
or exchangeable or exercisable for, Common Stock within sixty (60) days after
the record date for such issuance of rights, options or warrants at an
offering price (or with an initial conversion, exchange or exercise price
plus such offering price) which is less than the current market price per
share (as defined in the Warrant Agreement) of Common Stock, (iv) the
distribution to all holders of Common Stock of any of the Company's assets
(including cash), debt securities, preferred stock or any rights or warrants
to purchase any such securities (excluding those rights and warrants referred
to in clause (iii) above), (v) the issuance of shares of Common Stock for a
consideration per share less than the current market price per share
(excluding securities issued in transactions referred to in clauses (i)
through (iv) above), (vi) the issuance of securities convertible into or for
Common Stock for a conversion or exchange price less than the current market
price for a share of Common Stock (excluding securities issued in
transactions referred to in clauses (iii) or (iv) and (vii) certain other
events that could have the effect of depriving holders of the Warrants of the
benefit of all or a portion of the purchase rights evidenced by the Warrants.
The events described in clauses (v) and (vi) above are subject to certain
exceptions described in the Warrant Agreement, including, without limitation,
(A) certain bona fide public offerings and private placements to persons that
are not affiliates of the Company and (B) Common Stock (and options
exercisable therefor) issued to the Company's employees, officers and
directors under bona fide employee benefit plans (other than the Principal
and his Related Parties).
No adjustment in the Exercise Price will be required unless such
adjustment would require an increase or decrease of at least one percent (1%)
in the Exercise Price; provided, however, that any adjustment that is not
made will be carried forward and taken into account in any subsequent
adjustment. In addition, the Company may at any time reduce the Exercise
Price to any amount (but not less than the par value of the Common Stock) for
any period of time (but not less than twenty (20) business days) deemed
appropriate by the Board of Directors of the Company.
In the case of certain consolidations or mergers of the Company, or the
sale of all or substantially all of the assets of Company to another
corporation, each Warrant will thereafter be exercisable for the right to
receive the kind and amount of shares of stock or other securities or
property to which such Holder would have been entitled as a result of such
consolidation, merger or sale had the Warrants been exercised immediately
prior thereto.
AMENDMENT
From time to time, the Company and the Warrant Agent, without the consent
of the Holders of the Warrants, may amend or supplement the Warrant Agreement
for certain purposes, including curing defects or inconsistencies or making
any change that does not materially adversely affect the rights of any
Holder. Any amendment or supplement to the Warrant Agreement that has a
material adverse effect on the interests of the Holders of the Warrants will
require the written consent of the Holders of a majority of the then
outstanding Warrants (excluding Warrants held by the Company or any of its
Affiliates). The consent of each Holder of the Warrants affected will be
required for any amendment pursuant to which the Exercise Price would be
increased or the number of Warrant Shares would be decreased (other than
pursuant to adjustments provided in the Warrant Agreement).
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REGISTRATION
The Company will file and, subject to applicable federal and state
securities laws, has agreed to use its best efforts to make effective by the
date of commencement of the Offering a shelf registration statement on the
appropriate form covering the issuance of the Warrant Shares upon the
exercise of any Warrants. The Company will keep such registration statement
effective until 30 days after the Expiration Date.
ADDITIONAL INFORMATION
Anyone who receives a copy of this Prospectus may obtain a copy of the
Company's Amended and Restated Certificate of Incorporation, the Certificate
of Designation, the Exchange Note Indenture and the Warrant Agreement without
charge by writing to Pegasus Communications Corporation, Suite 454, Radnor
Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087, Attention:
General Counsel.
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DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company (which, in this section,
refers only to Pegasus) consists of (i) 30,000,000 shares of Class A Common
Stock, par value $.01 per share (the "Class A Common Stock"), (ii) 15,000,000
shares of Class B Common Stock, par value $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), and
(iii) 5,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). Of the 5,000,000 shares of Preferred Stock that the
Company is authorized to issue, 100,000 shares have been designated as Series
A Preferred Stock. After giving effect to this Offering (without giving
effect to any Warrant Shares underlying the Warrants), 4,663,229 shares of
Class A Common Stock, 4,581,900 shares of Class B Common Stock and 100,000
shares of Series A Preferred Stock will be outstanding. In addition,
5,569,714 shares of Class A Common Stock are reserved for issuance with
respect to (i) the conversion of shares of Class B Common Stock to Class A
Common Stock, (ii) the exercise of the Warrants, (iii) the exercise of the
WTLH Warrants, and (iv) the Incentive Program and other employee and/or
director options.
The following summary description relating to the Company's capital stock
sets forth the material terms of the capital stock, but does not purport to
be complete. A description of the Company's capital stock is contained in the
Amended and Restated Certificate of Incorporation and the Certificate of
Designation, which are filed as exhibits to the registration statement of
which this Prospectus forms a part. Reference is made to such exhibits for
detailed descriptions of the provisions thereof summarized below or elsewhere
in this Prospectus.
COMMON STOCK
Voting, Dividend and Other Rights. The voting powers, preferences and
relative rights of the Class A Common Stock and the Class B Common Stock are
identical in all respects, except that (i) the holders of Class A Common
Stock are entitled to one vote per share and holders of Class B Common Stock
are entitled to ten votes per share, (ii) stock dividends on Class A Common
Stock may be paid only in shares of Class A Common Stock and stock dividends
on Class B Common Stock may be paid only in shares of Class B Common Stock
and (iii) shares of Class B Common Stock have certain conversion rights and
are subject to certain restrictions on ownership and transfer described below
under "Conversion Rights and Restrictions on Transfer of Class B Common
Stock." Any amendment to the Amended and Restated Certificate of
Incorporation that has any of the following effects will require the approval
of the holders of a majority of the outstanding shares of each of the Class A
Common Stock and Class B Common Stock, voting as separate classes: (i) any
decrease in the voting rights per share of Class A Common Stock or any
increase in the voting rights of Class B Common Stock; (ii) any increase in
the number of shares of Class A Common Stock into which shares of Class B
Common Stock are convertible; (iii) any relaxation on the restrictions on
transfer of the Class B Common Stock; or (iv) any change in the powers,
preferences or special rights of the Class A Common Stock or Class B Common
Stock adversely affecting the holders of the Class A Common Stock. The
approval of the holders of a majority of the outstanding shares of each of
the Class A Common Stock and Class B Common Stock, voting as separate
classes, is also required to authorize or issue additional shares of Class B
Common Stock (except for parallel action with respect to Class A Common Stock
in connection with stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus). Except as described above
or as required by law, holders of Class A Common Stock and Class B Common
Stock vote together on all matters presented to the stockholders for their
vote or approval, including the election of directors.
The outstanding shares of Class A Common Stock equal 50.4% of the total
Common Stock outstanding, and the holders of Class B Common Stock have
control of approximately 90.8% of the combined voting power of the Common
Stock. The holders of the Class B Common Stock, therefore, have the power to
elect the entire Board of Directors of the Company. In particular, Marshall
W. Pagon, by virtue of his beneficial ownership of all of the Class B Common
Stock, has sufficient voting power to determine the outcome of any matter
submitted to the stockholders for approval (except matters on which the
holders of Class A Common Stock are entitled to vote separately as a class),
including the power to determine the outcome of all corporate transactions.
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Each share of Class A Common Stock and Class B Common Stock is entitled to
receive dividends if, as and when declared by the Board of Directors of the
Company out of funds legally available therefor. The Class A Common Stock and
Class B Common Stock share equally, on a share-for-share basis, in any cash
dividends declared by the Board of Directors on the Common Stock.
In the event of a merger or consolidation to which the Company is a party,
each share of Class A Common Stock and Class B Common Stock will be entitled
to receive the same consideration, except that holders of Class B Common
Stock may receive stock with greater voting power in lieu of stock with
lesser voting power received by holders of the Company's Class A Common Stock
in a merger in which the Company is not the surviving corporation.
Stockholders of the Company have no preemptive or other rights to
subscribe for additional shares. Subject to any rights of holders of any
Preferred Stock, all holders of Common Stock, regardless of class, are
entitled to share equally on a share for share basis in any assets available
for distribution to stockholders on liquidation, dissolution or winding up of
the Company. No shares of Common Stock are subject to redemption or a sinking
fund. In the event of any increase or decrease in the number of outstanding
shares of either Class A Common Stock or Class B Common Stock from a stock
split, combination or consolidation of shares or other capital
reclassification, the Company is required to take parallel action with
respect to the other class so that the number of shares of each class
outstanding immediately following the stock split, combination, consolidation
or capital reclassification bears the same relationship to each other as the
number of shares of each class outstanding before such event.
Conversion Rights and Restrictions on Transfer of Class B Common Stock.
The Class A Common Stock has no conversion rights. Each share of Class B
Common Stock is convertible at the option of the holder at any time and from
time to time into one share of Class A Common Stock.
The Company's Amended and Restated Certificate of Incorporation provides
that any holder of shares of Class B Common Stock desiring to transfer such
shares to a person other than a Permitted Transferee (as defined below) must
present such shares to the Company for conversion into an equal number of
shares of Class A Common Stock upon such transfer. Thereafter, such shares of
Class A Common Stock may be freely transferred to persons other than
Permitted Transferees, subject to applicable securities laws.
Shares of Class B Common Stock may not be transferred except to (i)
Marshall W. Pagon or any "immediate family member" of his; (ii) any trust
(including a voting trust), corporation, partnership or other entity, more
than 50% of the voting equity interests of which are owned directly or
indirectly by (or, in the case of a trust not having voting equity interests
which is more than 50% for the benefit of) and which is controlled by, one or
more persons referred to in this paragraph; or (iii) the estate of any person
referred to in this paragraph until such time as the property of such estate
is distributed in accordance with such person's will or applicable law
(collectively, "Permitted Transferees"). "Immediate family member" means the
spouse or any parent of Marshall W. Pagon, any lineal descendent of a parent
of Marshall W. Pagon and the spouse of any such lineal descendent (parentage
and descent in each case to include adoptive and step relationships). Upon
any sale or transfer of ownership or voting rights to a transferee other than
a Permitted Transferee or if an entity no longer remains a Permitted
Transferee, such shares of Class B Common Stock will automatically convert
into an equal number of shares of Class A Common Stock. Accordingly, no
trading market is expected to develop in the Class B Common Stock and the
Class B Common Stock will not be listed or traded on any exchange or in any
market.
Effects of Disproportionate Voting Rights. The disproportionate voting
rights of the Class A Common Stock and Class B Common Stock could have an
adverse effect on the market price of the Class A Common Stock. Such
disproportionate voting rights may make the Company a less attractive target
for a takeover than it otherwise might be, or render more difficult or
discourage a merger proposal, a tender offer or a proxy contest, even if such
actions were favored by stockholders of the Company other than the holders of
the Class B Common Stock. Accordingly, such disproportionate voting rights
may deprive holders of Class A Common Stock of an opportunity to sell their
shares at a premium over prevailing market prices, since takeover bids
frequently involve purchases of stock directly from stockholders at such a
premium price.
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PREFERRED STOCK
The Company has authorized 5,000,000 shares of Preferred Stock. The Board
of Directors is empowered by Pegasus' Amended and Restated Certificate of
Incorporation to designate and issue from time to time one or more classes or
series of Preferred Stock without any action of the stockholders. The Board
of Directors may authorize issuance in one or more classes or series, and may
fix and determine the relative rights, preferences and limitations of each
class or series so authorized. In connection with this Offering, 100,000
shares of Series A Preferred Stock will be issued. See "Description of
Securities -- Description of the Series A Preferred Stock" for a detailed
description of the Series A Preferred Stock. Shares of Preferred Stock may be
issued in connection with the Indiana DBS Acquisition. See "Business -- DBS
- -- The Pending Acquisition." Additional issuances of Preferred Stock could
adversely affect the voting power of the holders of the Common Stock or
Series A Preferred Stock or could have the effect of discouraging or making
difficult any attempt by a person or group to obtain control of the Company.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock, the Series A
Preferred Stock, and the Warrants is First Union National Bank.
LIMITATION ON DIRECTORS' LIABILITY
The Delaware General Corporation Law authorizes corporations to limit or
eliminate the personal liability of directors to corporations and their
stockholders for monetary damages for breach of directors' fiduciary duty of
care. The duty of care requires that, when acting on behalf of the
corporation, directors must exercise an informed business judgment based on
all material information reasonably available to them. In the absence of the
limitations authorized by the Delaware statute, directors could be
accountable to corporations and their stockholders for monetary damages for
conduct that does not satisfy their duty of care. Although the statute does
not change directors' duty of care, it enables corporations to limit
available relief to equitable remedies such as injunction or rescission.
Pegasus' Amended and Restated Certificate of Incorporation limits the
liability of Pegasus' directors to Pegasus or its stockholders to the fullest
extent permitted by the Delaware statute. Specifically, the directors of
Pegasus will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability (i) for any
breach of the director's duty of loyalty to Pegasus or its stockholders, (ii)
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) for unlawful payments of
dividends or unlawful stock repurchases or redemptions as provided in Section
174 of the Delaware General Corporation law or (iv) for any transaction from
which the director derived an improper personal benefit. The inclusion of
this provision in the Amended and Restated Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from
bringing a lawsuit against directors for breach of their duty of care, even
though such an action, if successful, might otherwise have benefited Pegasus
and its stockholders.
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SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to this Offering (without giving effect to any Warrant
Shares underlying the Warrants), the Company will have outstanding 4,663,229
shares of Class A Common Stock and 4,581,900 shares of Class B Common Stock,
all of which shares of Class B Common Stock are convertible into shares of
Class A Common Stock on a share for share basis, and 100,000 shares of Series
A Preferred Stock, which are being offered hereby. Of these shares, the
3,000,000 shares of Class A Common Stock sold in the Initial Public Offering
and all of the Series A Preferred Stock to be sold hereby will be tradeable
without restriction (except that the Units will not be separately
transferable until the Separation Date) unless they are purchased by
affiliates of the Company. All shares received pursuant to the Registered
Exchange Offer are also tradeable without restriction, subject to the
agreement of each exchanging holder not to sell, otherwise dispose of or
pledge any shares of the Class A Common Stock received in the Registered
Exchange Offer until April 3, 1997 without the prior written consent of
Lehman Brothers Inc. The approximately 1,471,437 remaining shares of Class A
Common Stock and all of the 4,581,900 shares of Class B Common Stock and any
securities issued in connection with the DBS Acquisitions are "restricted
securities" under the Securities Act. These "restricted securities" and any
shares purchased by affiliates of the Company in this Offering may be sold
only if they are registered under the Securities Act or pursuant to an
applicable exemption from the registration requirements of the Securities
Act, including Rule 144 and Rule 701 thereunder. The holders of 4,944,564 of
the 6,053,337 "restricted securities" have agreed not to sell, otherwise
dispose of or pledge any shares of the Company's Common Stock or securities
convertible into or exercisable or exchangeable for such Common Stock until
April 3, 1997 without the prior written consent of Lehman Brothers Inc. Such
holders have also agreed to certain restrictions on their ability to transfer
their Common Stock until , 1997 without the prior written consent of
CIBC Wood Gundy Securities Corp. All of the Company's directors and executive
officers are subject to the lock-up.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned restricted shares for at least two years, including
affiliates, may sell, within any three-month period, a number of shares that
does not exceed the greater of 1% of the then outstanding Class A Common
Stock (approximately 46,632 shares) or the average weekly trading volume in
the Class A Common Stock on the Nasdaq during the four calendar weeks
preceding such sale. Sales under Rule 144 are also subject to certain
provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. A person who is
not deemed an affiliate of the Company and who has beneficially owned
restricted shares for three years from the date of acquisition of restricted
securities from the Company or any affiliate is entitled to sell such shares
under Rule 144(k) freely and without restriction or registration under the
Securities Act. As used in Rule 144, affiliates of the Company generally
include its directors, executive officers and persons directly or indirectly
owning 10% or more of the Class A Common Stock. Without consideration of the
lock-up agreements described above, none of the restricted securities would
be available for immediate sale in the public market in reliance on Rule
144(k) or would be available for immediate sale under Rule 144.
The Securities and Exchange Commission (the "Commission") has proposed to
amend the holding period required by Rule 144 to permit sales of "restricted
securities" after one year rather than two years (and two years rather than
three years for non-affiliates who desire to sell such shares under Rule
144(k). If such proposed amendment were enacted, the "restricted securities"
would become freely tradeable (subject to any applicable contractual
restrictions) at correspondingly earlier dates.
Under Rule 701, any employee, officer or director of, or consultant to the
Company who prior to the Initial Public Offering purchased shares pursuant to
a written compensatory plan or contract and who was not an affiliate of the
Company, is entitled to sell such shares without having to comply with the
public information, holding period, volume limitation or notice provisions of
Rule 144 commencing 90 days after the Initial Public Offering. Rule 701 also
permits affiliates to sell such shares without having to comply with the Rule
144 holding period restrictions commencing 90 days after the Initial Public
Offering. As of the date hereof, approximately 190,742 shares of Class A
Common Stock would be eligible for sale under Rule 701.
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OPTIONS AND WARRANTS
As additional remuneration for joining the Board of Directors of PM&C,
Donald W. Weber was granted in April 1996 an option to purchase 3,385 shares
of Class A Common Stock at an exercise price of $14.00 per share. Mr. Weber's
option vested upon issuance, is exercisable until November 2000 and, at the
time of grant, was issued at an exercise price equal to fair market value at
the time Mr. Weber was elected a director.
In connection with the acquisition of WTLH, the Parent issued to various
trusts controlled by the sellers of WTLH (the "WTLH Trusts") the WTLH
Warrants to purchase in the aggregate $1,000,000 of Class A Common Stock of
Pegasus at the price to the public of $14.00 per share in the Initial Public
Offering, commencing on October 2, 1996 (the date that the registration
statement relating to the Initial Public Offering was declared effective) and
ending 120 days after such date. The WTLH Trusts will have the right to
acquire approximately 71,429 shares of Class A Common Stock. Such shares will
be "restricted securities" within the meaning of Rule 144.
The letter of intent relating to the Virginia/West Virginia DBS
Acquisition contemplates the possible issuance of warrants to purchase 30,000
shares of Class A Common Stock.
REGISTRATION RIGHTS
In connection with the Michigan/Texas DBS Acquisition, the Company granted
certain piggyback registration rights to Harron. These rights expire upon the
Class A Common Stock issued to Harron becoming eligible for sale under Rule 144
of the Securities Act. Similar rights have been granted to the holder of the
$1.0 million in shares of Class A Common Stock issued in connection with the
acquisition of the Portland LMA and the $150,000 of shares of Class A Common
Stock issued in connection with the Portland Acquisition. It is anticipated that
piggyback registration rights will be granted in connection with the issuance of
certain securities in the Indiana DBS Acquisition and the Virginia/West Virginia
DBS Acquisition.
LOCK-UP AGREEMENT
All of the executive officers and directors of Pegasus, who are deemed to
beneficially own 4,957,152 shares of Common Stock (including options to
purchase 3,385 shares), have agreed not to sell, otherwise dispose of or
pledge any shares of the Common Stock or any securities convertible into or
exercisable for such Common Stock until April 3, 1997 without the prior
written consent of Lehman Brothers Inc. Such holders have also agreed to
certain restrictions on their ability to transfer their Common Stock until
,1997 without the prior written consent of CIBC Wood Gundy Securities
Corp. In addition, the terms of the Registered Exchange Offer required that
each exchanging holder agree not to sell, otherwise dispose of or pledge any
shares of the Class A Common Stock received in the Registered Exchange Offer
until April 3, 1997 without the consent of Lehman Brothers Inc.
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CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes the material federal income tax
considerations generally applicable to Holders acquiring the Units, the
Series A Preferred Stock and the Warrants offered hereby on original issue,
but does not purport to be a complete analysis of all potential tax
consequences. The discussion is based upon the Internal Revenue Code of 1986,
as amended (the "Code"), Treasury Regulations, Internal Revenue Service
("IRS") rulings and pronouncements and judicial decisions now in effect, all
of which are subject to change at any time by legislative, judicial or
administrative action. Any such changes may be applied retroactively in a
manner that could adversely affect a Holder of the Securities (jointly, the
"Securities").
The discussion assumes that the Holders of the Securities will hold them
as "capital assets" within the meaning of Section 1221 of the Code. Although
the matter is not entirely free from doubt, the Company intends to treat the
Series A Preferred Stock as equity and the Exchange Notes as indebtedness for
federal income tax purposes, and the balance of the discussion is based on
the assumption that such treatment will be respected. The discussion is not
binding on the IRS or the courts. The Company has not sought and will not
seek any rulings from the IRS with respect to the positions of the Company
discussed herein, and there can be no assurance that the IRS will not take a
different position concerning the tax consequences of the purchase, ownership
or disposition of the Securities or that any such position would not be
sustained.
The tax treatment of a Holder of the Securities may vary depending on his
particular situation or status. Certain Holders (including S corporations,
insurance companies, tax-exempt organizations, financial institutions,
broker-dealers, taxpayers subject to alternative minimum tax or persons
holding the Securities as a part of a "straddle," "hedge" or "conversion
transaction") may be subject to special rules not discussed below. The
following discussion is limited to the United States federal income tax
consequences relevant to a Holder of the Securities that is a citizen or
resident of the United States or any state thereof, or a corporation or other
entity created or organized under the laws of the United States or any
political subdivision thereof, or an estate or trust the income of which is
subject to United States federal income tax regardless of source or that is
otherwise subject to United States federal income tax on a net income basis
in respect of the Securities. The following discussion does not consider all
aspects of United States federal income tax that may be relevant to the
purchase, ownership, and disposition of the Securities by such Holder in
light of his personal circumstances. In addition, the description does not
consider the effect of any applicable foreign, state, local or other tax laws
or estate or gift tax considerations.
ALLOCATION OF ISSUE PRICE BETWEEN SERIES A PREFERRED STOCK AND WARRANTS
Each Holder of a Unit will have an aggregate tax basis in the Unit equal
to the amount of cash paid by the Holder for such Unit. For federal income
tax purposes, a Holder's aggregate tax basis in the Units will be allocated
between the Series A Preferred Stock and the Warrants represented by such
Units based on their relative fair market values at the time of the issuance.
The Company will determine and provide Holders with its estimate of the fair
market values of the Series A Preferred Stock and Warrant and the Holders
will allocate the basis of the Units between the Series A Preferred Stock and
Warrant, in proportion to these relative fair market values. There can be no
assurance, however, that the IRS will respect the Company's determination.
DISTRIBUTIONS ON SERIES A PREFERRED STOCK
Distributions on the Series A Preferred Stock, whether paid in cash or in
additional shares of Series A Preferred Stock ("Dividend Shares"), will be
taxable to the Holder as ordinary dividend income to the extent that the cash
amount or fair market value of the Series A Preferred Stock on the date of
distribution does not exceed the Company's current and accumulated earnings
and profits (as determined for federal income tax purposes). The amount of
the Company's earnings and profits at any particular time depends on the
future actions and financial performance of the Company. To the extent that
the amount of any distribution on the outstanding Series A Preferred Stock
exceeds the Company's current and accumulated earnings and profits (as
determined for federal income tax purposes), the distribution will be treated
as a return of capital, thus reducing the Holder's adjusted tax basis in such
outstanding Series A Preferred Stock. The amount of any such excess
distribution that is greater than the holder's adjusted tax basis in the
outstanding Series A
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Preferred Stock will be taxed as capital gain and will be long-term capital
gain if the Holder's holding period for such outstanding Series A Preferred
Stock exceeds one year. A Holder's initial tax basis in any Dividend Shares
distributed by the Company generally will equal the fair market value of such
Dividend Shares on their date of distribution. The holding period for such
Dividend Shares will commence with their distribution, and will not include
the Holder's holding period for outstanding shares of Series A Preferred
Stock with respect to which such Dividend Shares were distributed. For
purposes of the remainder of this discussion, the term "dividend" refers to a
distribution paid out of allocable earnings and profits, unless the context
indicates otherwise.
To the extent that dividends are treated as ordinary income, dividends
received by corporate Holders generally will be eligible for the 70%
dividends-received deduction under Section 243 of the Code. There are,
however, many exceptions and restrictions relating to the availability of
such dividends-received deduction, such as restrictions relating to (i) the
holding period of the stock on which the dividends are sought to be deducted,
(ii) debt-financed portfolio stock, (iii) dividends treated as "extraordinary
dividends" for purposes of Section 1059 of the Code, and (iv) taxpayers that
pay alternative minimum tax. Corporate stockholders should consult their own
tax advisor regarding the extent, if any, to which such exceptions and
restrictions may apply to their particular factual situations.
Under Section 1059 of the Code, the tax basis of Series A Preferred Stock
that has been held by a corporate shareholder for two years or less (ending
on the earliest of the date on which the Company declares, announces or
agrees to the payment of an actual or constructive dividend) is reduced (but
not below zero) by the non-taxed portion of an "extraordinary dividend" for
which a dividends-received deduction is allowed. To the extent that a
corporate Holder's tax basis in its Series A Preferred Stock would have been
reduced below zero but for the foregoing limitation, such Holder must
increase the amount of gain recognized on the ultimate sale or exchange of
such Series A Preferred Stock. Generally, an "extraordinary dividend" is a
dividend that (i) equals or exceeds 5% of the Holder's basis in the Series A
Preferred Stock (treating all dividends having ex-dividend dates within an
85-day period as a single dividend) or (ii) exceeds 20% of the Holder's
adjusted basis in the Series A Preferred Stock (treating all dividends having
ex-dividend dates within a 365-day period as a single dividend). If an
election is made by the Holder, under certain circumstances the fair market
value of the Series A Preferred Stock as of the day before the ex-dividend
date may be substituted for the Holder's basis in applying these tests.
Special rules exist with respect to extraordinary dividends for "qualified
preferred dividends," which are any fixed dividends payable with respect to
any share of stock which (i) provides for fixed preferred dividends payable
not less frequently than annually and (ii) is not in arrears as to dividends
at the time the Holder acquires such stock. A qualified preferred dividend
does not include any dividend payable with respect to any share if the actual
rate of return of such stock for the period the stock has been held by the
Holder receiving the dividend exceeds 15%. CORPORATE STOCKHOLDERS ARE URGED
TO CONSULT THEIR TAX ADVISORS WITH RESPECT TO THE POSSIBLE APPLICATION OF
SECTION 1059 OF THE CODE TO THEIR OWNERSHIP AND DISPOSITION OF PREFERRED
STOCK.
SERIES A PREFERRED STOCK DISCOUNT
The Series A Preferred Stock is subject to mandatory redemption on ,
2007 (the "Mandatory Redemption"). In addition, on or after , 2002 and
subject to certain restrictions, the Series A Preferred Stock is redeemable
at any time at the option of the Company at specified redemption prices (the
"Optional Redemption"). See "Description of Securities -- Description of
Series A Preferred Stock --Optional Redemption" and " -- Mandatory
Redemption." Pursuant to Section 305(c) of the Code, Holders of Series A
Preferred Stock may be required to treat a portion of the difference between
the Series A Preferred Stock's issue price and its redemption price as
constructive distributions of property includible in income on a periodic
basis. For purposes of determining whether such constructive distribution
treatment applies, the Mandatory Redemption and the Optional Redemption are
tested separately. Constructive distribution treatment is required if either
(or both) of these tests is satisfied.
Section 305(c) of the Code provides that the entire amount of a redemption
premium with respect to preferred stock that is subject to mandatory
redemption is treated as being distributed to the holders of such
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preferred stock on an economic accrual basis. Preferred stock generally is
considered to have a redemption premium for this purpose if the price at
which it must be redeemed (the "Redemption Price") exceeds its issue price
(as determined in accordance with an allocation of the issue price of the
Units, as discussed above) by more than a de minimis amount. For this
purpose, such excess (the "Series A Preferred Stock Discount") will be
treated as zero if it is less than 1/4 of 1% of the Redemption Price
multiplied by the number of complete years from the date of issuance of the
stock until the stock must be redeemed. Series A Preferred Stock Discount is
taxable as a constructive distribution to the Holder (treated as a dividend
to the extent of the Company's current and accumulated earnings and profits
and otherwise subject to the treatment described above for distributions)
over the term of the preferred stock using a constant interest rate method
similar to that described below for accruing OID. See "--Original Issue
Discount" below.
Under recently issued regulations (the "Regulations"), Series A Preferred
Stock Discount will arise due to the Optional Redemption feature only if,
based on all of the facts and circumstances as of the date the Series A
Preferred Stock is issued, redemption pursuant to the Optional Redemption is
more likely than not to occur. Even if redemption were more likely than not
to occur, however, constructive distribution treatment would not result if
the redemption premium were solely in the nature of a penalty for premature
redemption. For this purpose, a penalty for premature redemption is a premium
paid as a result of changes in economic or market conditions over which
neither the issuer nor the Holder has legal or practical control, such as
changes in prevailing dividend rates. The Regulations provide a safe harbor
pursuant to which constructive distribution treatment will not result from an
issuer call right if (i) the issuer and the Holder are unrelated, (ii) there
are no arrangements that effectively require the issuer to redeem the stock
and (iii) exercise of the option to redeem would not reduce the yield of the
stock. The Company does not believe that the Optional Redemption would be
treated as more likely than not to be exercised under these rules.
Dividend Shares received by Holders of the Series A Preferred Stock may
bear Series A Preferred Stock Discount depending upon the issue price of such
shares (i.e., the fair market value of the Dividend Shares on the date of
their issuance). If shares of Series A Preferred Stock (including Dividend
Shares) bear Series A Preferred Stock Discount, such shares generally will
have different tax characteristics from other shares of Series A Preferred
Stock and might trade separately, which might adversely affect the liquidity
of such shares.
SALE, REDEMPTION AND EXCHANGE OF SERIES A PREFERRED STOCK
A redemption of shares of Series A Preferred Stock for cash or in exchange
for Exchange Notes would be a taxable event. A redemption of shares of Series
A Preferred Stock for cash will generally be treated as a sale or exchange if
the Holder does not own, actually or constructively within the meaning of
Section 318 of the Code, any stock of the Company other than the redeemed
Series A Preferred Stock. If a Holder does own, actually or constructively,
other stock of the Company (including Series A Preferred Stock not redeemed
and Class A Common Stock to be received upon exercise of the Warrants), a
redemption of Series A Preferred Stock may be treated as a dividend to the
extent of the Company's current and accumulated earnings and profits (as
determined for federal income tax purposes). Such dividend treatment would
not be applied if the redemption is "not essentially equivalent to a
dividend" with respect to the Holder under Section 302(b)(1) of the Code. A
distribution to a Holder will be "not essentially equivalent to a dividend"
if it results in a "meaningful reduction" in the holder's stock interest in
the Company. For this purpose, a redemption of Series A Preferred Stock that
results in a reduction in the proportionate interest in the Company (taking
into account any actual ownership of common stock of the Company and any
stock constructively owned, including such stock to be received upon the
exercise of the Warrant) of a Holder whose relative stock interest in the
Company is minimal and who exercises no control over corporate affairs should
be regarded as a meaningful reduction in the Holder's stock interest in the
Company. If the redemption of the Series A Preferred Stock for cash is not
treated as a distribution taxable as a dividend, the redemption would result
in capital gain or loss equal to the difference between the amount of cash
received and the Holder's adjusted tax basis in the Series A Preferred Stock
redeemed, except to the extent that the redemption price includes dividends
which have been declared by the Board of Directors of the Company prior to
the redemption. Similarly, upon the sale of the Series A Preferred Stock
(other than in a redemption or in exchange of the Exchange Notes), the
difference between the sum of the amount of cash and the fair market value of
other property received and the Holder's adjusted basis in the Series A
Preferred Stock would result in capital gain or loss. This gain or loss
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would be long-term capital gain or loss if the Holder's holding period for
the Series A Preferred Stock exceeds one year. Under current law, capital
gains recognized by corporations are taxed at a maximum rate of 35% and the
maximum rate on net capital gains in the case of individuals is 28%. A
redemption of Series A Preferred Stock in exchange for Exchange Notes will be
subject to the same general rules as a redemption for cash, except that the
holder would have capital gain or loss equal to the difference between the
issue price of the Exchange Notes received (as determined for purposes of
computing the OID on such Exchange Notes) and the Holders's adjusted tax
basis in the Series A Preferred Stock redeemed. See the discussion below
under "Original Issue Discount." Additionally, any such gain may be eligible
for deferral under the installment sale method as long as neither the
Exchange Notes nor the Series A Preferred Stock are readily traded in an
established securities market.
If a redemption of Series A Preferred Stock is treated as a distribution
that is taxable as a dividend, the amount of the distribution will be
measured by the amount of cash or the issue price of the Exchange Notes, as
the case may be, received by the Holder. The Holder's adjusted tax basis in
the redeemed Series A Preferred Stock will be transferred to any remaining
stock holdings in the Company. If the Holder does not retain any actual stock
ownership in the Company (only having a stock interest constructively), the
Holder may lose such basis entirely. Under the "extraordinary dividend"
provision of Section 1059 of the Code, a corporate Holder may, under certain
circumstances, be required to reduce its basis in its remaining shares of
stock of the Company (and possibly recognize gain upon a disposition of such
shares) to the extent the Holder claims the 70% dividends-received deduction
with respect to the dividend. See the discussion above under "--
Distributions on Series A Preferred Stock."
Depending upon a Holder's particular circumstances, the tax consequences
of holding Exchange Notes may be less advantageous than the tax consequences
of holding Series A Preferred Stock because, for example, payments of
interest on the Exchange Notes will not be eligible for any
dividends-received deduction that may be available to corporate Holders.
ORIGINAL ISSUE DISCOUNT
In the event that the Series A Preferred Stock is exchanged for Exchange
Notes and the "stated redemption price at maturity" of the Exchange Notes
exceeds their "issue price" by more than a de minimis amount, the Exchange
Notes will be treated as having OID equal to the entire amount of such
excess. OID will generally be considered de minimis as long as it is less
than the stated redemption price at maturity of the Exchange Notes multiplied
by 1/4 of 1% multiplied by the number of years to maturity.
If the Exchange Notes are traded on an established securities market
within the sixty-day period ending thirty days after the exchange date, the
issue price of the Exchange Notes will be their fair market value as of their
issue date. Subject to certain limitations described in the Treasury
Regulations, the Exchange Notes will be deemed to be traded on an established
securities market if, among other things, price quotations will be readily
available from dealers, brokers, or traders. If the Series A Preferred Stock,
but not the Exchange Notes issued and exchanged therefor, is traded on an
established securities market within the sixty-day period ending thirty days
after the exchange, then the issue price of each Exchange Note should be the
fair market value of the Series A Preferred Stock exchanged therefor at the
time of the exchange. The Series A Preferred Stock generally will be deemed
to be traded on an established securities market if it appears on a system of
general circulation that provides a reasonable basis to determine fair market
value based either on recent price quotations or recent sales transactions.
In the event that neither the Series A Preferred Stock nor the Exchange Notes
are traded on an established securities market within the applicable period,
the issue price of the Exchange Notes will be their stated principal amount
- -- namely, their face value -- unless either (i) the Exchange Notes do not
bear "adequate stated interest" within the meaning of Section 1274 of the
Code, in which case the issue price of such Exchange Notes generally will be
their "imputed principal amount," or (ii) the Exchange Notes are issued in a
so-called "potentially abusive situation" as defined in the Treasury
Regulations under Section 1274 of the Code (including a situation involving a
recent sales transaction), in which case the issue price of such Exchange
Notes generally will be the fair market value of the Series A Preferred Stock
surrendered in exchange therefor. The "stated redemption price at maturity"
of the Exchange Notes should equal the total of all payments under the
Exchange Notes, other than payments of "qualified
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stated interest." "Qualified stated interest" generally is stated interest
that is unconditionally payable in cash or other property (other than
Exchange Notes) at least annually at a single fixed rate. Exchange Notes that
are issued when the Company has the option to pay interest for certain
periods in additional Exchange Notes should be treated as having been issued
without any qualified stated interest. Accordingly, the sum of all interest
payable pursuant to the stated interest rate on such Exchange Notes over the
entire term should be included (along with stated principal) in the stated
redemption price at maturity of such Exchange Notes. On the other hand, if
the Exchange Notes are issued after the period for paying interest in
additional Exchange Notes has passed, then stated interest would qualify as
qualified stated interest and none of such stated interest would be included
in the stated redemption price at maturity of the Exchange Notes.
TAXATION OF STATED INTEREST AND ORIGINAL ISSUE DISCOUNT ON EXCHANGE NOTES
Each Holder of an Exchange Note with OID will be required to include in
gross income an amount equal to the sum of the "daily portions" of the OID
for all days during the taxable year in which such Holder holds the Exchange
Note. The daily portions of OID required to be included in a Holder's gross
income in a taxable year will be determined under a constant yield method by
allocating to each day during the taxable year in which the Holder holds the
Exchange Note a pro rata portion of the OID thereon which is attributable to
the "accrual period" in which such day is included. The amount of the OID
attributable to each accrual period will be the product of the "adjusted
issue price" of the Exchange Note at the beginning of such accrual period
multiplied by the "yield to maturity" of the Exchange Note (properly adjusted
for the length of the accrual period). The adjusted issue price of an
Exchange Note at the beginning of an accrual period is the original issue
price of the Exchange Note plus the aggregate amount of OID that accrued in
all prior accrual periods, less any cash payments -- other than qualified
stated interest payments (which only would apply if the Exchange Notes were
issued after , 2002) on the Exchange Note. The "yield to maturity" is the
discount rate that, when used in computing the present value of all principal
and interest payments to be made under the Exchange Note, produces an amount
equal to the issue price of the Exchange Note. An "accrual period" may be of
any length and may vary in length over the term of the debt instrument,
provided that each accrual period is no longer than one year and each
scheduled payment of principal or interest occurs either on the final day or
the first day of an accrual period. An additional Exchange Note (a "Secondary
Note") issued in payment of interest with respect to an initially issued
Exchange Note (an "Initial Note") will not be considered as a payment made on
the Initial Note and will be aggregated with the Initial Note for purposes of
computing and accruing OID on the Initial Note. As between the Initial Note
and the Secondary Note, the adjusted issue price of the Initial Note would be
allocated between the Initial Note and the Secondary Note in proportion to
their respective principal amounts. That is, upon the issuance of a Secondary
Note with respect to an Initial Note, the Initial Note and the Secondary Note
derived from the Initial Note are treated as initially having the same
adjusted issue price and inherent amount of OID per dollar of principal
amount. The Initial Note and the Secondary Note derived therefrom would be
treated as having the same yield to maturity. Similar treatment would be
applied when additional Exchange Notes are issued on Secondary Notes.
In the event that the Exchange Notes are not issued with OID, because they
are issued after , 2002, when the Company does not have the option to
pay interest thereon in additional Exchange Notes and the redemption price of
the Exchange Notes does not exceed their issue price by more than a de
minimis amount, stated interest would be included in income by a Holder in
accordance with such holder's usual method of accounting. In all other cases,
all stated interest will be treated as payments on the Exchange Notes under
the rules discussed above.
BOND PREMIUM ON EXCHANGE NOTES
If Series A Preferred Stock is exchanged for Exchange Notes that are not
treated as having OID, and the issue price of such Exchange Notes exceeds the
amount payable at the maturity date (or earlier call date, if appropriate),
such excess will be deductible by the Holder of the Exchange Notes as
amortizable bond premium over the term of the Exchange Notes (taking into
account earlier call dates, as appropriate), under a yield-to-maturity
formula, if an election by the Holder under Section 171 of the Code is made
or is already in effect. An election under Section 171 of the Code is
available only if the Exchange Notes are held as capital assets. This
election is revocable only with the consent of the IRS and applies to all
obligations owned or
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acquired by the Holder on or after the first day of the taxable year to which
the election applies. To the extent the excess is deducted as amortizable
bond premium, the Holder's adjusted tax basis in the Exchange Notes will be
reduced. Except as may otherwise be provided in future Treasury Regulations,
the amortizable bond premium will be treated as an offset to interest income
on the Exchange Notes rather than as a separate deduction item.
ACQUISITION PREMIUM ON EXCHANGE NOTES
A Holder of an Exchange Note issued with OID who purchases such Exchange
Note for an amount that is greater than its then adjusted issue price but
equal to or less than the sum of all amounts payable on the Exchange Note
after the purchase date (other than payments, if any, of qualified stated
interest) will be considered to have purchased such Exchange Note at an
"acquisition premium." Under the acquisition premium rules, the amount of OID
which such Holder must include in income with respect to such Exchange Note
for any taxable year will be reduced by the portion of such acquisition
premium properly allocable to such year.
MARKET DISCOUNT ON EXCHANGE NOTES
Purchasers of Series A Preferred Stock should be aware that the
disposition of Exchange Notes may be affected by the market discount
provisions of the Code. The market discount rules generally provide, if a
holder of a debt instrument purchases it at a "market discount" and
thereafter realizes gain upon a disposition or a retirement of the debt
instrument, the lesser of such gain or the portion of the market discount
that has accrued on a straight-line basis (or on a constant interest rate
basis, if such alternative rate of accrual has been elected by the holder
under Section 1276(b) of the Code) while the debt instrument was held by such
Holder will be taxed as ordinary income at the time of such disposition.
"Market discount" with respect to the Exchange Notes will be the amount,if
any, by which the "revised issue price" of an Exchange Note (or its stated
redemption price at maturity of the Exchange Note has no OID) exceeds the
holder's, basis in the Exchange Note immediately after such Holder's
acquisition, subject to a de minimis exception. The "revised issue price" of
an Exchange Note is its issue price increased by the portion of OID
previously includible in the gross income of prior Holders for periods prior
to the acquisition of the Exchange Note by the Holder (without regard to any
acquisition premium exclusion) and reduced by prior payments other than
payments of qualified stated interest.
REDEMPTION OR SALE OF EXCHANGE NOTES
Generally, any redemption or sale of Exchange Notes by a Holder would
result in taxable gain or loss equal to the difference between the sum of
amount of cash and the fair market value of other property received (except
to the extent that cash received is attributable to accrued, but previously
untaxed interest, which portion of the consideration would be taxed as
ordinary income) and the Holder's adjusted tax basis in the Exchange Notes.
The adjusted tax basis of a Holder who receives an Exchange Note in exchange
for Series A Preferred Stock will generally be equal to the issue price of
the Exchange Note increased by any OID with respect to the Exchange Note
included in the Holder's income prior to sale or redemption of the Exchange
Note, reduced by any amortizable bond premium applied against the Holder's
income prior to sale or redemption of the Exchange Note and by payments other
than payments of qualified stated interest. Except to the extent that an
intention to call the Exchange Notes prior to their maturity existed at the
time of their original issue as an agreement or understanding between the
Company and the original holders of a substantial amount of the Exchange
Notes (which is unlikely), such gain or loss would be long-term capital gain
or loss if the Holder's holding period for the Exchange Notes exceeded one
year.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES TO THE COMPANY AND TO CORPORATE
HOLDERS
Pursuant to Section 163 of the Code and in the event that the Exchange
Notes are "applicable high yield discount obligations" ("AHYDOs"), a portion
of the OID (if any) accruing on the Exchange Notes may be treated as a
dividend generally eligible for the dividends-received deduction in the case
of corporate Holders, and the Company would not be entitled to deduct the
"disqualified portion" of the OID accruing on the
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<PAGE>
Exchange Notes and would be allowed to deduct the remainder of the OID only
when paid in cash. The Exchange Notes will constitute AHYDOs if they (i) have
a term of more than five years, (ii) have a yield to maturity equal to or
greater than the sum of the applicable federal rate at the time of issuance
of the Exchange Notes (the "AFR") plus five percentage points, and (iii) have
"significant" OID. A debt instrument is treated as having "significant" OID
if the aggregate amount that would be includible in gross income with respect
to such debt instrument for periods before the close of any accrual period
ending after the date five years after the date of issue exceeds the sum of
(i) the aggregate amount of interest to be paid in cash under the debt
instrument before the close of such accrual period and (ii) the product of
the initial issue price of such debt instrument and its yield to maturity.
Because the amount of OID, if any, attributable to the Exchange Notes will be
determined at the time such Exchange Notes are issued and the AFR at that
point in time is not predictable, it is impossible currently to determine
whether Exchange Notes will be treated as AHYDOs. If an Exchange Note is
treated as an AHYDO, a Holder would be treated as receiving dividend income
to the extent of the lesser of (i) the Company's current and accumulated
earnings and profits, and (ii) the "disqualified portion" of the OID of such
AHYDO. The "disqualified portion" of the OID is equal to the lesser of (i)
the amount of OID or (ii) the portion of the "total return" (i.e., the excess
of all payments to be made with respect to the Exchange Note over its issue
price) in excess of the AFR plus six percentage points.
THE WARRANTS
Upon the sale or exchange of a Warrant (including the receipt of cash in
lieu of a fractional interest in Class A Common Stock upon exercise of a
Warrant), a Holder will recognize gain or loss in an amount equal to the
difference between the amount of cash and the fair market value of property
received therefor and the Holder's tax basis in the Warrant. A Holder's
initial tax basis in a Warrant acquired in this Offering will be that portion
of the issue price of the Unit allocable to the Warrant, as described above,
subject to adjustment in the events described below. See the discussion above
under "-- Allocation of Basis." Such gain or loss will be capital gain or
loss if the Class A Common Stock to which the Warrants relate would be a
capital asset in the hands of the Warrant holder. Any such capital gain or
loss will be long-term capital gain or loss if the Warrant was held for more
than one year.
Notwithstanding the above, it is possible that a redemption of a Warrant
by the Company would not be treated as a sale or exchange or a capital asset.
In that event, the Holder of a Warrant could recognize ordinary income or
loss on such redemption.
The exercise of a Warrant for cash will not result in a taxable event to
the holder of the Warrant (except to the extent of cash, if any, received in
lieu of fractional interest in Class A Common Stock). Upon such exercise, the
holder's tax basis in the Class A Common Stock obtained will be equal to the
sum of such Holder's tax basis in the Warrant (described above) and the
exercise price of the Warrant; the Holder's holding period with respect to
such Class A Common Stock will commence on the day after the date of
exercise. The Holder will realize capital gain or loss on the sale or
exchange of shares of Class A Common Stock if the Class A Common Stock is a
capital asset in the hands of the Holder, and such capital gain or loss will
be long-term if the Class A Common Stock was held for more than one year. If
a Warrant expires without being exercised, the Holder will recognize a loss
in an amount equal to its tax basis in the Warrant. Such loss will be a
capital loss if the Class A Common Stock to which the Warrants relate would
have been a capital asset in the hands of the Warrant Holder, and such
capital loss will be a long-term capital loss if the Warrant was held for
more than one year.
Adjustments to the conversion ratio of the Warrants, or the failure to
make adjustments, may in certain circumstances result in the receipt of
taxable constructive dividends by the holder, in which event the Holder's
tax, basis in the Warrants would be increased by an amount equal to the
constructive dividend.
If the exercise price of the Warrants is a nominal amount, it may be
possible that the Warrants will be considered to be constructively exercised
for federal income tax purposes on the day on which the Warrants first become
exercisable or, possibly, on the day of issuance. In that event, (i) no gain
or loss will be recognized to a Holder on such deemed exercise or upon actual
exercise of the Warrants, (ii) the adjusted basis of the Class A Common Stock
deemed received for federal income tax purposes on the constructive exercise
of the Warrants will be equal to the adjusted basis in the Warrants until the
Warrants are actually
137
<PAGE>
exercised (and the exercise price paid) at which time such basis would be
increased by the exercise price of the Warrants, and (iii) the holding period
of the Class A Common Stock deemed received for federal income tax purposes
on the constructive exercise of the Warrants will begin on the day following
the day of such constructive exercise.
BACKUP WITHHOLDING
A Holder of a Security may be subject to backup withholding at the rate of
31% with respect to dividends on the Series A Preferred Stock, interest on
the Exchange Notes or sales proceeds of Warrants, Series A Preferred Stock,
Exchange Notes and Class A Common Stock, unless such Holder (a) is a
corporation or comes within certain other exempt categories and, when
required, demonstrates such exemption or (b) provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of a Security who does not provide the Holder's
correct taxpayer identification number upon request may be subject to
penalties imposed by the IRS. Any amount paid as backup withholding would be
creditable against the Holder's federal income tax liability. THE FOREGOING
DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES NOT CONSIDER THE
FACTS AND CIRCUMSTANCES OF ANY PARTICULAR PROSPECTIVE PURCHASER'S SITUATION
OR STATUS. ACCORDINGLY, EACH PURCHASER OF SERIES A PREFERRED STOCK SHOULD
CONSULT ITS OWN TAX ADVISOR WITH RESPECT TO THE TAX CONSEQUENCES TO IT,
INCLUDING THOSE UNDER STATE, LOCAL, FOREIGN AND OTHER TAX LAWS.
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<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, each of CIBC
Wood Gundy Securities Corp. ("CIBC Wood Gundy"), Lehman Brothers Inc. and BT
Securities Corporation (collectively, the "Underwriters") have agreed
severally, and not jointly, to purchase and Pegasus has agreed to sell, that
aggregate number of shares of Units offered hereby set forth opposite its
name below :
Number
Underwriters of Units
------------ ------------
CIBC Wood Gundy Securities Corp. ....
Lehman Brothers Inc. ................
BT Securities Corporation ...........
------------
Total .............................. 100,000
============
Pegasus has been advised by the Underwriters that they propose to offer
the Units to the public at the public offering price set forth on the cover
page hereof. After the initial offering to the public, the offering price and
other selling terms may be changed by the Underwriters.
The Underwriting Agreement provides that the obligation of the
Underwriters to pay for and accept delivery of the Units are subject to
approval of certain legal matters by counsel and to certain other conditions,
including the condition that no stop order suspending the effectiveness of
the Registration Statement is in effect and no proceedings for such purpose
are pending or threatened by the Commission and that there has been no
material adverse change or any development involving a prospective material
adverse change in the condition of the Company from that set forth in the
Registration Statement otherwise than as set forth or contemplated in this
Prospectus, and that certain certificates, opinions and letters have been
received from the Company and its counsel and independent auditors. The
Underwriters are obligated to take and pay for all of the Units if any such
Units are taken.
The Company and the Underwriters have agreed in the Underwriting Agreement
to indemnify each other against certain liabilities, including liabilities
under the Securities Act.
The Underwriters have informed Pegasus that the Underwriters do not intend
to confirm sales to accounts over which they exercise discretionary
authority.
Prior to this Offering, there has been no public market for the Units. The
public offering price was negotiated between Pegasus and the Underwriters.
Among the factors considered in determining the public offering price of the
Units, in addition to the prevailing market conditions, were the Company's
historical performance, capital structure, estimates of the business
potential and earnings prospects of the Company, an assessment of the
Company's management and consideration of the above factors in relation to
market values of the companies in related businesses.
An affiliate of CIBC Wood Gundy, one of the Underwriters, is one of the
lenders under the New Credit Facility. CIBC Wood Gundy is the lender under
the Pegasus Credit Facility and in such connection received a closing fee of
$62,500. CIBC Wood Gundy has acted as a financial advisor to the Company in
connection with, among other things, the selection of the representatives of
the Initial Public Offering. For its financial advisory services, CIBC Wood
Gundy received $100,000 in fees.
Each of the Underwriters also acted as representatives of the underwriters
in the Initial Public Offering and received customary underwriting discounts
and commissions in connection therewith.
Under Rule 2710(c)(8) of the Conduct Rules of the National Association of
Securities Dealers, Inc. (the "NASD"), if more than 10% of the net proceeds of a
public offering of equity securities are to be paid to members of the NASD that
are participating in the offering, or affiliated or associated persons, the
price at which the equity securities are distributed to the public must be no
lower than that recommended by a "qualified independent underwriter," as defined
in Rule 2720 of the Conduct Rules of the NASD. Because CIBC Inc., an affiliate
of CIBC Wood Gundy, will receive more than 10% of the net proceeds of this
Offering as a result of the repayment of amounts under the New Credit Facility
(and because CIBC Wood Gundy may receive additional amounts upon repayment of
any amounts drawn under the Pegasus Credit Facility), pursuant to Rule 2720 of
the Conduct Rules of the NASD, BT Securities Corporation will act as a qualified
independent underwriter ("QIU") in connection with this Offering and will assume
the responsibilities of acting as a QIU in pricing this Offering and conducting
due diligence. BT Securities Corporation will receive no additional compensation
for acting as QIU.
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<PAGE>
LEGAL MATTERS
The validity of the issuance of the Units offered hereby will be passed
upon by Drinker Biddle & Reath, counsel for the Company. Michael B. Jordan, a
partner of Drinker Biddle & Reath, is an Assistant Secretary of the Company.
Certain legal matters in connection with this Offering will be passed upon
for the Underwriters by Latham & Watkins, New York, New York.
EXPERTS
The Company's combined balance sheets as of December 31, 1994 and 1995 and
the related combined statements of operations, statements of changes in total
equity and statements of cash flows for each of the two years in the period
ended December 31, 1995 included in this Prospectus, have been included
herein in reliance on the report of Coopers & Lybrand L.L.P., independent
accountants, given on the authority of that firm as experts in accounting and
auditing.
The Company's combined statement of operations, statement of changes in
total equity and statement of cash flows for the year ended December 31, 1993
included in this Prospectus, have been included herein in reliance on the
report of Herbein + Company, Inc., independent accountants, given on the
authority of that firm as experts in accounting and auditing.
The balance sheets of Portland Broadcasting, Inc. as of September 25, 1994
and September 24, 1995 and the related statements of operations, statements
of deficiency in assets and statements of cash flows for the fiscal years
ended September 26, 1993, September 25, 1994 and September 24, 1995, included
in this Prospectus, have been included herein in reliance on the report of
Ernst & Young LLP, independent accountants, given on the authority of that
firm as experts in accounting and auditing.
The balance sheets of WTLH, Inc. as of December 31, 1994 and 1995 and the
related statements of operations, statements of capital deficiency, and
statements of cash flows for each of the two years in the period ended
December 31, 1995, included in this Prospectus, have been included herein in
reliance on the report of Coopers & Lybrand L.L.P., independent accountants,
given on the authority of that firm as experts in accounting and auditing.
The combined balance sheets of the DBS Operations of Harron Communications
Corp. as of December 31, 1994 and 1995 and the related combined statements of
operations, and statements of cash flows for each of the two years in the
period ended December 31, 1995 included in this Prospectus, have been
included herein in reliance on the report of Deloitte & Touche LLP,
independent auditors, given on the authority of that firm as experts in
accounting and auditing.
The balance sheets of Dom's Tele-Cable, Inc. as of May 31, 1995 and 1996
and the related statements of operations and deficit, and statements of cash
flows for each of the three years in the period ended May 31, 1996 included
in this Prospectus, have been included herein in reliance on the report of
Coopers & Lybrand L.L.P., independent accountants, given on the authority of
that firm as experts in accounting and auditing.
In March 1995, the Company, with the recommendation and approval of the
Company's sole director, selected Coopers & Lybrand L.L.P. to act as
independent accountants for the Company and informed Herbein + Company, Inc.,
the Company's independent accountants since 1990, of its decision. In
connection with its audit for the year ended December 31, 1993 and through
its dismissal in March 1995, there were no disagreements with Herbein +
Company, Inc. on any matters of accounting principles or practices, financial
statement disclosure, or auditing scope or procedures. Herbein + Company,
Inc.'s report on the Company's financial statements for the fiscal year ended
December 31, 1993 contained no adverse opinions or disclaimers of opinion and
were not modified or qualified as to uncertainly, audit scope, or accounting
principles.
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<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the securities offered hereby. This Prospectus, which
constitutes a part of the Registration Statement, omits certain information
contained in the Registration Statement, and reference is made to the
Registration Statement and the exhibits thereto for further information with
respect to the Company and the securities to which this Prospectus relates.
Statements contained herein concerning the provisions of any contract,
agreement or other document are not necessarily complete, and, in each
instance, reference is made to the copy of such document filed as an exhibit
to the Registration Statement for a more complete description of the matter
involved, and each such statement is qualified in its entirety by such
reference. The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith, files reports, proxy statements and other information
with the Commission. The Registration Statement, including the exhibits and
schedules filed therewith, and any reports, proxy statements and other
information filed under the Exchange Act may be inspected at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the regional offices of the Commission located
at 7 World Trade Center, New York, New York 10048 and Northwestern Atrium
Center, 500 West Madison Street, Chicago, Illinois 60606. Copies of such
materials may be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. The Commission maintains a web site at http://www.sec.gov that
contains reports, proxy information statements and other information
regarding registrants, like Pegasus, that file electronically with the
Commission.
The Company intends to furnish to its stockholders annual reports
containing audited financial information and furnish quarterly reports
containing condensed unaudited financial information for each of the first
three quarters of each fiscal year.
141
<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 September 30, 1996 (unaudited) .............. F-4
Combined Statements of Operations for the years ended December 31, 1993, 1994, 1995 and the nine months
ended September 30, 1995 (unaudited) and 1996 (unaudited) ............................................ F-5
Combined Statements of Changes in Total Equity for the years ended December 31, 1993, 1994, 1995 and
the nine months ended September 30, 1996 (unaudited) ................................................. F-6
Combined Statements of Cash Flows for the years ended December 31, 1993, 1994 and 1995 and the nine
months ended September 30, 1995 (unaudited) and 1996 (unaudited) ..................................... F-7
Notes to Combined Financial Statements ................................................................ F-8
Portland Broadcasting, Inc. (an acquired entity)
Report of Ernst & Young LLP ........................................................................... F-21
Balance Sheets as of September 25, 1994, September 24, 1995, and December 31, 1995 (unaudited) ........ F-22
Statements of Operations for fiscal year ended September 26, 1993, September 25, 1994, September 24,
1995 and fiscal quarters ended December 25, 1994 (unaudited) and December 31, 1995 (unaudited) ....... F-23
Statements of Deficiency in Assets for the fiscal years ended September 26, 1993, September 25, 1994
and September 24, 1995 and the fiscal quarter ended December 31, 1995 (unaudited) .................... F-24
Statements of Cash Flows for fiscal years ended September 26, 1993, September 25, 1994 and September
24, 1995 and fiscal quarter ended December 1994 (unaudited) and 1995 (unaudited) ..................... F-25
Notes to Financial Statements ......................................................................... F-26
WTLH, Inc. (an acquired entity)
Report of Coopers & Lybrand L.L.P. .................................................................... F-30
Balance Sheets as of December 31, 1994, 1995 and February 29, 1996 (unaudited) ........................ F-31
Statements of Operations for the years ended December 31, 1994, 1995 and for the two months ended
February 28, 1995 (unaudited) and February 29, 1996 (unaudited) ...................................... F-32
Statements of Capital Deficiency for the years ended December 31, 1994, 1995 and for the two months
ended February 29, 1996 (unaudited) .................................................................. F-33
Statements of Cash Flows for the years ended December 31, 1994, 1995 and the two months ended February
28, 1995 (unaudited) and February 29, 1996 (unaudited) ............................................... F-34
Notes to Financial Statements ......................................................................... F-35
DBS Operations of Harron Communications Corp. (an acquired business)
Report of Deloitte & Touche LLP ....................................................................... F-41
Combined Balance Sheets as of December 31, 1994, 1995 and September 30, 1996 (unaudited) .............. F-42
Combined Statements of Operations for years ended December 31, 1994, 1995 and the nine months ended
September 30, 1995 (unaudited) and 1996 (unaudited) .................................................. F-43
Combined Statements of Cash Flows for years ended December 31, 1994, 1995 and the nine months ended
September 30, 1995 (unaudited) and 1996 (unaudited) .................................................. F-44
Notes to Combined Financial Statements ................................................................ F-45
Dom's Tele Cable, Inc. (an acquired entity)
Report of Coopers & Lybrand L.L.P. .................................................................... F-49
Balance Sheets as of May 31, 1995, 1996 and August 29, 1996 (unaudited) ............................... F-50
Statements of Operations and Deficit for years ended May 31, 1994, 1995, 1996, the three months ended
August 31, 1995 and the period June 1 to August 29, 1996 ............................................. F-51
Statements of Cash Flows for the years ended May 31, 1994, 1995, 1996, the three months ended August
31, 1995 and the period June 1 to August 29, 1996 .................................................... F-52
Notes to Financial Statements ......................................................................... F-53
</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
November 8, 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, September 30,
------------------------------
1994 1995 1996
------------- ------------- --------------
(unaudited)
ASSETS
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents ................. $ 1,380,029 $11,974,747 $ 5,668,285
Restricted cash ........................... -- 9,881,198 --
Accounts receivable, less allowance for
doubtful accounts at December 31, 1994,
1995 and September 30, 1996 of $348,000,
$238,000 and $256,000, respectively ..... 4,000,671 4,884,045 4,467,768
Program rights ............................ 1,097,619 931,664 1,451,077
Inventory ................................. 711,581 1,100,899 233,629
Deferred taxes ............................ 77,232 42,440 77,887
Prepaid expenses and other ................ 629,274 329,895 1,480,774
------------- ------------- --------------
Total current assets .................... 7,896,406 29,144,888 13,379,420
Property and equipment, net .................... 18,047,416 16,571,538 26,015,359
Intangible assets, net ......................... 47,354,826 48,028,410 80,780,835
Program rights ................................. 1,688,866 1,932,680 2,227,268
Deposits and other ............................. 406,168 92,325 166,498
------------- ------------- --------------
Total assets ............................ $75,393,682 $95,769,841 $122,569,380
============= ============= ==============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Notes payable ............................. $ 285,471 $ 316,188 $ 51,666
Advances payable -- related party ......... 142,048 468,327 --
Current portion of long-term debt ......... 25,578,406 271,934 376,127
Accounts payable .......................... 2,388,974 2,494,738 2,398,242
Accrued interest .......................... -- 5,173,745 3,190,440
Accrued expenses .......................... 1,619,052 1,712,603 4,767,734
Current portion of program rights payable . 956,740 1,141,793 1,581,374
------------- ------------- --------------
Total current liabilities ............... 30,970,691 11,579,328 12,365,583
------------- ------------- --------------
Long-term debt, net ............................ 35,765,495 82,308,195 117,240,865
Program rights payable ......................... 1,499,180 1,421,399 1,539,915
Deferred taxes ................................. 216,694 211,902 137,349
------------- ------------- --------------
Total liabilities ....................... 68,452,060 95,520,824 131,283,712
Commitments and contingent liabilities ......... -- -- --
Total equity (deficiency):
Preferred stock ........................... -- -- --
Common stock .............................. 494 1,700 1,700
Additional paid-in capital ................ 16,382,054 7,880,848 7,880,848
Retained earnings (deficit) ............... (3,905,909) 1,825,283 (3,203,594)
Partners' deficit ......................... (5,535,017) (9,458,814) (13,393,286)
------------- ------------- --------------
Total equity (deficiency) ............... 6,941,622 249,017 (8,714,332)
------------- ------------- --------------
Total liabilities and equity ............ $75,393,682 $95,769,841 $122,569,380
============= ============= ==============
</TABLE>
See accompanying notes to combined financial statements
F-4
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31, Nine Months Ended September 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 $9,770,738 $14,347,439
Barter programming revenue .... 2,735,500 4,604,200 5,110,662 3,635,100 3,820,000
Basic and satellite service ... 7,537,325 8,455,815 10,002,579 7,362,475 9,964,424
Premium services .............. 1,335,108 1,502,929 1,652,419 1,238,290 1,488,513
Other ......................... 307,388 423,998 519,682 477,751 499,477
-------------- -------------- ------------- ------------- --------------
Total revenues ............... 19,487,372 28,191,090 32,148,076 22,484,354 30,119,853
-------------- -------------- ------------- ------------- --------------
Operating expenses:
Barter programming expense .... 2,735,500 4,604,200 5,110,662 3,635,100 3,820,000
Programming ................... 3,139,284 4,094,688 5,475,623 3,883,754 5,862,461
General and administrative .... 2,219,133 3,289,532 3,885,473 3,021,519 4,053,184
Technical and operations ...... 2,070,896 2,791,885 2,740,670 2,024,047 2,425,639
Marketing and selling ......... 2,070,404 3,372,482 3,928,073 2,818,302 3,893,414
Incentive compensation ........ 192,070 432,066 527,663 443,995 605,390
Corporate expenses ............ 1,265,451 1,505,904 1,364,323 1,025,023 1,074,190
Depreciation and amortization . 5,977,678 6,940,147 8,751,489 6,240,180 8,479,427
-------------- -------------- ------------- ------------- --------------
Income (loss) from operations (183,044) 1,160,186 364,100 (607,566) (93,851)
Interest expense .............. (4,043,692) (5,360,729) (8,793,823) (5,969,800) (8,929,328)
Interest expense - related
party ...................... (358,318) (612,191) (22,759) -- --
Interest income ............... -- -- 370,300 184,362 171,513
Other expenses, net ........... (220,319) (65,369) (44,488) (68,633) (76,493)
-------------- -------------- ------------- ------------- --------------
Loss before income taxes and
extraordinary items ........ (4,805,373) (4,878,103) (8,126,670) (6,461,637) (8,928,159)
Provision (benefit) for income
taxes ...................... -- 139,462 30,000 30,000 (110,000)
-------------- -------------- ------------- ------------- --------------
Loss before extraordinary items (4,805,373) (5,017,565) (8,156,670) (6,491,637) (8,818,159)
Extraordinary gain (loss) from
extinguishment of debt, net -- (633,267) 10,210,580 6,931,323 (250,603)
-------------- -------------- ------------- ------------- --------------
Net income (loss) ............. ($ 4,805,373) ($ 5,650,832) $2,053,910 $439,686 ($9,068,762)
============== ============== ============= ============= ==============
Pro forma income (loss) per
share; (See Note 14)
Loss before extraordinary
items .................... $(1.56) $(1.68)
Extraordinary gain (loss) .. 1.95 (0.05)
------------- --------------
Net income (loss) .......... $0.39 $(1.73)
============= ==============
Weighted average shares .... 5,235,833 5,235,833
</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 ....................... (5,028,877) (4,039,885) (9,068,762)
Contribution by partner ........ 105,413 105,413
----------- -------- -------------- -------------- --------------- --------------
Balances at September 30, 1996
(unaudited) ................... 170,000 $1,700 $ 7,880,848 $(3,203,594) $(13,393,286) $ (8,714,332)
=========== ======== ============== ============== =============== ==============
</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, Nine Months Ended September 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 $ 439,686 ($ 9,068,762)
Adjustments to reconcile net income (loss)
to net cash provided by operating
activities:
Extraordinary (gain) loss on
extinguishment of debt, net ...... -- 633,267 (10,210,580) (6,931,323) 250,603
Depreciation and amortization ...... 5,977,678 6,940,147 8,751,489 6,240,180 8,479,427
Program rights amortization ........ 1,342,194 1,193,559 1,263,190 1,140,262 1,063,439
Accretion of bond discount ......... -- -- -- -- 294,066
Gain (loss) on disposal of fixed assets (9,344) 30,524 -- -- --
Bad debt expense ................... 96,932 200,039 146,147 140,309 (92,413)
Deferred income taxes .............. -- 139,462 30,000 30,000 (110,000)
Payments of programming rights ..... (1,278,650) (1,310,294) (1,233,777) (1,006,527) (1,319,343)
Interest paid with refinancing of debt (671,803) -- -- -- --
Change in assets and liabilities:
Accounts receivable .............. (853,305) (1,353,448) (815,241) 148,338 (184,324)
Inventory ........................ -- (711,581) (389,318) (554,492) 867,270
Prepaid expenses and other ....... (133,745) (250,128) 490,636 (70,821) (1,152,317)
Accounts payable & accrued expenses (113,160) 702,240 (826,453) (652,473) 3,495,061
Advances payable -- related party . -- 142,048 326,279 -- --
Accrued interest ................. 1,851,800 2,048,569 5,173,745 2,244,304 (2,292,849)
Deposits and other ............... 64,133 39,633 5,843 463 (74,173)
-------------- -------------- -------------- -------------- --------------
Net cash provided (used) by operating
activities ......................... 1,693,677 2,793,205 4,765,870 1,167,906 155,685
Cash flows from investing activities:
Acquisitions ....................... -- -- -- -- (43,050,514)
Capital expenditures ............... (884,950) (1,264,212) (2,640,475) (2,063,765) (2,606,717)
Purchase of intangible assets ...... -- (943,238) (2,334,656) (1,912,368) (843,210)
Cash acquired from acquisitions .... 803,908 -- -- -- --
Other .............................. (25,065) (53,648) (250,000) (1,200) --
-------------- -------------- -------------- -------------- --------------
Net cash used for investing activities . (106,107) (2,261,098) (5,225,131) (3,977,333) (46,500,441)
Cash flows from financing activities:
Proceeds from long-term debt ....... 15,060,000 35,015,000 81,651,373 82,439,688 247,736
Borrowings on revolving credit facility -- -- 2,591,335 2,591,335 40,400,000
Proceeds from long-term borrowings from
related parties .................. 5,574 26,000 20,000 13,000 --
Repayments on revolving credit
facility ......................... -- -- (2,591,335) (51,762,444) (8,894,653)
Repayments of long-term debt ....... (15,194,664) (33,991,965) (48,095,692) -- --
Restricted cash .................... -- -- (9,881,198) (9,768,877) 9,875,818
Debt issuance costs ................ (843,380) (1,552,539) (3,974,454) (3,640,450) (1,383,670)
Capital lease repayments ........... (47,347) (154,640) (166,050) (159,374) (206,937)
Distributions to Parent ............ -- -- (12,500,000) (12,500,000) --
Proceeds from the issuance of PM&C Class
B Shares ......................... -- -- 4,000,000 4,000,000 --
-------------- -------------- -------------- -------------- --------------
Net cash provided (used) by financing
activities ....................... (1,019,817) (658,144) 11,053,979 11,212,878 40,038,294
Net increase (decrease) in cash and cash
equivalents ........................... 567,753 (126,037) 10,594,718 8,303,451 (6,306,462)
Cash and cash equivalents, beginning of period 938,313 1,506,066 1,380,029 1,380,029 11,974,747
-------------- -------------- -------------- -------------- --------------
Cash and cash equivalents, end of period . $ 1,506,066 $ 1,380,029 $ 11,974,747 $ 9,683,480 $ 5,668,285
============== ============== ============== ============== ==============
</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 8, 1996, the Company completed an initial public offering (the
"Initial Public Offering") in which it sold 3,000,000 shares of its Class A
Common Stock to the public at a price of $14.00 per share resulting in net
proceeds to the Company of $38.1 million. The Company applied the net proceeds
from the Initial Public Offering as follows: (i) $17.9 million for the payment
of the cash portion of the purchase price of the Michigan/Texas DBS Acquisition,
(ii) $12.0 million to the Ohio DBS Acquisition, (iii) $3.0 million to repay the
indebtedness under the Credit Facility, (iv) $1.9 million to make a payment on
account of the Portland Acquisition, (v) $1.4 million for the payment of the
cash portion of the purchase price of the Management Agreement Acquisition, (vi)
$1.4 million for the Towers Purchase, and (vii) $522,000 for general corporate
purposes. The Management Agreement Acquisition and the Towers Purchase were
accounted for as entities under common control as if a pooling of interest
had occurred.
On October 31, 1994, the limited partnerships which owned and operated
PCH's broadcast television, cable and satellite operations, restructured and
transferred their assets to the PM&C's subsidiaries, PBT, PCT and PST,
respectively. This reorganization has been accounted for as if a pooling of
interests had occurred.
Pegasus Towers L.P. ("Towers"), an affiliated entity of Pegasus, owns and
operates television and radio transmitting towers located in Pennsylvania and
Tennessee.
Pegasus Communications Management Company ("PCMC"), an affiliated entity
of Pegasus, provides certain management and accounting services to its
affiliates.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
BASIS OF PRESENTATION:
The combined financial statements include the accounts of Pegasus, PM&C,
PBT, PCT, PST, PBA, MCT, Towers and PCMC. All significant intercompany
transactions and balances have been eliminated.
The 1994 conversion from limited partnerships to corporate form has been
treated as a reorganization of the aforementioned subsidiaries and affiliated
entities, with the assets and liabilities recorded at their historical cost.
The accompanying combined financial statements and notes hereto reflect the
limited partnerships' historical results of operations for the periods prior
to October 31, 1994 and the operations of the Company as a corporation from
that date through December 31, 1994, except for MCT which reflects the
limited partnership's results of operations from the effective date of
acquisition, March 1, 1993.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets
and liabilities and disclosure of contingencies. Actual results could differ
from those estimates.
F-8
<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 at December
31, 1995. These funds were disbursed from the escrow to pay interest on its
Series B Senior Subordinated Notes due 2005 (the "Series B Notes") in 1996.
PROGRAM RIGHTS:
The Company enters into agreements to show motion pictures and syndicated
programs on television. In accordance with the Statements of Financial
Accounting Standards No. 63 ("SFAS No. 63"), only the right and associated
liabilities for those films and programs currently available for showing are
recorded. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period which approximates amortization based on the
estimated number of showings during the contract period. Amortization of
$1,359,117, $1,238,849 and $1,306,768 is included in programming expenses for
the years ended December 31, 1993, 1994 and 1995, respectively. The
obligations arising from the acquisition of film rights are recorded at the
gross amount. Payments for the contracts are made pursuant to the contractual
terms over periods which are generally shorter than the license periods.
The Company has entered into agreements totaling $798,800 as of December
31, 1995, which are not yet available for showing at December 31, 1995, and
accordingly, are not recorded by the Company.
At December 31, 1995, the Company has commitments for future program
rights of $1,141,793, $827,793, $438,947 and $154,659 in 1996, 1997, 1998 and
1999, respectively.
INCOME TAXES:
On October 31, 1994, in conjunction with the incorporation, PBT, PCT, and
PST adopted the provisions of Statement of Financial Accounting Standards No.
109, "Accounting for Income Taxes" ("SFAS No. 109"). Prior to such date, the
above entities operated as partnerships for federal and state income tax
purposes and, therefore, no provision for income taxes was necessary. MCT is
treated as a partnership for federal and state income tax purposes, but taxed
as a corporation for Puerto Rico income tax purposes. The adoption of SFAS
No. 109 did not have a material impact on the Company's financial position or
results of operations. For the year ended December 31, 1994, income and
deferred taxes are based on the Company's operations from November 1, 1994
through December 31, 1994, excluding (i) MCT, which for Puerto Rico income
tax purposes is taxed as a corporation for the 12 month period ended December
31, 1994, and (ii) PBA and Towers, which are limited partnerships.
CONCENTRATION OF CREDIT RISK:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's
customer base, and their dispersion across different businesses and
geographic regions. As of December 31, 1994 and 1995, the Company had no
significant concentrations of credit risk.
F-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
3. INTERIM FINANCIAL INFORMATION:
The financial statements as of September 30, 1996 and for the nine months
ended September 30, 1995 and 1996 are unaudited. In the opinion of
management, all adjustments, including normal recurring adjustments,
necessary for a fair presentation of the results of operations have been
included. Results for the nine months ended September 30, 1996 may not be
indicative of the results expected for the year ending December 31, 1996.
The Company has provided unaudited footnote information for the interim
periods to the extent such information is substantially different from the
audited periods.
4. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 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 28,201,357
Transmitter equipment ................ 7,249,289 7,478,134 10,660,248
Building and improvements ............ 823,428 1,554,743 1,579,571
Equipment, furniture and fixtures .... 938,323 1,333,797 3,990,618
Vehicles ............................. 304,509 571,456 733,558
Other equipment ...................... 655,167 997,352 2,033,713
-------------- -------------- --------------
32,385,952 35,034,411 48,061,363
Accumulated depreciation ............. (14,338,536) (18,462,873) (22,046,004)
-------------- -------------- --------------
Net property and equipment ........... $ 18,047,416 $ 16,571,538 $ 26,015,359
============== ============== ==============
</TABLE>
Depreciation expense amounted to $3,154,394, $4,027,866, $4,140,058,
$3,281,839 and $3,649,497 for the years ended December 31, 1993, 1994, 1995
and for the nine months ended September 30, 1995 and 1996, respectively.
5. INTANGIBLES:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31, September 30,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Goodwill ............................. $28,490,035 $ 28,490,035 $ 57,079,813
Deferred franchise costs ............. 13,254,985 13,254,985 15,296,243
Broadcast licenses ................... 3,124,461 3,124,461 4,649,461
Network affiliation agreements ....... 1,236,641 1,236,641 2,761,641
Deferred financing costs ............. 1,788,677 3,974,454 4,003,702
DBS rights ........................... 3,130,093 4,832,160 4,832,160
Non-compete agreement ................ -- -- 1,800,000
Organization and other deferred costs 3,130,926 3,862,021 5,933,781
-------------- -------------- --------------
54,155,818 58,774,757 96,356,801
Accumulated amortization ............. (6,800,992) (10,746,347) (15,575,966)
-------------- -------------- --------------
Net intangible assets .............. $47,354,826 $ 48,028,410 $ 80,780,835
============== ============== ==============
</TABLE>
Amortization expense amounted to $2,823,284, $2,912,281, $4,611,431,
$2,958,341 and $4,829,930 for the years ended December 31, 1993, 1994, 1995
and for the nine months ended September 30, 1995 and 1996, respectively.
F-11
<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, September 30,
1994 1995 1996
-------------- -------------- --------------
(unaudited)
<S> <C> <C> <C>
Series B Notes payable by PM&C, due 2005, interest at
12.5%, payable semi-annually in arrears on January 1, and
July 1, net of unamortized discount of $3,804,546 and
$3,608,620 as of December 31, 1995 and June 30, 1996,
respectively ............................................ $81,195,454 $ 81,489,520
Senior term note, due 2001, interest at the Company's
option at either the bank's prime rate, plus an
applicable margin or LIBOR, plus an applicable margin
(9.25% at December 31, 1994) ............................ $20,000,000 -- --
Subordinated term loan, due 2003, interest at the
Company's option of either 4%, plus the higher of the
bank's prime rate or the Federal Funds rate plus 1% or
the Eurodollar rate, plus 6.5% (12.5% at December 31,
1994) ................................................... 15,000,000 -- --
Senior loan payable by MCT, due 1995, interest at prime,
plus 2% (10.5% at December 31, 1994) .................... 15,000,000 -- --
Junior loan payable by MCT, due 1995, interest at prime
plus 2% (10.5% at December 31, 1994) .................... 10,348,857 -- --
Senior seven year revolving credit facility dated August
29, 1996, interest at the Company's option at either the
banks prime rate, plus an applicable margin or LIBOR,
plus an applicable margin (8.375% at September 30, 1996) -- -- 31,600,000
Mortgage payable, due 2000, interest at 8.75% ............ -- 517,535 503,391
Other .................................................... 995,044 867,140 4,024,081
-------------- -------------- --------------
61,343,901 82,580,129 117,616,992
Less current maturities .................................. 25,578,406 271,934 376,127
-------------- -------------- --------------
Long-term debt ........................................... $35,765,495 $82,308,195 $117,240,865
============== ============== ==============
</TABLE>
On August 29, 1996, PM&C entered into a $50.0 million seven-year senior
revolving credit facility, which is collateralized by substantially all of
the assets of PM&C. On the same date, the Company had drawn $8.8 million to
repay all amounts outstanding under the $10.0 million senior collateralized
five-year revolving credit facility and $22.8 million to fund the acquisition
of Dom's Tele-Cable, Inc. ("Dom's").
On October 31, 1994, the Company repaid the outstanding balances under its
senior and junior term loan agreements with a portion of the proceeds from a
$20,000,000 term note agreement ("senior note") and $15,000,000 subordinated
term loan agreement ("subordinated loan") from various banking institutions.
The senior note and subordinated loan were scheduled to mature on December
31, 2001 and September 30, 2003, respectively. Amounts were subsequently
repaid as described below.
On July 7, 1995, the Company sold 85,000 units consisting of $85,000,000
in aggregate amount of 12.5% Series A Senior Subordinated Notes due 2005 (the
"Series A Notes" and, together with the Series B Notes, the "Notes") and
8,500 shares of Class B Common Stock of PM&C (the "Note Offering"). The net
proceeds from the sale were used to (i) repay approximately $38.6 million in
loans and other obligations, (ii) repurchase $26.0 million of notes for
approximately $13.0 million resulting in an extraordinary gain of $10.2
million, net of expenses of $2.8 million, (iii) make a $12.5 million
distribution to PCH, (iv) escrow $9.7 million for the purpose of paying
interest on the Notes, (v) pay $3.3 million in fees and expenses and (vi) to
fund proposed acquisitions.
F-12
<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 .......................... $ 442,703 $ 380,754
=========== ===========
F-13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
7. Leases: - (Continued)
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1995 are as follows:
Operating Capital
Leases Leases
----------- ----------
1996 ............................................ $160,000 $183,000
1997 ............................................ 131,000 157,000
1998 ............................................ 106,000 88,000
1999 ............................................ 31,000 23,000
2000 ............................................ 9,000 6,000
Thereafter ...................................... 15,000 3,000
----------- ----------
Total minimum payments .......................... $452,000 460,000
----------- ----------
Less: amount representing interest .............. 56,000
----------
Present value of net minimum lease payments
including current maturities of $142,000 ....... $404,000
==========
8. COMMITMENTS AND CONTINGENT LIABILITIES:
LEGAL MATTERS:
The operations of the Company are subject to regulation by the Federal
Communications Commission ("FCC") and other franchising authorities,
including the Connecticut Department of Public Utility Control ("DPUC").
During 1994, the DPUC ordered a reduction in the rates charged by PCT-CT
for its basic cable service tier and equipment charges and refunds for
related overcharges, plus interest, retroactive to September 1, 1993
requiring PCT-CT to issue refunds totaling $141,000. In December 1994, the
Company filed an appeal with the FCC. In March 1995, the FCC granted a stay
of the DPUC's rate reduction and refund order pending the appeal. The FCC has
not ruled on the appeal and the outcome cannot be predicted with any degree
of certainty. The Company believes it will prevail in its appeal. In the
event of an adverse ruling, the Company expects to make refunds in kind
rather than cash.
The Company is currently contesting a claim for unpaid premiums on its
workers' compensation insurance policy assessed by the state insurance fund
of Puerto Rico. Based upon current information available, the Company's
liability related to the claim is estimated to be less than $200,000.
From time to time the Company is also involved with claims that arise in
the normal course of business. In the opinion of management, the ultimate
liability with respect to these claims will not have a material adverse
effect on the combined operations, cash flows or financial position of the
Company.
9. INCOME TAXES:
Effective October 1, 1994, in conjunction with the incorporation of PBT,
PCT, and PST, the Company, excluding MCT which for Puerto Rico income tax
purposes has been treated as a corporation and Towers and PBA which are
limited partnerships, adopted SFAS No. 109.
F-14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
9. Income Taxes: - (Continued)
The following is a summary of the components of income taxes from
operations:
1994 1995
---------- ---------
Federal -- deferred ....... $104,644 $23,000
State and local ........... 34,818 7,000
---------- ---------
Provision for income
taxes ................ $139,462 $30,000
========== =========
The deferred income tax assets and liabilities recorded in the combined
balance sheets at December 31, 1994 and 1995, are as follows:
<TABLE>
<CAPTION>
1994 1995
------------- -------------
<S> <C> <C>
Assets:
Receivables .................................... $ 77,232 $ 42,440
Excess of tax basis over book basis from tax
gain recognized upon incorporation of
subsidiaries ................................ 1,876,128 1,751,053
Loss carryforwards ............................. 745,862 9,478,069
Other .......................................... 739,810 806,312
------------- -------------
Total deferred tax assets ................... 3,439,032 12,077,874
Liabilities:
Excess of book basis over tax basis of property,
plant and equipment ......................... (1,224,527) (1,015,611)
Excess of book basis over tax basis of
amortizable intangible assets ............... (597,837) (4,277,512)
Total deferred tax liabilities .............. (1,822,364) (5,293,123)
------------- -------------
Net deferred tax assets ........................ 1,616,668 6,784,751
Valuation allowance ............................ (1,756,130) (6,954,213)
------------- -------------
Net deferred tax liabilities ................... $ (139,462) $ (169,462)
============= =============
</TABLE>
The Company has recorded a valuation allowance of $6,954,213 to reflect
the estimated amount of deferred tax assets which may not be realized due to
the expiration of the Company's net operating loss carryforwards and portions
of other deferred tax assets related to prior acquisitions. The valuation
allowance increased primarily as the result of net operating loss
carryforwards generated during 1995 which may not be utilized.
At December 31, 1995, the Company has net operating loss carryforwards of
approximately $9.5 million which are available to offset future taxable
income and expire through 2010.
A reconciliation of the federal statutory rate to the effective tax rate
is as follows:
1994 1995
---------- ----------
U.S. statutory federal income tax rate ............. (34.00%) (34.00%)
Net operating loss attributable to the partnerships 29.55 --
Foreign net operating income (loss) ................ (18.14) (27.09)
State net operating loss ........................... (.96) --
Valuation allowance ................................ 25.70 61.46
Other .............................................. .72 --
---------- ----------
Effective tax rate ................................. 2.87% .37%
========== ==========
F-15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
10. RELATED PARTY TRANSACTIONS:
Related party transaction balances at December 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Notes payable ......................................... $211,728 $257,228
Interest expense related to subordinated notes payable 594,875 --
</TABLE>
At December 31, 1994 and 1995, PCMC had advances payable to an affiliate
for $142,048 and $468,327, respectively. 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, Nine months ended September 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 $3,635,100 $3,820,000
Intangible assets and related affiliated
debt .................................. 2,994,811 -- -- -- --
Acquisition of program rights and
assumption of related program payables -- 1,797,866 1,335,275 1,335,275 990,203
Acquisition of plant under capital
leases ................................ 289,786 168,960 121,373 121,373 247,736
Redemption of minority interests and
related receivable .................... -- 49,490 246,515 -- --
Interest converted to principal ........ -- 867,715 -- -- --
Issuance of put/call agreement ......... -- -- -- -- 3,050,000
</TABLE>
For the years ended December 31, 1993, 1994, 1995 and for the nine months
ended September 30, 1995 and 1996, the Company paid cash for interest in the
amount of $3,280,520, $3,757,097, $3,620,931, $3,375,887 and $5,866,424,
respectively. The Company paid no taxes for the years ended December 31, 1993,
1994, 1995 and for the nine months ended September 30, 1995 and 1996.
F-16
<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
========
Pro forma, as if the Initial Public Offering, the exchange of the PM&C
Class B Shares for shares of the Company's Class A Common Stock (the
"Registered Exchange Offer") and the issuance of Class A Common Stock in
transactions occurring concurrently with the Initial Public Offering had
happened at September 30, 1996, common stock consists of the following:
<TABLE>
<CAPTION>
Pro Forma
September 30,
1996
---------------
<S> <C>
Pegasus Class A common stock, $0.01 par value; 30.0 million shares
authorized; 4,663,229 issued and outstanding ............................... $46,632
Pegasus Class B common stock, $0.01 par value; 15.0 million shares
authorized; 4,581,900 issued and outstanding ............................... 45,819
---------------
Total common stock .......................................................... $92,451
===============
</TABLE>
The pro forma data above assume that the Registered Exchange Offer has
been consummated and that all holders of the PM&C Class B Shares accept the
offer. If all Holders do not accept this offer, the actual pro forma data
would differ from that set forth herein.
On July 7, 1995, as part of a plan of reorganization, PM&C agreed to
exchange 161,500 Class A Shares for all of the existing common stock
outstanding of PM&C, all outstanding shares of PST and a 99% limited interest
in PBA. The Company also acquired all of the outstanding interests of MCT for
nominal consideration. Additionally, the Company issued 8,500 Class B Shares
of PM&C on July 7, 1995 in connection with the Note Offering (see footnote
6).
In May 1996, Pegasus was incorporated. Pegasus is authorized to issue
30,000,000 shares of Class A and 15,000,000 shares of Class B, $0.01 par
value common stock and 5,000,000 shares of Preferred Stock.
13. INDUSTRY SEGMENTS:
The Company operates in three industry segments: broadcast television
(TV), cable television (Cable), and direct broadcast satellite television
(DBS). TV consists of three Fox affiliated television stations, of which one
also simulcasts its signal in Hazelton and Williamsport, Pennsylvania. Cable
and DBS consists of cable television services and direct broadcast satellite
services/equipment, respectively. Information regarding the Company's
business segments in 1993, 1994, and 1995 is as follows:
F-17
<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>
1993
Revenues ................. $10,307 $ 9,134 $ 46 $19,487
Operating income (loss) .. 488 (625) (46) (183)
Identifiable assets ...... 34,939 $2,995 38,251 319 76,504
Incentive compensation ... 106 -- 86 -- 192
Corporate expenses ....... 649 -- 612 4 1,265
Depreciation &
amortization .......... 1,501 -- 4,405 72 5,978
Capital expenditures ..... 127 -- 691 67 885
1994
Revenues ................. $17,808 $ 174 $10,148 $ 61 $28,191
Operating income (loss) .. 2,057 (103) (769) (25) 1,160
Identifiable assets ...... 36,078 4,438 34,535 343 75,394
Incentive compensation ... 327 -- 105 -- 432
Corporate expenses ....... 860 5 634 7 1,506
Depreciation &
amortization .......... 2,184 61 4,632 63 6,940
Capital expenditures ..... 411 57 704 92 1,264
1995
Revenues ................. $19,973 $1,469 $10,606 $100 $32,148
Operating income (loss) .. 2,252 (752) (1,103) (33) 364
Identifiable assets ...... 36,906 5,577 52,934 353 95,770
Incentive compensation ... 415 9 104 -- 528
Corporate expenses ....... 782 114 450 18 1,364
Depreciation &
amortization .......... 2,591 719 5,364 77 8,751
Capital expenditures ..... 1,403 216 953 69 2,641
</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 $11.7 million of
which $4.2 million was allocated to fixed and tangible assets and $7.5
million to goodwill. On June 20, 1996, PCH acquired the FCC license of WPXT
for aggregate consideration of $3.0 million.
F-18
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
14. Subsequent Events: - (Continued)
Effective March 1, 1996, the Company acquired the principal tangible
assets of WTLH, Inc. and certain of its affiliates for approximately $5.0
million in cash, except for the FCC license and Fox affiliation agreement.
Additionally, WTLH License Corp., a subsidiary of the Company entered into a
put/call agreement regarding the FCC license and Fox affiliation agreement
with General Management Consultants, Inc. ("GMC"), the licensee of WTLH,
Tallahassee, Florida. As a result of entering into the put/call agreement,
the Company recorded $3.1 million in intangible assets and long term debt
representing the FCC license and Fox affiliation agreement and the related
contingent liability. In August 1996, the Company exercised the put/call
agreement for $3.1 million.
The aggregate purchase price of WTLH, Inc. and the related FCC licenses
and Fox affiliation agreement is approximately $8.1 million of which $2.2
million was allocated to fixed and tangible assets and $5.9 million to
various intangible assets. In addition, the Company granted the owners of
WTLH a warrant to purchase $1,000,000 of stock at the initial public offering
price. The warrant expires 120 days after the effective date of the
registration statement relating to the Company's initial public offering.
Effective August 29, 1996, the Company acquired all of the assets of Dom's
for approximately $25.0 million in cash and $1.4 million in assumed
liabilities. Dom's operates cable systems serving ten communities contiguous
to the Company's Mayaguez, Puerto Rico cable system. The aggregate purchase
price of the principal assets of Dom's amounted to $26.4 million of which
$4.7 million was allocated to fixed and tangible assets and $21.7 million to
various intangible assets.
On May 30, 1996, PCH entered into an agreement with Harron Communications
Corp., under which the Company will acquire the rights to provide DIRECTV
programming in certain rural areas of Texas and Michigan and related assets
in exchange for approximately $17.9 million in cash and $11.9 million of the
Company's Class A Common Stock.
The above acquisitions have been or will be accounted for as purchases.
C. ADDITIONAL ACQUISITIONS AND DISPOSITIONS
On November 6, 1996, the Company entered into an agreement with State
Cable TV Corp. to sell substantially all assets of its New Hampshire cable
system for approximately $7.1 million in cash. The Company anticipates
recognizing a gain in the transaction. This transaction is expected to be
completed in the first quarter of 1997.
On November 8, 1996, the Company acquired, from Horizon Infotech, Inc., a
division of Chillicothe Telephone Company, the rights to provide DIRECTV
programming in certain rural areas of Ohio and the related assets in exchange
for approximately $12.0 million in cash.
D. PRO FORMA INCOME (LOSS) PER SHARE
Historical earnings per share has not been provided since it is not
meaningful due to the combined presentation of Pegasus. Pro forma earnings
per share has been presented as if Pegasus operated as a consolidated entity
for the year ended December 31, 1995 and the nine months ended September 30,
1996.
The pro forma income (loss) per share has been calculated based upon
5,235,833 shares outstanding and has been retroactively applied. The pro
forma average shares consists of the following:
F-19
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS - (Continued)
14. Subsequent Events: - (Continued)
<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 $14 per share ..................... 1,400,000 1,400,000
--------- ----------- -----------
455,398 4,780,435 5,235,833
========= =========== ===========
</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. LONG-TERM DEBT
On August 29, 1996, PM&C entered into a $50.0 million seven-year senior
revolving credit facility, which is collateralized by substantially all of
the assets of PM&C. On the same date, the Company had drawn $8.8 million to
repay all amounts outstanding under the $10.0 million senior collateralized
five-year revolving credit facility and $22.8 million to fund the acquisition
of Dom's Tele-Cable, Inc. ("Dom's").
G. INITIAL PUBLIC OFFERING
On October 8, 1996, the Company completed the Initial Public Offering in
which it sold 3,000,000 shares of its Class A Common Stock to the public at a
price of $14.00 per share resulting in net proceeds to the Company of $38.1
million. The Company applied the net proceeds from the Initial Public
Offering as follows: (i) $17.9 million for the payment of the cash portion of
the purchase price of the Michigan/Texas DBS Acquisition, (ii) $12.0 million
to the Ohio DBS Acquisition, (iii) $3.0 million to repay the indebtedness
under the Credit Facility, (iv) $1.9 million to make a payment on account of
the Portland Acquisition, (v) $1.5 million for the payment of the cash
portion of the purchase price of the Management Agreement Acquisition,
(vi) $1.4 million for the Towers Purchase, and (vii) $444,000 for general
corporate purposes. The Management Agreement Acquisition and the Towers Purchase
were accounted for as entities under Common Control as if a pooling of
interests had occurred.
F-20
<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-21
<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-22
<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-23
<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-24
<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-25
<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-26
<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-27
<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-28
<PAGE>
PORTLAND BROADCASTING, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
6. CONCENTRATION OF CREDIT RISK
Financial instruments which potentially subject the Company to significant
concentrations of credit risk consist principally of customers' accounts
receivable. Credit is extended based on the Company's evaluation of the
customer's financial condition, and the Company does not require collateral.
The Company's accounts receivable consist primarily of credit extended to a
variety of businesses in the greater Portland area and to national
advertising agencies for the purchase of advertising.
7. INCOME TAXES
The Company has unused income tax loss carryforwards approximating
$6,039,000 for tax purposes expiring between years 2001 and 2008.
An investment tax credit carryforward of $89,641 (after reduction required
by the Tax Reform Act of 1986) expires in 2001.
Deferred tax assets and liabilities result from temporary differences in
the recognition of income and expense for financial and income tax reporting
purposes including the temporary differences between book and tax
deductibility of the officer's salary accrual, vacation accrual, bad debt
reserve and depreciation. They represent future tax benefits or costs to be
recognized when those temporary differences reverse. At September 24, 1995, a
valuation allowance of $2,821,579 ($2,643,744 at September 25, 1994) was
recorded to offset net deferred tax assets. Significant components of the
Company's deferred tax assets and liabilities are as follows:
1994 1995
------------- -------------
Deferred tax assets:
Accrued officer's salary ................. $ 235,200 $ 248,700
Contingent liability ..................... -- 160,000
Accrued interest to shareholders ......... 7,143 387
Bad debt reserve ......................... 13,346 16,800
Accrued vacation ......................... 4,374 7,779
Net operating loss carryforwards ......... 2,415,084 2,405,479
Investment tax credit carryforward ....... 89,641 89,641
------------ -----------
Total deferred assets ...................... 2,764,788 2,928,786
Valuation allowance for deferred tax assets (2,643,744) (2,821,579)
------------ -----------
Net deferred tax assets .................... 121,044 107,207
Deferred tax liability:
Depreciation .............................. 121,044 107,207
------------ ------------
Net deferred tax assets .................... $ -- $ --
============ ============
During 1994 and 1995, the Company utilized net operating loss
carryforwards of approximately $235,000 and $24,000, realizing a benefit of
approximately $89,000 and $5,500, respectively.
8. SUBSEQUENT EVENT
On October 16, 1995, the Company entered into an Asset Purchase Agreement
for the sale of substantially all assets and liabilities of the Company, with
the exception of the station's FCC License.
F-29
<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-30
<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-31
<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-32
<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-33
<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-34
<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-35
<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:
February 29,
1994 1995 1996
----------- ----------- --------------
(Unaudited)
Transmitter and studio equipment $731,962 $718,958 $718,958
Computer equipment .............. 40,772 25,019 25,019
Furniture and fixtures .......... 27,914 27,914 27,914
Other equipment ................. 56,141 63,827 63,827
----------- ----------- --------------
856,789 835,718 835,718
Less accumulated depreciation ... 779,506 784,713 785,472
----------- ----------- --------------
$ 77,283 $ 51,005 $ 50,246
=========== =========== ==============
Building and equipment under capital leases consist of the following:
December 31, December 31, February 29,
1994 1995 1996
------------- ------------- ------------
(Unaudited)
Building ........................ $ 0 $525,000 $525,000
Transmitter and studio equipment 38,400 38,400 38,400
Tower ........................... 210,055 210,055 210,055
Computer equipment .............. 41,300 41,300 41,300
Furniture and fixtures .......... 7,950 7,950 7,950
Vehicle ......................... 8,952 0 0
------------- ------------- ------------
306,657 822,705 822,705
Less accumulated depreciation ... 80,654 129,886 140,191
------------- ------------- ------------
$226,003 $692,819 $682,514
============= ============= ============
Depreciation expense amounted to $135,474, $107,197, $13,936 and $10,305
for the years ended December 31, 1994 and 1995 and the two months ended
February 28, 1995 and February 29, 1996, respectively.
F-36
<PAGE>
WTLH, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
3. LONG-TERM DEBT TO AFFILIATES:
The following is a summary of long-term debt to affiliates:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1994 1995 1996
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
Note payable to affiliated company through common
ownership, interest at 12.97%, due at the earlier of
August 12, 1999 or the date the station is refinanced or
sold, collateralized by an assignment of outstanding
accounts receivable .................................... $453,673 $418,623 $392,335
Note payable to stockholders, interest at 12.97%, due
upon sale of the station ............................... 156,584 112,558 102,558
Other ................................................... 4,250 0 0
-------------- -------------- --------------
Total ................................................. 614,507 531,181 494,893
Less current portion .................................. 4,250 0 0
-------------- -------------- --------------
Long-term debt to affiliates .......................... $610,257 $531,181 $494,893
============== ============== ==============
</TABLE>
Scheduled maturities of long-term debt to affiliates, exclusive of
$112,558 for sale of the station, are as follows:
1999 ................................................... $418,623
==========
4. LEASES:
The Company leases a broadcasting tower, a vehicle and computer and other
equipment which have been accounted for as capital leases. The following is a
summary of capital lease obligations:
<TABLE>
<CAPTION>
December 31, December 31, February 29,
1994 1995 1996
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
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-37
<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-38
<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-39
<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-40
<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 October 8, 1996
F-41
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
COMBINED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995, AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
December 31, September 30,
------------------------------
1994 1995 1996
------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash ........................................... $ 140,311 $ 452,016 $ 433,083
Accounts Receivable, net of allowance for
doubtful accounts of $64,100 in 1995 and 1996 71,818 485,803 509,583
Inventory ...................................... 766,945 304,335 15,939
------------- ------------- --------------
Total current assets ................... 979,074 1,242,154 958,605
------------- ------------- --------------
PROPERTY AND EQUIPMENT ........................... 14,270 71,777 71,777
Accumulated depreciation ....................... (1,000) (9,565) (20,915)
------------- ------------- --------------
Property and equipment, net ............ 13,270 62,212 50,862
------------- ------------- --------------
FRANCHISE COSTS .................................. 5,399,321 5,590,167 5,590,167
Accumulated amortization ....................... (224,877) (775,423) (1,200,187)
------------- ------------- --------------
Franchise costs, net ................... 5,174,444 4,814,744 4,389,980
------------- ------------- --------------
TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,399,447
============= ============= ==============
LIABILITIES AND DIVISION DEFICIENCY
CURRENT LIABILITIES:
Accounts payable ............................... $ 272,340 $ 49,290 $ 3,792
Accrued expenses (Note 4) ....................... 121,085 504,339 999,274
------------- ------------- --------------
Total current liabilities .............. 393,425 553,629 1,003,066
------------- ------------- --------------
DUE TO AFFILIATE (Note 8) ........................ 6,708,407 8,399,809 7,953,908
------------- ------------- --------------
Total liabilities ............................ 7,101,832 8,953,438 8,956,974
COMMITMENTS AND CONTINGENCIES
DIVISION DEFICIENCY .............................. (935,044) (2,834,328) (3,557,527)
------------- ------------- --------------
TOTAL ............................................ $6,166,788 $ 6,119,110 $ 5,399,447
============= ============= ==============
</TABLE>
See notes to combined financial statements.
F-42
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
COMBINED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1994 AND 1995, AND
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
-------------------------------- ----------------------------
1994 1995 1995 1996
------------- --------------- ------------ ------------
(Unaudited)
<S> <C> <C> <C> <C>
REVENUES:
Programming ................ $ 95,488 $ 1,677,581 $ 1,039,045 $ 2,659,788
Equipment and other ........ 279,430 835,379 286,125 304,813
------------- --------------- ------------ ------------
374,918 2,512,960 1,325,170 2,964,601
------------- --------------- ------------ ------------
COST OF SALES:
Programming ................ 42,464 707,880 436,429 1,349,286
Equipment and other ........ 233,778 901,420 254,474 302,532
------------- --------------- ------------ ------------
276,242 1,609,300 690,903 1,651,818
------------- --------------- ------------ ------------
GROSS PROFIT ................. 98,676 903,660 634,267 1,312,783
------------- --------------- ------------ ------------
OPERATING EXPENSES:
Selling .................... 17,382 463,425 258,284 111,416
General and administrative . 199,683 1,009,633 627,623 908,314
Corporate allocation ....... 103,200 139,700 104,700 114,593
Depreciation and
amortization ............ 225,877 559,111 410,683 436,114
------------- --------------- ------------ ------------
546,142 2,171,869 1,401,290 1,570,437
------------- --------------- ------------ ------------
LOSS FROM OPERATIONS ......... (447,466) (1,268,209) (767,023) (257,654)
INTEREST EXPENSE ............. 487,578 631,075 460,361 465,545
------------- --------------- ------------ ------------
NET LOSS ..................... $(935,044) $ (1,899,284) $(1,227,384) $ (723,199)
============= =============== ============ ============
</TABLE>
See notes to combined financial statements.
F-43
<PAGE>
DBS OPERATIONS OF HARRON COMMUNICATIONS CORP.
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1994 AND 1995, AND
NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
-------------------------------- ------------------------------
1994 1995 1995 1996
------------- --------------- -------------- ------------
(Unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................. $ (935,044) $ (1,899,284) $(1,227,384) $(723,199)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization .......... 225,877 559,111 410,683 436,114
Changes in assets and liabilities:
Accounts receivable .................. (71,818) (413,985) (161,579) (23,780)
Inventory ............................ (766,945) 462,610 (188,125) 288,396
Accounts payable ..................... 272,340 (223,050) (229,151) (45,498)
Accrued expenses ..................... 121,085 383,254 325,711 494,935
------------- --------------- -------------- ------------
Net cash provided by (used in)
operating activities ............ (1,154,505) (1,131,344) (1,069,845) 426,968
------------- --------------- -------------- ------------
INVESTING ACTIVITIES:
Purchase of property and equipment ........ (14,270) (57,507) (55,617) --
Purchase of franchise rights and other .... (190,846) (190,846) --
------------- --------------- -------------- ------------
Net cash used in investing
activities ...................... (14,270) (248,353) (246,463) --
------------- --------------- -------------- ------------
FINANCING ACTIVITIES -- Advances from (to)
affiliate, net ............................ 1,309,086 1,691,402 1,371,725 (445,901)
------------- --------------- -------------- ------------
NET INCREASE (DECREASE) IN CASH ............. 140,311 311,705 55,417 (18,933)
CASH, BEGINNING OF PERIOD ................... 140,311 140,311 452,016
------------- --------------- -------------- ------------
CASH, END OF PERIOD ......................... $ 140,311 $ 452,016 $ 195,728 $ 433,083
============= =============== ============== ============
</TABLE>
See notes to combined financial statements.
F-44
<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. On October 8, 1996, Harron sold
its DBS operations to Pegasus Communications Corporation (see Note 9). These
divisions have no separate legal existence apart from Harron.
The historical combined financial statements of the DBS Operations of
Harron Communications Corp. do not necessarily reflect the results of
operations or financial position that would have existed if the component DBS
operating divisions were independent companies. Harron provides certain
legal, treasury, accounting, tax, risk management and other corporate
services to the Divisions (see Note 8). There are no significant intercompany
transactions or balances between the component divisions.
Nature of Business -- The Divisions provide direct broadcast satellite
television distribution services and sell the related equipment in rural
territories located in Michigan and Texas franchised by the National Rural
Telecommunications Cooperative ("NRTC") and DIRECTV. While these franchises
are exclusive as they relate to programming provided by DIRECTV, other
programming providers may offer DBS services within the Divisions' markets.
In 1993, the Divisions purchased their initial franchises with a potential
subscriber base of 343,174 homes for approximately $5,395,000. In July 1994,
the Divisions added their first DBS subscriber. In 1995, the Divisions
purchased an additional franchise with a potential subscriber base of 7,695
homes for approximately $190,000. Total subscribers at December 31, 1995 and
1994 were 6,573 and 1,737 homes, respectively.
Under the franchise agreements, DIRECTV operates a satellite through which
programming is transmitted. The NRTC provides certain billing and collection
services to the Divisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounts Receivable -- Accounts receivable consist of amounts due from
customers for programming services and equipment purchases and installation.
In 1995, the Divisions sold equipment and related installation to
approximately 50 customers under contracts with repayment terms of up to 48
months. The Divisions have provided a reserve for estimated uncollectible
amounts of $64,100 at December 31, 1995. Bad debt expense in 1994 and 1995
was $0 and $87,400, respectively.
Inventory -- Inventory, consisting of DBS systems (primarily, satellite
dishes and converter boxes) and related parts and supplies, is stated at the
lower of cost (first in - first out method) or market. Because of the nature
of the technology involved, the value of inventory held by the Divisions is
subject to changing market conditions. Accordingly, inventory has been
written down to its estimated net realizable value, and results of operations
in 1995 include a corresponding charge of approximately $105,000.
In 1995, the Divisions provided demonstration units to certain dealers and
others. The cost of demonstration units is expensed when such units are
placed in service. In 1995, demonstration units amounting to approximately
$32,000 were placed in service.
Property and Equipment -- Property and equipment are recorded at cost.
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets.
Franchise Costs -- Franchise acquisition costs are capitalized and are
being amortized using the straight-line method over the remaining minimum
franchise period (originally 10 years) which approximates the estimated
useful life of the satellite operated by DIRECTV.
F-45
<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 September 30, 1996 and
the combined statements of operations and cash flows for the nine months
ended September 30, 1995 and 1996 have been prepared by the Divisions and
have not been audited. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
combined financial position, results of operations and cash flows of the
Divisions as of September 30, 1996 and for the nine months ended September
30, 1995 and 1996 have been made. The combined results of operations for the
nine months ended September 30, 1996 are not necessarily indicative of
operating results for the full year.
Disclosures About Fair Value of Financial Instruments -- The following
disclosure of the estimated fair value of financial instruments is made in
accordance with SFAS No. 107, Disclosures About Fair Value of Financial
Instruments.
Cash, Accounts Receivable, Accounts Payable, and Accrued Expenses --
The carrying amounts of these items approximate their fair values as of
December 31, 1994 and 1995 because of their short maturity.
Due to Affiliates -- A reasonable estimate of fair value is not
practicable to obtain because of the related party nature of this item.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
Estimated December 31,
Years --------------------------
Useful Life 1994 1995
------------- --------- ---------
Furniture and fixtures . 10 $ 8,550 $19,435
Computer equipment ..... 5 5,720 25,839
Automobiles ............ 3 21,005
Other .................. 3 5,498
--------- ---------
14,270 71,777
Accumulated depreciation . (1,000) (9,565)
--------- ---------
$13,270 $62,212
========= =========
F-46
<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-47
<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 October 8, 1996, Harron contributed its DBS operations and related
assets to Pegasus Communications Corporation ("Pegasus") in exchange for (a)
cash in the amount of $17.9 million and (b) 852,110 shares of Class A Common
Stock of Pegasus. On that date, Pegasus consummated an initial public
offering of its Class A Common Stock at an initial public offering price of
$14 per share.
F-48
<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 except as to Note 10
for which the date is
August 29, 1996
F-49
<PAGE>
DOM'S TELE CABLE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
May 31, May 31, August 29,
1995 1996 1996
------------- ------------- -------------
(unaudited)
<S> <C> <C> <C>
ASSETS
Property, plant, and equipment net of accumulated
depreciation and amortization .................. $ 5,077,102 $ 4,839,293 $ 4,832,871
Cash ............................................ 60,648 146,368 86,277
Accounts receivable, trade -- net of allowance
for doubtful accounts of $26,900 and $30,390 for
May 31, 1995 and 1996, respectively ............ 107,876 26,314 0
Prepaid expenses ................................ 85,536 62,856 120,203
Other assets .................................... 11,086 11,086 11,636
Due from related parties ........................ 212 212 0
Deferred tax asset .............................. 330,200 0 0
------------- ------------- -------------
Total assets ............................... $ 5,672,660 $ 5,086,129 $ 5,050,987
============= ============= =============
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Liabilities:
Notes and loans payable ....................... $ 6,079,357 $ 5,086,232 $ 4,896,800
Accounts payable, trade ....................... 695,519 194,856 192,736
Accrued expenses .............................. 942,227 1,055,337 1,107,822
Unearned revenues ............................. 53,852 41,369 38,248
Income tax payable ............................ 16,840 15,410 35,954
------------- ------------- -------------
7,787,795 6,393,204 6,271,560
------------- ------------- -------------
Commitments and contingencies ................... 477,083 495,352 515,223
Stockholders' Deficiency:
Common stock -- $10 par value; authorized,
100,000 shares, issued and outstanding 9,575
shares ..................................... 95,750 95,750 95,750
Accumulated deficit ........................... (2,687,968) (1,898,177) (1,831,546)
------------- ------------- -------------
(2,592,218) (1,802,427) (1,735,796)
------------- ------------- -------------
Total liabilities and stockholders'
deficiency ............................... $ 5,672,660 $ 5,086,129 $ 5,050,987
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-50
<PAGE>
DOM'S TELE CABLE, INC.
STATEMENTS OF OPERATIONS AND DEFICIT
FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996,
THE THREE MONTHS ENDED AUGUST 31, 1995 AND THE PERIOD JUNE 1 TO AUGUST 29, 1996
<TABLE>
<CAPTION>
May 31, May 31, May 31, August 31, August 29,
1994 1995 1996 1995 1996
--------------- --------------- --------------- -------------- -------------
As Restated (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Revenues ....................... $ 5,356,652 $ 5,447,228 $ 6,015,072 $ 1,424,132 $ 1,505,942
Operating costs and expenses ... 1,521,390 1,950,762 1,909,206 478,285 513,646
--------------- --------------- --------------- -------------- -------------
Gross profit .............. 3,835,262 3,496,466 4,105,866 945,847 992,296
--------------- --------------- --------------- -------------- -------------
Marketing, general, and
administrative expenses . 1,346,487 1,412,951 1,636,322 379,646 671,914
Depreciation and
amortization ............ 634,750 491,295 505,042 151,639 102,866
--------------- --------------- --------------- -------------- -------------
1,981,237 1,904,246 2,141,364 531,285 774,780
--------------- --------------- --------------- -------------- -------------
Operating income ............... 1,854,025 1,592,220 1,964,502 414,562 217,516
Non-operating (income) expenses:
Other ........................ -- (50,000) -- -- --
Interest expense ............. 753,047 777,461 827,800 203,271 130,341
--------------- --------------- --------------- -------------- -------------
Income before benefit
(provision) for income
taxes ..................... 1,100,978 864,759 1,136,702 211,291 87,175
Benefit (provision) for income
taxes ..................... 184,000 129,356 (346,911) 0 (20,544)
--------------- --------------- --------------- -------------- -------------
Net income ................ 1,284,978 994,115 789,791 211,291 66,631
Deficit at beginning of period . (4,967,061) (3,682,083) (2,687,968) (2,687,968) (1,898,177)
--------------- --------------- --------------- -------------- -------------
Deficit at end of period ....... $(3,682,083) $(2,687,968) $(1,898,177) $(2,476,677) $(1,831,546)
=============== =============== =============== ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-51
<PAGE>
DOM'S TELE CABLE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED MAY 31, 1994, 1995 AND 1996,
THE THREE MONTHS ENDED AUGUST 31, 1995 AND THE PERIOD JUNE 1 TO AUGUST 29, 1996
<TABLE>
<CAPTION>
May 31, May 31, May 31, August 31, August 29,
1994 1995 1996 1995 1996
------------- ------------- ------------- ------------ -----------
As Restated (unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income .................................. $ 1,284,978 $ 994,115 $ 789,791 $ 211,291 $ 66,631
------------- ------------- ------------- ------------ -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization ............ 634,750 491,295 505,042 151,639 102,866
Provision for doubtful accounts .......... 50,595 9,241 110,408 28,270 29,901
Changes in assets and liabilities:
(Increase) decrease in accounts receivables,
trade ................................. (24,781) (51,864) (28,846) 1,434 (3,587)
(Increase) decrease in accounts
receivable, other ................... (14,743) 35,866 -- -- --
(Increase) decrease in prepaid expenses (35,218) (4,845) 22,679 (211,647) (57,347)
(Increase) in other assets ............. (3,916) -- -- -- (550)
(Increase) decrease in due from related
parties ............................. (2,887) 3,414 -- 988 12,587
(Increase) decrease in deferred tax
asset ............................... (184,000) (146,200) 330,200 330,200 --
Increase (decrease) in accounts payable 238,870 266,705 (500,663) (277,178) (2,120)
Increase (decrease) in accrued expenses (186,870) (120,322) 113,110 (271,309) 40,111
Increase (decrease) in income tax
payable ............................. -- 16,840 (1,430) (16,840) 20,543
Increase (decrease) in unearned revenues (12,483) (22,908) (12,483) 7,305 (3,121)
Increase in contingencies .............. -- 191,083 18,269 245,199 19,871
------------- ------------- ------------- ------------ -----------
Other .................................. -- -- -- (195,982) --
Total adjustments ................... 459,317 668,305 556,286 (207,921) 159,154
------------- ------------- ------------- ------------ -----------
Net cash provided by operating
activities ........................ 1,744,295 1,662,420 1,346,077 3,370 225,785
------------- ------------- ------------- ------------ -----------
Cash flows from investing activities:
Capital expenditures ........................ (390,172) (249,727) (267,232) (58,715) (96,444)
------------- ------------- ------------- ------------ -----------
Net cash used in investing activities (390,172) (249,727) (267,232) (58,715) (96,444)
------------- ------------- ------------- ------------ -----------
Cash flows from financing activities:
Bank overdraft .............................. -- -- -- 102,586 --
Payments of notes payable ................... (1,469,104) (1,443,650) (1,011,925) (107,889) (189,432)
Proceeds from issuance of loan payable ...... 40,000 -- 18,800 -- --
------------- ------------- ------------- ------------ -----------
Net cash used in financing activities (1,429,104) (1,443,650) (993,125) (5,303) (189,432)
------------- ------------- ------------- ------------ -----------
Net increase (decrease) in cash ............... (74,981) (30,957) 85,720 (60,648) (60,091)
Cash, beginning of period ..................... 166,586 91,605 60,648 60,648 146,368
------------- ------------- ------------- ------------ -----------
Cash, end of period ........................... $ 91,605 $ 60,648 $ 146,368 $ -- $ 86,277
============= ============= ============= ============ ===========
Supplemental disclosure of cash flows
information:
Cash paid during the period for interest ..... $ 713,821 $ 805,421 $ 833,209 $ 203,271 $ 130,341
============= ============= ============= ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-52
<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-53
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
YEARS ENDED DECEMBER 31, 1994 AND 1995
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - (Continued)
INCOME TAXES
Deferred income taxes are recognized for the tax consequences in future
years of differences between the tax bases of assets and liabilities and
their financial reporting amounts at each year-end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences
are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized. Income tax expense is the tax
payable for the period and the change during the period in deferred tax
assets and liabilities.
FAIR VALUE OF FINANCIAL INSTRUMENTS
For cash and accounts receivable, the estimated fair value is the same or
approximately the same as the recorded value.
RISKS AND UNCERTAINTIES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
INTERIM FINANCIAL INFORMATION:
The financial statements as of August 29, 1996 and for the three months
ended August 31, 1995 and the period June 1 to August 29, 1996 are unaudited.
In the opinion of management, all adjustments, including normal recurring
adjustments, necessary for a fair presentation of the results of operations
have been included.
RECLASSIFICATIONS
Certain reclassifications have been made to the 1995 financial statements
to be consistent with the current year presentation.
2. FRANCHISE FEES AND COMMITMENTS
The Company was granted a cable television franchise for certain
municipalities on December 28, 1984 by the Puerto Rico Service Commission for
twenty years. The franchise agreement requires a payment of 3% of the
Company's gross revenues. In addition, the Company has to pay its subscribers
5% interest on its customer deposits.
The Company's pole rental agreements with the Puerto Rico Telephone
Company and the Puerto Rico Electric Power Authority are renewed on a yearly
basis. These contracts specify that the Company will pay $3.00 and $7.33,
respectively, for the use of each pole. The rental expense for the years
ended May 31, 1994, 1995, and 1996, amounted to $58,334, $73,063 and $73,065,
respectively.
3. RELATED PARTY TRANSACTION
The Company was partially owned by Three-Sixty Corporation. Transactions
with Three-Sixty Corporation not disclosed elsewhere are management fees
amounting to $55,367, $54,952 and $55,367 in May 31, 1994, 1995, and 1996,
respectively.
In October 1994, all of the Company's stock was acquired by the majority
stockholder.
F-54
<PAGE>
DOM'S TELE CABLE, INC.
NOTES TO FINANCIAL STATEMENTS - (Continued)
4. PROPERTY, PLANT, AND EQUIPMENT
Property, plant, and equipment consists of:
<TABLE>
<CAPTION>
May 31, May 31,
1995 1996
------------- ------------
<S> <C> <C>
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
============= ============
</TABLE>
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-55
<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:
May 31, May 31, May 31,
1994 1995 1996
------------- ------------ ----------
As Restated
Tax at statutory rate ............... $ 462,411 $ 363,199 $ 443,314
Adjustment due to:
Benefit of net operating loss
carryforwards ................ (456,149) (354,255) (439,187)
Alternative minimum tax ........ 0 16,844 16,711
Change in valuation allowances .. (184,000) (146,200) 330,200
Others, net .................... (6,262) (8,944) (4,127)
------------- ------------ ----------
$(184,000) $(129,356) $ 346,911
============= ============ ==========
F-56
<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.
On August 29, 1996, all of the Company's assets were acquired by Pegasus
Communications Corporation for approximately $25.0 million in cash and $1.4
million in assumed liabilities.
11. PRIOR PERIOD ADJUSTMENT
The Company restated its depreciation expense by $520,329 to correct the
depreciation expense for the year ended May 31, 1994. The effect was to
increase net income for the year ended May 31, 1994 by $520,329.
F-57
<PAGE>
[Collage of photographs of television personalities]
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at the lowest prices ever. For the most movies, sports and cable channels
available anywhere, it's got to be Pegasus Satellite Television.
Pegasus Satellite Television
[Pegasus Satellite Televison LOGO]
DIRECTV Satellite TV at its Best
Hardware and programming sold separately. DIRECTV, DSS and "DIRECTV. Satellite
TV at its Best," are official trademarks of DIRECTV, Inc., a unit of Hughes
Electronics Corp. (c)1996 NRTC. MKT BROCH 1003
<PAGE>
==============================================================================
No dealer, salesperson or other person has been authorized to give any
information or to make any representation other than those contained in this
Prospectus, and, if given or made, such infor-
mation or representation must not be relied upon as having been authorized by
the Company or by any Underwriter. This Prospectus does not consti-
tute an offer to sell or a solicitation of an offer to buy the Securities by
anyone in any jurisdiction in which the person making the offer or solicitation
is not qualified to do so or to any person to whom it is unlawful to make such
offer or solicitation. Neither the delivery of this Prospectus nor any sale made
hereunder shall create any implication that there has been no change in the
affairs of the Company since the date hereof or that information con- tained
herein is correct as of any time subsequent to the date hereof.
------
TABLE OF CONTENTS
Page
------
Prospectus Summary ....................... 1
Risk Factors ............................. 20
Use of Proceeds .......................... 28
Dividend Policy .......................... 29
Class A Common Stock Information ......... 29
Capitalization ........................... 30
Pro Forma Combined Financial Information . 31
Selected Historical and Pro Forma Combined
Financial Data .......................... 38
Management's Discussion and Analysis of
Financial Condition and Results of
Operations .............................. 41
Business ................................. 51
Management and Certain Transactions ...... 81
Ownership and Control .................... 87
Description of Indebtedness .............. 88
Description of Securities ................ 90
Description of Capital Stock ............. 126
Shares Eligible for Future Sale .......... 129
Certain Federal Income Tax Considerations 131
Underwriting ............................. 139
Legal Matters ............................ 140
Experts .................................. 140
Additional Information ................... 141
Index to Financial Statements ............ F-1
===============================================================================
<PAGE>
===============================================================================
$100,000,000
LOGO
100,000 UNITS
% SERIES A CUMULATIVE
EXCHANGEABLE PREFERRED STOCK
AND
WARRANTS TO PURCHASE
193,600 SHARES OF
CLASS A COMMON STOCK
------
P R O S P E C T U S
------
CIBC WOOD GUNDY SECURITIES CORP.
LEHMAN BROTHERS
BT SECURITIES CORPORATION
, 1997
===============================================================================
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses payable by the Registrant in
connection with this Registration Statement. All of such expenses are
estimates, other than the filing and listing fees payable to the Securities
and Exchange Commission and the National Association of Securities Dealers,
Inc.
<TABLE>
<CAPTION>
<S> <C>
Filing Fee -- Securities and Exchange Commission ................ $ 30,303.03
Filing Fee -- National Association of Securities Dealers, Inc. .. $ 10,500.00
Fees and Expenses of Accountants ................................ $120,000.00
Fees and Expenses of Counsel .................................... $170,000.00
Printing Expenses ............................................... $120,000.00
Blue Sky Fees and Expenses ...................................... $ 10,000.00
Miscellaneous Expenses .......................................... $ 39,196.97
---------------
Total ......................................................... $500,000.00
===============
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Amended and Restated Certificate of Incorporation
provides that a director of the Registrant shall have no personal liability
to the Registrant or to its stockholders for monetary damages for breach of
fiduciary duty as a director except to the extent that Section 102(b)(7) (or
any successor provision) of the Delaware General Corporation Law, as amended
form time to time, expressly provides that the liability of a director may
not be eliminated or limited.
Article 6 of the Registrant's By-Laws provides that any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director
or officer of the Registrant, or is or was serving while a director or
officer of the Registrant at the request of the Registrant as a director,
officer, employee, agent, fiduciary or other representative of another
corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall be indemnified by the Registrant against expenses
(including attorneys' fees), judgments, fines, excise taxes and amounts paid
in settlement actually and reasonably incurred by such person in connection
with such action, suit or proceeding to the full extent permissible under
Delaware law. Article 6 also provides that any person who is claiming
indemnification under the Registrant's By-Laws is entitled to advances from
the Registrant for the payment of expenses incurred by such person in the
manner and to the full extent permitted under Delaware law.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Registrant against certain liabilities under the Securities
Act of 1933, as amended. Reference is made to Section 8 of the form of
Underwriting Agreement which is filed as Exhibit 1.1 hereto.
The Registrant intends to obtain directors' and officers' liability
insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The Registrant was incorporated on May 30, 1996. In connection with its
incorporation, the Registrant issued 100 shares of Class B Common Stock to
its parent, Pegasus Communications Holdings, Inc. on May 30, 1996, in
reliance on the exemption from registration set forth in Section 4(2) of the
Securities Act. On October 8, 1996, the Registrant issued 852,110 shares in
connection with the Michigan/Texas Acquisition, 263,606 shares pursuant to
the Management Share Exchange, 269,964 shares initially issued as Class B
Common Stock and transferred as Class A Common Stock to certain members of
management who participated in the Management Share Exchange, 10,714 shares
in connection with the Portland Acqusition
II-1
<PAGE>
and 71,429 shares in connection with the Portland LMA. All of the foregoing
issuances were made in reliance upon the exemption from registration set
forth in Section 4(2) of the Securities Act. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" for consideration
relating to these issuances.
In addition, on October 8, 1996, the Registrant also issued 1,400,000
shares in connection with the Management Agreement Acquisition, 71,429 shares
in connection with the Portland Acquisition and 3,380,435 shares issued to
the Parent on account of the Parent's contribution of all of the outstanding
PM&C Class A Shares to the Registrant. All of the foregoing issuances were
made in reliance upon the exemption from registration set forth in Section
4(2) of the Securities Act. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for consideration relating to
these issuances.
On October 8, 1996, the Registrant issued $1.0 million in warrants to
purchase Class A Common Stock of the Registrant in connection with the
purchase by the Registrant of television station WTLH. This issuance was also
made in reliance upon the exemption from registration set forth in Section
4(2) of the Securities Act. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" for consideration relating to
this issuance.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------------ ------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement for Initial Public Offering (which is incorporated by reference to Exhibit
1.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
1.2* Form of Underwriting Agreement.
2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla
Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which
is incorporated herein by reference to Exhibit 2.1 of the Form 10-K for the year ended December 31, 1995
of Pegasus Media & Communications, Inc.).
2.2 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30, 1996 (including
form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agreement) (which is incorporated
by reference to Exhibit 2.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
2.3 Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to Exhibit 2 to Pegasus Media & Communications,
Inc.'s Form 8-K dated August 29, 1996).
2.4 Joinder Agreement dated as of May 31, 1996 by and among the Parent, Dominica Padilla Acosta (aka Dominick
Padilla), Maria Del Carmen Padilla Lopez and Domar (which is incorporated by reference to Exhibit 5 to Pegasus
Media & Communications, Inc.'s Form 8-K dated August 29, 1996).
2.5 Amendment No. 1 to Exhibit 2.2 (which is incorporated by reference to Pegasus' Form 8-K, dated October 8,
1996).
2.6 Amendment No. 2 to Exhibit 2.2 (which is incorporated by reference to Exhibit 2.5 to Pegasus' Registration
Statement on Form S-1 (File No. 333-057057).
2.7 Amendment No. 3 to Exhibit 2.2 (which is incorporated by reference to Exhibit 4 to Pegasus' Form 8-K dated
October 8, 1996).
2.8 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation
and Harron Communications Corp. dated as of October 8, 1996 (which is incorporated by reference to Exhibit
5 to Pegasus' Form 8-K dated October 8, 1996).
2.9 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation
and Harron Communications Corporation dated as of October 8, 1996 (which is incorporated by reference to
Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------------ ------------------------------------------------------------------------------------------------------
<S> <C>
2.10 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation
and Harron Communications Corp. dated October 8, 1996 (which is incorporated by reference to Exhibit 7 to
Pegasus Form 8-K dated as of October 8, 1996)
2.11 Asset Purchase Agreement by and among Pegasus Communications Corporation and Horizon Telcom, Inc., Horizon
Infotech, Inc. and Chillicothe Telephone Company dated as of October 23, 1996 (which is incorporated herein
by reference to Pegasus' Registration Statement on Form S-4 (File No. 333-14857).
2.12** Asset Purchase Agreement dated as of November 6, 1996 between State Cable TV Corp. and Pegasus Cable Television,
Inc.
3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to
Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement
on Form S-1 (File No. 333-05057).
3.3* Form of Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions Thereof.
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the Guarantors (as
this term is defined in the Indenture), and First Fidelity Bank, National Association, as Trustee, relating
to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form of Notes and Subsidiary
Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
4.2 Form of Notes (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee (included in Exhibit 4.1 above).
4.4* Form of Indenture dated as of , 1997 by and between Pegasus and First Union National Bank, as trustee,
relating to the Exchange Notes.
5.1* Opinion of Drinker Biddle & Reath.
8.1* Opinion of Drinker Biddle & Reath as to Tax Matters.
10.1 Tax Sharing Agreement, made as of July 7, 1995, among the Parent, Pegasus Media & Communications, Inc.,
the Guarantors, Pegasus Cable Television of Connecticut, Inc., and Pegasus Communications Portfolio Holdings,
Inc. (which is incorporated herein by reference to Exhibit 10.1 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.2 Management Agreement, dated July 7, 1995, between Pegasus Media & Communications, Inc. and BDI Associates
L.P. (which is incorporated herein by reference to Exhibit 10.2 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast
Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit
10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting
Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein
by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
10.5 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners
Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.6 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting
Company and Scranton TV Partners, Ltd. relating to television station WOLF (which is incorporated herein
by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
10.7 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication Protection,
dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating
to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to Exhibit 10.10
to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042).
10.8 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television,
L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to
Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.9 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating
to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media
& Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.10 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting
Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated
herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042).
10.11 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14
to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.12 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National
Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by
reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
10.13 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993,
between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is
incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042).
10.14 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc.
(which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042).
10.15 Stock Purchase Agreement dated January 25, 1996, among the Parent, Portland Broadcasting, Inc., HMW, Inc.,
Bride Communications, Inc., John W. Bride, John H. Bride and Christopher McHenry Bride, as amended (the
"Stock Purchase Agreement") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus
Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.16 Amendment to the Stock Purchase Agreement (which is incorporated herein by reference to Exhibit 2 to Pegasus
Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.17 Time Brokerage Agreement dated as of January 28, 1996, between HMW, Inc. and the Parent (which is incorporated
herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.18 Asset Purchase Agreement, dated October 13, 1995, among WTLH, Inc. ("WTLH"), General Management Consultants,
Inc. ("GMC"), TV 57 Live-Oak Gainsville, Inc. ("TV-57"), Paul Lansat, Renee Lansat and Pegasus Broadcast
Television, Inc. ("PBT") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.19 Agreement of Sale, dated October 13, 1995, between Lansat Communications Inc. ("LCI") and PBT (which is
incorporated herein by reference to Exhibit B to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s
Registration
Statement on Form S-4 (File No. 33-95042).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
10.20 Modification Agreement, dated March 8, 1996, among WTLH, GMC, TV57, LCI, Paul Lansat, Renee Lansat, WTLH
License Corp. ("License Corp.") and the Parent (which is incorporated herein by reference to Exhibit 3 to
Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996).
10.21 Put-Call and Security Agreement, dated March 8, 1996, among WTLH, GMC, Paul Lansat, Renee Lansat, License
Corp., PBT and the Parent (which is incorporated herein by reference to Exhibit 4 to Pegasus Media &
Communications,
Inc.'s Form 8-K dated March 8, 1996).
10.22 Time Brokerage Agreement, dated March 8, 1996, among GMC, WTLH and the Parent (to be assigned to a subsidiary
of Pegasus) (which is incorporated herein by reference to Exhibit 5 to Pegasus Media & Communications, Inc.'s
Form 8-K dated March 8, 1996).
10.23 Noncompetition Agreement, dated March 8, 1996, among Paul Lansat, Renee Lansat, the Parent, PBT and License
Corp. (which is incorporated herein by reference to Exhibit 6 to Pegasus Media & Communications, Inc.'s
Form 8-K dated March 8, 1996).
10.24 Noncompetition Agreement, dated March 8, 1996, among Frank Watson, the Parent, PBT and License Corp. (which
is incorporated herein by reference to Exhibit 7 to Pegasus Media & Communications, Inc.'s Form 8-K dated
March 8, 1996).
10.25 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for
the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao (which
is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated
March 21, 1996).
10.26 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems for
the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference to Exhibit
3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996).
10.27 New Credit Facility (which is incorporated by reference to Exhibit 10.27 to Pegasus' Registration Statement
on Form S-1 (File No. 333-05057).
10.28 Pegasus Restricted Stock Plan (which is incorporated by reference to Exhibit 10.28 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
10.29 Option Agreement for Donald W. Weber (which is incorporated by reference to Exhibit 10.29 Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
10.30 Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057)
10.31* Amendment to Option Agreement for Donald W. Weber dated December 19, 1996.
10.32* Form of Warrant Agreement between the Company and First Union National Bank, as Warrant Agent, relating to
the Warrants.
12.1** Statement of computation of ratio of earnings to combined fixed charges and preferred stock dividends.
16.1 Letter from Herbein + Company, Inc. relating to change in certifying accountant (which is incorporated herein
by reference to Exhibit 16.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
21.1* Subsidiaries of Pegasus
23.1 Consent of Drinker Biddle & Reath (included in their opinion filed as Exhibits 5.1).
23.2* Consent of Herbein + Company, Inc.
23.3* Consents of Coopers & Lybrand L.L.P.
23.4* Consent of Ernst & Young LLP
23.5* Consent of Deloitte & Touche LLP
24.1** Powers of Attorney (included in Signatures and Powers of Attorney).
25.1** Statement of Eligibility of Trustee on Form T-1 dated November 21, 1996 relating to the Exchange Notes.
27.1** Financial Data Schedule
</TABLE>
- ------
* Filed herewith.
** Previously filed. All other exhibits have been previously filed.
II-5
<PAGE>
(b) Financial Statement Schedules
Schedule II. Valuation and Qualifying Accounts
All other schedules of Pegasus for which provision is made in the
applicable accounting regulations of the Commission are not required, are
inapplicable or have been disclosed in the notes to the consolidated
financial statements and therefore have been omitted.
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons
of the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with
the securities being registered, the registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
1. For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
the form of prospectus filed by the registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
2. For the purposes of determining any liability under the Securities
Act of 1933, each post- effective amendment that contains a form of
prospectus shall be deemed to be a new Registration Statement relating to
the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
The undersigned registrant hereby undertakes to file an application for
the purpose of determining the eligibility of the trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act in accordance with
the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Trust Indenture Act.
II-6
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this Amendment to Registration Statement to be
signed on its behalf by the undersigned and hereunto duly authorized in the
City of Radnor, Commonwealth of Pennsylvania, on the 21st day of January, 1997.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Marshall W. Pagon
--------------------------------
Marshall W. Pagon
Chief Executive Officer and
President
Each person whose signature appears below hereby constitutes and appoints
Marshall W. Pagon, Robert N. Verdecchio and Ted S. Lodge as his
attorneys-in-fact and agents, with full power and substitution for him in any
and all capacities, to sign any or all amendments or post-effective
amendments to this Registration Statement, or any Registration Statement for
the same offering that is to be effective upon filing pursuant to Rule 462(b)
under the Securities Act of 1933, as amended, and to file the same, with
exhibits thereto and other documents in connection therewith or in connection
with the registration of the Class A Common Stock under the Securities
Exchange Act of 1934, as amended, with the Securities and Exchange
Commission, granting unto each of such attorneys-in-fact the agents full
power and authority to do and perform each and ever act and thing requisite
and necessary in connection with such matters and hereby ratifying and
confirming all that each of such attorneys-in-fact and agents or his
substitutes may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
--------------------------------- ------------------------------------- ------------------
<S> <C> <C>
/s/ Marshall W. Pagon President, Chief Executive Officer and January 21, 1997
-------------------------------- Chairman of the Board
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, Chief January 21, 1997
-------------------------------- Financial Officer and Assistant
Robert N. Verdecchio Secretary
(Principal Financial and
Accounting Officer)
/s/ James J. McEntee, III Director January 21, 1997
--------------------------------
James J. McEntee, III
/s/ Mary C. Metzger Director January 21, 1997
--------------------------------
Mary C. Metzger
/s/ Donald W. Weber Director January 21, 1997
--------------------------------
Donald W. Weber
</TABLE>
II-7
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audits of the combined financial statements of Pegasus
Communications Corporation as of December 31, 1994 and 1995, and for each of
the two years in the period ended December 31, 1995 which financial
statements are included in the Prospectus, we have audited the financial
statement schedule listed in Item 16 herein.
In our opinion, the financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, present fairly, in all
material respects, the information required to be included therein.
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
May 31, 1996
S-1
<PAGE>
HERBEIN+COMPANY, INC.
To the Board of Directors and Stockholders
Pegasus Communications Corporation
Radnor, Pennsylvania
REPORT OF INDEPENDENT ACCOUNTANTS
In connection with our audit of the combined financial statements of Pegasus
Communications Corporation for the year ended December 31, 1993, which
financial statements are included in the Form S-1 Registration Statement, we
have audited the financial statement Schedule II -- Valuation and Qualifying
Accounts.
In our opinion, the financial statement schedule, when considered in relation
to the basic financial statements taken as a whole, presents fairly, in all
material respects, the information required to be included therein.
HERBEIN + COMPANY, INC.
Reading, Pennsylvania
March 4, 1994
S-2
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Balance at Additions Additions Balance at
Beginning Charged To Charged To End of
Description of Period Expenses Other Accounts Deductions Period
<S> <C> <C> <C> <C> <C>
Allowance for Uncollectible
Accounts Receivable
Year 1993 ............ $ 108 $ 156 $245 (a) $ 201 (b) $ 308
Year 1994 ............ $ 308 $ 200 $ -- $ 160 (b) $ 348
Year 1995 ............ $ 348 $ 151 $ -- $ 261 (b) $ 238
Valuation Allowance for
Deferred Tax Assets
Year 1994 ............ $ 0 $1,756 $ -- $ -- $1,756
Year 1995 ............ $1,756 $8,675 $ -- $3,477 $6,954
</TABLE>
(a) Balance at acquisition date.
(b) Amounts written off, net of recoveries.
S-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement for Initial Public Offering (which is incorporated by reference to Exhibit
1.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
1.2* Form of Underwriting Agreement.
2.1 Asset Purchase Agreement, dated March 21, 1996, among Dominica Padilla Acosta, Maria Del Carmen Padilla
Lopez, Dom's Tele-Cable, Inc. and the Parent relating to the acquisition of Dom's Tele-Cable, Inc. (which
is incorporated herein by reference to Exhibit 2.1 of the Form 10-K for the year ended December 31, 1995
of Pegasus Media & Communications, Inc.).
2.2 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30, 1996 (including
form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agreement) (which is incorporated
by reference to Exhibit 2.2 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
2.3 Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to Exhibit 2 to Pegasus Media & Communications,
Inc.'s Form 8-K dated August 29, 1996).
2.4 Joinder Agreement dated as of May 31, 1996 by and among the Parent, Dominica Padilla Acosta (aka Dominick
Padilla), Maria Del Carmen Padilla Lopez and Domar (which is incorporated by reference to Exhibit 5 to Pegasus
Media & Communications, Inc.'s Form 8-K dated August 29, 1996).
2.5 Amendment No. 1 to Exhibit 2.2 (which is incorporated by reference to Pegasus' Form 8-K, dated October 8,
1996).
2.6 Amendment No. 2 to Exhibit 2.2 (which is incorporated by reference to Exhibit 2.5 to Pegasus' Registration
Statement on Form S-1 (File No. 333-057057).
2.7 Amendment No. 3 to Exhibit 2.2 (which is incorporated by reference to Exhibit 4 to Pegasus' Form 8-K dated
October 8, 1996).
2.8 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation
and Harron Communications Corp. dated as of October 8, 1996 (which is incorporated by reference to Exhibit
5 to Pegasus' Form 8-K dated October 8, 1996).
2.9 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation
and Harron Communications Corporation dated as of October 8, 1996 (which is incorporated by reference to
Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996).
2.10 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communications Corporation
and Harron Communications Corp. dated October 8, 1996 (which is incorporated by reference to Exhibit 7 to
Pegasus Form 8-K dated as of October 8, 1996)
2.11 Asset Purchase Agreement by and among Pegasus Communications Corporation and Horizon Telcom, Inc., Horizon
Infotech, Inc. and Chillicothe Telephone Company dated as of October 23, 1996 (which is incorporated herein
by reference to Pegasus' Registration Statement on Form S-4 (File No. 333-14857).
2.12** Asset Purchase Agreement dated as of November 6, 1996 between State Cable TV Corp. and Pegasus Cable Television,
Inc.
3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit 3.1 to
Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration Statement
on Form S-1 (File No. 333-05057).
3.3* Form of Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions Thereof.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------------ ------------------------------------------------------------------------------------------------------
<S> <C>
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the Guarantors (as
this term is defined in the Indenture), and First Fidelity Bank, National Association, as Trustee, relating
to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form of Notes and Subsidiary
Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
4.2 Form of Notes (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee (included in Exhibit 4.1 above).
4.4* Form of Indenture dated as of , 1997 by and between Pegasus and First Union National Bank, as trustee,
relating to the Exchange Notes.
5.1* Opinion of Drinker Biddle & Reath.
8.1* Opinion of Drinker Biddle & Reath as to Tax Matters.
10.1 Tax Sharing Agreement, made as of July 7, 1995, among the Parent, Pegasus Media & Communications, Inc.,
the Guarantors, Pegasus Cable Television of Connecticut, Inc., and Pegasus Communications Portfolio Holdings,
Inc. (which is incorporated herein by reference to Exhibit 10.1 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.2 Management Agreement, dated July 7, 1995, between Pegasus Media & Communications, Inc. and BDI Associates
L.P. (which is incorporated herein by reference to Exhibit 10.2 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. & K. Broadcast
Properties L.P. relating to television station WDBD (which is incorporated herein by reference to Exhibit
10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox Broadcasting
Company and Donatelli & Klein Broadcast relating to television station WDBD (which is incorporated herein
by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
10.5 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scranton TV Partners
Ltd. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.8 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.6 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting
Company and Scranton TV Partners, Ltd. relating to television station WOLF (which is incorporated herein
by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
10.7 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Nonduplication Protection,
dated December 2, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television, L.P. relating
to television stations WOLF, WWLF, and WILF (which is incorporated herein by reference to Exhibit 10.10
to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33- 95042).
10.8 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus Broadcast Television,
L.P. relating to television station WOLF (which is incorporated herein by reference to Exhibit 10.11 to
Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.9 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and WDSI Ltd. relating
to television station WDSI (which is incorporated herein by reference to Exhibit 10.12 to Pegasus Media
& Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------------ ------------------------------------------------------------------------------------------------------
<C> <C>
10.10 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox Broadcasting
Company and Pegasus Broadcast Television, L.P. relating to television station WDSI (which is incorporated
herein by reference to Exhibit 10.13 to Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042).
10.11 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to Exhibit 10.14
to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.12 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993, between the National
Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is incorporated herein by
reference to Exhibit 10.28 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
10.13 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993,
between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd. (which is
incorporated herein by reference to Exhibit 10.29 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042).
10.14 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite Television, Inc.
(which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media & Communications, Inc.'s Registration
Statement on Form S-4 (File No. 33-95042).
10.15 Stock Purchase Agreement dated January 25, 1996, among the Parent, Portland Broadcasting, Inc., HMW, Inc.,
Bride Communications, Inc., John W. Bride, John H. Bride and Christopher McHenry Bride, as amended (the
"Stock Purchase Agreement") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus
Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.16 Amendment to the Stock Purchase Agreement (which is incorporated herein by reference to Exhibit 2 to Pegasus
Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.17 Time Brokerage Agreement dated as of January 28, 1996, between HMW, Inc. and the Parent (which is incorporated
herein by reference to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated January 29, 1996).
10.18 Asset Purchase Agreement, dated October 13, 1995, among WTLH, Inc. ("WTLH"), General Management Consultants,
Inc. ("GMC"), TV 57 Live-Oak Gainsville, Inc. ("TV-57"), Paul Lansat, Renee Lansat and Pegasus Broadcast
Television, Inc. ("PBT") (which is incorporated herein by reference to Exhibit A to Exhibit 2.1 to Pegasus
Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.19 Agreement of Sale, dated October 13, 1995, between Lansat Communications Inc. ("LCI") and PBT (which is
incorporated herein by reference to Exhibit B to Exhibit 2.1 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.20 Modification Agreement, dated March 8, 1996, among WTLH, GMC, TV57, LCI, Paul Lansat, Renee Lansat, WTLH
License Corp. ("License Corp.") and the Parent (which is incorporated herein by reference to Exhibit 3 to
Pegasus Media & Communications, Inc.'s Form 8-K dated March 8, 1996).
10.21 Put-Call and Security Agreement, dated March 8, 1996, among WTLH, GMC, Paul Lansat, Renee Lansat, License
Corp., PBT and the Parent (which is incorporated herein by reference to Exhibit 4 to Pegasus Media &
Communications, Inc.'s Form 8-K dated March 8, 1996).
10.22 Time Brokerage Agreement, dated March 8, 1996, among GMC, WTLH and the Parent (to be assigned to a subsidiary
of Pegasus) (which is incorporated herein by reference to Exhibit 5 to Pegasus Media & Communications, Inc.'s
Form 8-K dated March 8, 1996).
10.23 Noncompetition Agreement, dated March 8, 1996, among Paul Lansat, Renee Lansat, the Parent, PBT and License
Corp. (which is incorporated herein by reference to Exhibit 6 to Pegasus Media & Communications, Inc.'s
Form 8-K dated March 8, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
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<C> <C>
10.24 Noncompetition Agreement, dated March 8, 1996, among Frank Watson, the Parent, PBT and License Corp. (which
is incorporated herein by reference to Exhibit 7 to Pegasus Media & Communications, Inc.'s Form 8-K dated
March 8, 1996).
10.25 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television systems for
the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana Grande and Maricao (which
is incorporated herein by reference to Exhibit 2 to Pegasus Media & Communications, Inc.'s Form 8-K dated
March 21, 1996).
10.26 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems for
the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference to Exhibit
3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996).
10.27 New Credit Facility (which is incorporated by reference to Exhibit 10.27 to Pegasus' Registration Statement
on Form S-1 (File No. 333-05057).
10.28 Pegasus Restricted Stock Plan (which is incorporated by reference to Exhibit 10.28 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
10.29 Option Agreement for Donald W. Weber (which is incorporated by reference to Exhibit 10.29 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
10.30 Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
10.31* Amendment to Option Agreement for Donald W. Weber dated December 19, 1996.
10.32* Form of Warrant Agreement between the Company and First Union National Bank, as Warrant Agent, relating to
the Warrants.
12.1** Statement of computation of ratio of earnings to combined fixed charges and preferred stock dividends.
16.1 Letter from Herbein + Company, Inc. relating to change in certifying accountant (which is incorporated herein
by reference to Exhibit 16.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
21.1* Subsidiaries of Pegasus
23.1 Consent of Drinker Biddle & Reath (included in their opinion filed as Exhibits 5.1)
23.2* Consent of Herbein + Company, Inc.
23.3* Consents of Coopers & Lybrand L.L.P.
23.4* Consent of Ernst & Young LLP
23.5* Consent of Deloitte & Touche LLP
24.1** Powers of Attorney (included in Signatures and Powers of Attorney)
25.1** Statement of Eligibility of Trustee on Form T-1 dated November 21, 1996 relating to the Exchange Notes
27.1** Financial Data Schedule
</TABLE>
- ------
* Filed herewith.
** Previously filed.
<PAGE>
L&W DRAFT OF DECEMBER 20, 1996
PEGASUS COMMUNICATIONS CORPORATION
$100,000,000
100,000 Units of
100,000 Shares of __% Series A Cumulative Exchangeable Preferred Stock and
Warrants to Purchase _____ Shares of Class A Common Stock
UNDERWRITING AGREEMENT
January __, 1997
CIBC WOOD GUNDY SECURITIES CORP.
LEHMAN BROTHERS INC.
BT SECURITIES CORPORATION
c/o CIBC Wood Gundy Securities Corp.
425 Lexington Avenue
3rd Floor
New York, New York 10017
Ladies and Gentlemen:
Pegasus Communications Corporation., a Delaware corporation (the
"Company"), and each of the Company's subsidiaries listed on Schedule 1 hereto
(each a "Subsidiary," and collectively, the "Subsidiaries") hereby confirm their
agreement with each of you (the "Underwriters"), as set forth below.
1. The Securities. Subject to the terms and conditions herein
contained, the Company proposes to issue and sell (the "Offering") to the
Underwriters 100,000 Units (the "Units") consisting in the aggregate of 100,000
shares of its ___% Series A Cumulative Exchangeable Preferred Stock (liquidation
preference $1,000 per share) (the "Series A Preferred Stock") and 100,000
Warrants (the "Warrants") to purchase ______ shares of Class A Common Stock, par
value $.01 per share (the "Class A Common Stock"), of the Company. Pursuant to
terms of the Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions thereof relating to the Series A
Preferred Stock (the "Certificate of Designation"), the Series A Preferred Stock
shall be exchangeable, in full but not in part, for the Company's ___% Senior
Subordinated Exchange Notes due 2006 (the "Exchange Notes") which, if issued,
will be issued pursuant to an indenture (the "Exchange Note Indenture"). The
Warrants are to be issued pursuant to a Warrant Agreement (the "Warrant
Agreement") to be dated as of January ___, 1997 between the Company and First
Union National Bank, as warrant agent (the "Warrant Agent"). Shares of Class A
Common Stock issuable upon exercise of the Warrants are collectively referred to
herein as the "Warrant Shares." The Units, the Series A Preferred Stock and the
Warrants are collectively referred to herein as the "Securities." This
Agreement, the Exchange Note Indenture and the Warrant Agreement are
collectively referred to herein as the "Operative Documents."
<PAGE>
Concurrently with the Offering, the Company will repay all of the
outstanding indebtedness under Pegasus Media & Communications, Inc.'s
seven-year, senior collateralized credit facility (the "New Credit Facility").
Prior to the Offering, the Company shall have entered into (i) the
Asset Purchase Agreement (the "New Hampshire Cable Sale Agreement"), dated as of
November 6, 1996, between State Cable TV Corp. and Pegasus Cable Television,
Inc. ("PCTV, Inc."), pursuant to which PCTV, Inc. shall sell its New Hampshire
cable system (the "New Hampshire Cable Sale"), (ii) the Letter of Intent (the
"Arkansas DBS Agreement"), dated as of December 3, 1996, between Blocker
Electronics and the Company, pursuant to which the Company shall acquire all
right, title and interest in and to all of the assets of Blocker Electronics'
DirecTV distribution business (the "Arkansas Acquisition"), (iii) the Letter of
Intent (the "Indiana DBS Agreement"), dated as of December 4, 1996, between DBS
of Indiana, Inc. and the Company, pursuant to which the Company shall acquire
all right, title and interest in and to all outstanding capital stock of DBS of
Indiana, Inc. (the "Indiana Acquisition"), (iv) the Letter of Intent (the
"Mississippi DBS Agreement"), dated as of November 21, 1996, by and among Clear
Vision, Inc. and the Company, pursuant to which the Company shall acquire all
right, title and interest in and to all of the assets of Clear Vision, Inc. (the
"Mississippi Acquisition"), and (v) the Letter of Intent (the "Virginia\West
Virginia DBS Agreement"), dated as of November 22, 1996, between Turner Vision,
Inc. and the Company, pursuant to which the Company shall acquire all right,
title and interest in and to all of Turner Visions, Inc.'s assets in connection
with its DirecTV business (the "Virginia\West Virginia Acquisition"). The New
Hampshire Cable Sale Agreement, the Arkansas DBS Agreement, the Indiana DBS
Agreement, the Mississippi DBS Agreement and the Virginia\West Virginia DBS
Agreement are collectively referred to herein as the "Transaction Documents."
The New Hampshire Cable Sale, the Arkansas Acquisition, the Indiana Acquisition,
the Mississippi Acquisition and the Virginia\West Virginia Acquisition are
collectively referred to herein as the "Transactions."
2. Representations and Warranties of the Company and the Subsidiaries.
The Company and each of the Subsidiaries, jointly and severally, represent and
warrant to and agree with the Underwriters that:
(a) The Registration Statement on Form S-1 with respect to the
Securities has (i) been prepared by the Company in conformity with the
requirements of the United States Securities Act of 1933, as amended
(the "Securities Act"), and the rules and regulations (the "Rules and
Regulations") of the United States Securities and Exchange Commission
(the "Commission") thereunder, (ii) been filed with the Commission
under the Securities Act and (iii) become effective under the
Securities Act or will become effective not later than 9:30 a.m., New
York City time, on the date of this Agreement or at such later date and
time as the Underwriters may approve. Copies of the Registration
Statement have been delivered by the Company to each of the
Underwriters. As used in this Agreement, "Effective Time" means the
date and the time as of which the Registration Statement, or the most
recent post-effective amendment thereto, if any, was declared effective
by the Commission; "Effective Date" means the date of the Effective
Time; "Preliminary Prospectus" means each prospectus included in such
Registration Statement, or amendments thereof, before it became
effective under the Securities Act and any prospectus filed with the
Commission by the Company with the consent of the Underwriters pursuant
to Rule 424(a) of the Rules and Regulations; "Registration Statement"
means such Registration Statement, as amended at the Effective Time,
including a registration statement (if any) filed pursuant to Rule
462(b) under the Securities Act increasing the size of the Offering
registered under the
2
<PAGE>
Securities Act and all information contained in the final prospectus
filed with the Commission pursuant to Rule 424(b) of the Rules and
Regulations in accordance with Section 6(a) hereof and deemed to be a
part of the Registration Statement as of the Effective Time pursuant to
paragraph (b) of Rule 430A of the Rules and Regulations; and
"Prospectus" means such final prospectus, as first filed with the
Commission pursuant to paragraph (1) or (4) of Rule 424(b) of the Rules
and Regulations. The Commission has not issued any order preventing or
suspending the use of the Registration Statement or any Preliminary
Prospectus.
(b) The Registration Statement conforms, and the Prospectus
and any further amendments or supplements to the Registration Statement
or the Prospectus will, when they become effective or are filed with
the Commission, as the case may be, conform in all respects to the
requirements of the Securities Act and the Rules and Regulations and do
not and will not (i) as of the Effective Date, as to the Registration
Statement and any amendment thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein not misleading and
(ii) as of the applicable filing date, as to the Prospectus and any
amendment or supplement thereto, contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided
that no representation or warranty is made as to information contained
in or omitted from the Registration Statement or the Prospectus in
reliance upon and in conformity with written information furnished to
the Company by or on behalf of any Underwriter specifically for
inclusion therein.
(c) The Company is duly organized and validly existing as a
corporation in good standing under the laws of its jurisdiction of
incorporation, has all requisite corporate power and authority to carry
on its business as it is being conducted and as described in the
Registration Statement and the Prospectus and to own, lease and operate
its properties, and is duly qualified and in good standing as a foreign
corporation authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property requires
such qualification.
(d) All the outstanding shares of capital stock or other
securities evidencing equity ownership of the Company have been duly
authorized and validly issued and are fully paid, non-assessable and
not subject to any preemptive or similar rights. The authorized, issued
and outstanding stock of the Company was as of December __, 1996 and
will be, after giving effect to the consummation of this Offering, as
set forth in the Registration Statement and the Prospectus under the
captions "Capitalization" and "Description of Capital Stock." After
giving effect to the Offering and the application of the proceeds
thereof as described in the Registration Statement and the Prospectus
under the caption "Use of Proceeds," the Company's consolidated
capitalization as of December __, 1996 would have been as set forth
under the "As Adjusted" and "Pro Forma" columns under the caption
"Capitalization." The table under the caption "Capitalization" sets
forth and identifies in reasonable detail all outstanding short-term
and long-term indebtedness of the Company and its Subsidiaries, on a
consolidated basis, prior to and after giving effect to the Offering
and the use of proceeds thereof. The authorized capital stock of the
Company, including the Series A Preferred Stock, the Class A Common
Stock and the Warrant Shares, conforms as to legal matters to the
description thereof contained in the Registration Statement and the
Prospectus. Except as set forth in the Registration Statement and the
Prospectus, there are no outstanding rights, warrants or options to
acquire, or instruments
3
<PAGE>
convertible into or exchangeable for, any shares of capital stock or
other equity interest in the Company. ______ shares of Class A Common
Stock have been validly reserved for issuance upon exercise of the
Warrants.
(e) The Company's direct and indirect subsidiaries are as set
forth on Schedule 1 hereto. Each Subsidiary is duly organized and
validly existing as a corporation or partnership, as the case may be,
in good standing under the laws of its jurisdiction of incorporation or
organization, as the case may be, and has all requisite corporate power
(in the case of corporations) or legal capacity (in the case of
partnerships) and authority to carry on its business as it is being
conducted and as described in the Registration Statement and the
Prospectus and to own, lease and operate its properties, and is duly
qualified and in good standing as a foreign corporation or partnership,
as the case may be, authorized to do business in each jurisdiction in
which the nature of its business or its ownership or leasing of
property requires such qualification. All of the outstanding shares of
capital stock and other securities evidencing equity ownership of each
of the Subsidiaries are fully paid and (except in the case of general
partnership interests and in the case of limited partnership interests,
except to the extent that the provisions of the applicable limited
partnership act requiring partners to return distributions may be
deemed to constitute assessability) nonassessable and, in the case of
Subsidiaries other than Pegasus Media & Communications, Inc. ("PM&C"),
free of any preemptive or similar rights and are [(with the exception
of the PM&C Class B Shares)] owned by the Company directly, or
indirectly through one of the other Subsidiaries, free and clear of any
lien, adverse claim, security interest or other encumbrance, except as
are in effect under the New Credit Facility.
(f) The Company and each of the Subsidiaries has all requisite
corporate power (in the case of corporations) or legal capacity (in the
case of partnerships) and authority to execute, deliver and perform its
obligations under each of the Operative Documents and the Transaction
Documents, as applicable, and to consummate the transactions
contemplated hereby and thereby, including, without limitation, in the
case of the Company, all requisite corporate power and authority to
issue, sell and deliver the Securities and the Warrant Shares, as
provided herein.
(g) This Agreement has been duly and validly authorized,
executed and delivered by each of the Company and the Subsidiaries and
is the legally valid and binding agreement of each of them, enforceable
against each of them in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally (including laws relating to
fraudulent transfers or conveyances), by general equitable principles
(regardless of whether such enforceability is considered in a
proceeding in equity or at law) and, as to rights of indemnification
and contribution, by federal and state securities laws and principles
of public policy.
(h) The execution and delivery of the Exchange Note Indenture
has been duly and validly authorized by the Company and when executed
and delivered by the Company (assuming the due execution and delivery
by the trustee thereunder) will constitute the legal, valid and binding
agreement of the Company, will conform in all material respects with
the description thereof contained in the Registration Statement and the
Prospectus and will be enforceable against the Company in accordance
with its terms except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other similar
laws relating to or affecting creditors' rights generally (including
laws relating to fraudulent transfers or conveyances), by
4
<PAGE>
general equitable principles (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
(i) The Exchange Notes have been duly and validly authorized,
and, when executed, authenticated, issued and delivered in exchange for
the Series A Preferred Stock in accordance with the terms of the
Certificate of Designation and the Exchange Note Indenture, will be
validly issued and outstanding, will conform in all material respects
with the description thereof contained in the Registration Statement
and the Prospectus and will constitute the legal, valid and binding
obligations of the Company, entitled to the benefits of the Exchange
Note Indenture and enforceable against the Company in accordance with
their terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws relating
to or affecting creditors' rights generally (including laws relating to
fraudulent transfers or conveyances), by general equitable principles
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(j) The Warrant Agreement has been duly and validly
authorized, and, when executed and delivered by the Company, will
conform in all material respects with the description thereof contained
in the Registration Statement and the Prospectus and will be the
legally valid and binding agreement of the Company, enforceable against
the Company in accordance with its terms except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting creditors' rights
generally (including laws relating to fraudulent transfers or
conveyances), by general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law);
the Warrant Agreement requires that each holder exercising its Warrants
agree not to, directly or indirectly, offer for sale, sell or otherwise
dispose of or pledge (or enter into any transaction or device which is
designed to, or could be expected to, result in the disposition by any
person during the Lock-Up Period (as hereinafter defined) of) any
Warrant Shares received in such exercise of Warrants during the Lock-Up
Period, without the prior written consent of CIBC Wood Gundy Securities
Corp.
(k) The Warrants have been duly and validly authorized, and
when issued and delivered in accordance with the terms of the Warrant
Agreement and delivered to and paid for by the Underwriters in
accordance with the terms hereof, the Warrants will conform in all
material respects to the description thereof contained in the
Registration Statement and the Prospectus and will have been duly and
validly issued and the issuance of such Warrants will not be subject to
any preemptive or similar rights, [except for such rights contained in
those agreements set forth in Schedule 3 hereto].
(l) The Warrant Shares have been duly and validly authorized
and reserved for issuance upon exercise of the Warrants and, when
issued and delivered upon exercise of the Warrants against payment of
the Exercise Price (as defined in the Warrant Agreement, the "Exercise
Price"), the Warrant Shares will have been duly and validly issued and
will be fully paid and non-assessable, and the issuance of such Warrant
Shares will not be subject to any preemptive or similar rights, [except
for such rights contained in those agreements set forth on Schedule 3
hereto].
5
<PAGE>
(m) A shelf registration statement (the "Shelf Registration
Statement") on the appropriate form covering the issuance of the
Warrant Shares upon the exercise of any Warrants has been filed with
the Commission.
(n) The New Hampshire Cable Sale Agreement has been duly and
validly authorized, executed and delivered by PCTV, Inc. and is the
legally valid and binding obligation of PCTV, Inc., enforceable against
PCTV, Inc. in accordance with its terms except as such enforceability
may be limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting creditors' rights
generally (including laws relating to fraudulent transfers or
conveyances), by general equitable principles (regardless of whether
such enforceability is considered in a proceeding in equity or at law).
(o) The Arkansas DBS Agreement has been duly and validly
authorized, executed and delivered by the Company and is the legally
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally
(including laws relating to fraudulent transfers or conveyances), by
general equitable principles (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
(p) The Indiana DBS Agreement has been duly and validly
authorized, executed and delivered by the Company and is the legally
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally
(including laws relating to fraudulent transfers or conveyances), by
general equitable principles (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
(q) The Mississippi DBS Agreement has been duly and validly
authorized, executed and delivered by the Company and is the legally
valid and binding obligation of the Company, enforceable against the
Company in accordance with its terms except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium and
other similar laws relating to or affecting creditors' rights generally
(including laws relating to fraudulent transfers or conveyances), by
general equitable principles (regardless of whether such enforceability
is considered in a proceeding in equity or at law).
(r) The Virginia\West Virginia DBS Agreement has been duly and
validly authorized, executed and delivered by the Company and is the
legally valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally (including laws relating to
fraudulent transfers or conveyances), by general equitable principles
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(s) None of the securities issued in connection with any of
the Transactions are required to be registered under the Securities Act
and the issuance of any such securities will not violate the Securities
Act or the Rules and Regulations.
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(t) Neither the Company nor any of the Subsidiaries is (A) in
violation of its charter, bylaws, limited partnership agreement or
other organizational documents or (B) in default in the performance of
any material bond, debenture, note, indenture, mortgage, deed of trust
or other agreement or instrument to which it is a party or by which it
is bound or to which any of its properties is subject, or (C) in
violation in any material respect of any law, statute, rule,
regulation, judgment or court decree applicable to it or any of its
assets or properties, except in the case of clauses (B) and (C), for
any violation or default that would not, singly or in the aggregate,
(x) have a material adverse effect on the assets, liabilities,
business, results of operations, condition (financial or otherwise),
cash flows, affairs or prospects of the Company and the Subsidiaries,
taken as a whole, (y) interfere with or adversely affect the issuance
or marketability of the Securities pursuant hereto or (z) in any manner
draw into question the validity of any of the Operative Documents or
the Transaction Documents or any of the transactions contemplated
hereby or thereby (any of the events set forth in clauses (x), (y) or
(z), a "Material Adverse Effect"). There exists no condition that, with
notice, the passage of time or otherwise, would constitute a default
under any such document or instrument.
(u) None of (A) the execution, delivery or performance by the
Company or any of the Subsidiaries of the Operative Documents, as
applicable, (B) the issuance and sale of the Securities or the Warrant
Shares, (C) the execution, delivery or performance by the Company or
any of the Subsidiaries of the Transaction Documents, as applicable, or
(D) the transactions contemplated by the Operative Documents and the
Transaction Documents will violate, conflict with or constitute a
breach of any of the terms or provisions of, or a default under (or an
event that with notice or the lapse of time, or both, would constitute
a default), or (except as contemplated in the second and third
sentences of this paragraph) require consent under, or result in the
imposition of a lien or encumbrance on any properties of the Company or
any Subsidiary, or an acceleration of any indebtedness of the Company
or any Subsidiary pursuant to, (i) the charter, bylaws, limited
partnership agreement or other organizational documents of the Company
or any Subsidiary, (ii) any bond, debenture, note, indenture, mortgage,
deed of trust or other agreement or instrument to which the Company or
any Subsidiary is a party or by which any of them or their respective
property is or may be bound, (iii) any statute, rule or regulation
applicable to the Company or any Subsidiary or their respective assets
or properties or (iv) any judgment, order or decree of any court or
governmental agency, body or administrative agency or authority having
jurisdiction over the Company, any Subsidiary or their respective
assets or properties, except for any such violation, default, consent,
imposition of a lien or acceleration that would not, in the case of
clauses (ii), (iii) and (iv), singly or in the aggregate, have a
Material Adverse Effect. No consent, approval, authorization or order
of, or filing, registration, qualification, license or permit of or
with, any court or governmental agency, body or administrative agency
or authority is required for (1) the execution, delivery and
performance by the Company and the Subsidiaries of the Operative
Documents or the Transaction Documents, as applicable, (2) the issuance
and sale of the Securities or the Warrant Shares or (3) the
transactions contemplated by the Operative Documents or the Transaction
Documents, except for (A) the registration of the Securities and the
Warrant Shares under the Securities Act, (B) such consents, approvals,
authorizations, registrations or qualifications as may be required
under the Securities and Exchange Act of 1934, as amended (the
"Exchange Act") and applicable state securities laws in connection with
the purchase and distribution of the Securities by the Underwriters,
(C) such as may be required by the National Association of Securities
Dealers, Inc. (the "NASD"), (D) to the extent that governing laws,
regulations, or orders may require post-closing filings with the FCC,
the Connecticut Department of Public Utility Control (the "DPUC")
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and the Puerto Rico Public Service Commission (the "PSC"), and from
time to time, FCC, DPUC or PSC authorizations or filings required in
the ordinary course of business of the Company and the Subsidiaries,
and that certain future resales of shares could require, if combined
with other offerings of equity in the Company, FCC, DPUC or PSC consent
or be restricted by FCC, DPUC or PSC rules, regulations or policies,
and (E) such as have been obtained or made. No consents or waivers from
any other person are required for the execution, delivery and
performance by the Company and the Subsidiaries, as applicable, of the
Operative Documents or the Transaction Documents, the issuance and sale
of the Securities and the Warrant Shares or the consummation of the
transactions contemplated by the Operative Documents or the Transaction
Documents, other than (A) such consents and waivers as have been
obtained and (B) such as are disclosed in the Registration Statement
and the Prospectus.
(v) The Company has received the consent of Lehman Brothers
Inc. to the issuance of the Securities and the Warrant Shares as
required by Section 5(i) of the Underwriting Agreement, dated as of
October 3, 1996, among the Company, certain of its subsidiaries, Lehman
Brothers Inc, BT Securities Corporation, CIBC Wood Gundy Securities
Corp. and PaineWebber Incorporated.
(w) There is (i) except as otherwise disclosed in the
Registration Statement and the Prospectus, no action, suit, proceeding
or investigation before or by any court, arbitrator or governmental
agency, body or official, domestic or foreign, now pending or, to the
best knowledge of the Company and each of the Subsidiaries, threatened
or contemplated to which the Company or any Subsidiary is or may be a
party or to which the business or property of the Company or any
Subsidiary is subject, (ii) except as otherwise disclosed in the
Registration Statement and the Prospectus, no statute, rule, regulation
or order that has been enacted, adopted or issued by any governmental
agency or that has been proposed by any governmental body, (iii) no
injunction, restraining order or order of any nature by a federal or
state court or foreign court of competent jurisdiction to which the
Company or any Subsidiary is or may be subject or to which the
business, assets, or property of the Company or any Subsidiary is or
may be subject, issued that, in the case of clauses (i), (ii) and (iii)
above, might, singly or in the aggregate, result in a Material Adverse
Effect.
(x) No action has been taken by the Company or any Subsidiary
(or, to the best knowledge of the Company and the Subsidiaries, by any
other Person) and no statute, rule, regulation or order has been
enacted, adopted or issued by any governmental agency that prevents the
issuance of the Securities or the Warrant Shares or prevents or
suspends the use of the Registration Statement or the Prospectus; no
injunction, restraining order or order of any nature by a federal,
state or municipal court or any governmental authority or agency or any
other tribunal of competent jurisdiction has been issued that prevents
the issuance of the Securities or the Warrant Shares or prevents or
suspends the sale of the Securities or the Warrant Shares in any
jurisdiction referred to in Section 6(h) hereof; and every request of
any securities authority or agency of any jurisdiction for additional
information has been complied with in all material respects.
(y) There is (i) no significant unfair labor practice
complaint pending or, to the best knowledge of the Company and each of
the Subsidiaries, threatened against the Company or any Subsidiary
before the National Labor Relations Board, any state or local labor
relations board or any foreign labor relations board, and no
significant grievance or significant arbitration
8
<PAGE>
proceeding arising out of or under any collective bargaining agreement
is so pending or, to the best knowledge of the Company and each of the
Subsidiaries, threatened against the Company or any Subsidiary, (ii) no
significant strike, labor dispute, slowdown or stoppage pending against
the Company or any Subsidiary nor, to the best knowledge of the Company
and each of the Subsidiaries, threatened against the Company or any
Subsidiary, and (iii) no union representation question existing with
respect to the employees of the Company or any Subsidiary. To the best
knowledge of the Company and each of the Subsidiaries, no union
organizing activities are taking place. Neither the Company nor any
Subsidiary has violated (A) any federal, state or local law, statute,
rule or regulation or foreign law, statute, rule or regulation relating
to discrimination in hiring, promotion or pay of employees, (B) any
applicable wage or hour laws, (C) any provision of the Employee
Retirement Income Security Act of 1974, as amended, or the rules and
regulations thereunder, or (D) analogous foreign laws, statutes, rules
and regulations, which in the case of clause (A), (B), (C) or (D) above
might, individually or in the aggregate, result in a Material Adverse
Effect.
(z) In the ordinary course of its business, the Company and
each Subsidiary conducts periodic reviews of the effect of
Environmental Laws (as defined below) and the disposal of hazardous or
toxic substances, wastes, pollutants and contaminants on the business,
assets, operations and properties of the Company and each Subsidiary,
in the course of which it identifies and evaluates associated costs and
liabilities (including, without limitation, all material capital and
operating expenditures required for clean-up, closure of properties and
compliance with Environmental Laws, all permits, licenses and
approvals, all related constraints on operating activities and all
potential liabilities to third parties). On the basis of such reviews
the Company has reasonably concluded that such associated costs and
liabilities would not, singly or in the aggregate, have a Material
Adverse Effect. Neither the Company nor any Subsidiary has violated any
environmental, safety or similar law or regulation applicable to it or
its business or property relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("Environmental Laws"), lacks any permit,
license or other approval required of it under applicable Environmental
Laws or is violating any term or condition of such permit, license or
approval which might, either individually or in the aggregate, have a
Material Adverse Effect.
(aa) The Company and each Subsidiary has (i) good and
marketable title to all of the properties and assets necessary for the
operation of its business as described in the Registration Statement
and the Prospectus as owned by it, free and clear of all liens,
charges, encumbrances and restrictions, except such as (A) are
described in the Registration Statement and the Prospectus, (B) are in
effect under the New Credit Facility, or (C) would not, singly or in
the aggregate, have a Material Adverse Effect, (ii) peaceful and
undisturbed possession under all leases to which it is party as lessee
except such as would not either individually or in the aggregate have a
Material Adverse Effect, (iii) all licenses, certificates, permits,
authorizations, approvals, franchises and other rights from, and will
have made all declarations and filings with, all federal, state and
local authorities, all self-regulatory authorities and all courts or
governmental agencies, bodies or administrative agencies or authorities
(each an "Authorization") necessary to engage in the business conducted
by it in the manner described in the Registration Statement and the
Prospectus, except where failure to hold such Authorizations would not,
singly or in the aggregate, have a Material Adverse Effect and (iv) no
reason to believe that any governmental body or agency is considering
limiting, suspending or revoking any such Authorization. Except where
the failure to be in full force and effect would not, singly or in the
9
<PAGE>
aggregate, have a Material Adverse Effect, all such Authorizations are
valid and in full force and effect. The Company and each Subsidiary is
in compliance in all material respects with the terms and conditions of
all such Authorizations and with the rules and regulations of the
regulatory authorities having jurisdiction with respect thereto. All
material leases to which the Company and each Subsidiary is a party are
valid and binding and no default by the Company or any such Subsidiary
has occurred and is continuing thereunder and no material defaults by
the landlord are existing under any such lease.
(ab) The Company and each Subsidiary owns or has valid and
enforceable licenses to use all patents, patent rights, licenses,
inventions, copyrights, know-how (including, without limitation, trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks and trade names (collectively, the "Intellectual Property")
employed by it in connection with the businesses operated by it as
described in the Registration Statement and the Prospectus, and neither
the Company nor any Subsidiary has received any notice of infringement
of or conflict with asserted rights of others with respect to any of
the foregoing. To the best knowledge of the Company, the use of the
Intellectual Property in connection with the business and operations of
the Company and each of the Subsidiaries does not infringe on the
rights of any person.
(ac) All tax returns required to be filed by the Company and
each Subsidiary, in all jurisdictions, have been so filed, except to
the extent such failure to file would not, individually or in the
aggregate, have a Material Adverse Effect. All taxes, including
withholding taxes, penalties and interest, assessments, fees and other
charges due or claimed to be due from such entities or that are due and
payable have been paid, other than those being contested in good faith
and for which adequate reserves have been provided or those currently
payable without penalty or interest. There are no material proposed
additional tax assessments against the Company or any Subsidiary or the
assets or property of the Company or any Subsidiary.
(ad) None of the Company or the Subsidiaries is (i) an
"investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as
amended (the "Investment Company Act").
(ae) There are no holders of securities of the Company or any
Subsidiary who, by reason of the execution by the Company or the
Subsidiaries of this Agreement, any other Operative Document or any
Transaction Document to which the Company or any Subsidiary is a party
or the consummation by the Company or the Subsidiaries, as applicable,
of the transactions contemplated hereby and thereby, have the right to
request or demand that the Company or any Subsidiary register under the
Securities Act or analogous foreign laws and regulations securities
held by them, other than as disclosed in the Registration Statement and
the Prospectus.
(af) There are no contracts, agreements or understandings
between the Company or any Subsidiary and any other person that would
give rise to a valid claim against the Company, any Subsidiary or any
of the Underwriters for a brokerage commission, finder's fee or like
payment in connection with the issuance, purchase and sale of the
Securities or the Warrant Shares, other than arrangements with CIBC
Wood Gundy Securities Corp. with respect to various financial services
provided to the Company.
10
<PAGE>
(ag) The Company and each Subsidiary maintains a system of
internal accounting controls sufficient to provide reasonable assurance
that (i) transactions are executed in accordance with management's
general or specific authorizations, (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity
with generally accepted accounting principles and to maintain
accountability for assets, (iii) access to assets is permitted only in
accordance with management's general or specific authorization and (iv)
the recorded accountability for assets is compared with the existing
assets at reasonable intervals and appropriate action is taken with
respect thereto.
(ah) The Company and each Subsidiary maintains insurance
covering its properties, operations, personnel and businesses. Such
insurance insures against such losses and risks as are adequate in
accordance with customary industry practice to protect the Company,
each of the Subsidiaries and their businesses. Neither the Company nor
any Subsidiary has received notice from any insurer or agent of such
insurer that substantial capital improvements or other expenditures
will have to be made in order to continue such insurance. All such
insurance is outstanding and duly in force on the date hereof.
(ai) Neither the Company nor any Subsidiary has (i) taken,
directly or indirectly, any action designed to, or that might
reasonably be expected to, cause or result in stabilization or
manipulation of the price of any security of the Company or any
Subsidiary to facilitate the sale or resale of the Securities or the
Warrant Shares. Except as permitted by the Securities Act, none of the
Company or any of the Subsidiaries has distributed any Registration
Statement, Preliminary Prospectus, Prospectus, Shelf Registration
Statement or other offering material in connection with the offering
and sale of the Securities and the Warrant Shares.
(aj) Except as described in the Registration Statement and the
Prospectus, the Company has not sold or issued any debt or equity
securities during the six-month period preceding the date of the
Prospectus, including any sales pursuant to Rule 144A or Regulations D
or S under the Securities Act.
(ak) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus
and up to the Delivery Date (as defined below), except as set forth or
contemplated in the Registration Statement and the Prospectus, neither
the Company nor any Subsidiary has incurred any liabilities or
obligations, direct or contingent, that are material to the Company and
the Subsidiaries, taken as a whole, or entered into any transaction not
in the ordinary course of business; there has not been, singly or in
the aggregate, any material adverse change, or any development that may
reasonably be expected to involve a material adverse change, in the
assets, liabilities, business, results of operations, condition
(financial or otherwise), cash flows, affairs or prospects of the
Company and the Subsidiaries, taken as a whole; and there has been no
dividend or distribution of any kind declared, paid or made by the
Company or any Subsidiary on any class of its capital stock.
(al) The accountants who have certified or shall certify the
financial statements included or to be included as part of the
Registration Statement and the Prospectus (the "Accountants"), are
independent accountants within the meaning of the Securities Act. The
historical combined financial statements and schedules of the Company
and the Subsidiaries and the historical financial statements and
schedules of each of the entities and businesses acquired or to be
acquired by the Company and the Subsidiaries comply as to form in all
material respects
11
<PAGE>
with the requirements applicable to registration statements on Form S-1
under the Securities Act and present fairly the combined financial
position and results of operations of the Company and the Subsidiaries
and the financial position and results of operations of each of the
entities and businesses acquired or to be acquired by the Company and
the Subsidiaries at the respective dates and for the respective periods
indicated. Such financial statements have been prepared in accordance
with generally accepted accounting principles applied on a consistent
basis throughout the periods presented. The pro forma financial
statements included in the Registration Statement and the Prospectus
have been prepared on a basis consistent with such historical
statements, except for the pro forma adjustments specified therein, and
give effect to assumptions made on a reasonable basis and present
fairly the historical and proposed transactions contemplated by this
Agreement and as set forth in the Prospectus; and such pro forma
financial statements comply as to form in all material respects with
the requirements applicable to pro forma financial statements included
in registration statements on Form S-1 under the Securities Act. The
other historical and pro forma financial and statistical information
and data included in the Prospectus and the Registration Statement are
accurately presented in all material respects and prepared on a basis
consistent with the financial statements, historical and pro forma,
included in the Registration Statement, the Prospectus and the books
and records of the Company, the Subsidiaries or the entities or
businesses acquired or to be acquired by the Company and the
Subsidiaries.
(am) Neither the Company nor any of the Subsidiaries nor, to
the best knowledge of the Company or any Subsidiary, any employee or
agent of the Company or any of the Subsidiaries has made any payment of
funds of the Company or any of the Subsidiaries or received or retained
any funds in violation of any law, rule or regulation, which payment,
receipt or retention of funds is of a character required to be
disclosed in the Registration Statement and the Prospectus.
(an) Neither the Company nor any Subsidiary intends to, nor do
they believe that they will, incur debts beyond their ability to pay
such debts as they mature. The present fair saleable value of the
assets of the Company and the Subsidiaries exceeds the amount that will
be required to be paid on or in respect of the existing debts and other
liabilities (including, without limitation, contingent liabilities) of
the Company and the Subsidiaries as they become absolute and matured.
The assets of the Company and the Subsidiaries do not constitute
unreasonably small capital to carry out the business of the Company and
the Subsidiaries, as conducted or as proposed to be conducted. Upon the
issuance of the Units, the Series A Preferred Stock and the Warrants,
the present fair saleable value of the assets of the Company and the
Subsidiaries will exceed the amount that will be required to be paid on
or in respect of the existing debts and other liabilities (including,
without limitation, contingent liabilities) of the Company and the
Subsidiaries as they become absolute and matured. Upon the issuance of
the Units, the Series A Preferred Stock and the Warrants, the assets of
the Company and the Subsidiaries will not constitute unreasonably small
capital to carry out their businesses as now conducted, including the
capital needs of the Company and the Subsidiaries, taking into account
the projected capital requirements and capital availability.
(ao) There are no contracts or other documents which are
required to be described in the Registration Statement or the
Prospectus or filed as exhibits to the Registration Statement by the
Securities Act or by the Rules and Regulations which have not been
described in the
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<PAGE>
Registration Statement or the Prospectus or filed as exhibits to the
Registration Statement or incorporated therein by reference as
permitted by the Rules and Regulations.
(ap) No relationship, direct or indirect, exists between or
among the Company or any Subsidiary on the one hand, and the directors,
officers, stockholders, customers or suppliers of the Company or any
Subsidiary on the other hand, which is required to be described in the
Prospectus and which is not so described.
(aq) Since the date as of which information is given in the
Registration Statement or the Prospectus through the date hereof, and
except as may otherwise be disclosed or contemplated in the
Registration Statement or the Prospectus, the Company and the
Subsidiaries have not (i) issued or granted any securities, (ii)
incurred any liability or obligation, direct or contingent, other than
liabilities and obligations which were incurred in the ordinary course
of business, (iii) entered into any transaction not in the ordinary
course of business or (iv) declared or paid any dividend on their
capital stock.
(ar) None of Company or any Subsidiary does business with the
government of Cuba or with any person or affiliate located in Cuba
within the meaning of Section 517.075, Florida Statutes.
(as) Each certificate signed by any officer of the Company or
any Subsidiary and delivered to the Underwriters or counsel for the
Underwriters shall be deemed to be a representation and warranty by the
Company or such Subsidiary, as applicable, to the Underwriters as to
the matters covered thereby.
3. Purchase of the Securities by the Underwriters. On the basis of the
representations and warranties contained in, and subject to the terms and
conditions of, this Agreement, the Company agrees to sell the Securities to the
several Underwriters and each of the Underwriters, severally and not jointly,
agrees to purchase the number of Securities set forth opposite that
Underwriter's name in Schedule 2 hereto. The respective purchase obligations of
the Underwriters with respect to the Securities shall be rounded among the
Underwriters to avoid fractional shares, as the Underwriters may determine.
The Company shall not be obligated to deliver any of the Securities to
be delivered on the Delivery Date except upon payment for all the Securities to
be purchased on the Delivery Date as provided herein.
The Company hereby confirms its engagement of BT Securities Corporation
and BT Securities Corporation hereby confirms its engagement with the Company to
render services as a "qualified independent underwriter" within the meaning of
Rules 2720(b)(15)(A) through (b)(15)(G) of the Conduct Rules of the NASD with
respect to the offering and sale of the Securities. BT Securities Corporation,
solely in its capacity as qualified independent underwriter and not otherwise,
is referred to herein as the "Independent Underwriter."
4. Offering of Securities by the Underwriters.
Upon authorization by the Underwriters of the release of the
Securities, the several Underwriters propose to offer the Securities for sale
upon the terms and conditions set forth in the Prospectus.
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<PAGE>
5. Delivery of and Payment for the Securities. Delivery of and payment
for the Securities shall be made at the office of Latham & Watkins, 885 Third
Avenue, New York, New York 10022, at 9:00 a.m., New York City time, on January
__, 1997 or at such other date or place as shall be determined by agreement
among the Underwriters and the Company. This date and time are sometimes
referred to as the "Delivery Date." On the Delivery Date, the Company shall
deliver or cause to be delivered certificates representing the Securities to the
Underwriters for the account of each Underwriter against payment to or upon the
order of the Company or as the Company may direct of the purchase price (deposit
of which the Underwriters shall bear no responsibility for) by certified or
official bank check or checks payable in next day funds, or in such manner as
all parties to this Agreement shall have previously agreed. Time shall be of the
essence, and delivery at the time and place specified pursuant to this Agreement
is a further condition of the obligation of each Underwriter hereunder. Upon
delivery, the Securities shall be registered in such names and in such
denominations as the Underwriters shall request in writing not less than two
full Business Days prior to the Delivery Date. For the purpose of expediting the
checking and packaging of the certificates for the Securities, the Company shall
make the certificates representing the Securities available for inspection by
the Underwriters in New York, New York, not later than 2:00 p.m., New York City
time, on the Business Day prior to the Delivery Date.
6. Further Agreements of the Company. The Company agrees:
(a) To prepare the Prospectus in a form approved by the
Underwriters and to file such Prospectus, if required by the Securities
Act, pursuant to Rule 424(b) under the Securities Act not later than
Commission's close of business on the second Business Day following the
execution and delivery of this Agreement or, if applicable, such
earlier time as may be required by Rule 430A(a)(3) under the Securities
Act; to make no further amendment or any supplement to the Registration
Statement or to the Prospectus except as permitted herein; to advise
the Underwriters, promptly after it receives notice thereof, of the
time when any amendment to the Registration Statement has been filed or
becomes effective or any supplement to the Prospectus or any amended
Prospectus has been filed and to furnish the Underwriters with copies
thereof; to advise the Underwriters, promptly after it receives notice
thereof, of the issuance by the Commission of any stop order or of any
order preventing or suspending the use of the Registration Statement,
any Preliminary Prospectus or the Prospectus, of the suspension of the
qualification of the Securities for offering or sale in any
jurisdiction, of the initiation or threatening of any proceeding for
any such purpose, or of any request by the Commission for the amending
or supplementing of the Registration Statement or the Prospectus or for
additional information; and, in the event of the issuance of any stop
order or of any order preventing or suspending the use of the
Registration Statement, any Preliminary Prospectus or the Prospectus or
suspending any such qualification, to use promptly its best efforts to
obtain its withdrawal;
(b) To furnish promptly to each of the Underwriters and to
counsel for the Underwriters, without charge, a signed copy of the
Registration Statement as originally filed with the Commission, and
each amendment thereto filed with the Commission, including all
consents and exhibits filed therewith;
(c) To deliver promptly to the Underwriters and to counsel for
the Underwriters, without charge, such number of the following
documents as the Underwriters shall reasonably request: (i) conformed
copies of the Registration Statement as originally filed with the
Commission and each amendment thereto (in each case including exhibits)
and (ii) each Preliminary Prospectus, the Prospectus and any amended or
supplemented Prospectus and, if the
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<PAGE>
delivery of a prospectus is required at any time after the Effective
Time in connection with the offering or sale of the Securities or any
other securities relating thereto and if at such time any events shall
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made when such Prospectus is delivered, not misleading, or, if for
any other reason it shall be necessary to amend or supplement the
Prospectus in order to comply with the Securities Act, to notify the
Underwriters and, upon their request, to file such document and to
prepare and furnish without charge to each Underwriter and to any
dealer in securities as many copies as the Underwriters may from time
to time reasonably request of an amended or supplemented Prospectus
which will correct such statement or omission or effect such
compliance;
(d) To file promptly with the Commission any amendment to the
Registration Statement or the Prospectus, any supplement to the
Prospectus or any registration statement pursuant to Rule 462(b) under
the Securities Act that may, in the judgment of the Company or the
Underwriters, be required by the Securities Act or requested by the
Commission;
(e) Prior to filing with the Commission any amendment to the
Registration Statement or supplement to the Prospectus or any
Prospectus pursuant to Rule 424 of the Rules and Regulations, to
furnish, at least two days before filing such amendment to the
Registration Statement or supplement to the Prospectus, a copy thereof
to the Underwriters and counsel for the Underwriters and obtain the
consent of the Underwriters to the filing;
(f) As soon as practicable after the Effective Date, to make
generally available to the Company's security holders and to deliver to
the Underwriters an earnings statement of the Company and its
Subsidiaries (which need not be audited) complying with Section 11(a)
of the Securities Act and the Rules and Regulations (including Rule 158
under the Securities Act);
(g) For a period of five years following the Effective Date,
to furnish to the Underwriters copies of all materials furnished by the
Company to its shareholders and all public reports and all reports and
financial statements furnished by the Company to the principal national
securities exchange upon which the Class A Common Stock or any of the
Securities may be listed pursuant to requirements of or agreements with
such exchange or to the Commission pursuant to the Exchange Act or any
rule or regulation of the Commission thereunder;
(h) The Company will arrange for the qualification of the
Securities for sale under the securities or Blue Sky laws of such
jurisdictions in the United States as the Underwriters may designate,
and will maintain such qualifications in effect so long as required for
the sale of the Securities; provided that the Company shall not be
required to qualify as a foreign corporation or to file a general
consent to service of process in any jurisdiction. The Company will
promptly advise the Underwriters of the receipt by the Company of any
notification with respect to the suspension of the qualification of any
of the Securities for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose;
(i) For a period of 180 days from the date of the Prospectus
(the "Lock-Up Period"), not to, directly or indirectly, offer for sale,
sell or otherwise dispose of or pledge (or enter into any transaction
or device which is designed to, or could be expected to, result in the
disposition by any person during the Lock-Up Period of) any shares of
Common Stock or other capital stock
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<PAGE>
of the Company (other than (i) the Warrant Shares to be issued upon
exercise of the Warrants, (ii) stock grants made pursuant to the terms
of the Incentive Program (as in effect on the date of the Prospectus),
(iii) stock grants made pursuant to the Stock Option Plan (as in effect
on the date of the Prospectus) and (iv) securities issued as
consideration for an acquisition if the party being issued the
securities agrees to lock-up provisions similar to those contained in
this subsection or if the securities issued are "restricted securities"
under the Securities Act), or sell or grant options, rights or warrants
with respect to any shares of Common Stock or other capital stock of
the Company (other than the grant of options pursuant to option plans
existing on the date hereof), without the prior written consent of CIBC
Wood Gundy Securities Corp.;
(j) The Company will use its best efforts to cause the
Commission to declare the Shelf Registration Statement effective prior
to the Delivery Date;
(k) The Company will use its best efforts to keep the Shelf
Registration Statement continuously effective (other than as provided
in the Warrant Agreement) under the Securities Act in order to permit
the prospectus included therein to be lawfully delivered by the Company
to the holders exercising the Warrants until 30 days after the
Expiration Date or such shorter period that will terminate when all the
Warrants have been exercised.
(l) The Company will cause the Registration Statement and the
related prospectus and any amendment or supplement thereto, as of the
effective date of the Registration Statement, amendment or supplement,
(i) to comply in all material respects with the applicable requirements
of the Securities Act and the rules and regulations of the Commission
and (ii) not to contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in
order to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
(m) The Company will at all times reserve and keep available,
free from preemptive rights, out of the aggregate of its authorized but
unissued Common Stock or authorized and issued Common Stock held in its
treasury, for the purpose of enabling it to satisfy any obligation to
issue Warrant Shares upon exercise of Warrants, the maximum number of
shares of Common Stock which may then be deliverable upon the exercise
of all outstanding Warrants.
(n) The Company will comply with all of its obligations
(including, without limitation, such obligations set forth in Sections
6(k), (l) and (m) of this Agreement) under the Warrant Agreement;
(o) The Company agrees to cause the Certificate of Designation
to be filed with [appropriate authority] prior to the Delivery Date.
(p) The Company will use all amounts received by it pursuant
to Section 5 of this Agreement in the manner described under "Use of
Proceeds" in the Registration Statement and the Prospectus and pursuant
to a funds flow memorandum, which shall be available for review prior
to the Delivery Date and acceptable in both form and substance to the
Underwriters (the "Funds Flow Memorandum"); and
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<PAGE>
(q) To take such steps as shall be necessary to ensure that
neither the Company nor any subsidiary shall become an "investment
company" within the meaning of such term under the Investment Company
Act of 1940 and the rules and regulations of the Commission thereunder.
7. Expenses. Notwithstanding any termination of this Agreement
(pursuant to Section 11 of this Agreement or otherwise), the Company and the
Subsidiaries jointly and severally agree to pay the following costs and expenses
and all other costs and expenses incident to the performance by the Company and
the Subsidiaries of their obligations hereunder: (i) the preparation, printing
or reproduction, and filing of the Certificate of Designation, the Registration
Statement (including financial statements included therein and exhibits
thereto), each Preliminary Prospectus, the Prospectus and each amendment or
supplement to any of them; (ii) the printing (or reproduction) and delivery
(including postage, air freight charges and charges for counting and packaging)
of such copies of the Registration Statement, each Preliminary Prospectus, the
Prospectus and all amendments or supplements to any of them as may be reasonably
requested for use in connection with the offering and sale of the Units, the
Series A Preferred Stock and the Warrants; (iii) the preparation, printing,
authentication, issuance and delivery of certificates for the Units, the Series
A Preferred Stock and the Warrants including any stamp taxes in connection with
the original issuance and sale of the Units, the Preferred Stock and the
Warrants; (iv) the reproduction and delivery of this Agreement, the preliminary
and supplemental Blue Sky memoranda and all other agreements or documents
reproduced and delivered in connection with the offering of the Securities; (v)
the registration or qualification of the Securities for offer and sale under the
securities or Blue Sky laws of the several states (including filing fees and the
fees, expenses and disbursements of Latham & Watkins, counsel to the
Underwriters, relating to such registration and qualification); (vi) the filing
fees in connection with any filings required to be made with the NASD (including
the fees and disbursements of Latham & Watkins, counsel to the Underwriters, in
respect thereof and in connection with obtaining an opinion of the NASD
concerning the fairness of the terms and arrangements of the underwriting of the
Securities); (vii) the transportation and other expenses incurred by or on
behalf of Company representatives in connection with presentations to
prospective purchasers of the Securities; (viii) the fees and expenses of the
Company's accountants and the fees and expenses of counsel (including local and
special counsel) for the Company and the Subsidiaries; (ix) any fees charged by
investment rating agencies for the rating of the Securities; (x) the fees and
expenses of the transfer agent for the Series A Preferred Stock (the "Transfer
Agent") and any agent of the Transfer Agent and the fees and disbursements of
any counsel for the Transfer Agent in connection with the Series A Preferred
Stock; (xi) the fees and expenses of the Warrant Agent and any agent of the
Warrant Agent and the fees and disbursements of any counsel for the Warrant
Agent in connection with the Warrants; (xii) all fees and expenses of BT
Securities Corporation in its capacity as Independent Underwriter; and (xiii)
any and all expenses arising from or incurred in connection with the Shelf
Registration Statement and the transactions contemplated therein.
8. Conditions of the Underwriters' Obligations. The respective
obligations of the Underwriters hereunder are subject to the accuracy, when made
and on the Delivery Date, of the representations and warranties of the Company
and each of the Subsidiaries contained herein, to the performance by the Company
and each of the Subsidiaries of their respective obligations hereunder, and to
each of the following additional terms and conditions:
(a) The Registration Statement, including a registration
statement filed under Rule 462(b) of the Securities Act, shall have
become effective not later than 9:30 a.m., New York City time, on the
date of this Agreement or at such later date and time as the
Underwriters may approve; the Prospectus shall have been timely filed
with the Commission in accordance with
17
<PAGE>
Section 6(a) hereof; no stop order suspending the effectiveness of the
Registration Statement or any part thereof shall have been issued and
no proceeding for that purpose shall have been initiated or threatened
by the Commission; and any request of the Commission for inclusion of
additional information in the Registration Statement or the Prospectus
or otherwise shall have been complied with.
(b) The Shelf Registration Statement shall have been filed
with the Commission.
(c) No Underwriter shall have discovered and disclosed to the
Company on or prior to the Delivery Date that the Registration
Statement or the Prospectus or any amendment or supplement thereto
contains an untrue statement of a fact which, in the opinion of Latham
& Watkins, counsel for the Underwriters, is material or omits to state
a fact which, in the opinion of such counsel, is material and is
required to be stated therein or is necessary to make the statements
therein not misleading.
(d) All corporate proceedings and other legal matters incident
to the authorization, form and validity of the Operative Documents, the
Securities, the Registration Statement and the Prospectus, and all
other legal matters relating to the Operative Documents and the
transactions contemplated hereby and thereby shall be reasonably
satisfactory in all material respects to counsel for the Underwriters,
and the Company shall have furnished to such counsel all documents and
information that they may reasonably request to enable them to pass
upon such matters.
(e) Drinker Biddle & Reath shall have furnished to the
Underwriters its written opinion, as counsel to the Company, addressed
to the Underwriters and dated the Delivery Date, in form and substance
reasonably satisfactory to the Underwriters, to the effect that:
(i) The Company is duly incorporated and validly
existing as a corporation in good standing under the laws of
its jurisdiction of incorporation, and has all requisite
corporate power and authority to carry on its business as, to
such counsel's knowledge, it is being conducted and as
described in the Registration Statement and the Prospectus and
to own, lease and operate its properties known to such
counsel, and is not qualified as a foreign corporation
authorized to do business in any other jurisdiction.
(ii) Each of the Subsidiaries is duly incorporated or
formed and validly existing as a corporation or partnership,
as the case may be, in good standing under the laws of its
jurisdiction of incorporation or formation, as the case may
be, and has all requisite corporate power and authority (in
the case of corporations) or legal capacity (in the case of
partnerships) to carry on its business as, to such counsel's
knowledge, it is being conducted and as described in the
Registration Statement and the Prospectus and to own, lease
and operate its properties know to such counsel, and is duly
qualified and in good standing as a foreign corporation or
partnership, as the case may be, authorized to do business in
each jurisdiction set forth on Schedule 1 to such opinion. All
of the outstanding shares of capital stock and other
securities evidencing equity ownership of each of the
Subsidiaries are fully paid and (except in the case of general
partnership interests and, in the case of limited partnership
interests, except to the extent that the provisions of the
applicable limited partnership act requiring partners to
return distributions may be deemed to constitute
assessability) nonassessable and free of any
18
<PAGE>
preemptive or similar rights, and are owned by the Company
directly, or indirectly through one of the other Subsidiaries,
free and clear of any lien, adverse claim, security interest
or other encumbrance known to such counsel except as described
in the Registration Statement and the Prospectus and for
security interests securing the New Credit Facility.
(iii) The authorized capital stock of the Company
consists of 30,000,000 shares of Class A Common Stock, par
value $.01 per share, 15,000,000 shares of Class B Common
Stock, par value $.01 per share, and 5,000,000 shares of
preferred stock, par value $.01 per share ("Preferred
Shares"). Upon the consummation of the Offering and the
registered exchange offer (the "Exchange Offer") of an
aggregate of 191,792 shares of Class A Common Stock for all of
the outstanding shares of PM&C's Class B Common Stock (the
"PM&C Class B Shares") (assuming all holders of the PM&C Class
B Shares exchange their shares for Class A Common Stock in the
Exchange Offer), 4,663,229 shares of Class A Common Stock,
4,581,900 shares of Class B Common Stock and 100,000 shares of
Preferred Shares will be issued and outstanding. The
authorized capital stock of the Company, including the Series
A Preferred Stock, the Warrant Shares and the Class A Common
Stock, conforms as to legal matters to the description thereof
contained in the Registration Statement and the Prospectus.
The Securities to be issued and sold by the Company hereunder
have been duly authorized and, when issued and delivered to
the Underwriters against payment therefor as provided by this
Agreement, will have been validly issued and will be fully
paid and non-assessable, and the issuance of such Securities
will not be subject to any preemptive or similar rights. The
Company has reserved ______ shares of Class A Common Stock for
issuance upon exercise of the Warrants.
(iv) The Registration Statement was declared
effective under the Securities Act as of the date and time
specified in such opinion; the Prospectus was filed with the
Commission pursuant to the subparagraph of Rule 424(b) of the
Rules and Regulations on the date specified therein; and, to
the knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement has been issued
and no proceeding for that purpose is pending or threatened by
the Commission.
(v) The Registration Statement and the Prospectus and
any further amendments or supplements thereto made by the
Company prior to the Delivery Date (other than the financial
statements, including the notes thereto, and supporting
schedules and other financial, statistical and accounting data
included therein or omitted therefrom, as to which such
counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act
and the Rules and Regulations.
(vi) The Shelf Registration Statement was filed with
the Commission on or prior to the date of this Agreement. To
the best of such counsel's knowledge, such Shelf Registration
Statement complies in all material respects with the
requirements of the Securities Act and the Rules and
Regulations.
(vii) To the best of such counsel's knowledge, there
are no contracts or other documents which are required to be
described in the Registration Statement and the Prospectus or
filed as exhibits to the Registration Statement by the
Securities Act or by
19
<PAGE>
the Rules and Regulations which have not been described or
filed as exhibits to the Registration Statement or
incorporated therein by reference as permitted by the Rules
and Regulations.
(viii) To the best of such counsel's knowledge,
except as set forth in the Registration Statement and the
Prospectus, there are no outstanding rights, warrants or
options to acquire, or instruments convertible into or
exchangeable for, any shares of capital stock or other equity
interest in the Company.
(ix) There are no preemptive or other rights to
subscribe for or to purchase, nor any restriction upon the
voting or transfer of, any of the Securities pursuant to the
Company's charter or by-laws or any agreement or other
instrument (except as set forth in the Registration Statement
and the Prospectus) known to such counsel.
(x) The Company and each of the Subsidiaries have all
requisite power and authority to execute, deliver and perform
their respective obligations under this Agreement, the other
Operative Documents and the Transaction Documents, as
applicable, and to consummate the transactions contemplated
hereby and thereby, including, without limitation, in the case
of the Company, the corporate power and authority to issue,
sell and deliver the Securities and the Warrant Shares, as
provided herein.
(xi) This Agreement has been duly and validly
authorized, executed and delivered by the Company and the
Subsidiaries.
(xii) The execution and delivery of the Exchange Note
Indenture has been duly and validly authorized by the Company
and when executed and delivered by the Company (assuming the
due execution and delivery by the trustee thereunder) will
constitute the legal, valid and binding agreement of the
Company, will conform in all material respects to the
description thereof in the Registration Statement and the
Prospectus, and will be enforceable against the Company in
accordance with its terms except as such enforceability may be
limited by bankruptcy, insolvency, reorganization, moratorium
and other similar laws relating to or affecting creditors'
rights generally (including laws relating to fraudulent
transfers or conveyances), by general equitable principles
(regardless of whether such enforceability is considered in a
proceeding in equity or at law).
(xiii) The Exchange Notes have been duly and validly
authorized, and, when executed, authenticated, issued and
delivered in exchange for the Series A Preferred Stock in
accordance with the terms of the Certificate of Designation
and the Exchange Note Indenture, will be validly issued and
outstanding, will conform in all material respects to the
description thereof in the Registration Statement and the
Prospectus and will constitute the legal, valid and binding
obligations of the Company, entitled to the benefits of the
Exchange Note Indenture and enforceable against the Company in
accordance with their terms except as such enforceability may
be limited by bankruptcy, insolvency, reorganization,
moratorium and other similar laws relating to or affecting
creditors' rights generally (including laws relating to
fraudulent transfers or
20
<PAGE>
conveyances), by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in
equity or at law).
(xiv) The Warrant Agreement has been duly and validly
authorized, executed and delivered by the Company, conforms in
all material respects to the description thereof in the
Registration Statement and the Prospectus and is the legally
valid and binding agreement of the Company, enforceable
against the Company in accordance with its terms except as
such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally (including laws
relating to fraudulent transfers or conveyances), by general
equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at
law).
(xv) The Warrants have been duly and validly
authorized, issued and delivered in accordance with the terms
of the Warrant Agreement, conform in all material respects to
the description thereof in the Registration Statement and the
Prospectus and the issuance of such Warrants is not be subject
to any preemptive or similar rights, except for such rights
contained in those agreements set forth in Schedule 3 hereto.
(xvi) The Warrant Shares have been duly and validly
authorized and reserved for issuance upon exercise of the
Warrants and, when issued and delivered upon exercise of the
Warrants against payment of the Exercise Price as provided in
the Warrant Agreement, the Warrant Shares will have been duly
and validly issued and will be fully paid and non-assessable,
and the issuance of such Warrant Shares will not be subject to
any preemptive or similar rights, except for such rights
contained in those agreements set forth on Schedule 3 hereto.
(xvii) The New Hampshire Cable Sale Agreement has
been duly and validly authorized, executed and delivered by
PCTV, Inc. and is the legally valid and binding obligation of
PCTV, Inc., enforceable against PCTV, Inc. in accordance with
its terms except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights
generally (including laws relating to fraudulent transfers or
conveyances), by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in
equity or at law).
(xviii) The Arkansas DBS Agreement has been duly and
validly authorized, executed and delivered by the Company and
is the legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms
except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally
(including laws relating to fraudulent transfers or
conveyances), by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in
equity or at law).
(xix) The Indiana DBS Agreement has been duly and
validly authorized, executed and delivered by the Company and
is the legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms
except
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<PAGE>
as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally
(including laws relating to fraudulent transfers or
conveyances), by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in
equity or at law).
(xx) The Mississippi DBS Agreement has been duly and
validly authorized, executed and delivered by the Company and
is the legally valid and binding obligation of the Company,
enforceable against the Company in accordance with its terms
except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws
relating to or affecting creditors' rights generally
(including laws relating to fraudulent transfers or
conveyances), by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in
equity or at law).
(xxi) The Virginia\West Virginia DBS Agreement has
been duly and validly authorized, executed and delivered by
the Company and is the legally valid and binding obligation of
the Company, enforceable against the Company in accordance
with its terms except as such enforceability may be limited by
bankruptcy, insolvency, reorganization, moratorium and other
similar laws relating to or affecting creditors' rights
generally (including laws relating to fraudulent transfers or
conveyances), by general equitable principles (regardless of
whether such enforceability is considered in a proceeding in
equity or at law).
(xxii) None of the securities issued in connection
with any of the Transactions are required to be registered
under the Securities Act and the issuance of any such
securities will not violate the Securities Act or the Rules
and Regulations.
(xxiii) None of (A) the execution, delivery or
performance by the Company or any of the Subsidiaries of the
Operative Documents, as applicable, (B) the issuance and sale
of the Securities or the Warrant Shares, (C) the execution,
delivery or performance by the Company or any of the
Subsidiaries of the Transaction Documents, as applicable, or
(D) the transactions contemplated by the Operative Documents
and the Transaction Documents will violate, conflict with or
constitute a breach of any of the terms or provisions of, or a
default under (or an event that with notice or the lapse of
time, or both, would constitute a default), or (except as
contemplated in the second and third sentences of this
paragraph) require consent under, or result in the imposition
of a lien or encumbrance on any properties of the Company or
any Subsidiary, or an acceleration of any indebtedness of the
Company or any Subsidiary pursuant to, (i) the charter,
bylaws, limited partnership or other organizational documents
of the Company or any Subsidiary, (ii) any material bond,
debenture, note, indenture, mortgage, deed of trust or other
agreement or instrument known to such counsel relating to
borrowed money to which the Company or any Subsidiary is a
party or by which any of them or their respective property is
bound, (iii) any statute, rule or regulation known to such
counsel applicable to the Company or any Subsidiary or their
respective assets or properties or (iv) any judgment, order or
decree known to such counsel of any court or governmental
agency, body or administrative agency or authority having
jurisdiction over the Company, any Subsidiary or their
respective assets or properties. No consent, approval,
22
<PAGE>
authorization or order of, or filing, registration,
qualification, license or permit of or with, any regulatory
agency or body, administrative agency, or other governmental
agency is required for (1) the execution, delivery and
performance by the Company and the Subsidiaries of any of the
Operative Documents or the Transaction Documents, as
applicable, (2) the issuance and sale of the Securities or the
Warrant Shares or (3) the transactions contemplated by any of
the Operative Documents or the Transaction Documents, except
for (A) the registration of the Securities and the Warrant
Shares under the Securities Act, (B) such consents, approvals,
authorizations, registrations or qualifications as may be
required under the Exchange Act and applicable state
securities laws in connection with the purchase and
distribution of the Securities by the Underwriters, (C) such
as may be required by the NASD, and (D) such as have been
obtained or made, it being understood that such counsel need
express no opinion concerning any law administered by, or any
rule, regulation or order of, the FCC, the DPUC or the PSC, or
any other law, rule or regulation pertaining to the broadcast
television or cable television industry. To the best of such
counsel's knowledge, no consents or waivers from any other
person are required for the execution, delivery and
performance by the Company and each of the Subsidiaries, as
applicable, of any of the Operative Documents or the
Transaction Documents, the issuance and sale of the Securities
and the Warrant Shares to the Underwriters or the consummation
of the transactions contemplated by any of the Operative
Documents or the Transaction Documents, other than (1) such
consents and waivers as have been obtained and (2) such as are
disclosed in the Registration Statement and the Prospectus.
(xxiv) None of the Company or the Subsidiaries is (i)
an "investment company" or (ii) a company "controlled" by an
"investment company" within the meaning of the Investment
Company Act of 1940, as amended.
(xxv) The statements in the Prospectus under the
captions ["Prospectus Summary," "Risk Factors," "Business -
Licenses, LMAs, DBS Agreements and Cable Franchises,"
"Management and Certain Transactions - Management Agreement,"
"Management and Certain Transactions - Incentive Program,"
"Description of Indebtedness," "Description of Capital Stock"
and "Shares Eligible for Future Sale," and Items 14, 15 and 17
of Part II of the Registration Statement], in so far as they
are descriptions of contracts, agreements or other legal
documents or laws, regulations or statutes are accurate, in
all material respects, and present fairly the information
required to be shown.
(xxvi) To the best of such counsel's knowledge, there
are no holders of securities of the Company or any Subsidiary
who, by reason of the execution by the Company or any
Subsidiary of this Agreement, any of the other Operative
Documents or any Transaction Document to which the Company or
any Subsidiary, as applicable, is a party or the consummation
by the Company and the Subsidiaries of the transactions
contemplated hereby and thereby, as applicable, have the right
to request or demand that the Company or any Subsidiary
register under the Securities Act or analogous foreign laws
and regulations securities held by them, other than as
disclosed in the Registration Statement and the Prospectus.
23
<PAGE>
(xxvii) To the best of such counsel's knowledge,
there are no contracts, agreements or understandings between
the Company or any Subsidiary and any other person that would
give rise to a valid claim against the Company, any Subsidiary
or any of the Underwriters for a brokerage commission,
finder's fee or like payment in connection with the issuance,
purchase and sale of the Securities, other than arrangements
with CIBC Wood Gundy Securities Corp. with respect to various
financial services provided by the Company.
(xxviii) To the best of such counsel's knowledge and
other than as set forth in the Registration Statement and the
Prospectus, there are no legal or governmental proceedings
pending to which the Company or any of the Subsidiaries is a
party or of which any property or assets of the Company or any
of the Subsidiaries is the subject which, if determined
adversely to the Company or any of the Subsidiaries, might,
singly or in the aggregate, have a Material Adverse Effect;
and, to the best of such counsel's knowledge, no such
proceedings are threatened or contemplated by governmental
authorities or threatened by others.
(xxix) None of Company or any Subsidiary does
business with the government of Cuba or with any person or
affiliate located in Cuba within the meaning of Section
517.075, Florida Statutes.
In addition, such counsel shall state that it has participated in
conferences with officers and other representatives of the Company and
the Subsidiaries, representatives of the Accountants and
representatives of the Underwriters at which the contents of the
Registration Statement and the Prospectus and related matters were
discussed and, although such counsel has not undertaken to investigate
or verify independently, and does not assume any responsibility for,
the accuracy, completeness or fairness of the statements contained in
the Registration Statement and the Prospectus, on the basis of the
foregoing (relying as to materiality to a large extent upon the
opinions of officers and other representatives of the Company) such
counsel does not believe that (A) the Registration Statement and any
amendment or supplement thereto (except as to financial statements,
including the notes thereto, and supporting schedules and other
financial, statistical and accounting data included therein or omitted
therefrom, as to which no belief need be expressed) as of the Effective
Date, contained an untrue statement of a material fact or omitted to
state any fact required to be stated therein or necessary to make the
statements therein not misleading and (B) the Prospectus and any
amendment or supplement thereto (except as to financial statements,
including the notes thereto, and supporting schedules and other
financial, statistical and accounting data included therein or omitted
therefrom, as to which no belief need be expressed) as of its date or
the Delivery Date, contained an untrue statement of a material fact or
omitted to state any fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading.
(f) Vorys, Sater, Seymour and Pease shall have furnished to
the Underwriters its written opinion, as special regulatory counsel for
the Company and the Subsidiaries, addressed to the Underwriters and
dated the Delivery Date, in form and substance reasonably satisfactory
to the Underwriters, substantially in the form of Exhibit A attached
hereto.
(g) Fisher Wayland Cooper Leader & Zaragoza L.L.P. shall have
furnished to the Underwriters its written opinion, as special
regulatory counsel for the Company and the
24
<PAGE>
Subsidiaries, addressed to the Underwriters and dated the Delivery
Date, in form and substance reasonably satisfactory to the
Underwriters, substantially in the form of Exhibit B attached hereto.
(h) Murtha, Cullina, Richter and Pinney shall have furnished
to the Underwriters its written opinion, as special regulatory counsel
for the Company and the Subsidiaries, addressed to the Underwriters and
dated the Delivery Date, in form and substance reasonably satisfactory
to the Underwriters, substantially in the form of Exhibit C attached
hereto.
(i) The Underwriters shall have received from Latham &
Watkins, counsel for the Underwriters, such opinion or opinions, dated
the Delivery Date, with respect to the issuance and sale of the
Securities, the Registration Statement, the Prospectus and other
related matters as the Underwriters may reasonably require, and the
Company shall have furnished to such counsel such documents as they
reasonably request for the purpose of enabling them to pass upon such
matters.
(j) The Accountants shall have furnished to the Underwriters a
letter or letters, dated respectively as of the date hereof and the
Delivery Date, addressed to the Underwriters, in form and substance
satisfactory to each of the Underwriters, containing statements and
information, of the type ordinarily included in accountants' "comfort
letters" with respect to the financial statements and financial
information contained in the Registration Statement and the Prospectus.
(k) The Company shall have furnished to the Underwriters a
certificate of the Company and the Subsidiaries, signed by the Chairman
of the Board or the President and the principal financial or accounting
officer of the Company and each of the Subsidiaries, dated the Delivery
Date, to the effect that the signers of such certificate have carefully
examined the Registration Statement and the Prospectus (and any
amendment or supplement thereto) and this Agreement and that:
(i) the representations and warranties of the Company
and the Subsidiaries in this Agreement are true and correct in
all material respects on and as of the Delivery Date with the
same effect as if made on the Delivery Date and the Company
and the Subsidiaries have complied with all the agreements and
satisfied all the conditions on their part to be performed or
satisfied at or prior to the Delivery Date;
(ii) they have carefully examined (A) the
Registration Statement and, in their opinion, (1) as of the
Effective Date, the Registration Statement did not include any
untrue statement of a material fact and did not omit to state
a material fact required to be stated therein or necessary to
make the statements therein not misleading, and (2) since the
Effective Date, no event has occurred which should have been
set forth in an amendment to the Registration Statement and
(B) the Prospectus and, in their opinion, (1) as of the
Effective Date and as of the Delivery Date, the Prospectus did
not include any untrue statement of a material fact and did
not omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the
light of the circumstances under which they were made, not
misleading, and (2) since the Effective Date, no event has
occurred which should have been set forth in a supplement or
amendment to the Prospectus.
(iii) since the date of the most recent financial
statements included in the Registration Statement and the
Prospectus (including any amendment or supplement
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thereto), there has been no material adverse change in the
condition (financial or other), earnings, business, properties
or prospects of the Company and the Subsidiaries, taken as a
whole, or any development involving a prospective material
adverse change in the capital stock or in the long-term debt
of the Company and the Subsidiaries from that set forth in the
Registration Statement and the Prospectus, whether or not
arising from transactions in the ordinary course of business,
except as set forth in the Registration Statement and the
Prospectus (exclusive of any amendment or supplement thereto);
(iv) the Company and the Subsidiaries have no
liability or obligation, direct or contingent, which is
material to the Company and the Subsidiaries, taken as a
whole, other than those reflected in the Registration
Statement and the Prospectus;
(v) the copies furnished by the Company, on or before
the date hereof, of this Agreement and the Warrant Agreement
are true, correct and complete, were duly and validly
authorized and constitute valid and binding obligations of the
Company and the Subsidiaries, as applicable, except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally (including laws
relating to fraudulent transfers and conveyances), and by
general equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at
law) and, as to rights of indemnification and contribution, by
federal and state securities laws and principles of public
policy;
(vi) the copies furnished by the Company, on or
before the date hereof, of the Certificate of Designation are
true, correct and complete and were duly and validly
authorized and constitute valid and binding obligations of the
Company, and the Company has caused the Certificate of
Designation to be filed with the [appropriate authority] prior
to the date hereof; and
(vii) the copies furnished by the Company, on or
before the date hereof, of the Exchange Note Indenture are
true, correct and complete, were duly and validly authorized
by the Company and when executed and delivered by the Company
(assuming the due execution and delivery by the trustee
thereunder) will constitute the legal, valid and binding
agreement of the Company, will conform in all material
respects with the description thereof in the Registration
Statement and the Prospectus and will be enforceable against
the Company in accordance with its terms except as such
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws relating to
or affecting creditors' rights generally (including laws
relating to fraudulent transfers or conveyances), by general
equitable principles (regardless of whether such
enforceability is considered in a proceeding in equity or at
law).
(l) Subsequent to the date hereof or, if earlier, the dates as
of which information is given in the Registration Statement and the
Prospectus (exclusive of any amendment or supplement thereto), there
shall not have been (i) any change or decrease specified in the letter
or letters referred to in paragraph (j) of this Section 8 or (ii) any
change, or any development involving a prospective change, in or
affecting the business or properties of the Company or any of the
Subsidiaries, the effect of which is, in the judgment of the
Underwriters, so material and
26
<PAGE>
adverse as to make it impractical or inadvisable to market the
Securities as contemplated by the Registration Statement and the
Prospectus (exclusive of any amendment or supplement thereto).
(m) Subsequent to the date hereof and on or prior to the
Delivery Date, there shall not have been any decrease in the rating of
any of the Company's or the Subsidiaries' securities by any "nationally
recognized statistical rating organization" (as defined for purposes of
Rule 436(g)(2) under the Securities Act) or any notice given of any
intended or potential decrease in any such rating or of a possible
change in any such rating that does not indicate the direction of the
possible change.
(n) The Company and each of the Subsidiaries shall have duly
entered into this Agreement and the Warrant Agreement, as applicable,
and the Underwriters shall have received executed copies of each of
such documents and agreements.
(o) The Certificate of Designation shall have been filed with
the appropriate authorities and the Underwriters shall have received
copies thereof.
(p) The Transaction Documents shall be in full force and
effect and the Underwriters shall have received copies thereof.
(q) There shall exist at and as of the Delivery Date (after
giving effect to the transactions contemplated by this Agreement and
the Warrant Agreement) no conditions that would constitute a default
(or an event that with notice or the lapse of time, or both, would
constitute a default) under the New Credit Facility. All outstanding
amounts of indebtedness under the New Credit Facility shall have been
repaid in accordance with the terms of the New Credit Facility.
(r) On the Delivery Date, the Underwriters shall have received
evidence reasonably satisfactory to each of the Underwriters that any
consents or waivers necessary for the Company and the Subsidiaries to
effect the transactions contemplated hereby are in effect.
(s) The Underwriters' counsel shall have been furnished with
such documents as they may reasonably require for the purpose of
enabling them to review or pass upon the matters referred to in this
Section 8 and in order to evidence the accuracy, completeness or
satisfaction in all material respects of any of the representations,
warranties or conditions herein contained.
(t) Each officer and director of the Company shall have
furnished to the Underwriters, prior to the Delivery Date, a letter or
letters, in form and substance satisfactory to counsel for the
Underwriters, pursuant to which each such person shall agree not to,
directly or indirectly, offer for sale, sell or otherwise dispose of or
pledge (or enter into any transaction or device which is designed to,
or could be expected to, result in the disposition by any person during
the Lock-Up Period of) any shares of Common Stock or other capital
stock of the Company during the Lock-Up Period, without the prior
written consent of CIBC Wood Gundy Securities Corp.
(u) The amounts received by the Company pursuant to Section 5
of this Agreement shall have been disbursed by the Company as described
in the Funds Flow Memorandum.
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<PAGE>
(v) On or prior to the Delivery Date, the Company shall have
furnished to the Underwriters such further information, certificates
and documents as the Underwriters may reasonably request.
(w) No action shall have been taken and no statute, rule or
regulation or order shall have been enacted, adopted or issued by any
governmental agency that would as of the Delivery Date prevent the
issuance of the Securities; no injunction, restraining order or order
of any nature by a federal or state court of competent jurisdiction
shall have been issued as of the Delivery Date that would prevent the
issuance of the Securities; and, on the Delivery Date no action, suit
or proceeding shall be pending against or affect the Company or any of
the Subsidiaries, before any court or arbitrator or any governmental
body, agency or official that, if adversely determined, would interfere
with or adversely affect the issuance of the Securities or would,
except as disclosed in the Registration Statement and the Prospectus,
individually or in the aggregate have a Material Adverse Effect or in
any manner draw into question the validity of this Agreement, the other
Operative Documents, the Transaction Documents or any of the
Securities.
If any of the conditions specified in this Section 8 shall not have
been waived by the Underwriters or fulfilled in all material respects when and
as provided in this Agreement, or if any of the opinions and certificates
mentioned above or elsewhere in this Agreement shall not be in all material
respects reasonably satisfactory in form and substance to each of the
Underwriters and counsel for the Underwriters, this Agreement and all
obligations of the Underwriters hereunder may be canceled at, or at any time
prior to, the Delivery Date by the Underwriters. Notice of such cancellation
shall be given to the Company in writing or by telephone or telegraph confirmed
in writing.
9. Indemnification and Contribution. (a) The Company and each of the
Subsidiaries (together with the Company referred to in this Section 9
collectively as the "Issuers") jointly and severally agree to indemnify and hold
harmless each Underwriter, and each person, if any, who controls either of the
Underwriters within the meaning of Section 15 of the Securities Act or Section
20 of the Exchange Act, against any losses, claims, damages or liabilities to
which such Underwriter or such controlling person may become subject under the
Securities Act, the Exchange Act or otherwise, insofar as any such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon:
(i) any untrue statement or alleged untrue statement of any
material fact contained in (A) the registration statement originally
filed with respect to the Securities or any amendment thereto or any
Preliminary Prospectus or the Prospectus or any amendment or supplement
thereto or (B) any application or other document, or any amendment or
supplement thereto, executed by any Issuer or based upon written
information furnished by or on behalf of any Issuer filed in any
jurisdiction in order to qualify the Securities under the securities or
"Blue Sky" laws thereof or filed with the Commission or any securities
association or securities exchange (each an "Application");
(ii) the omission or alleged omission to state, (A) in the
Registration Statement or any amendment thereto or any Application, a
material fact required to be stated therein or necessary to make the
statements therein not misleading or (B) in any Preliminary Prospectus
or the Prospectus or any amendment or supplement thereto, a material
fact required to be stated therein or necessary to make the statement
therein, in the light of the circumstances under which they were made,
not misleading; or
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<PAGE>
(iii) any act or failure to act or any alleged act or failure
to act by any Underwriter in connection with, or relating in any manner
to, the Securities or the offering contemplated hereby, and which is
included as part of or referred to in any loss, claim, damage,
liability or action arising out of or based upon matters covered by
clause (i) or (ii) above (provided that the Company and the
Subsidiaries shall not be liable under this clause (iii) to the extent
that it is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, liability or action
resulted directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross negligence or
willful misconduct),
and will reimburse, as incurred, each Underwriter and each such controlling
person for any legal or other expenses reasonably incurred by such Underwriter
or such controlling person in connection with investigating, defending against
or appearing as a third-party witness in connection with any such loss, claim,
damage, liability or action; provided, however, that none of the Issuers will be
liable in any such case to an Underwriter or any controlling person of such
Underwriter to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto, or any Application in reliance upon and in conformity with
written information furnished to the Issuers by or on behalf of such Underwriter
specifically for use therein; and provided, further, that none of the Issuers
will be liable to an Underwriter or any person controlling such Underwriter with
respect to any such untrue statement or omission made in any Preliminary
Prospectus that is corrected in the Prospectus (or any amendment or supplement
thereto) if the person asserting any such loss, claim, damage or liability
purchased Securities from such Underwriter in reliance upon the Preliminary
Prospectus but was not sent or given a copy of the Prospectus (as amended or
supplemented) that was made available by the Issuers to such Underwriter at or
prior to the written confirmation of the sale of the Securities to such person
in any case where such delivery of such Prospectus (as so amended or
supplemented) is required by the Securities Act, unless such failure to deliver
such Prospectus (as amended or supplemented) was a result of noncompliance by
the Issuers with Section 6(c) of this Agreement.
This indemnity agreement will be in addition to any liability that the
Issuers may otherwise have to the indemnified parties. None of the Issuers will,
without the prior written consent of the Underwriters, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim, action,
suit or proceeding in respect of which indemnification by the Underwriters may
be sought hereunder (whether or not the Underwriters or any person who controls
either of the Underwriters within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of the Underwriters and each such controlling person from
all liability arising out of such claim, action, suit or proceeding.
(b) Each Issuer also jointly and severally agrees to indemnify and hold
harmless the Independent Underwriter and each person, if any, who controls the
Independent Underwriter within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act, against any losses, claims, damages or
liabilities incurred as a result of the Independent Underwriter's participation
as a "qualified independent underwriter" within the meaning of Rules
2720(b)(15)(A) through (b)(15)(G) of the Conduct Rules of the NASD in connection
with the offering of the Securities, and will reimburse the Independent
Underwriter for any legal or other expenses reasonably incurred by the
Independent Underwriter in connection with investigating or defending any such
loss, claim, damage, liability or action as such expenses are incurred. The
obligations of the Issuers under this Section 9 shall be in addition to any
29
<PAGE>
liability which the Issuer may otherwise have and shall extend, upon the same
terms and conditions, to each person, if any, who controls the Independent
Underwriter within the meaning of the Securities Act.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Issuers, their respective directors, officers who signed the
Registration Statement and each person, if any, who controls any of the Issuers
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act against any losses, claims, damages or liabilities to which any of
the Issuers or any such director, officer or controlling person may become
subject under the Securities Act, the Exchange Act, or otherwise, insofar as
such losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue statement
of any material fact contained in the Registration Statement or any amendment
thereto, any Preliminary Prospectus or the Prospectus or any amendment or
supplement thereto or any Application, in each case to the extent, but only to
the extent, that such untrue statement or alleged untrue statement was made in
reliance upon and in conformity with written information furnished to any of the
Issuers by or on behalf of such Underwriter specifically for use therein; and,
subject to the limitation set forth immediately preceding this clause, will
reimburse, as incurred, any legal or other expenses reasonably incurred by any
of the Issuers or any such director, officer or controlling person in connection
with investigating or defending against or appearing as a third-party witness in
connection with any such loss, claim, damage, liability or action in respect
thereof. This indemnity agreement will be in addition to any liability that the
Underwriters may otherwise have to the indemnified parties. The Underwriters
will not, without the prior written consent of the Issuers, settle or compromise
or consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification by any of the
Issuers may be sought hereunder (whether or not any of the Issuers or any person
who controls the Issuers within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act is a party to such claim, action, suit or
proceeding), unless such settlement, compromise or consent includes an
unconditional release of any such Issuer and each such controlling person from
all liability arising out of such claim, action, suit or proceeding or otherwise
with the consent of the Issuers.
(d) Promptly after receipt by an indemnified party under this Section 9
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section 9, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve it from any
liability that it may have to any indemnified party except to the extent that
such omission results in the forfeiture by the indemnifying party of substantial
rights and defenses. In case any such action is brought against any indemnified
party, and such indemnified party notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate
therein and, to the extent that it may wish, jointly with any other indemnifying
party similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party; provided, however, that if the named
parties in any such action (including any impleaded parties) include both the
indemnified party and the indemnifying party and the indemnified party shall
have reasonably concluded that there may be one or more legal defenses available
to it and/or other indemnified parties that are different from or additional to
those available to any such indemnifying party, then the indemnifying parties
shall not have the right to direct the defense of such action on behalf of such
indemnified party or parties and such indemnified party or parties shall have
the right to select separate counsel to defend such action on behalf of such
indemnified party or parties. After notice from the indemnifying party to such
indemnified party of its election so to assume the defense thereof and approval
by such indemnified party of counsel appointed to defend such action, the
indemnifying party will not be liable to such indemnified party under this
Section 9 for any legal or other expenses, other than reasonable and documented
out-of-pocket costs of investigation,
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<PAGE>
subsequently incurred by such indemnified party in connection with the defense
thereof, unless (i) the indemnified party shall have employed separate counsel
in accordance with the proviso to the immediately preceding sentence (it being
understood, however, that in connection with such action the indemnifying party
shall not be liable for the expenses of more than one separate counsel (in
addition to local counsel) in any one action or separate but substantially
similar actions in the same jurisdiction arising out of the same general
allegations or circumstances, designated by the Underwriters in the case of
paragraph (a) of this Section 9 or the Issuers in the case of paragraph (c) of
this Section 9, representing the indemnified parties under such paragraph (a) or
paragraph (c), as the case may be, who are parties to such action or actions);
(ii) the indemnifying party has authorized in writing the employment of counsel
for the indemnified party at the expense of the indemnifying parties; or (iii)
the indemnifying party shall have failed to assume the defense or retain counsel
reasonably satisfactory to the indemnified party. If indemnity is sought
pursuant to paragraph (b) of this Section 9, then in addition to such counsel
for the indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one separate counsel (in addition
to any necessary local counsel) for the Independent Underwriter in its capacity
as a "qualified independent underwriter" and all persons, if any, who control
the Independent Underwriter within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act if, in the reasonable judgment of the
Independent Underwriter, there may exist a conflict of interest between the
Independent Underwriter and the other indemnified parties. In the case of any
such separate counsel for the Independent Underwriter and such control persons
of the Independent Underwriter, such counsel, which shall be reasonably
acceptable to the Issuers, shall be designated in writing by the Independent
Underwriter. After such notice from the indemnifying parties to such indemnified
party (so long as the indemnified party shall have informed the indemnifying
parties of such action in accordance with this Section 9 on a timely basis prior
to the indemnified party seeking indemnification hereunder), the indemnifying
parties will not be liable under this Section 9 for the costs and expenses of
any settlement of such action effected by such indemnified party without the
consent of the indemnifying party, unless such indemnified party waived its
rights under this Section 9, in which case the indemnified party may effect such
a settlement without such consent.
(e) In circumstances in which the indemnity agreement provided for in
the preceding paragraphs of this Section 9 is unavailable or insufficient to
hold harmless an indemnified party in respect of any losses, claims, damages or
liabilities (or actions in respect thereof), each indemnifying party, in order
to provide for just and equitable contribution, shall contribute to the amount
paid or payable by such indemnified party as a result of such losses, claims,
damages or liabilities (or actions in respect thereof) in such proportion as is
appropriate to reflect (i) the relative benefits received by the indemnifying
party or parties on the one hand and the indemnified party on the other from the
offering of the Securities or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, not only such relative benefits
but also the relative fault of the indemnifying party or parties on the one hand
and the indemnified party on the other in connection with the actions,
statements or omissions or alleged actions, statements or omissions that
resulted in such losses, claims, damages or liabilities (or actions in respect
thereof). The relative benefits received by the Issuers on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total proceeds from the offering of the Securities (before deducting expenses)
received by the Issuers bear to the total underwriting discounts and commissions
received by the Underwriters. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Issuers on the one hand,
or the Underwriters on the other, the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such statement or
omission, and any other equitable considerations appropriate in the
circumstances. The Issuers and the Underwriters agree that the Independent
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<PAGE>
Underwriter will not receive any additional benefits hereunder for serving as
the Independent Underwriter in connection with the offering and sale of the
Securities. The Issuers and the Underwriters agree that it would not be
equitable if the amount of such contribution were determined by pro rata or per
capita allocation (even if the Issuers on the one hand and the Underwriters on
the other hand were treated as one entity for such purpose) or by any other
method of allocation that does not take into account the equitable
considerations referred to in the first sentence of this paragraph (e).
Notwithstanding any other provision of this paragraph (e), the Underwriters
shall not be obligated to make contributions hereunder that in the aggregate
exceed the total underwriting discounts and commissions received by the
Underwriters under this Agreement, less the aggregate amount of any damages that
the Underwriters have otherwise been required to pay by reason of the untrue or
alleged untrue statements, and no person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (e), each person, if any, who
controls any of the Underwriters within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act shall have the same rights to
contribution as the Underwriters, and each director of any of the Issuers, each
officer of any of the Issuers who signed the Registration Statement and each
person, if any, who controls any of the Issuers within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act, shall have the same
rights to contribution as the Issuers.
10. Survival Clause. The respective representations, warranties,
agreements, covenants, indemnities and other statements of the Company, each of
the Subsidiaries, their respective officers and the Underwriters set forth in
this Agreement or made by or on behalf of them, respectively, pursuant to this
Agreement shall remain in full force and effect, regardless of (i) any
investigation made by or on behalf of the Company, the Subsidiaries, any of
their respective officers or directors, the Underwriters or any controlling
person referred to in Section 9 hereof and (ii) delivery of and payment for the
Securities, and shall be binding upon and shall inure to the benefit of, any
successors, assigns, heirs, personal representatives of the Company, the
Subsidiaries, the Underwriters and indemnified parties referred to in Section 9
hereof. The respective agreements, covenants, indemnities and other statements
set forth in Sections 6, 7 and 9 hereof shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement.
11. Termination. (a) This Agreement may be terminated in the sole
discretion of the Underwriters by notice to the Company given in the event that
the Company or any of the Subsidiaries shall have failed, refused or been unable
to satisfy all conditions on its respective part to be performed or satisfied
hereunder on or prior to the Delivery Date or, if at or prior to the Delivery
Date:
(i) any of the Company or the Subsidiaries shall have
sustained any loss or interference with respect to their respective
businesses or properties from fire, flood, hurricane, earthquake,
accident or other calamity, whether or not covered by insurance, or
from any labor dispute or any legal or governmental proceeding, which
loss or interference has had or has a material adverse effect on the
business, condition (financial or other), properties, prospects or
results of operations of the Company and the Subsidiaries, taken as a
whole, or there shall have been any material adverse change, or any
development involving a prospective material adverse change (including
without limitation a change in management or control of the Issuers),
in the business, condition (financial or other), properties, prospects
or results of operations of the Company and the Subsidiaries, taken as
a whole, except as described in or contemplated by the Prospectus
(exclusive of any amendment or supplement thereto);
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(ii) trading in securities generally on the New York Stock
Exchange, the American Stock Exchange or the Nasdaq National Market
shall have been suspended or minimum or maximum prices shall have been
established on any such exchange;
(iii) a banking moratorium shall have been declared by New
York, Pennsylvania or United States authorities;
(iv) there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power, (B) an
outbreak or escalation of any other insurrection or armed conflict
involving the United States or any material change in the financial
markets of the United States that, in the sole judgment of the
Underwriters, makes it impracticable or inadvisable to proceed with the
public offering or the delivery of the Securities as contemplated by
the Registration Statement, as amended as of the date hereof; or
(v) any securities of the Company shall have been downgraded
or placed on any "watch list" for possible downgrading by any
"nationally recognized statistical rating organization" (as defined for
purposes of Rule 436(g)(2) under the Securities Act) or any notice
given of any intended or potential decrease in any such rating or of a
possible change in any such rating that does not indicate the direction
of the possible change.
(b) Termination of this Agreement pursuant to this Section 11 shall be
without liability of any party to any other party except as provided in Section
10 hereof.
12. Notices. All communications hereunder shall be in writing and, if
sent to the Underwriters, shall be mailed, delivered or telecopied and confirmed
in writing to the Underwriters c/o CIBC Wood Gundy Securities Corp., 425
Lexington Avenue, 3rd Floor, New York, New York 10017, Attention: William
Phoenix (Fax: (212) 664-1429), and with a copy to Latham & Watkins, 885 Third
Avenue, Suite 1000, New York, New York 10022, Attention: Kirk A. Davenport, Esq.
(Fax: (212) 751-4864). If sent to the Company or any of the Subsidiaries, shall
be mailed, delivered or telecopied and confirmed in writing, to Pegasus
Communications Corporation, Suite 455, 5 Radnor Corporate Center, 100 Matsonford
Road, Radnor, Pennsylvania 19087, Attention: Marshall W. Pagon (Fax: (610) 341-
1835), with a copy to Drinker Biddle & Reath, 1345 Chestnut Street, Suite 1100,
Philadelphia, Pennsylvania 19107, Attention: Michael B. Jordan, Esq. (Fax: (215)
988-2757).
13. Successors. This Agreement shall inure to the benefit of and be
binding upon the Underwriters and the Company and each of the Subsidiaries and
their respective successors and legal representatives, and nothing expressed or
mentioned in this Agreement is intended or shall be construed to give any other
person any legal or equitable right, remedy or claim under or in respect of this
Agreement, or any provisions herein contained; this Agreement and all conditions
and provisions hereof being intended to be and being for the sole and exclusive
benefit of such persons and for the benefit of no other person except that (i)
the indemnities of the Company and each of the Subsidiaries contained in Section
9 of this Agreement shall also be for the benefit of any person or persons who
control the Underwriters within the meaning of Section 15 of the Securities Act
or Section 20 of the Exchange Act and (ii) the indemnities of the Underwriters
contained in Section 9 of this Agreement shall also be for the benefit of the
directors of the Company and each of the Subsidiaries, their respective officers
who have signed the Registration Statement and any person or persons who
controls the Company or any of the Subsidiaries within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange
33
<PAGE>
Act. No purchaser of Securities from the Underwriters will be deemed a successor
because of such purchase.
14. Joint and Several Obligations. All of the obligations of the
Company and each of the Subsidiaries hereunder shall be joint and several
obligations of each of them.
15. Information Supplied by the Underwriters. The statements set forth
in [the last paragraph on the front cover page of the Prospectus and in the
third paragraph, the third sentence of the fourth paragraph, the fifth paragraph
and the second sentence of the seventh paragraph,] in each case under the
heading "Underwriting" in the Prospectus (to the extent such statements relate
to the Underwriters) constitute the only information furnished by the
Underwriters to the Company and the Subsidiaries for purposes of Sections 2(b)
and 9 hereof.
16. Entire Agreement. This Agreement constitutes the entire agreement
among the parties hereto and supersedes all prior agreements, understandings and
arrangements, oral or written, among the parties hereto with respect to the
subject matter hereof.
17. Default of Underwriters. If any Underwriter defaults in its
obligations to purchase Securities hereunder and arrangements satisfactory to
the non-defaulting Underwriter and the Company for the purchase of such
Securities by other persons are not made within 36 hours after such default,
this Agreement may be terminated by the Company or the non-defaulting
Underwriter without liability on the part of the non-defaulting Underwriter or
the Company, except as provided in Sections 7 and 9 of this Agreement. As used
in this Agreement, the term "Underwriter" includes any person substituted for an
Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
18. APPLICABLE LAW. THE VALIDITY AND INTERPRETATION OF THIS AGREEMENT,
AND THE TERMS AND CONDITIONS SET FORTH HEREIN SHALL BE GOVERNED BY AND CONSTRUED
IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO
ANY PROVISIONS RELATING TO CONFLICTS OF LAW.
19. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
[signature page follows]
34
<PAGE>
If the foregoing correctly sets forth the agreement among the
Company, the Subsidiaries and the Underwriters, please indicate your acceptance
in the space provided for that purpose below.
Very truly yours,
PEGASUS COMMUNICATIONS CORPORATION (the
"Company")
BRIDE COMMUNICATIONS, INC. ("BCI")
HMW, INC. ("HMW")
MCT CABLEVISION, LTD. ("MCT LTD")
PEGASUS ANASCO HOLDINGS, INC. ("PAH")
PEGASUS BROADCAST TELEVISION, INC. ("PBT")
PEGASUS CABLE TELEVISION, INC. ("PCT INC")
PEGASUS CABLE TELEVISION OF ANASCO, INC.
("PCT ANASCO")
PEGASUS CABLE TELEVISION OF CONNECTICUT,
INC. ("PCT CONN")
PEGASUS CABLE TELEVISION OF SAN GERMAN,
INC. ("PCT SG")
PEGASUS MEDIA & COMMUNICATIONS, INC.
("PM&C")
PEGASUS SATELLITE TELEVISION, INC. ("PST")
PORTLAND BROADCASTING, INC. ("PBI")
WDBD LICENSE CORP. ("WDBD")
WDSI LICENSE CORP. ("WDSI")
WILF INC. ("WILF")
WOLF LICENSE CORP. ("WOLF")
WTLH, INC. ("WTLH INC")
35
<PAGE>
WTLH LICENSE CORP. ("WTLH")
By: _______________________________________
Marshall W. Pagon, President of each of the
Company, BCI, HMW, MCT LTD, PAH, PBT,
PCT INC, PCT ANASCO, PCT CONN, PCT
SG, PM&C, PST, PBI, WDBD, WDSI, WILF,
WOLF, WTLH INC and WTLH.
MCT CABLEVISION, LIMITED PARTNERSHIP
By: MCT CABLEVISION, LTD., General Partner
By: _______________________________________
Marshall W. Pagon, President
PEGASUS BROADCAST ASSOCIATES, L.P.
By: WILF, INC., General Partner
By: _______________________________________
Marshall W. Pagon, President
36
<PAGE>
CIBC WOOD GUNDY SECURITIES CORP.
Acting severally on behalf of themselves
and the several Underwriters named
in Schedule 2 hereto
By: CIBC WOOD GUNDY SECURITIES CORP.
By: _______________________________________
Name:
Title:
<PAGE>
Schedule 1
The Subsidiaries
Bride Communications, Inc.
HMW, Inc.
MCT Cablevision, Limited Partnership
MCT Cablevision, Ltd.
PCT SG, Inc.
Pegasus Anasco Holdings, Inc.
Pegasus Broadcast Associates, L.P.
Pegasus Broadcast Television, Inc.
Pegasus Cable Television, Inc.
Pegasus Cable Television of Anasco, Inc.
Pegasus Cable Television of Connecticut, Inc.
Pegasus Cable Television of San German, Inc.
Pegasus Media & Communications, Inc.
Pegasus Satellite Television, Inc.
Portland Broadcasting, Inc.
PP Broadcast, Inc.
WDBD License Corp.
WDSI License Corp.
WILF, Inc.
WOLF License Corp.
WTLH, Inc.
WTLH License Corp.
[any missing]
1 - 1
<PAGE>
Schedule 2
The Underwriters
Number of Units
Underwriter to be Purchased
- ----------- ---------------
CIBC Wood Gundy Securities Corp.
Lehman Brothers Inc.
BT Securities Corporation
Total 100,000
2 - 1
<PAGE>
Schedule 3
Preemptive Rights
[to be provided by DB&R]
3 - 1
<PAGE>
Appendix A
Form of Opinion of Vorys, Sater, Seymour and Pease.
Vorys, Sater, Seymour and Pease shall have furnished to the
Underwriters its written opinion, as special regulatory counsel for the Company
and MCT Cablevision, Ltd., Pegasus Cable Television, Inc., Pegasus Satellite
Television and _______ [any missing?] (the "Cable Affiliates"), addressed to the
Underwriters and dated the Delivery Date, to the effect that:
1. There are no FCC licenses, authorizations, consents or permits required
by the FCC as necessary in connection with the conduct of the Company
and the Cable Affiliates with respect to the operation of the systems
owned and operated by Company and the Cable Affiliates (the "Systems")
as presently conducted.
2. Such "Registrations" or "Certificates of Compliance" as are required by
the FCC are on file with the FCC. Carriage of the commercial television
broadcast signals presently offered by the Systems are, as of this
date, consistent with the FCC's regulations and are carried pursuant to
retransmission consent or pursuant to request for carriage by the
applicable station.
3. All commercial and non-commercial television broadcast stations that
have requested carriage are being carried pursuant to the terms and
conditions of their request.
4. All current FCC reports and filings required to be filed for the
Systems have been filed.
5. All required FCC Forms 320 have been filed for the Systems and reflect
compliance with the FCC's cumulative leakage index ("CLI") and signal
leakage requirements.
6. The Systems are in substantial compliance with the FCC's rules and
regulations with regard to equal employment opportunity.
7. No consent, approval, or authorization of, or filing with the FCC is
necessary to issue and sell the Securities.
8. No consent, approval, or authorization of, or filing with the FCC is
necessary for the execution and delivery of the this Agreement or the
other Operative Documents in accordance with their terms.
9. The execution and delivery of the Operative Documents, and the
performance, on the Delivery Date, by the Company and the Cable
Affiliates of the obligations required under the Operative Documents,
will not violate the Telecommunications Act of 1996, the Communications
Act of 1934 or the rules of the FCC, provided, however that no interest
in any license issued by the FCC may be transferred or assigned without
prior FCC consent.
10. The statements set forth in the Registration Statement and the
Prospectus under the caption "Business - Legislation and Regulation -
Cable," fairly present the information contained under such caption
insofar as such statements constitute a summary, with respect to the
federal regulation of cable television, of material (i) statements of
law, (ii) statutes, rules or regulations, or (iii) legal conclusions.
A - 1
<PAGE>
11. All relevant Statements of Account (as defined by the Copy Right Act of
1976) required by Section 111 of the Copyright Act of 1976, as amended
(the "Copyright Act"), and royalty payments accompanying said
Statements of Account, have been submitted to the Licensing Division of
the United States Copyright Office with respect to the Systems. There
have been no inquiries received from the United States Copyright Office
or any other party which would have a material adverse impact upon the
operation of the Company and the Cable Affiliates and which questions
the Statements of Account or any copyright payments made by the Company
and the Cable Affiliates with respect to the Systems, nor are we aware
of any claim, action, or demand for copyright infringement or for
non-payment of royalties pending or threatened against the Company and
the Cable Affiliates with respect to the Systems' compliance with
former Section 111(d)(1) of the Copyright Act with regard to the
requirement to file initial notices of identity and signal carriage
complement in view of the elimination of this requirement.
12. There is no FCC judgment, decree or order which has been issued against
any System or the Company, or Cable Affiliates with respect to the
Systems, other than rule makings which are applicable to the cable
industry generally, nor is there any FCC action, proceeding, or
investigation pending, or, to the best of our knowledge, threatened by
the FCC against any system, the Company, or the Cable Affiliates with
respect to the Systems.
13. A review of the FCC files indicates that the basic rates for all
communities in Massachusetts and Connecticut and the cable program
service tiers of the communities listed on Attachment 1 are subject to
rate regulation by the local franchise authority or the FCC.
14. The FCC has rendered no adverse rate finding with respect to Company,
the Cable Affiliates, or the Systems.
A - 2
<PAGE>
Appendix B
Form of Opinion of Fisher Wayland Cooper Leader & Zaragoza L.L.P.
Fisher Wayland Cooper Leader & Zaragoza L.L.P. shall have furnished to
the Underwriters its written opinion, as special regulatory counsel for the
Company and Pegasus Broadcast Associates, L.P., Pegasus Broadcast Television,
Inc. WDBD License Corp., WDSI License Corp., WILF, Inc., WOLF License Corp. and
_______ (the "TV Affiliates"), addressed to the Underwriters and dated the
Delivery Date, to the effect that:
1. The statements set forth in the Registration Statement and the
Prospectus under the caption "Business - Legislation and Regulation -
TV," insofar as such statements constitute a summary with respect to
FCC matters of material (i) statements of law, (ii) statutes, rules, or
regulations, or (iii) legal conclusions, fairly present the information
contained under such caption.
2. The execution, delivery, and performance in accordance with their terms
of the Operative Documents by the Company and the TV Affiliates that is
a party thereto does not require any authorization, consent, or
approval of the FCC not previously obtained, and does not violate the
Communications Acts of 1934, as amended, and the published rules,
regulations and policies promulgated thereunder by the FCC.
B - 1
<PAGE>
Appendix C
Form of Opinion of Murtha, Cullina, Richter and Pinney
Murtha, Cullina, Richter and Pinney shall have furnished to the
Underwriters its written opinion, as special regulatory counsel for Pegasus
Cable Television, Inc., Pegasus Cable Television of Connecticut, Inc. and _____
(the "NE Affiliates"), addressed to the Underwriters and dated the Delivery
Date, to the effect that there are no facts that causes such counsel to believe
that the Registration Statement or the Prospectus, either at November __, 1996
or the Delivery Date, contained or contains any untrue statement of a material
fact or omitted or omits to state a material fact required to be stated therein
or necessary to make the statement therein not misleading with respect to the NE
Affiliates' cable television operations and activities in Connecticut and
Massachusetts.
C - 1
<PAGE>
[L&W Draft of 1/14/97]
CERTIFICATE OF DESIGNATION, PREFERENCES
AND RELATIVE, PARTICIPATING, OPTIONAL AND
OTHER SPECIAL RIGHTS OF PREFERRED
STOCK AND QUALIFICATIONS, LIMITATIONS
AND RESTRICTIONS THEREOF
OF
___% SERIES A CUMULATIVE EXCHANGEABLE
PREFERRED STOCK
OF
PEGASUS COMMUNICATIONS CORPORATION
-------------------------
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
-------------------------
Pegasus Communications Corporation (the "Company"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, certifies that pursuant to the authority contained in Article
Fourth of its Amended and Restated Certificate of Incorporation (the
"Certificate of Incorporation") and in accordance with the provisions of Section
151 of the General Corporation Law of the State of Delaware, a duly constituted
committee of the Board of Directors of the Company, acting within the scope of
the authority delegated to it by the Board of Directors, by unanimous written
consent dated January __, 1997 duly approved and adopted the following
resolution (this "Certificate of Designation") which resolution remains in full
force and effect on the date hereof:
RESOLVED, that pursuant to the authority vested in the Pricing
Committee of the Board of Directors by resolutions duly adopted by the Board of
Directors on November 21, 1996, the Pricing Committee of the Board of Directors
does hereby designate, create, authorize and provide for the issue of ___%
Series A Cumulative Exchangeable Preferred Stock due __________, 2007 (the
"Series A Preferred Stock"), par value $0.01 per share, with a liquidation
preference of $1,000 per share, consisting of 100,000 shares, having the
following voting powers, preferences and relative, participating, optional and
other special rights, and qualifications, limitations and restrictions thereof
as follows:
1. Certain Definitions.
Unless the context otherwise requires, the terms defined in
this Section 1 shall have, for all purposes of this resolution, the meanings
herein specified (with terms defined in the singular having comparable meanings
when used in the plural).
<PAGE>
"Acquired Debt" means, with respect to any specified Person,
(i) Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Adjusted Operating Cash Flow" means, for the four most recent
fiscal quarters for which internal financial statements are available, Operating
Cash Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for
the most recent four-quarter period plus DBS Cash Flow for the most recent
quarterly period, multiplied by four.
"Affiliate" of any specified Person means any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management or policies of such Person,
whether through the ownership of voting securities, by agreement or otherwise;
provided that beneficial ownership of 10% or more of the voting securities of a
Person shall be deemed to be control.
"Affiliate Transaction" has the meaning set forth in Section
8(d) below.
"Applicable Redemption Price" means a price per share equal to
the following redemption prices specified below (expressed as percentages of the
Liquidation Preference thereof), in each case, together with accumulated and
unpaid dividends, if any, to the date of redemption if redeemed during the
12-month period commencing on ________ of each of the years set forth below:
2002................................................___%
2003................................................___%
2004................................................___%
2005 and thereafter.................................___%
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business consistent with past
practices and (ii) the issue or sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following transactions will not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly
Owned Restricted Subsidiary of the Company or by a Wholly Owned Restricted
Subsidiary of the Company to the Company or to another Wholly Owned Restricted
Subsidiary of the Company, (ii) an issuance of Equity Interests by a Wholly
Owned Restricted Subsidiary of the Company to the Company or to another Wholly
Owned Restricted Subsidiary of the Company and (iii) a Restricted Payment that
is permitted by the provisions of Section 8(a) hereof.
2
<PAGE>
"Asset Swap" means an exchange of assets by the Company or a
Restricted Subsidiary of the Company for one or more Permitted Businesses or for
a controlling equity interest in any Person whose assets consist primarily of
one or more Permitted Businesses.
"Bank Facilities" means, with respect to the Company or any of
its Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Basket Period" has the meaning set forth in Section 8(a)
below.
"Board of Directors" means the Board of Directors of the
Company or any authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any
determination thereof is to be made, the amount of the liability in respect of a
capital lease that would at such time be required to be capitalized on a balance
sheet in accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation,
corporate stock, (ii) in the case of an association or business entity, any and
all shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii)
securities issued or directly and fully guaranteed or insured by the United
States government or any agency or instrumentality thereof having maturities of
not more than six months from the date of acquisition, (iii) certificates of
deposit and eurodollar time deposits with maturities of six months or less from
the date of acquisition, bankers' acceptances with maturities not exceeding six
months and overnight bank deposits, in each case, with any domestic commercial
bank having capital and surplus in excess of $500 million and a Thompson Bank
Watch Rating of "B" or better, (iv) repurchase obligations with a term of not
more than seven days or on demand for underlying securities of the types
described in clauses (ii) and (iii) above entered into with any financial
institution meeting the qualifications specified in clause (iii) above and (v)
commercial paper having the highest rating at acquisition obtainable from
Moody's Investors Service, Inc. or Standard & Poor's Corporation and in each
case maturing within six months after the date of acquisition.
"Certificated Securities" has the meaning set forth in Section
14(d) below.
"Change of Control" means the occurrence of any of the
following: (i) the sale, lease, transfer, conveyance or other disposition (other
than by way of merger or consolidation), in one or a series of related
transactions, of all or substantially all of the assets of the Company and its
Restricted Subsidiaries taken as a whole to any "person" (as such term is used
in Section 13(d)(3) of the Exchange Act) other than the Principal or his Related
Parties, (ii) the adoption of a plan relating to the liquidation
3
<PAGE>
or dissolution of the Company, (iii) the consummation of any transaction
(including, without limitation, any merger or consolidation) the result of which
is that (A) any "person" (as defined above) becomes the "beneficial owner" (as
such term is defined in Rule 13d-3 and Rule 13d-5 under the Exchange Act, except
that a person shall be deemed to have "beneficial ownership" of all securities
that such person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time, upon the happening of an event or
otherwise), directly or indirectly, of more of the Class A Common Stock of the
Company than is beneficially owned (as defined above) at such time by the
Principal and his Related Parties in the aggregate, (B) the Principal and his
Related Parties collectively cease to beneficially own (as defined above) Voting
Stock of the Company having at least 30% of the combined voting power of all
classes of Voting Stock of the Company then outstanding or (C) the Principal and
his Affiliates acquire, in the aggregate, beneficial ownership (as defined
above) of more than 66 2/3% of the shares of Class A Common Stock at the time
outstanding or (iv) the first day on which a majority of the members of the
Board of Directors are not Continuing Directors.
"Change of Control Offer" has the meaning set forth in Section
7(a) below.
"Change of Control Payment" has the meaning set forth in
Section 7(a) below.
"Change of Control Payment Date" has the meaning set forth in
Section 7(d)(ii) below.
"Class A Common Stock" means the Class A Common Stock, par
value $.01 per share, of the Company.
"Closing Date" means the date on which shares of Series A
Preferred Stock are first issued.
"Commission" means the Securities and Exchange Commission.
"Consolidated Net Income" means, with respect to any Person
for any period, the aggregate of the Net Income of such Person and its
Restricted Subsidiaries for such period, on a consolidated basis, determined in
accordance with GAAP; provided that (i) the Net Income (but not loss) of any
Person that is not a Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded, (iii) the cumulative effect of a change in accounting principles
shall be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall
be excluded, whether or not distributed to the Company or one of its
Subsidiaries.
"Continuing Directors" means, as of any date of determination,
any member of the Board of Directors of the Company who (i) was a member of such
Board of Directors on the Closing Date or (ii) was nominated for election or
elected to such Board of Directors with the approval of a majority of the
Continuing Directors who were members of such Board at the time of such
nomination or election.
"Cumulative Operating Cash Flow" means, as of any date of
determination, Operating Cash Flow for the Company and its Restricted
Subsidiaries for the period (taken as one accounting period) from the beginning
of the first full month commencing after the Closing Date to the end of the
4
<PAGE>
most recently ended fiscal quarter for which internal financial statements are
available at such date of determination, plus all cash dividends received by the
Company or a Wholly Owned Restricted Subsidiary of the Company from any
Unrestricted Subsidiary of the Company or any Unrestricted Subsidiary of any
Wholly Owned Restricted Subsidiary of the Company to the extent that such
dividends are not included in the calculation of permitted Restricted Payments
under Section 8(a)(i)(3) hereof by virtue of clause (C) of such section.
"Cumulative Total Interest Expense" means, with respect to the
Company and its Restricted Subsidiaries, as of any date of determination, Total
Interest Expense for the period (taken as one accounting period) from the
beginning of the first full month commencing after the Closing Date to the end
of the most recently ended fiscal quarter for which internal financial
statements are available at such date of determination.
"Depositary" has the meaning set forth in Section 14(a) below.
"DBS Cash Flow" means income from operations (before
depreciation, amortization and Non-Cash Incentive Compensation to the extent
deducted in arriving at income from operations) for the Satellite Segment
determined on a basis consistent with the segment data contained in the
Company's consolidated audited financial statements.
"Default" means any event that is or with the passage of time
or the giving of notice or both would be an Event of Default.
"DGCL" has the meaning set forth in Section 2(b) below.
"Disqualified Stock" means any Capital Stock (other than the
Series A Preferred Stock) that, by its terms (or by the terms of any security
into which it is convertible or for which it is exchangeable), or upon the
happening of any event, matures or is mandatorily redeemable, pursuant to a
sinking fund obligation or otherwise, or redeemable at the option of the Holder
thereof, in whole or in part, on or prior to the mandatory redemption date of
the Series A Preferred Stock set forth in this Certificate of Designation
unless, in any such case, the issuer's obligation to pay, purchase or redeem
such Capital Stock is expressly conditioned on its ability to do so in
compliance with the provisions of Section 8(a) hereof.
"Dividend Payment Date" has the meaning set forth in Section
2(a) below.
"Equity Interests" means Capital Stock and all warrants,
options or other rights to acquire Capital Stock (but excluding any debt
security that is convertible into, or exchangeable for, Capital Stock).
"Event of Default" means any Event of Default under the
Exchange Note Indenture.
"Exchange Act" means the Securities and Exchange Act of 1934,
as amended.
"Exchange Date" has the meaning set forth in Section 5(b)
below.
5
<PAGE>
"Exchange Notes" means the Company's ___% Senior Subordinated
Exchange Notes due 2007 issuable in exchange for the Company's Series A
Preferred Stock.
"Exchange Note Indenture" means that certain indenture under
which the Exchange Notes would be issued and which shall be substantially in the
form attached as Annex A hereto.
"Exchange Note Trustee" means the trustee under the Exchange
Note Indenture.
"Executive Officer" means any officer of the Company that
would be deemed to be an "executive officer" within meaning of the rules and
regulations of the Commission.
"Existing Indebtedness" means all Indebtedness of the Company
and its Subsidiaries in existence on the Closing Date, until such amounts are
repaid.
"fair market value" means, with respect to assets or aggregate
net proceeds having a fair market value (a) of less than $5.0 million, the fair
market value of such assets or proceeds determined in good faith by the Board of
Directors (including a majority of the Independent Directors thereof) and
evidenced by a board resolution and (b) equal to or in excess of $5.0 million,
the fair market value of such assets or proceeds as determined by an independent
appraisal firm with experience in the valuation of the classes and types of
assets in question; provided that the fair market value of the assets purchased
in an arms'-length transaction by an Affiliate of the Company (other than a
Subsidiary) from a third party that is not also an Affiliate of the Company or
of such purchaser and contributed to the Company within five Business Days of
the consummation of the acquisition of such assets by such Affiliate shall be
deemed to be the aggregate consideration paid by such Affiliate (which may
include the fair market value of any non-cash consideration to the extent that
the valuation requirements of this definition are complied with as to any such
non-cash consideration).
"GAAP" means generally accepted accounting principles set
forth in the opinions and pronouncements of the Accounting Principles Board of
the American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the Closing Date.
"Global Shares" has the meaning set forth in Section 14(a)
below.
"Global Share Holder" has the meaning set forth in Section
14(a) below.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, co-borrowing
arrangements, letters of credit and reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
6
<PAGE>
"Holder" means the record holder of one or more shares of
Series A Preferred Stock, as shown on the books and records of the Transfer
Agent.
"incur" has the meaning set forth in Section 8(b) below.
"Indebtedness" means, with respect to any Person, any
indebtedness of such Person, whether or not contingent, in respect of borrowed
money or evidenced by bonds, notes, debentures or similar instruments or letters
of credit (or reimbursement agreements in respect thereof) or banker's
acceptances or representing any Capital Lease Obligations or the balance
deferred and unpaid of the purchase price of any property or representing any
Hedging Obligations, except any such balance that constitutes an accrued expense
or trade payable, if and to the extent any of the foregoing indebtedness (other
than letters of credit and Hedging Obligations) would appear as a liability upon
a balance sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether or
not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person. The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided
that the amount outstanding at any time of any Indebtedness issued with original
issue discount is the full amount of such Indebtedness less the remaining
unamortized portion of the original issue discount of such Indebtedness at such
time as determined in conformity with GAAP.
"Indebtedness to Adjusted Operating Cash Flow Ratio" means, as
of any date of determination, the ratio of (a) the aggregate principal amount of
all outstanding Indebtedness of a Person and its Restricted Subsidiaries as of
such date on a consolidated basis, plus the aggregate liquidation preference of
all outstanding preferred stock (other than Qualified Subsidiary Stock) of the
Restricted Subsidiaries of such Person as of such date (excluding any such
preferred stock held by such Person or a Wholly Owned Restricted Subsidiary of
such Person), plus the aggregate liquidation preference or redemption amount of
all Disqualified Stock of such Person (excluding any Disqualified Stock held by
such Person or a Wholly Owned Restricted Subsidiary of such Person) as of such
date to (b) Adjusted Operating Cash Flow of such Person and its Restricted
Subsidiaries for the most recent four-quarter period for which internal
financial statements are available determined on a pro forma basis after giving
effect to all acquisitions and dispositions of assets (notwithstanding clause
(ii) of the definition of "Consolidated Net Income") (including, without
limitation, Asset Swaps) made by such Person and its Restricted Subsidiaries
since the beginning of such four-quarter period through such date as if such
acquisitions and dispositions had occurred at the beginning of such four-quarter
period.
"Independent Director" means a member of the Board of
Directors who is neither an officer nor an employee of the Company or any of its
Affiliates.
"Investments" means, with respect to any Person, all
investments by such Person in other Persons (including Affiliates) in the forms
of direct or indirect loans (including Guarantees of Indebtedness or other
obligations), advances or capital contributions (excluding commission, travel
and similar advances to officers and employees made in the ordinary course of
business), purchases or other acquisitions for consideration of Indebtedness,
Equity Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration
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consisting of common equity securities, or preferred stock which is not
Disqualified Stock, of the Company shall not be deemed to be an Investment.
"Junior Securities" has the meaning set forth in Section 2(c)
below.
"Legal Holiday" means a Saturday, a Sunday or a day on which
banking institutions in the City of New York or at a place of payment are
authorized by law, regulation or executive order to remain closed.
"Lien" means, with respect to any asset, any mortgage, lien,
pledge, charge, security interest or encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including any conditional sale or other title retention agreement, any
lease in the nature thereof, any option or other agreement to sell or give a
security interest in and any filing of or agreement to give any financing
statement under the Uniform Commercial Code (or equivalent statutes) of any
jurisdiction).
"Liquidation Preference" means $1,000 per share of Series A
Preferred Stock.
"Mandatory Redemption Date" has the meaning set forth in
Section 4(a) below.
"Net Income" means, with respect to any Person, the net income
(loss) of such Person, determined in accordance with GAAP and before any
reduction in respect of preferred stock dividends, excluding, however, (i) any
gain (but not loss), together with any related provision for taxes on such gain
(but not loss), realized in connection with (a) any Asset Sale (including,
without limitation, dispositions pursuant to sale and leaseback transactions) or
(b) the disposition of any securities by such Person or any of its Restricted
Subsidiaries or the extinguishment of any Indebtedness of such Person or any of
its Restricted Subsidiaries and (ii) any extraordinary or nonrecurring gain (but
not loss), together with any related provision for taxes on such extraordinary
or nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by
the Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting, investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness in connection with such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
"Non-Cash Incentive Compensation" means incentive compensation
paid to any officer, employee or director of the Company or any of its
Subsidiaries in the form of Class A Common Stock of the Company or options to
purchase Class A Common Stock of the Company pursuant to the Pegasus
Communications Restricted Stock Plan and the Pegasus Communications 1996 Stock
Option Plan.
"Non-Recourse Debt" means Indebtedness (i) as to which neither
the Company nor any of its Restricted Subsidiaries (a) provides credit support
of any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a
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guarantor or otherwise) or (c) constitutes the lender; and (ii) no default with
respect to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of
the Board, the Chief Executive Officer, the President, the Chief Operating
Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer,
the Controller, the Secretary, any Assistant Secretary or any Vice-President of
such Person.
"Officers' Certificate" means a certificate signed on behalf
of the Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements of
Section 10 hereof.
"Operating Cash Flow" means, with respect to any Person for
any period, the Consolidated Net Income of such Person for such period, (a) plus
(i) extraordinary net losses and net losses on sales of assets outside the
ordinary course of business during such period, to the extent such losses were
deducted in computing such Consolidated Net Income, plus (ii) provision for
taxes based on income or profits, to the extent such provision for taxes was
included in computing such Consolidated Net Income, and any provision for taxes
utilized in computing the net losses under clause (i) hereof, plus (iii)
consolidated interest expense of such Person and its Subsidiaries for such
period, whether paid or accrued and whether or not capitalized (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), to the extent that any such expense was deducted in
computing such Consolidated Net Income, plus (iv) depreciation, amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) and
other non-cash charges (excluding any such non-cash charge to the extent that it
represents an accrual of or reserve for cash charges in any future period or
amortization of a prepaid cash expense that was paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation, amortization and other non-cash charges were deducted in computing
such Consolidated Net Income, plus (v) Non-Cash Incentive Compensation to the
extent such compensation expense was deducted in computing such Consolidated Net
Income and to the extent not included in clause (iv) of this definition and (b)
less all non-cash income for such period (excluding any such non-cash income to
the extent it represents an accrual of cash income in any future period or
amortization of cash income received in a prior period).
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"Parity Securities" means any class or series of Capital Stock
of the Company of the Company ranking on a parity with the Series A Preferred
Stock.
"Paying Agent" has the meaning set forth in Section 9(c)
below.
"Payment Default" has the meaning set forth in Section 6(b)
below.
"Permitted Businesses" means (a) any media or communications
business, including but not limited to, any broadcast television station, cable
franchise or other business in the television broadcasting, cable or
direct-to-home satellite television industries and (b) any business reasonably
related or ancillary to any of the foregoing businesses.
"Permitted Investments" means (a) any Investments in the
Company or in a Wholly Owned Restricted Subsidiary of the Company; (b) any
Investments in Cash Equivalents; (c) Investments by the Company or any
Restricted Subsidiary of the Company in a Person, if as a result of such
Investment (i) such Person becomes a Wholly Owned Restricted Subsidiary of the
Company or (ii) such Person is merged, consolidated or amalgamated with or into,
or transfers or conveys substantially all of its assets to, or is liquidated
into, the Company or a Wholly Owned Restricted Subsidiary of the Company; and
(d) other Investments (measured as of the time made and without giving effect to
subsequent changes in value) that do not exceed an amount equal to $5.0 million
plus, to the extent any such Investments are sold for cash or are otherwise
liquidated or repaid for cash, any gains less any losses realized on the
disposition of such Investments.
"Permitted Refinancing Debt" means any Indebtedness of the
Company or any of its Restricted Subsidiaries issued in exchange for, or the net
proceeds of which are used to extend, refinance, renew, replace, defease or
refund other Indebtedness of the Company or any of its Restricted Subsidiaries;
provided that (i) the principal amount of such Permitted Refinancing Debt does
not exceed the principal amount of the Indebtedness so extended, refinanced,
renewed, replaced, defeased or refunded (plus (a) the amount of reasonable
expenses incurred in connection therewith and (b) the amount of any premium
required to be paid in connection with such refinancing pursuant to the terms of
such refinancing or deemed by the Company or such Restricted Subsidiary
necessary to be paid in order to effectuate such refinancing); (ii) such
Permitted Refinancing Debt has a final maturity date not earlier than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
would, if the Exchange Notes were outstanding at such time, be subordinated in
right of payment to the Exchange Notes, such Permitted Refinancing Debt has a
final maturity date later than _________, 2007 and would, if the Exchange Notes
were outstanding at such time, be subordinated in right of payment to the
Exchange Notes on terms at least as favorable to the holders of such Exchange
Notes as those contained in the documentation governing the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; and (iv) such
Indebtedness is incurred either by the Company or by the Restricted Subsidiary
who is the obligor on the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision
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thereof (including any subdivision or ongoing business of any such entity or
substantially all of the assets of any such entity, subdivision or business).
"Principal" means Marshall W. Pagon.
"Qualified Subsidiary Stock" means Capital Stock of a
Subsidiary of the Company which by its terms (a) does not mature, or is not
mandatorily redeemable, pursuant to a sinking fund obligation or otherwise and
is not redeemable at the option of the holder thereof, in whole or in part,
prior to __________, 2008 (in each case, whether automatically or upon the
happening of any event) (unless, in any such case, the issuer's obligation to
pay, purchase or redeem such Capital Stock is expressly conditioned on its
ability to do so in compliance with the provisions of Section 8(a) hereof), (b)
is automatically exchangeable into shares of Capital Stock of the Company that
is not Disqualified Stock upon the earlier to occur of (i) the occurrence of a
Voting Rights Triggering Event and (ii) __________, 2006, (c) has no voting or
remedial rights and (d) does not permit the payment of cash dividends prior to
__________, 2007 (unless, in the case of this clause (d), the issuer's ability
to pay cash dividends is expressly conditioned on its ability to do so in
compliance with the provisions of Section 8(a) hereof).
"Record Date" has the meaning set forth in Section 2(a) below.
"Redemption Date" has the meaning set forth in Section 4(d)
below.
"reduction or decrease in capital stock" has the meaning set
forth in Section 3 below.
"Related Party" with respect to the Principal means (A) any
immediate family member of the Principal or (B) any trust, corporation,
partnership or other entity, more than 50% of the voting equity interests of
which are owned directly or indirectly by, and which is controlled by, the
Principal and/or such other Persons referred to in the immediately preceding
clause (A). For purposes of this definition, (i) "immediate family member" means
spouse, parent, step-parent, child, sibling or step-sibling and (ii) "control"
has the meaning specified in the definition of "Affiliate." In addition, the
Principal's estate shall be deemed to be a Related Party until such time as such
estate is distributed in accordance with the Principal's will or applicable
state law.
"Restricted Investment" means an Investment other than a
Permitted Investment.
"Restricted Payment" has the meaning set forth in Section 8(a)
below.
"Restricted Subsidiary" of a Person means any Subsidiary of
the referent Person that is not an Unrestricted Subsidiary.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Securities" means any class or series of capital stock
of the Company ranking senior to the Series A Preferred Stock.
"Separation Date" means the earlier to occur of (i) April 3,
1997 and (ii) in the event of a Change of Control, the date the Company mails
notice thereof.
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"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the Closing Date.
"Split Dollar Agreement" means the Split Dollar Agreement
between the Company and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan,
as trustees of an insurance trust established by Marshall W. Pagon, as in effect
on the Closing Date.
"Subsidiary" means, with respect to any Person, (i) any
corporation, association or other business entity of which more than 50% of the
total voting power of shares of Capital Stock entitled (without regard to the
occurrence of any contingency) to vote in the election of directors, managers or
trustees thereof is at the time owned or controlled, directly or indirectly, by
such Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof).
"Total Interest Expense" means, with respect to any Person for
any period, the sum of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations) and (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
to the extent such amounts are not included in clause (i) of this definition,
and (iii) any interest expense for such period on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets (other than Equity Interests in Unrestricted
Subsidiaries securing Indebtedness of Unrestricted Subsidiaries) of such Person
or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) all cash and non-cash dividend payments during such period
on any series of preferred stock of a Restricted Subsidiary of such Person.
"Transfer Agent" means the entity designated from time to time
by the Company to act as the registrar and transfer agent for the Series A
Preferred Stock.
"Trust Indenture Act" means the Trust Indenture Act of 1939,
as amended.
"Unrestricted Subsidiary" means any Subsidiary that is
designated by the Board of Directors as an Unrestricted Subsidiary pursuant to a
Board Resolution; but only to the extent that such Subsidiary (a) has no
Indebtedness other than Non-Recourse Debt; (b) is not party to any agreement,
contract, arrangement or understanding with the Company or any Restricted
Subsidiary of the Company unless the terms of any such agreement, contract,
arrangement or understanding are no less favorable to the Company or such
Restricted Subsidiary than those that might be obtained at the time from Persons
who are not Affiliates of the Company; (c) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; (d) has not guaranteed or
otherwise directly or
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indirectly provided credit support for any Indebtedness of the Company or any of
its Restricted Subsidiaries; and (e) has at least one executive officer that is
not a director or executive officer of the Company or any of its Restricted
Subsidiaries. If, at any time, any Unrestricted Subsidiary would fail to meet
the foregoing requirements as an Unrestricted Subsidiary, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of this Certificate of
Designation and any Indebtedness of such Subsidiary shall be deemed to be
incurred by a Restricted Subsidiary of the Company as of such date (and, if such
Indebtedness is not permitted to be incurred as of such date under the
provisions of Section 8(b)(i) hereof (treating such Subsidiary as a Restricted
Subsidiary for such purpose for the period relevant to such covenant set forth
in Section 8(b)(i) hereof), the Company shall be in default of such covenant);
provided, however, that in the event an Unrestricted Subsidiary ceases to meet
the requirement set forth in clause (e) of this definition, such Unrestricted
Subsidiary shall have 60 days to meet such requirement before such Unrestricted
Subsidiary shall cease to be an Unrestricted Subsidiary. The Board of Directors
may at any time designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided that such designation shall be deemed to be an incurrence
of Indebtedness by a Restricted Subsidiary of the Company of any outstanding
Indebtedness of such Unrestricted Subsidiary and such designation shall be
permitted only if (i) such Indebtedness is permitted under Section 8(b)(i)
hereof (treating such Subsidiary as a Restricted Subsidiary for such purpose for
the period relevant to such covenant set forth in Section 8(b)(i) hereof) and
(ii) no Voting Rights Triggering Event would be in existence following such
designation.
"Voting Stock" means with respect to any specified Person,
Capital Stock with voting power, under ordinary circumstances and without regard
to the occurrence of any contingency, to elect the directors or other managers
or trustees of such Person.
"Voting Rights Triggering Event" has the meaning set forth in
Section 6(b) below.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a
Restricted Subsidiary of such Person all of the outstanding Capital Stock (other
than Qualified Subsidiary Stock) or other ownership interests of which (other
than directors' qualifying shares) shall at the time be owned by such Person
and/or by one or more Wholly Owned Restricted Subsidiaries of such Person.
2. Dividends.
(a) The Holders of shares of the Series A Preferred Stock
shall be entitled to receive, when, as and if dividends are declared by the
Board of Directors out of funds of the Company legally available therefor,
cumulative preferential dividends from the issue date of the Series A Preferred
Stock accruing at the rate per share of $ _____ per annum, payable semi-annually
in arrears on each ___________ and ____________ or, if any such date is not a
Business Day, on the next succeeding Business Day (each, a "Dividend Payment
Date"), to the Holders of record as of the next preceding __________ and
____________ (each, a "Record Date"). Dividends shall be payable in cash, except
that
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on each Dividend Payment Date occurring on or prior to ___________, 2002,
dividends may be paid, at the Company's option, by the issuance of additional
shares of Series A Preferred Stock (including fractional shares) having an
aggregate Liquidation Preference equal to the amount of such dividends. The
issuance of such additional shares of Series A Preferred Stock shall constitute
"payment" of the related dividend for all purposes of this Certificate of
Designation. The first dividend payment of $_______ per share of Series A
Preferred Stock shall be payable on _________, 1997. Dividends payable on the
Series A Preferred Stock shall be computed on the basis of a 360-day year
consisting of twelve 30-day months and shall be deemed to accumulate on a daily
basis.
(b) Dividends on the Series A Preferred Stock shall accumulate
whether or not the Company has earnings or profits, whether or not there are
funds legally available for the payment of such dividends and whether or not
dividends are declared. Dividends shall accumulate to the extent they are not
paid on the Dividend Payment Date for the period to which they relate.
Accumulated unpaid dividends shall bear interest at a per annum rate 200 basis
points in excess of the annual dividend rate on the Series A Preferred Stock.
The Company shall take all actions required or permitted under the Delaware
General Corporation Law (the "DGCL") to permit the payment of dividends on the
Series A Preferred Stock, including, without limitation, through the revaluation
of its assets in accordance with the DGCL, to make or keep funds legally
available for the payment of dividends.
(c) No dividend whatsoever shall be declared or paid upon, or
any sum set apart for the payment of dividends upon, any outstanding share of
the Series A Preferred Stock with respect to any dividend period unless all
dividends for all preceding dividend periods have been declared and paid, or
declared and a sufficient sum set apart for the payment of such dividend, upon
all outstanding shares of Series A Preferred Stock. Unless full cumulative
dividends on all outstanding shares of Series A Preferred Stock for all past
dividend periods shall have been declared and paid, or declared and a sufficient
sum for the payment thereof set apart, then: (i) no dividend (other than a
dividend payable solely in shares of any class of stock ranking junior to the
Series A Preferred Stock as to the payment of dividends and as to rights in
liquidation, dissolution or winding up of the affairs of the Company ("Junior
Securities") shall be declared or paid upon, or any sum set apart for the
payment of dividends upon, any shares of Junior Securities; (ii) no other
distribution shall be declared or made upon, or any sum set apart for the
payment of any distribution upon, any shares of Junior Securities, other than a
distribution consisting solely of Junior Securities; (iii) no shares of Junior
Securities shall be purchased, redeemed or otherwise acquired or retired for
value (excluding an exchange for shares of other Junior Securities) by the
Company or any of its Subsidiaries; and (iv) no monies shall be paid into or set
apart or made available for a sinking or other like fund for the purchase,
redemption or other acquisition or retirement for value of any shares of Junior
Securities by the Company or any of its Subsidiaries. Holders of the Series A
Preferred Stock shall not be entitled to any dividends, whether payable in cash,
property or stock, in excess of the full cumulative dividends as herein
described.
3. Distributions Upon Liquidation, Dissolution or Winding Up.
Upon any voluntary or involuntary liquidation, dissolution or winding
up of the affairs of the Company or reduction or decrease in its capital stock
resulting in a distribution of assets to the holders of any class or series of
the Company's capital stock (a "reduction or decrease in capital stock"), each
Holder of shares of the Series A Preferred Stock shall be entitled to payment
out of the assets of the Company available for distribution of an amount equal
to the Liquidation Preference per share of Series A Preferred Stock held by such
Holder, plus accumulated and unpaid dividends, if any, to the date fixed
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for liquidation, dissolution, winding up or reduction or decrease in capital
stock, before any distribution is made on any Junior Securities, including,
without limitation, common stock of the Company. After payment in full of the
Liquidation Preference and all accumulated dividends, if any, to which Holders
of Series A Preferred Stock are entitled, such Holders shall not be entitled to
any further participation in any distribution of assets of the Company. However,
neither the voluntary sale, conveyance, exchange or transfer (for cash, shares
of stock, securities or other consideration) of all or substantially all of the
property or assets of the Company nor the consolidation or merger of the Company
with or into one or more corporations shall be deemed to be a voluntary or
involuntary liquidation, dissolution or winding up of the Company or reduction
or decrease in capital stock, unless such sale, conveyance, exchange or transfer
shall be in connection with a liquidation, dissolution or winding up of the
business of the Company or reduction or decrease in capital stock.
4. Redemption by the Company
(a) On ________, 2007 (the "Mandatory Redemption Date"), the
Company shall be required to redeem (subject to the legal availability of funds
therefor) all outstanding shares of Series A Preferred Stock at a price in cash
equal to the Liquidation Preference thereof, plus accumulated and unpaid
dividends, if any, to the date of redemption. The Company shall not be required
to make sinking fund payments with respect to the Series A Preferred Stock. The
Company shall take all actions required or permitted under the DGCL to permit
such redemption.
(b) The Series A Preferred Stock may not be redeemed at the
option of the Company on or prior to _________, 2002. The Series A Preferred
Stock may be redeemed, in whole or in part, at the option of the Company on or
after _______, 2002, at the Applicable Redemption Price. Notwithstanding the
foregoing sentence, during the first 36 months after the Closing Date, the
Company may, on any one or more occasions, use the net proceeds of one or more
offerings of its Class A Common Stock to redeem up to 25% of the shares of
Series A Preferred Stock then outstanding (whether initially issued or issued in
lieu of cash dividends) at a redemption price of 110% of the Liquidation
Preference thereof plus, without duplication, accumulated and unpaid dividends
to the date of redemption; provided that, after any such redemption, at least
$75.0 million in aggregate Liquidation Preference of Series A Preferred Stock
remains outstanding; and provided further, that any such redemption shall occur
within 90 days of the date of closing of such offering of Class A Common Stock
of the Company.
(c) In case of redemption of less than all of the shares of
Series A Preferred Stock at the time outstanding, the shares to be redeemed
shall be selected pro rata or by lot as determined by the Company in its sole
discretion.
(d) Notice of any redemption shall be sent by or on behalf of
the Company not less than 30 nor more than 60 days prior to the date specified
for redemption in such notice (including the Mandatory Redemption Date, the
"Redemption Date"), by first class mail, postage prepaid, to all Holders of
record of the Series A Preferred Stock at their last addresses as they shall
appear on the books of the Company; provided, however, that no failure to give
such notice or any defect therein or in the mailing thereof shall affect the
validity of the proceedings for the redemption of any shares of Series A
Preferred Stock except as to the Holder to whom the Company has failed to give
notice or except as to the Holder to whom notice was defective. In addition to
any information required by law or by the applicable rules of any exchange upon
which Series A Preferred Stock may be listed or admitted to trading, such notice
shall state: (i) whether such redemption is being made pursuant to the optional
or the mandatory
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redemption provisions hereof; (ii) the Redemption Date; (iii) the Applicable
Redemption Price; (iv) the number of shares of Series A Preferred Stock to be
redeemed and, if less than all shares held by such Holder are to be redeemed,
the number of such shares to be redeemed; (v) the place or places where
certificates for such shares are to be surrendered for payment of the Applicable
Redemption Price, including any procedures applicable to redemptions to be
accomplished through book-entry transfers; and (vi) that dividends on the shares
to be redeemed will cease to accumulate on the Redemption Date. Upon the mailing
of any such notice of redemption, the Company shall become obligated to redeem
at the time of redemption specified thereon all shares called for redemption.
(e) If notice has been mailed in accordance with Section 4(d)
above and provided that on or before the Redemption Date specified in such
notice, all funds necessary for such redemption shall have been set aside by the
Company, separate and apart from its other funds in trust for the pro rata
benefit of the Holders of the shares so called for redemption, so as to be, and
to continue to be available therefor, then, from and after the Redemption Date,
dividends on the shares of the Series A Preferred Stock so called for redemption
shall cease to accumulate, and said shares shall no longer be deemed to be
outstanding and shall not have the status of shares of Series A Preferred Stock,
and all rights of the Holders thereof as stockholders of the Company (except the
right to receive from the Company the Applicable Redemption Price) shall cease.
Upon surrender, in accordance with said notice, of the certificates for any
shares so redeemed (properly endorsed or assigned for transfer, if the Company
shall so require and the notice shall so state), such shares shall be redeemed
by the Company at the Applicable Redemption Price. In case fewer than all the
shares represented by any such certificate are redeemed, a new certificate or
certificates shall be issued representing the unredeemed shares without cost to
the Holder thereof.
(f) Any funds deposited with a bank or trust company for the
purpose of redeeming Series A Preferred Stock shall be irrevocable except that:
(i) the Company shall be entitled to receive from
such bank or trust company the interest or other earnings, if any,
earned on any money so deposited in trust, and the Holders of any
shares redeemed shall have no claim to such interest or other earnings;
and
(ii) any balance of monies so deposited by the
Company and unclaimed by the Holders of the Series A Preferred Stock
entitled thereto at the expiration of two years from the applicable
Redemption Date shall be repaid, together with any interest or other
earnings earned thereon, to the Company, and after any such repayment,
the Holders of the shares entitled to the funds so repaid to the
Company shall look only to the Company for payment without interest or
other earnings.
(g) No Series A Preferred Stock may be redeemed except with
funds legally available for the purpose. The Company shall take all actions
required or permitted under the DGCL to permit any such redemption.
(h) Notwithstanding the foregoing provisions of this Section
4, unless the full cumulative dividends on all outstanding shares of Series A
Preferred Stock shall have been paid or contemporaneously are declared and paid
for all past dividend periods, none of the shares of Series A Preferred Stock
shall be redeemed unless all outstanding shares of Series A Preferred Stock are
simultaneously redeemed.
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(i) All shares of Series A Preferred Stock redeemed pursuant
to this Section 4 shall be restored to the status of authorized and unissued
shares of preferred stock, without designation as to series and may thereafter
be reissued as shares of any series of preferred stock other than shares of
Series A Preferred Stock.
5. Exchange.
(a) The Company may, at its option, on any Dividend Payment
Date occurring after the Separation Date, exchange, in whole, but not in part,
the then outstanding shares of Series A Preferred Stock for Exchange Notes;
provided, that (i) on the date of such exchange there are no accumulated and
unpaid dividends on the Series A Preferred Stock (including the dividend payable
on such date) or other contractual impediments to such exchange; (ii) there
shall be legally available funds sufficient therefor; (iii) no Voting Rights
Triggering Event has occurred and is continuing at the time of such exchange;
(iv) immediately after giving effect to such exchange, no Default or Event of
Default (each as defined in the Exchange Note Indenture) would exist under the
Exchange Note Indenture and no default or event of default would exist under any
material instrument governing Indebtedness outstanding at the time, in either
case, would be caused thereby; (v) the Exchange Note Indenture has been
qualified under the Trust Indenture Act, if such qualification is required at
the time of exchange; and (vi) the Company shall have delivered a written
opinion to the Exchange Note Trustee to the effect that all conditions to be
satisfied prior to such exchange have been satisfied.
(b) The Exchange Notes shall be issuable in principal amounts
of $1,000 and integral multiples thereof to the extent possible, and shall also
be issuable in principal amounts less than $1,000 so that each Holder of Series
A Preferred Stock will receive certificates representing the entire amount of
Exchange Notes to which such Holder's shares of Series A Preferred Stock entitle
such Holder; provided that the Company may pay cash in lieu of issuing an
Exchange Note having a principal amount less than $1,000. Notice of the
intention to exchange shall be sent by or on behalf of the Company not more than
60 days nor less than 30 days prior to the date fixed for the exchange (the
"Exchange Date"), by first class mail, postage prepaid, to each Holder of record
of Series A Preferred Stock at its registered address. In addition to any
information required by law or by the applicable rules of any exchange upon
which the Series A Preferred Stock may be listed or admitted to trading, such
notice shall state: (i) the Exchange Date; (ii) the place or places where
certificates for such shares are to be surrendered for exchange, including any
procedures applicable to exchanges to be accomplished through book-entry
transfers; and (iii) that dividends on the shares of Series A Preferred Stock to
be exchanged will cease to accumulate on the Exchange Date.
(c) A Holder delivering Series A Preferred Stock for exchange
shall not be required to pay any taxes or duties in respect of the issue or
delivery of Exchange Notes on exchange but shall be required to pay any tax or
duty that may be payable in respect of any transfer involved in the issue or
delivery of the Exchange Notes in a name other than that of the Holder of the
Series A Preferred Stock. Certificates representing Exchange Notes shall not be
issued or delivered unless all taxes and duties, if any, payable by the Holder
have been paid.
(d) If notice of any exchange has been properly given, and if
on or before the Exchange Date the Exchange Notes have been duly executed and
authenticated and an amount in cash or additional shares of Series A Preferred
Stock (as applicable) equal to all accumulated and unpaid dividends, if any,
thereon to the Exchange Date has been deposited with the Transfer Agent, then on
and
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after the close of business on the Exchange Date, the shares of Series A
Preferred Stock to be exchanged shall no longer be deemed to be outstanding and
may thereafter be issued in the same manner as the other authorized but unissued
preferred stock, but not as Series A Preferred Stock, and all rights of the
Holders thereof as stockholders of the Company shall cease, except the right of
the Holders to receive upon surrender of their certificates the Exchange Notes
and all accumulated and unpaid dividends, if any, thereon to the Exchange Date.
(e) As a condition to the exercise of the exchange rights
described in this Section 5, the Company shall deliver an opinion to the
Exchange Note Trustee as to the due authorization, execution, delivery and
enforceability of both the Exchange Notes and the Exchange Note Indenture and as
to the compliance by the Company with the provisions hereof.
6. Voting Rights.
(a) The Holders of record of shares of the Series A Preferred
Stock shall have no voting rights, except as required by law and as hereinafter
provided in this Section 6.
(b) Upon:
(i) the accumulation of accumulated and unpaid
dividends on the outstanding Series A Preferred Stock in an amount
equal to three (3) full semi-annual dividends (whether or not
consecutive);
(ii) the failure of the Company to satisfy any
mandatory redemption or repurchase obligation (including, without
limitation, pursuant to any required Change of Control Offer) with
respect to the Series A Preferred Stock;
(iii) the failure of the Company to make a Change of
Control Offer on the terms and in accordance with the provisions
described below in Section 7 hereof;
(iv) the failure of the Company to comply with any of
the other covenants or agreements set forth in this Certificate of
Designation and the continuance of such failure for 60 consecutive days
or more; or
(v) default under any mortgage, indenture or
instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company
or any of its Subsidiaries (or the payment of which is guaranteed by
the Company or any of its Subsidiaries) whether such Indebtedness or
Guarantee now exists, or is created after the Closing Date, which
default (1) is caused by a failure to pay principal of or premium, if
any, or interest on such Indebtedness prior to the expiration of the
grace period provided in such Indebtedness on the date of such default
(a "Payment Default") or (2) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the
principal amount of any such Indebtedness, together with the principal
amount of any other such Indebtedness under which there has been a
Payment Default or the maturity of which has been so accelerated,
aggregates $5.0 million or more (each of the events described in
clauses (i), (ii), (iii), (iv) and (v) being referred to herein as a
"Voting Rights Triggering Event");
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then the number of members of the Company's Board of Directors shall be
immediately and automatically increased by two, and the Holders of a majority of
the outstanding shares of Series A Preferred Stock, voting as a separate class,
shall be entitled to elect two members to the Board of Directors of the Company.
(c) Whenever such voting right shall have vested, such right
may be exercised initially either at a special meeting of the Holders of Series
A Preferred Stock, called as hereinafter provided, or at any annual meeting of
stockholders held for the purpose of electing directors, and thereafter at such
annual meetings or by the written consent of the Holders of Series A Preferred
Stock. Such right of the Holders of Series A Preferred Stock to elect directors
may be exercised until (i) all dividends in arrears shall have been paid in full
and (ii) all other Voting Rights Triggering Events have been cured or waived, at
which time the right of the Holders of Series A Preferred Stock to elect such
number of directors shall cease, the term of such directors previously elected
shall thereupon terminate, and the authorized number of directors of the Company
shall thereupon return to the number of authorized directors otherwise in
effect, but subject always to the same provisions for the renewal and divestment
of such special voting rights in the case of any such future dividend arrearage
or defaults or any such failure to make redemption payments.
(d) At any time when such voting right shall have vested in
the Holders of Series A Preferred Stock and if such right shall not already have
been initially exercised, a proper officer of the Company shall, upon the
written request of Holders of record of 10% or more of the Series A Preferred
Stock then outstanding, addressed to the Secretary of the Company, call a
special meeting of Holders of Series A Preferred Stock. Such meeting shall be
held at the earliest practicable date upon the notice required for annual
meetings of stockholders at the place for holding annual meetings of
stockholders of the Company or, if none, at a place designated by the Secretary
of the Company. If such meeting shall not be called by the proper officers of
the Company within 30 days after the personal service of such written request
upon the Secretary of the Company, or within 30 days after mailing the same
within the United States, by registered mail, addressed to the Secretary of the
Company at its principal office (such mailing to be evidenced by the registry
receipt issued by the postal authorities), then the Holders of record of 10% of
the shares of Series A Preferred Stock then outstanding may designate in writing
a Holder of Series A Preferred Stock to call such meeting at the expense of the
Company, and such meeting may be called by such person so designated upon the
notice required for annual meetings of stockholders and shall be held at the
place for holding annual meetings of the Company or, if none, at a place
designated by such Holder. Any Holder of Series A Preferred Stock that would be
entitled to vote at such meeting shall have access to the stock books of the
Company for the purpose of causing a meeting of stockholders to be called
pursuant to the provisions of this Section. Notwithstanding the provisions of
this paragraph, however, no such special meeting shall be called if any such
request is received less than 90 days before the date fixed for the next ensuing
annual or special meeting of stockholders.
(e) If any director so elected by the Holders of Series A
Preferred Stock shall cease to serve as a director before his term shall expire,
the Holders of Series A Preferred Stock then outstanding may, at a special
meeting of the Holders called as provided above, elect a successor to hold
office for the unexpired term of the director whose place shall be vacant.
(f) The Company shall not, without the affirmative vote or
consent of the Holders of a majority of the shares of Series A Preferred Stock
then outstanding (with shares held by the Company or any of its Affiliates not
being considered to be outstanding for this purpose):
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(i) authorize, create (by way of reclassification or
otherwise) or issue any Parity Securities or any Obligation or security
convertible into or evidencing the right to purchase any Parity
Securities;
(ii) amend or otherwise alter its Certificate of
Incorporation in any manner that adversely affects the rights of
Holders of Series A Preferred Stock;
(iii) amend or otherwise alter this Certificate of
Designation (including the provisions of Section 7 hereof) in any
manner; or
(iv) waive any existing Voting Rights Triggering
Event or compliance with any provision of this Certificate of
Designation.
(g) Without the consent of each Holder affected, an amendment
or waiver of the Company's Certificate of Incorporation or of this Certificate
of Designation may not (with respect to any shares of Series A Preferred Stock
held by a non-consenting Holder):
(i) alter the voting rights with respect to the
Series A Preferred Stock or reduce the number of shares of Series A
Preferred Stock whose Holders must consent to an amendment, supplement
or waiver;
(ii) reduce the Liquidation Preference of or change
the Mandatory Redemption Date of any share of Series A Preferred Stock
or alter the provisions with respect to the redemption of the Series A
Preferred Stock (except as provided above with respect to Section 7
hereof);
(iii) reduce the rate of or change the time for
payment of dividends on any share of Series A Preferred Stock;
(iv) waive the consequences of any failure to pay
dividends on the Series A Preferred Stock;
(v) make any share of Series A Preferred Stock
payable in any form other than that stated in this Certificate of
Designation;
(vi) make any change in the provisions of this
Certificate of Designation relating to waivers of the rights of Holders
of Series A Preferred Stock to receive the Liquidation Preference and
dividends on the Series A Preferred Stock;
(vii) waive a redemption payment with respect to any
share of Series A Preferred Stock (except as provided above with
respect to Section 7 hereof); or
(viii) make any change in the foregoing amendment and
waiver provisions.
(h) The Company shall not, without the consent of at least
two-thirds of the then outstanding shares of Series A Preferred Stock (with
shares held by the Company or its Affiliates not being considered to be
outstanding for this purpose), authorize, create (by way of reclassification or
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otherwise) or issue any Senior Securities or any Obligation or security
convertible into or evidencing a right to purchase any Senior Securities.
(i) The Company in its sole discretion may without the vote or
consent of any Holders of the Series A Preferred Stock amend or supplement this
Certificate of Designation:
(i) to cure any ambiguity, defect or inconsistency;
(ii) to provide for uncertificated Series A Preferred
Stock in addition to or in place of certificated Series A Preferred
Stock; or
(iii) to make any change that would provide any
additional rights or benefits to the Holders of the Series A Preferred
Stock or that does not adversely affect the legal rights under this
Certificate of Designation of any such Holder.
7. Change of Control.
(a) Upon the occurrence of a Change of Control, each Holder of
shares of Series A Preferred Stock shall have the right to require the Company
to repurchase all or any part (but not, in the case of any Holder requiring the
Company to purchase less than all of the shares of Series A Preferred Stock held
by such Holder, any fractional shares) of such Holder's Series A Preferred Stock
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate Liquidation Preference
thereof plus accumulated and unpaid dividends, if any, thereon to the date of
purchase (the "Change of Control Payment").
(b) The Change of Control Offer shall include all instructions
and materials necessary to enable Holders to tender their shares of Series A
Preferred Stock.
(c) The Company shall comply with the requirements of Rule
14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Series A Preferred Stock as a result of a Change of
Control.
(d) Within 30 days following any Change of Control, the
Company shall mail a notice to each Holder stating:
(i) that the Change of Control Offer is being made
pursuant to this Section 7 and that all shares of Series A Preferred
Stock tendered will be accepted for payment;
(ii) the purchase price and the purchase date, which
shall be no earlier than 30 days nor later than 60 days from the date
such notice is mailed (the "Change of Control Payment Date");
(iii) that any share of Series A Preferred Stock not
tendered will continue to accumulate dividends;
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(iv) that, unless the Company fails to pay the Change
of Control Payment, all shares of Series A Preferred Stock accepted for
payment pursuant to the Change of Control Offer shall cease to
accumulate dividends after the Change of Control Payment Date;
(v) that Holders electing to have any shares of
Series A Preferred Stock purchased pursuant to a Change of Control
Offer will be required to surrender the shares of Series A Preferred
Stock, with the form entitled "Option of Holder to Elect Purchase"
which shall be included with the Notice of Change of Control completed,
to the Paying Agent at the address specified in the notice prior to the
close of business on the third Business Day preceding the Change of
Control Payment Date;
(vi) that Holders will be entitled to withdraw their
election if the Paying Agent receives, not later than the close of
business on the second Business Day preceding the Change of Control
Payment Date, a telegram, telex, facsimile transmission or letter
setting forth the name of the Holder, the number of shares of Series A
Preferred Stock delivered for purchase, and a statement that such
Holder is withdrawing his election to have such shares purchased; and
(vii) the circumstances and relevant facts regarding
such Change of Control (including, but not limited to, information with
respect to pro forma historical financial information after giving
effect to such Change of Control and information regarding the Person
or Persons acquiring control).
(e) On the Change of Control Payment Date, the Company shall,
to the extent lawful, (i) accept for payment all shares of Series A Preferred
Stock or portions thereof properly tendered pursuant to the Change of Control
Offer, (ii) deposit with the Paying Agent an amount equal to the Change of
Control Payment in respect of all shares of Series A Preferred Stock or portions
thereof so tendered and (iii) deliver or cause to be delivered to the Transfer
Agent the shares of Series A Preferred Stock so accepted together with an
Officers' Certificate stating the aggregate Liquidation Preference of the shares
of Series A Preferred Stock or portions thereof being purchased by the Company.
The Paying Agent shall promptly mail to each Holder of Series A Preferred Stock
so tendered the Change of Control Payment for such Series A Preferred Stock, and
the Transfer Agent shall promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new certificate representing the
shares of Series A Preferred Stock equal in Liquidation Preference amount to any
unpurchased portion of the shares of Series A Preferred Stock surrendered, if
any. The Company shall publicly announce the results of the Change of Control
Offer on or as soon as practicable after the Change of Control Payment Date.
(f) Prior to complying with the provisions of this Section 7,
but in any event within 90 days following a Change of Control, the Company shall
either repay all outstanding Indebtedness or obtain the requisite consents, if
any, under all agreements governing outstanding Indebtedness to permit the
repurchase of Series A Preferred Stock required by this Section 7.
(g) The Company shall not be required to make a Change of
Control Offer upon a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Section 7 applicable to a Change of Control Offer
made by the Company and purchases all shares of Series A Preferred Stock validly
tendered and not withdrawn under such Change of Control Offer.
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8. Certain Covenants.
(a) Restricted Payments.
(i) The Company shall not, and shall not permit any
of its Restricted Subsidiaries to, directly or indirectly, (a) declare
or pay any dividend or make any payment or distribution on account of
the Company's Parity Securities or Junior Securities (including,
without limitation, any payment in connection with any merger or
consolidation involving the Company) or on account of any Qualified
Subsidiary Stock or make any payment or distribution to or for the
benefit of the direct or indirect holders of the Company's Parity
Securities or Junior Securities or the direct or indirect holders of
any Qualified Subsidiary Stock in their capacities as such (other than
dividends or distributions payable in Equity Interests (other than
Disqualified Stock) of the Company); (b) purchase, redeem or otherwise
acquire or retire for value any Parity Securities or Junior Securities
of the Company or any direct or indirect parent of the Company or other
Affiliate of the Company (other than any such Equity Interests owned by
the Company or any of its Restricted Subsidiaries and other than the
acquisition of Equity Interests in Subsidiaries of the Company solely
in exchange for Equity Interests (other than Disqualified Stock) of the
Company); (c) make any payment on, or purchase, redeem, defease or
otherwise acquire or retire for value any Junior Securities, except
payments of the Liquidation Preference thereof at final maturity; (d)
make any loan, advance, capital contribution to or other investment in,
or guarantee any obligation of, any Affiliate of the Company other than
a Permitted Investment; (e) forgive any loan or advance to or other
obligation of any Affiliate of the Company (other than a loan or
advance to or other obligation of a Wholly Owned Restricted Subsidiary)
which at the time it was made was not a Restricted Payment that was
permitted to be made; or (f) make any Restricted Investment (all such
payments and other actions set forth in clauses (a) through (f) above
being collectively referred to as "Restricted Payments"), unless, at
the time of and immediately after giving effect to such Restricted
Payment:
(1) no Voting Rights Triggering Event shall
have occurred and be continuing or would occur as a consequence
thereof; and
(2) the Company would be permitted to incur
$1.00 of additional Indebtedness pursuant to the Indebtedness to
Adjusted Operating Cash Flow Ratio described in Section 8(b)(i) hereof;
and
(3) such Restricted Payment, together with
the aggregate of all other Restricted Payments made by the Company and
its Restricted Subsidiaries after the Closing Date, is less than the
sum of (A) an amount equal to the Cumulative Operating Cash Flow for
the period (taken as one accounting period) from the beginning of the
first full month commencing after the Closing Date to the end of the
Company's most recently ended fiscal quarter for which internal
financial statements are available at the time of such Restricted
Payment (the "Basket Period") less 1.4 times the Company's Cumulative
Total Interest Expense for the Basket Period, plus (B) 100% of the
aggregate net cash proceeds and, in the case of proceeds consisting of
assets constituting or used in a Permitted Business, 100% of the fair
market value of the aggregate net proceeds other than cash received
since the Closing Date (i) by the Company as capital contributions to
the Company (other than from a Subsidiary) or (ii) from the sale by the
Company (other
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than to a Subsidiary) of its Equity Interests (other than Disqualified
Stock), plus (C) without duplication, to the extent that any Restricted
Investment that was made after the Closing Date is sold for cash or
otherwise liquidated or repaid for cash, the Net Proceeds received by
the Company or a Wholly Owned Restricted Subsidiary of the Company upon
the sale of such Restricted Investment, plus (D) without duplication,
to the extent that any Unrestricted Subsidiary is designated by the
Company as a Restricted Subsidiary, an amount equal to the fair market
value of such Investment at the time of such designation, plus (E) $2.5
million.
(ii) The foregoing Section 8(a)(i) shall not prohibit
(1) the payment of any dividend within 60 days after the date of
declaration thereof, if at said date of declaration such payment would
have complied with the provisions of this Certificate of Designation;
(2) the redemption, repurchase, retirement or other acquisition of any
Equity Interests of the Company in exchange for, or out of the net
proceeds of, the substantially concurrent sale (other than to a
Subsidiary of the Company) of other Equity Interests of the Company
(other than any Disqualified Stock); provided that the amount of any
such net proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from
clause (3)(B) of the preceding paragraph (i); (3) the payment by the
Company of advances under the Split Dollar Agreement in an amount not
to exceed $250,000 in any four-quarter period; (4) the repurchase or
redemption from employees of the Company and its Subsidiaries (other
than the Principal) of Capital Stock of the Company in an amount not to
exceed an aggregate of $3.0 million; (5) the payment of dividends on
the Series A Preferred Stock in accordance with the terms thereof as in
effect on the Closing Date; (6) the issuance of Exchange Notes in
exchange for shares of the Series A Preferred Stock; provided that such
issuance is permitted by Section 8(b) hereof; and (7) in the event that
the Company elects to issue Exchange Notes in exchange for Series A
Preferred Stock, cash payments made in lieu of the issuance of Exchange
Notes having a face amount less than $1,000 and any cash payments
representing accumulated and unpaid dividends in respect thereof, not
to exceed $100,000 in the aggregate in any fiscal year.
(iii) The amount of all Restricted Payments (other
than cash) shall be the fair market value on the date of the Restricted
Payment of the asset(s) proposed to be transferred by the Company or
the applicable Restricted Subsidiary, as the case may be, net of any
liabilities proposed to be assumed by the transferee and novated
pursuant to a written agreement releasing the Company and its
Subsidiaries. Not later than the date of making any Restricted Payment,
the Company shall deliver to the Board of Directors an Officers'
Certificate stating that such Restricted Payment is permitted by the
terms hereof and setting forth the basis upon which the calculations
required by this Section 8(a) were computed, which calculations may be
based upon the Company's latest available financial statements.
(iv) The Board of Directors may designate any
Restricted Subsidiary to be an Unrestricted Subsidiary if such
designation would not cause a Voting Rights Triggering Event. For
purposes of making such determination, all outstanding Investments by
the Company and its Restricted Subsidiaries in the Subsidiary so
designated shall be deemed to be Restricted Payments at the time of
such designation (valued as set forth below) and shall reduce the
amount available for Restricted Payments under Section 8(a)(i) hereof.
All such outstanding Investments shall be deemed to constitute
Investments in an amount equal to the fair market value of such
Investments at the time of such designation. Such designation shall be
permitted only if such Restricted
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Payment would be permitted at such time and if such Restricted
Subsidiary would otherwise meet the definition of an Unrestricted
Subsidiary.
(b) Incurrence of Indebtedness and Issuance of Preferred
Stock.
(i) The Company shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness (including Acquired Debt) and shall not issue any
Disqualified Stock and shall not permit any of its Subsidiaries to
issue any shares of preferred stock (other than Qualified Subsidiary
Stock); provided, however, that (a) the Company may incur Indebtedness
(including Acquired Debt) or issue shares of Disqualified Stock and (b)
a Restricted Subsidiary of the Company may incur Indebtedness
(including Acquired Debt) or issue shares of preferred stock (including
Disqualified Stock) if, in each case, the Company's Indebtedness to
Adjusted Operating Cash Flow Ratio as of the date on which such
Indebtedness is incurred or such Disqualified Stock or preferred stock
is issued would have been 7.0 to 1 or less, determined on a pro forma
basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred, or the
Disqualified Stock or preferred stock had been issued, as the case may
be, as of the date of such calculation.
The foregoing provisions shall not apply to:
(1) the incurrence by the Company's
Unrestricted Subsidiaries of Non-Recourse Debt or the issuance
by such Unrestricted Subsidiaries of preferred stock;
provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary or any such
preferred stock becomes preferred stock (other than Qualified
Subsidiary Stock) of a Restricted Subsidiary, as the case may
be, such event shall be deemed to constitute an incurrence of
Indebtedness by or an issuance of preferred stock (other than
Qualified Subsidiary Stock) of, as the case may be, a
Restricted Subsidiary of the Company;
(2) the incurrence by the Company or any of
its Restricted Subsidiaries of Indebtedness pursuant to one or
more Bank Facilities, so long as the aggregate principal
amount of all Indebtedness outstanding under all Bank
Facilities does not, at the time of incurrence, exceed an
amount equal to $50.0 million;
(3) the incurrence by the Company and its
Restricted Subsidiaries of the Existing Indebtedness;
(4) the incurrence by the Company of
Indebtedness under the Exchange Notes;
(5) the incurrence by the Company or any of
its Restricted Subsidiaries of intercompany Indebtedness
between or among the Company and any of its Wholly Owned
Restricted Subsidiaries; provided, however, that (A) any
subsequent issuance or transfer of Equity Interests that
result in any such Indebtedness being held by a Person other
than the Company or a Wholly Owned Restricted Subsidiary of
the
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Company and (B) any sale or other transfer of such
Indebtedness to a Person that is not either the Company or a
Wholly Owned Restricted Subsidiary of the Company shall be
deemed, in each case, to constitute an incurrence of such
Indebtedness by the Company or such Restricted Subsidiary, as
the case may be;
(6) the incurrence by the Company or any of
its Restricted Subsidiaries of Indebtedness represented by
Capital Lease Obligations, mortgage financings or purchase
money obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of
construction or improvement of property used in the business
of the Company or such Restricted Subsidiary, in an aggregate
principal amount not to exceed $5.0 million at any time
outstanding;
(7) the incurrence by the Company or any of
its Restricted Subsidiaries of Permitted Refinancing Debt in
exchange for, or the net proceeds of which are used to extend,
refinance, renew, replace, defease or refund, Indebtedness
that was permitted by this Certificate of Designation to be
incurred; and
(8) the incurrence by the Company or any of
its Restricted Subsidiaries of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph)
in an aggregate principal amount at any time outstanding not
to exceed $5.0 million.
(ii) If an item of Indebtedness is permitted to be
incurred on the basis of the first paragraph of Section 8(b)(i) hereof
and also on the basis of one or more of clauses (1) through (8) of
Section 8(b)(i) hereof, or is permitted to be incurred on the basis of
two or more of clauses (1) through (8) of Section 8(b)(i) hereof, then
the Company shall classify the basis on which such item of Indebtedness
is incurred. If an item of Indebtedness is repaid with the proceeds of
an incurrence of other Indebtedness (whether from the same or a
different creditor), the Company may classify such other Indebtedness
as having been incurred on the same basis as the Indebtedness being
repaid or on a different basis permitted under this covenant. For
purposes of this Section 8(b)(ii), "Indebtedness" includes Disqualified
Stock and preferred stock of Subsidiaries. Accrued interest and
accreted discount will not be deemed incurrence of Indebtedness for
purposes of this Section 8(b).
(c) Merger, Consolidation or Sale of Assets. The Company shall
not consolidate or merge with or into (whether or not the Company is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets in one or more
related transactions, to another corporation, Person or entity unless (i) the
Company is the surviving corporation or the entity or the Person formed by or
surviving any such consolidation or merger (if other than the Company) or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made is a corporation organized or existing under the laws of
the United States, any state thereof or the District of Columbia; (ii) the
Series A Preferred Stock shall be converted into or exchanged for and shall
become shares of such successor, transferee or resulting Person, having in
respect of such successor, transferee or resulting Person the same powers,
preferences and relative participating, optional or other special rights and the
qualifications, limitations or restrictions thereon, that the Series A Preferred
Stock had with respect to the Company immediately prior to such transaction;
(iii) immediately after such transaction no Voting Rights Triggering Event
exists; and (iv) the Company or the entity or
27
<PAGE>
Person formed by or surviving any such consolidation or merger (if other than
the Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Indebtedness to Adjusted
Operating Cash Flow Ratio set forth in Section 8(b)(i) hereof.
(d) Transactions with Affiliates. The Company shall not, and
shall not permit any of its Restricted Subsidiaries to, sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any
Affiliate (each of the foregoing, an "Affiliate Transaction"), unless (i) such
Affiliate Transaction is on terms that are no less favorable to the Company or
the relevant Restricted Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Restricted Subsidiary with an
unrelated Person and (ii) the Company delivers to the Holders (1) with respect
to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $1.0 million, a resolution of the
Board of Directors set forth in an Officers' Certificate certifying that such
Affiliate Transaction complies with clause (i) above and that such Affiliate
Transaction has been approved by a majority of the disinterested members of the
Board of Directors and a majority of the Independent Directors and (2) with
respect to any Affiliate Transaction or series of related Affiliate Transactions
involving aggregate consideration in excess of $5.0 million, an opinion as to
the fairness to the Company or such Restricted Subsidiary of such Affiliate
Transaction from a financial point of view issued by an investment banking firm
of national standing; provided that the Company shall not, and shall not permit
any of its Restricted Subsidiaries to, engage in any Affiliate Transaction
involving aggregate consideration in excess of $1.0 million at any time that
there is not at least one Independent Director on the Company's Board of
Directors; and provided further that (A) any employment agreement entered into
by the Company or any of its Restricted Subsidiaries in the ordinary course of
business and consistent with the past practice of the Company or such Restricted
Subsidiary, (B) transactions between or among the Company and/or its Restricted
Subsidiaries, (C) the payment of any dividend on, or the issuance of the
Exchange Notes in exchange for, the Series A Preferred Stock, provided that such
dividends are paid on a pro rata basis and the Exchange Notes are issued in
accordance with this Certificate of Designation, and (D) transactions permitted
by the provisions of Section 8(a) hereof, in each case, shall not be deemed
Affiliate Transactions.
(e) Dividend and Other Payment Restrictions Affecting
Subsidiaries. The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i)(1) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (A) on its Capital Stock or
(B) with respect to any other interest or participation in, or measured by, its
profits, or (2) pay any indebtedness owed to the Company or any of its
Restricted Subsidiaries, (ii) make loans or advances to the Company or any of
its Restricted Subsidiaries or (iii) transfer any of its properties or assets to
the Company or any of its Restricted Subsidiaries, except for such encumbrances
or restrictions existing under or by reason of (1) the terms of any Indebtedness
permitted by this Certificate of Designation to be incurred by any Subsidiary of
the Company, (2) Existing Indebtedness as in effect on the Closing Date, (3)
applicable law, (4) any instrument governing Indebtedness or Capital Stock of a
Person acquired by the Company or any of its Restricted Subsidiaries as in
effect at the time of such acquisition (except to the extent such Indebtedness
was incurred in
28
<PAGE>
connection with or in contemplation of such acquisition), which encumbrance or
restriction is not applicable to any Person, or the properties or assets of any
Person, other than the Person and its Subsidiaries, or the property or assets of
the Person and its Subsidiaries, so acquired or (5) by reason of customary
non-assignment provisions in leases and other contracts entered into in the
ordinary course of business and consistent with past practices.
(f) Limitation on Issuance and Sales of Capital Stock of
Wholly Owned Restricted Subsidiaries. The Company (i) shall not, and shall not
permit any Wholly Owned Restricted Subsidiary of the Company to, transfer,
convey, sell or otherwise dispose of any Capital Stock (other than Qualified
Subsidiary Stock) of any Wholly Owned Restricted Subsidiary of the Company to
any Person (other than the Company or a Wholly Owned Restricted Subsidiary of
the Company), unless such transfer, conveyance, sale, lease or other disposition
is of all the Capital Stock of such Wholly Owned Restricted Subsidiary and (ii)
shall not permit any Wholly Owned Restricted Subsidiary of the Company to issue
any of its Equity Interests (other than Qualified Subsidiary Stock and, if
necessary, shares of its Capital Stock constituting directors' qualifying
shares) to any Person other than to the Company or a Wholly Owned Restricted
Subsidiary of the Company.
(g) Reports.
(i) Whether or not required by the rules and
regulations of the Commission, so long as any shares of Series A
Preferred Stock are outstanding, the Company shall furnish to the
Holders of Series A Preferred Stock (1) all quarterly and annual
financial information that would be required to be contained in a
filing with the Commission on Forms 10-Q and 10-K if the Company were
required to file such Forms, including "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with
respect to the annual information only, a report thereon by the
Company's certified independent accountants and (2) all current reports
that would be required to be filed with the Commission on Form 8-K if
the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the
Company shall file a copy of all such information and reports with the
Commission for public availability (unless the Commission shall not
accept such a filing) and make such information available to securities
analysts and prospective investors upon request. In addition to the
financial information required by the Exchange Act, each such quarterly
and annual report shall be required to contain "summarized financial
information" (as defined in Rule 1-02(aa)(1) of Regulation S-X under
the Exchange Act) showing Adjusted Operating Cash Flow for the Company
and its Restricted Subsidiaries, on a consolidated basis, where
Adjusted Operating Cash Flow for the Company is calculated in a manner
consistent with the manner described under the definition of "Adjusted
Operating Cash Flow" contained herein. The summarized financial
information required pursuant to the preceding sentence may, at the
election of the Company, be included in the footnotes to audited
consolidated financial statements or unaudited quarterly financial
statements of the Company and shall be as of the same dates and for the
same periods as the consolidated financial statements of the Company
and its Subsidiaries required pursuant to the Exchange Act.
(ii) The Company shall deliver to the Holders, within
90 days after the end of each fiscal year, an Officers' Certificate
stating that a review of the activities of the Company and its
Subsidiaries during the preceding fiscal year has been made under the
supervision of the signing officers with a view to determining whether
the Company has kept, observed, performed
29
<PAGE>
and fulfilled its obligations under this Certificate of Designation and
further stating, as to each such officer signing such certificate, that
to the best of his or her knowledge the Company has kept, observed,
performed and fulfilled each and every covenant contained in this
Certificate of Designation and is not in default in the performance or
observance of any of the terms, provisions and conditions of this
Certificate of Designation (or, if any such default shall have
occurred, describing all such defaults of which he or she may have
knowledge and what action the Company is taking or proposes to take
with respect thereto) and that to the best of his or her knowledge no
event has occurred and remains in existence by reason of which payments
on account of the Liquidation Preference of or dividends, if any, on
the Series A Preferred Stock is prohibited or if such event has
occurred, a description of the event and what action the Company is
taking or proposes to take with respect thereto.
(ii) The Company shall, so long as any of the shares
of Series A Preferred Stock are outstanding, deliver to the Holders,
forthwith upon any Executive Officer of the Company becoming aware of
any default under this Certificate of Designation, an Officers'
Certificate specifying such default and what action the Company is
taking or proposes to take with respect thereto.
(h) Conflicts with By-laws. If any provisions of the Company's
By-laws conflict in any way with this Certificate of Designation, the Company
shall, so long as any of the shares of Series A Preferred Stock are outstanding,
take all necessary actions to amend such By-laws and thereby resolve the
conflict.
9. Payment.
(a) All amounts payable in cash with respect to the Series A
Preferred Stock shall be payable in United States dollars at the office or
agency of the Company maintained for such purpose within the City and State of
New York or, at the option of the Company, payment of dividends (if any) may be
made by check mailed to the Holders of the Series A Preferred Stock at their
respective addresses set forth in the register of Holders of Series A Preferred
Stock maintained by the Transfer Agent, provided that all cash payments with
respect to the Global Shares (as defined below) and shares of Series A Preferred
Stock the Holders of which have given wire transfer instructions to the Company
shall be required to be made by wire transfer of immediately available funds to
the accounts specified by the Holders thereof.
(b) Any payment on the Series A Preferred Stock due on any day
that is not a Business Day need not be made on such day, but may be made on the
next succeeding Business Day with the same force and effect as if made on such
due date.
(c) The Company has initially appointed the Transfer Agent to
act as the "Paying Agent." The Company may at any time terminate the appointment
of any Paying Agent and appoint additional or other Paying Agents, provided that
until the Series A Preferred Stock has been delivered to the Company for
cancellation, or moneys sufficient to pay the Liquidation Preference and
accumulated dividends on the Series A Preferred Stock have been made available
for payment and either paid or returned to the Company as provided in this
Certificate of Designation, it shall maintain an office or agency in the Borough
of Manhattan, The City of New York for surrender of Series A Preferred Stock for
conversion.
30
<PAGE>
(d) Dividends payable on the Series A Preferred Stock on any
redemption date or repurchase date that is a Dividend Payment Date shall be paid
to the Holders of record as of the immediately preceding Record Date.
(e) All moneys and shares of Series A Preferred Stock
deposited with any Paying Agent or then held by the Company in trust for the
payment of the Liquidation Preference and dividends on any shares of Series A
Preferred Stock which remain unclaimed at the end of two years after such
payment has become due and payable shall be repaid to the Company, and the
Holder of such shares of Series A Preferred Stock shall thereafter look only to
Company for payment thereof.
10. Officers' Certificate.
Each Officers' Certificate provided for in this Certificate of
Designation shall include:
(a) a statement that the officer making such certificate or
opinion has read such covenant or condition;
(b) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(c) a statement that, in the opinion of such officer, he or
she has made such examination or investigation as is necessary to
enable him to express an informed opinion as to whether or not such
covenant or condition has been satisfied; and
(d) a statement as to whether or not, in the opinion of such
officer, such condition or covenant has been satisfied.
11. Exclusion of Other Rights.
Except as may otherwise be required by law, the shares of
Series A Preferred Stock shall not have any voting powers, preferences and
relative, participating, optional or other special rights, other than those
specifically set forth in this Certificate of Designation (as such Certificate
of Designation may be amended from time to time) and in the Certificate of
Incorporation. The shares of Series A Preferred Stock shall have no preemptive
or subscription rights.
12. Headings of Subdivisions.
The headings of the various subdivisions hereof are for
convenience of reference only and shall not affect the interpretation of any of
the provisions hereof.
13. Severability of Provisions.
If any voting powers, preferences and relative, participating,
optional and other special rights of the Series A Preferred Stock and
qualifications, limitations and restrictions thereof set forth in this
Certificate of Designation (as it may be amended from time to time) is invalid,
unlawful or incapable of being enforced by reason of any rule of law or public
policy, all other voting powers, preferences and relative, participating,
optional and other special rights of Series A Preferred Stock and
qualifications,
31
<PAGE>
limitations and restrictions thereof set forth in this Certificate of
Designation (as so amended) which can be given effect without the invalid,
unlawful or unenforceable voting powers, preferences and relative,
participating, optional and other special rights of Series A Preferred Stock and
qualifications, limitations and restrictions thereof shall, nevertheless, remain
in full force and effect, and no voting powers, preferences and relative,
participating, optional or other special rights of Series A Preferred Stock and
qualifications, limitations and restrictions thereof herein set forth shall be
deemed dependent upon any other such voting powers, preferences and relative,
participating, optional or other special rights of Series A Preferred Stock and
qualifications, limitations and restrictions thereof unless so expressed herein.
14. Form of Securities.
(a) The Series A Preferred Stock shall initially be issued in
the form of one or more Global Preferred Shares (the "Global Shares"). The
Global Shares shall be deposited on the Closing Date with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of Cede &
Co., as nominee of the Depositary (such nominee being referred to as the "Global
Share Holder").
(b) So long as the Global Share Holder is the registered owner
of any Series A Preferred Stock, the Global Share Holder will be considered the
sole Holder under this Certificate of Designation of any shares of Series A
Preferred Stock evidenced by the Global Shares. Beneficial owners of shares of
Series A Preferred Stock evidenced by the Global Shares shall not be considered
the owners or Holders thereof under this Certificate of Designation for any
purpose. The Company shall not have any responsibility or liability for any
aspect of the records of the Depositary relating to the Series A Preferred
Stock.
(c) Payments in respect of the Liquidation Preference,
dividends on any Series A Preferred Stock registered in the name of the Global
Share Holder on the applicable record date shall be payable by the Company to or
at the direction of the Global Share Holder in its capacity as the registered
Holder under this Certificate of Designation. The Company may treat the persons
in whose names Series A Preferred Stock, including the Global Shares, are
registered as the owners thereof for the purpose of receiving such payments. The
Company does not and will not have any responsibility or liability for the
payments of such amounts to beneficial holders of Series A Preferred Stock.
(d) Any person having a beneficial interest in a Global Share
may, upon request to the Company, exchange such beneficial interest for Series A
Preferred Stock in the form of registered definitive certificates ("Certificated
Securities"). Upon any such issuance, the Company shall register such
Certificated Securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). If (i) the Company
notifies the Holders in writing that the Depositary is no longer willing or able
to act as a depositary and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the Holders in
writing that it elects to cause the issuance of Series A Preferred Stock in the
form of Certificated Securities, then, upon surrender by the Global Share Holder
of its Global Shares, Series A Preferred Stock in such form will be issued to
each person that the Global Share Holder and the Depositary identify as being
the beneficial owner of the related Series A Preferred Stock.
32
<PAGE>
IN WITNESS WHEREOF, the Company has caused this certificate to
be duly executed by Marshall W. Pagon, Chief Executive Officer, and attested by
Howard E. Verlin, its secretary, this __ day of January, 1997.
PEGASUS COMMUNICATIONS CORPORATION
By:___________________________________
Marshall W. Pagon
Chief Executive Officer
ATTEST:
By: __________________
Howard E. Verlin
Secretary
33
<PAGE>
[L&W Draft of 1/14/96]
Annex A
- --------------------------------------------------------------------------------
PEGASUS COMMUNICATIONS CORPORATION
___% SENIOR SUBORDINATED EXCHANGE NOTES DUE 2007
-----------------
INDENTURE
Dated as of ________________
-----------------
-----------------
FIRST UNION NATIONAL BANK
as Trustee
-----------------
- --------------------------------------------------------------------------------
<PAGE>
CROSS-REFERENCE TABLE*
Trust Indenture
Act Section Indenture Section
310 (a)(1)............................................. 7.10
(a)(2)............................................. 7.10
(a)(3) ............................................ N.A.
(a)(4)............................................. N.A.
(a)(5)............................................. 7.10
(b) ............................................... 7.03;7.10
(c) ............................................... N.A.
311 (a) ............................................... 7.11
(b) ............................................... 7.11
(c) ............................................... N.A.
312 (a)................................................ 2.05
(b)................................................ 11.03
(c) ............................................... 11.03
313 (a)................................................ 7.06
(b)(1) ............................................ N.A.
(b)(2) ............................................ 7.06;7.07
(c) ............................................... 7.06;11.02
(d)................................................ 7.06
314 (a) ............................................... 4.03;11.05
(b) ............................................... N.A
(c)(1) ............................................ 11.04
(c)(2) ............................................ 11.04
(c)(3) ............................................ N.A.
(d)................................................ N.A.
(e) .............................................. 11.05
(f)................................................ N.A.
315 (a)................................................ 7.01
(b)................................................ 7.05,11.02
(c) .............................................. 7.01
(d)................................................ 7.01
(e)................................................ 6.11
316 (a)(last sentence) ................................ 2.09
(a)(1)(A).......................................... 6.05
(a)(1)(B) ......................................... 6.04
(a)(2) ............................................ N.A.
(b) ............................................... 6.07
(c) ............................................... N.A.
317 (a)(1) ............................................ 6.08
(a)(2)............................................. 6.09
(b) ............................................... 2.04
318 (a)................................................ 11.01
(b)................................................ N.A.
(c)................................................ 11.01
N.A. means not applicable.
*This Cross-Reference Table is not part of the Indenture.
<PAGE>
TABLE OF CONTENTS
Page No.
--------
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
Section 1.01. Definitions.............................................. 1
Section 1.02. Other Definitions........................................ 12
Section 1.03. Incorporation by Reference of Trust Indenture Act........ 13
Section 1.04. Rules of Construction.................................... 13
ARTICLE 2
THE EXCHANGE NOTES
Section 2.01. Form and Dating.......................................... 14
Section 2.02. Execution and Authentication............................. 14
Section 2.03. Registrar and Paying Agent............................... 14
Section 2.04. Paying Agent to Hold Money in Trust...................... 15
Section 2.05. Holder Lists............................................. 15
Section 2.06. Transfer and Exchange.................................... 15
Section 2.07. Replacement Exchange Notes............................... 16
Section 2.08. Outstanding Exchange Notes............................... 16
Section 2.09. Treasury Exchange Notes.................................. 17
Section 2.10. Temporary Exchange Notes................................. 17
Section 2.11. Cancellation............................................. 17
Section 2.12. Defaulted Interest....................................... 17
ARTICLE 3
REDEMPTION AND PREPAYMENT
Section 3.01. Notices to Trustee....................................... 18
Section 3.02. Selection of Exchange Notes to Be Redeemed............... 18
Section 3.03. Notice of Redemption..................................... 19
Section 3.04. Effect of Notice of Redemption........................... 19
Section 3.05. Deposit of Redemption or Purchase Price.................. 19
Section 3.06. Exchange Notes Redeemed or Purchased in Part............. 20
Section 3.07. Optional Redemption...................................... 20
Section 3.08. Mandatory Redemption..................................... 21
Section 3.09. Offer to Purchase by Application of Excess Proceeds...... 21
ARTICLE 4
COVENANTS
Section 4.01. Payment of Exchange Notes................................ 23
Section 4.02. Maintenance of Office or Agency.......................... 23
Section 4.03. Reports.................................................. 23
Section 4.04. Compliance Certificate................................... 24
Section 4.05. Taxes.................................................... 25
Section 4.06. Stay, Extension and Usury Laws........................... 25
i
<PAGE>
Section 4.07. Restricted Payments.................................. 25
Section 4.08. Dividend and Other Payment Restrictions Affecting
Subsidiaries...................................... 27
Section 4.09. Incurrence of Indebtedness and Issuance of
Preferred Stock................................... 27
Section 4.10. Asset Sales.......................................... 29
Section 4.11. Transactions with Affiliates......................... 30
Section 4.12. Liens................................................ 30
Section 4.13. Offer to Repurchase Upon Change of Control........... 31
Section 4.14. Continued Existence.................................. 32
Section 4.15. Limitation on Layering............................... 32
Section 4.16. Limitation on Issuances and Sales of Capital
Stock of Wholly Owned Restricted Subsidiaries........ 32
ARTICLE 5
SUCCESSORS
Section 5.01. Merger, Consolidation, or Sale of Assets............. 33
Section 5.02. Successor Corporation Substituted.................... 33
ARTICLE 6
DEFAULTS AND REMEDIES
Section 6.01. Events of Default.................................... 33
Section 6.02. Acceleration......................................... 36
Section 6.03. Other Remedies....................................... 36
Section 6.04. Waiver of Past Defaults.............................. 36
Section 6.05. Control by Majority.................................. 37
Section 6.06. Limitation on Suits.................................. 37
Section 6.07. Rights of Holders of Exchange Notes to Receive
Payment........................................... 37
Section 6.08. Collection Suit by Trustee........................... 37
Section 6.09. Trustee May File Proofs of Claim..................... 38
Section 6.10. Priorities........................................... 38
Section 6.11. Undertaking for Costs................................ 38
ARTICLE 7
TRUSTEE
Section 7.01. Duties of Trustee.................................... 39
Section 7.02. Rights of Trustee.................................... 40
Section 7.03. Individual Rights of Trustee......................... 40
Section 7.04. Trustee's Disclaimer................................. 40
Section 7.05. Notice of Defaults................................... 41
Section 7.06. Reports by Trustee to Holders of the Exchange
Notes............................................. 41
Section 7.07. Compensation and Indemnity........................... 41
Section 7.08. Replacement of Trustee............................... 42
Section 7.09. Successor Trustee by Merger, etc..................... 43
Section 7.10. Eligibility; Disqualification........................ 43
Section 7.11. Preferential Collection of Claims Against Company.... 43
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
Section 8.01. Option to Effect Legal Defeasance or Covenant
Defeasance........................................ 43
ii
<PAGE>
Section 8.02. Legal Defeasance and Discharge....................... 43
Section 8.03. Covenant Defeasance.................................. 44
Section 8.04. Conditions to Legal or Covenant Defeasance........... 44
Section 8.05. Deposited Money and Government Securities to be
Held in Trust; Other Miscellaneous Provisions..... 46
Section 8.06. Repayment to Company................................. 46
Section 8.07. Reinstatement........................................ 46
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
Section 9.01. Without Consent of Holders of Exchange Notes......... 47
Section 9.02. With Consent of Holders of Exchange Notes............ 47
Section 9.03. Compliance with Trust Indenture Act.................. 49
Section 9.04. Revocation and Effect of Consents.................... 49
Section 9.05. Notation on or Exchange of Exchange Notes............ 49
Section 9.06. Trustee to Sign Amendments, etc...................... 49
ARTICLE 10
SUBORDINATION
Section 10.01. Agreement to Subordinate............................. 49
Section 10.02. Certain Definitions.................................. 50
Section 10.03. Liquidation; Dissolution; Bankruptcy................. 50
Section 10.04. Default on Designated Senior Debt.................... 51
Section 10.05. Acceleration of Exchange Notes....................... 51
Section 10.06. When Distribution Must Be Paid Over.................. 51
Section 10.07. Notice by Company.................................... 52
Section 10.08. Subrogation.......................................... 52
Section 10.09. Relative Rights...................................... 52
Section 10.10. Subordination May Not Be Impaired by Company......... 53
Section 10.11. Distribution or Notice to Representative............. 53
Section 10.12. Rights of Trustee and Paying Agent................... 53
Section 10.13. Authorization to Effect Subordination................ 53
Section 10.14. Amendments........................................... 53
ARTICLE 11
MISCELLANEOUS
Section 11.01. Trust Indenture Act Controls......................... 54
Section 11.02. Notices.............................................. 54
Section 11.03. Communication by Holders of Exchange Notes with
Other Holders of Exchange Notes................... 55
Section 11.04. Certificate and Opinion as to Conditions Precedent... 55
Section 11.05. Statements Required in Certificate or Opinion........ 55
Section 11.06. Rules by Trustee and Agents.......................... 56
Section 11.07. No Personal Liability of Directors, Officers,
Employees and Stockholders........................ 56
Section 11.08. Governing Law........................................ 56
Section 11.09. No Adverse Interpretation of Other Agreements........ 56
Section 11.10. Successors........................................... 56
Section 11.11. Severability......................................... 56
iii
<PAGE>
Section 11.12. Counterpart Originals................................ 57
Section 11.13. Table of Contents, Headings, etc..................... 57
Exhibit A............................................................A-1
iv
<PAGE>
INDENTURE dated as of __________________ between Pegasus
Communications Corporation, a Delaware corporation (the "Company"), and First
Union National Bank, a national banking association, as trustee (the "Trustee").
The Company and the Trustee agree as follows for the benefit of each
other and for the equal and ratable benefit of the Holders of the ___% Senior
Subordinated Exchange Notes due 2007 of the Company:
ARTICLE 1
DEFINITIONS AND INCORPORATION
BY REFERENCE
SECTION 1.01. DEFINITIONS.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"Adjusted Operating Cash Flow" means, for the four most recent fiscal
quarters for which internal financial statements are available, Operating Cash
Flow of such Person and its Restricted Subsidiaries less DBS Cash Flow for the
most recent four-quarter period plus DBS Cash Flow for the most recent quarterly
period, multiplied by four.
"Affiliate" of any specified Person means any other Person directly
or indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"Agent" means any Registrar, Paying Agent or co-registrar.
"Asset Sale" means (i) the sale, lease, conveyance or other
disposition of any assets (including, without limitation, by way of a sale and
leaseback) other than in the ordinary course of business consistent with past
practices (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Subsidiaries taken as
a whole will be governed by the provisions described in Section 4.13 hereof
and/or the provisions described in Section 5.01 hereof and not by the provision
of Section 4.10 hereof) and (ii) the issue or sale by the Company or any of its
Restricted Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $1.0 million or (b) for net proceeds in excess of $1.0
million. Notwithstanding the foregoing, the following transactions will not be
deemed to be Asset Sales: (i) a transfer of assets by the Company to a Wholly
Owned Restricted Subsidiary of the Company or by a
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Wholly Owned Restricted Subsidiary of the Company to the Company or to another
Wholly Owned Restricted Subsidiary of the Company, (ii) an issuance of Equity
Interests by a Wholly Owned Restricted Subsidiary of the Company to the Company
or to another Wholly Owned Restricted Subsidiary of the Company and (iii) a
Restricted Payment that is permitted by the provisions of Section 4.07 hereof.
"Asset Swap" means an exchange of assets by the Company or a
Restricted Subsidiary of the Company for one or more Permitted Businesses or for
a controlling equity interest in any Person whose assets consist primarily of
one or more Permitted Businesses.
"Bank Facilities" means, with respect to the Company or any of its
Restricted Subsidiaries, one or more debt facilities or commercial paper
facilities with banks or other institutional lenders providing for revolving
credit loans, term loans, receivables financing (including through the sale of
receivables to such lenders or to special purpose entities formed to borrow from
such lenders against such receivables) or letters of credit, in each case, as
amended, restated, modified, renewed, refunded, replaced or refinanced in whole
or in part from time to time.
"Bankruptcy Law" means Title 11, U.S. Code or any similar federal or
state law for the relief of debtors.
"Board" or "Board of Directors" means the Board of Directors of the
Company or any authorized committee of the Board of Directors.
"Business Day" means any day other than a Legal Holiday.
"Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital lease
that would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than six months from the date of acquisition, (iii) certificates of deposit
and eurodollar time deposits with maturities of six months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding six months
and overnight bank deposits, in each case with any domestic commercial bank
having capital and surplus in excess of $500 million and a Thompson Bank Watch
Rating of "B" or better, (iv) repurchase obligations with a term of not more
than seven days or on demand for underlying securities of the types described in
clauses (ii) and (iii) above entered into with any financial institution meeting
the qualifications specified in clause (iii) above and (v) commercial paper
having the highest rating at acquisition obtainable from Moody's Investors
Service, Inc. or Standard & Poor's Corporation and in each case maturing within
six months after the date of acquisition.
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"Certificate of Designation" means the Certificate of Designation,
Preferences and Relative, Participating, Optional and Other Special Rights of
Preferred Stock and Qualifications, Limitations and Restrictions Thereof setting
forth the terms of the Series A Preferred Stock.
"Change of Control" means the occurrence of any of the following: (i)
the sale, lease, transfer, conveyance or other disposition (other than by way of
merger or consolidation), in one or a series of related transactions, of all or
substantially all of the assets of the Company and its Restricted Subsidiaries
taken as a whole to any "person" (as such term is used in Section 13(d)(3) of
the Exchange Act) other than the Principal or his Related Parties, (ii) the
adoption of a plan relating to the liquidation or dissolution of the Company,
(iii) the consummation of any transaction (including, without limitation, any
merger or consolidation) the result of which is that (A) any "person" (as
defined above) becomes the "beneficial owner" (as such term is defined in Rule
13d-3 and Rule 13d-5 under the Exchange Act, except that a person shall be
deemed to have "beneficial ownership" of all securities that such person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time, upon the happening of an event or otherwise), directly or
indirectly, of more of the Class A Common Stock of the Company than is
beneficially owned (as defined above) at such time by the Principal and his
Related Parties in the aggregate, (B) the Principal and his Related Parties
collectively cease to beneficially own (as defined above) Voting Stock of the
Company having at least 30% of the combined voting power of all classes of
Voting Stock of the Company then outstanding or (C) the Principal and his
Affiliates acquire, in the aggregate, beneficial ownership (as defined above) of
more than 66 2/3 % of the shares of Class A Common Stock at the time outstanding
or (iv) the first day on which a majority of the members of the Board of
Directors are not Continuing Directors.
"Class A Common Stock" means the Company's Class A Common Stock, par
value $.01 per share.
"Closing Date" means the date on which shares of Series A Preferred
Stock are first issued.
"Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that (i) the Net Income (but not loss) of any Person that is
not a Subsidiary or that is accounted for by the equity method of accounting
shall be included only to the extent of the amount of dividends or distributions
paid in cash to the referent Person or a Wholly Owned Restricted Subsidiary
thereof, (ii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded, (iii) the cumulative effect of a change in accounting principles shall
be excluded and (iv) the Net Income of any Unrestricted Subsidiary shall be
excluded, whether or not distributed to the Company or one of its Subsidiaries.
"Company" means Pegasus Communications Corporation, a Delaware
corporation.
"Continuing Directors" means, as of any date of determination, any
member of the Board of Directors who (i) was a member of such Board of Directors
on the Closing Date or (ii) was nominated for election or elected to such Board
of Directors with the approval of a majority of the Continuing Directors who
were members of such Board at the time of such nomination or election.
"Corporate Trust Office of the Trustee" shall be at the address of
the Trustee specified in Section 11.02 hereof or such other address as to which
the Trustee may give notice to the Company.
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"Cumulative Operating Cash Flow" means, as of any date of
determination, Operating Cash Flow for the Company and its Restricted
Subsidiaries for the period (taken as one accounting period) from the beginning
of the first full month commencing after the Closing Date to the end of the most
recently ended fiscal quarter for which internal financial statements are
available at such date of determination, plus all cash dividends received by the
Company or a Wholly Owned Restricted Subsidiary of the Company from any
Unrestricted Subsidiary of the Company or any Unrestricted Subsidiary of any
Wholly Owned Restricted Subsidiary of the Company to the extent that such
dividends are not included in the calculation of permitted Restricted Payments
under paragraph (C) of Section 4.07(a) hereof by virtue of clause (iii) of such
paragraph.
"Cumulative Total Interest Expense" means, with respect to the
Company and its Restricted Subsidiaries, as of any date of determination, Total
Interest Expense for the period (taken as one accounting period) from the
beginning of the first full month commencing after the Closing Date to the end
of the most recently ended fiscal quarter for which internal financial
statements are available at such date of determination.
"DBS Cash Flow" means income from operations (before depreciation,
amortization and Non-Cash Incentive Compensation to the extent deducted in
arriving at income from operations) for the Satellite Segment determined on a
basis consistent with the segment data contained in the Company's consolidated
audited financial statements.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
"Depositary" means, with respect to the Exchange Notes issuable or
issued in whole or in part in global form, the Person specified in Section 2.03
hereof as the Depositary with respect to the Exchange Notes, until a successor
shall have been appointed and become such pursuant to the applicable provision
of this Indenture, and, thereafter, "Depositary" shall mean or include such
successor.
"Disqualified Stock" means any Capital Stock (other than the Series A
Preferred Stock) that, by its terms (or by the terms of any security into which
it is convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable at the option of the Holder thereof, in
whole or in part, on or prior to the mandatory redemption date of the Series A
Preferred Stock set forth in the Certificate of Designations unless, in any such
case, the issuer's obligation to pay, purchase or redeem such Capital Stock is
expressly conditioned on its ability to do so in compliance with the provisions
of Section 4.07 hereof.
"Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exchange Notes" means the Company's ___% Senior Subordinated
Exchange Notes due 2007 issuable in exchange for the Company's Series A
Preferred Stock.
"Existing Indebtedness" means all Indebtedness of the Company and its
Subsidiaries in existence on the Closing Date, until such amounts are repaid.
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"fair market value" means, with respect to assets or aggregate net
proceeds having a fair market value (a) of less than $5.0 million, the fair
market value of such assets or proceeds determined in good faith by the Board of
Directors (including a majority of the Independent Directors thereof) and
evidenced by a board resolution and (b) equal to or in excess of $5.0 million,
the fair market value of such assets or proceeds as determined by an independent
appraisal firm with experience in the valuation of the classes and types of
assets in question; provided that the fair market value of the assets purchased
in an arms'-length transaction by an Affiliate of the Company (other than a
Subsidiary) from a third party that is not also an Affiliate of the Company or
of such purchaser and contributed to the Company within five Business Days of
the consummation of the acquisition of such assets by such Affiliate shall be
deemed to be the aggregate consideration paid by such Affiliate (which may
include the fair market value of any non-cash consideration to the extent that
the valuation requirements of this definition are complied with as to any such
non-cash consideration).
"GAAP" means generally accepted accounting principles set forth in
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants and statements and
pronouncements of the Financial Accounting Standards Board or in such other
statements by such other entity as have been approved by a significant segment
of the accounting profession, which are in effect on the Closing Date.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States for the payment of which guarantee or
obligations the full faith and credit of the United States is pledged.
"Guarantee" means a guarantee (other than by endorsement of
negotiable instruments for collection in the ordinary course of business),
direct or indirect, in any manner (including, without limitation, co-borrowing
arrangements, letters of credit and reimbursement agreements in respect
thereof), of all or any part of any Indebtedness.
"Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Holder" means a Person in whose name an Exchange Note is registered.
"Indebtedness" means, with respect to any Person, any indebtedness of
such Person, whether or not contingent, in respect of borrowed money or
evidenced by bonds, notes, debentures or similar instruments or letters of
credit (or reimbursement agreements in respect thereof) or banker's acceptances
or representing any Capital Lease Obligations or the balance deferred and unpaid
of the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable, if
and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance sheet
of such Person prepared in accordance with GAAP, as well as all indebtedness of
others secured by a Lien on any asset of such Person (whether or not such
indebtedness is assumed by such Person) and, to the extent not otherwise
included, the Guarantee by such Person of any indebtedness of any other Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date; provided that the amount
outstanding at any time of any Indebtedness issued with original issue discount
is the full
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amount of such Indebtedness less the remaining unamortized portion of the
original issue discount of such Indebtedness at such time as determined in
conformity with GAAP.
"Indebtedness to Adjusted Operating Cash Flow Ratio" means, as of any
date of determination, the ratio of (a) the aggregate principal amount of all
outstanding Indebtedness of a Person and its Restricted Subsidiaries as of such
date on a consolidated basis, plus the aggregate liquidation preference of all
outstanding preferred stock (other than Qualified Subsidiary Stock) of the
Restricted Subsidiaries of such Person as of such date (excluding any such
preferred stock held by such Person or a Wholly Owned Restricted Subsidiary of
such Person), plus the aggregate liquidation preference or redemption amount of
all Disqualified Stock of such Person (excluding any Disqualified Stock held by
such Person or a Wholly Owned Restricted Subsidiary of such Person) as of such
date to (b) Adjusted Operating Cash Flow of such Person and its Restricted
Subsidiaries for the most recent four-quarter period for which internal
financial statements are available determined on a pro forma basis after giving
effect to all acquisitions and dispositions of assets (notwithstanding clause
(ii) of the definition of "Consolidated Net Income") (including, without
limitation, Asset Swaps) made by such Person and its Restricted Subsidiaries
since the beginning of such four-quarter period through such date as if such
acquisitions and dispositions had occurred at the beginning of such four-quarter
period.
"Indenture" means this Indenture, as amended or supplemented from
time to time.
"Independent Director" means a member of the Board of Directors who
is neither an officer nor an employee of the Company or any of its Affiliates.
"Investments" means, with respect to any Person, all investments by
such Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including Guarantees of Indebtedness or other obligations),
advances or capital contributions (excluding commission, travel and similar
advances to officers and employees made in the ordinary course of business),
purchases or other acquisitions for consideration of Indebtedness, Equity
Interests or other securities and all other items that are or would be
classified as investments on a balance sheet prepared in accordance with GAAP;
provided that an acquisition of assets, Equity Interests or other securities by
the Company for consideration consisting of common equity securities, or
preferred stock which is not Disqualified Stock, of the Company shall not be
deemed to be an Investment.
"Legal Holiday" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest shall accrue
for the intervening period.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation,
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dispositions pursuant to sale and leaseback transactions) or (b) the disposition
of any securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary or nonrecurring gain (but not loss),
together with any related provision for taxes on such extraordinary or
nonrecurring gain (but not loss).
"Net Proceeds" means the aggregate cash proceeds received by the
Company or any of its Restricted Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting, investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness in connection with such Asset Sale and any reserve
for adjustment in respect of the sale price of such asset or assets established
in accordance with GAAP.
"Non-Cash Incentive Compensation" means incentive compensation paid
to any officer, employee or director of the Company or any of its Subsidiaries
in the form of Class A Common Stock of the Company or options to purchase Class
A Common Stock of the Company pursuant to the Pegasus Communications Restricted
Stock Plan and the Pegasus Communications 1996 Stock Option Plan.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the
Company nor any of its Restricted Subsidiaries (a) provides credit support of
any kind (including any undertaking, agreement or instrument that would
constitute Indebtedness), (b) is directly or indirectly liable (as a guarantor
or otherwise) or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) as to which the lenders have been notified in
writing that they will not have any recourse to the stock or assets of the
Company or any of its Restricted Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Officer" means, with respect to any Person, the Chairman of the
Board, the Chief Executive Officer, the President, the Chief Operating Officer,
the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the
Controller, the Secretary, any Assistant Secretary, any Vice-President or any
Assistant Vice-President of such Person.
"Officers' Certificate" means a certificate signed on behalf of the
Company by two Officers of the Company, one of whom must be the principal
executive officer, the principal financial officer, the treasurer or the
principal accounting officer of the Company, that meets the requirements of
Section 11.05 hereof.
"Operating Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period, (a) plus (i)
extraordinary net losses and net losses on sales of assets outside the ordinary
course of business during such period, to the extent such losses were deducted
in computing such Consolidated Net Income, plus (ii) provision for taxes based
on income or profits, to the extent such provision for taxes was included in
computing such Consolidated Net
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Income, and any provision for taxes utilized in computing the net losses under
clause (i) hereof, plus (iii) consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued and whether or not
capitalized (including, without limitation, amortization of original issue
discount, non-cash interest payments, the interest component of any deferred
payment obligations, the interest component of all payments associated with
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letter of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations), to the extent that any
such expense was deducted in computing such Consolidated Net Income, plus (iv)
depreciation, amortization (including amortization of goodwill and other
intangibles but excluding amortization of prepaid cash expenses that were paid
in a prior period) and other non-cash charges (excluding any such non-cash
charge to the extent that it represents an accrual of or reserve for cash
charges in any future period or amortization of a prepaid cash expense that was
paid in a prior period) of such Person and its Subsidiaries for such period to
the extent that such depreciation, amortization and other non-cash charges were
deducted in computing such Consolidated Net Income, plus (v) Non-Cash Incentive
Compensation to the extent such compensation expense was deducted in computing
such Consolidated Net Income and to the extent not included in clause (iv) of
this definition and (b) less all non-cash income for such period (excluding any
such non-cash income to the extent it represents an accrual of cash income in
any future period or amortization of cash income received in a prior period).
"Opinion of Counsel" means an opinion from legal counsel who is not
unsatisfactory to the Trustee, that meets the requirements of Section 11.05
hereof. The counsel may be an employee of or counsel to the Company, any
Subsidiary of the Company or the Trustee.
"Pari Passu Debt" means senior subordinated Indebtedness of the
Company permitted by Section 4.09 hereof, other than the Exchange Notes, which
is pari passu in right of payment with the Exchange Notes.
"Permitted Businesses" means (a) any media or communications
business, including but not limited to, any broadcast television station, cable
franchise or other business in the television broadcasting, cable or
direct-to-home satellite television industries and (b) any business reasonably
related or ancillary to any of the foregoing businesses.
"Permitted Investments" means (a) any Investments in the Company or
in a Wholly Owned Restricted Subsidiary of the Company; (b) any Investments in
Cash Equivalents; (c) Investments by the Company or any Restricted Subsidiary of
the Company in a Person, if as a result of such Investment (i) such Person
becomes a Wholly Owned Restricted Subsidiary of the Company or (ii) such Person
is merged, consolidated or amalgamated with or into, or transfers or conveys
substantially all of its assets to, or is liquidated into, the Company or a
Wholly Owned Restricted Subsidiary of the Company; (d) Investments made as a
result of the receipt of non-cash consideration from an Asset Sale that was made
pursuant to and in compliance with the provisions of Section 4.10 hereof; and
(e) other Investments (measured as of the time made and without giving effect to
subsequent changes in value) that do not exceed an amount equal to $5.0 million
plus, to the extent any such Investments are sold for cash or are otherwise
liquidated or repaid for cash, any gains less any losses realized on the
disposition of such Investments.
"Permitted Liens" means (i) Liens securing Senior Debt; (ii) Liens
securing Indebtedness of a Subsidiary that was permitted to be incurred under
this Indenture, (iii) Liens on property of a Person existing at the time such
Person is merged into or consolidated with the Company or any Subsidiary of the
Company; provided that such Liens were not created in contemplation of such
merger or consolidation and do not extend to any assets other than those of the
Person merged into or consolidated
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with the Company or any Restricted Subsidiary of the Company; (iv) Liens on
property existing at the time of acquisition thereof by the Company or any
Subsidiary of the Company; provided that such Liens were not created in
contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
Liens existing on the Closing Date; (vii) Liens to secure Indebtedness
represented by Capital Lease Obligations, mortgage financings or purchase money
obligations permitted by clause (vi) of Section 4.09(b) hereof, covering only
the assets acquired with such Indebtedness; (viii) Liens for taxes, assessments
or governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded; provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor; (ix)
Liens incurred in the ordinary course of business of the Company or any
Subsidiary of the Company with respect to obligations that do not exceed $1.0
million at any one time outstanding and (x) Liens on assets of or Equity
Interests in Unrestricted Subsidiaries that secure Non-Recourse Debt of
Unrestricted Subsidiaries.
"Permitted Refinancing Debt" means any Indebtedness of the Company or
any of its Restricted Subsidiaries issued in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness of the Company or any of its Restricted Subsidiaries; provided that
(i) the principal amount of such Permitted Refinancing Debt does not exceed the
principal amount of the Indebtedness so extended, refinanced, renewed, replaced,
defeased or refunded (plus (a) the amount of reasonable expenses incurred in
connection therewith and (b) the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of such refinancing or
deemed by the Company or such Restricted Subsidiary necessary to be paid in
order to effectuate such refinancing); (ii) such Permitted Refinancing Debt has
a final maturity date not earlier than the final maturity date of, and has a
Weighted Average Life to Maturity equal to or greater than the Weighted Average
Life to Maturity of, the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; (iii) if the Indebtedness being extended,
refinanced, renewed, replaced, defeased or refunded is subordinated in right of
payment to the Exchange Notes, such Permitted Refinancing Debt has a final
maturity date later than the final maturity date of the Exchange Notes, and is
subordinated in right of payment to the Exchange Notes on terms at least as
favorable to the Holders of Exchange Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, partnership, joint
venture, association, joint-stock company, trust, unincorporated organization or
government or agency or political subdivision thereof (including any subdivision
or ongoing business of any such entity or substantially all of the assets of any
such entity, subdivision or business).
"Preferred Stock," of any Person, means Capital Stock of such Person
of any class or series (however designated) that ranks prior, as to payment of
dividends or as to the distribution of assets upon any voluntary or involuntary
liquidation, dissolution or winding up of such Person, to shares of Capital
Stock of any other class or series of such Person.
"Principal" means Marshall W. Pagon.
"Qualified Subsidiary Stock" means Capital Stock of a Subsidiary of
the Company which by its terms (a) does not mature, or is not mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise and is not
redeemable at the option of the Holder thereof, in whole or in part, prior to
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__________, 2008 (in each case, whether automatically or upon the happening of
any event) (unless, in any such case, the issuer's obligation to pay, purchase
or redeem such Capital Stock is expressly conditioned on its ability to do so in
compliance with the provisions of Section 4.07 hereof), (b) is automatically
exchangeable into shares of Capital Stock of the Company that is not
Disqualified Stock upon the earlier to occur of (i) the occurrence of an Event
of Default and (ii) __________, 2006, (c) has no voting or remedial rights and
(d) does not permit the payment of cash dividends prior to __________, 2007
(unless, in the case of this clause (d), the issuer's ability to pay cash
dividends is expressly conditioned on its ability to do so in compliance with
the provisions of Section 4.07 hereof).
"Related Party" with respect to the Principal means (A) any immediate
family member of the Principal or (B) any trust, corporation, partnership or
other entity, more than 50% of the voting equity interests of which are owned
directly or indirectly by, and which is controlled by, the Principal and/or such
other Persons referred to in the immediately preceding clause (A). For purposes
of this definition, (i) "immediate family member" means spouse, parent,
step-parent, child, sibling or step-sibling and (ii) "control" has the meaning
specified in the definition of "Affiliate" contained in this Section 1.01. In
addition, the Principal's estate shall be deemed to be a Related Party until
such time as such estate is distributed in accordance with the Principal's will
or applicable state law.
"Responsible Officer," when used with respect to the Trustee, means
any authorized officer within the Corporate Trust Administration department of
the Trustee (or any successor group of the Trustee) or any other officer of the
Trustee customarily performing functions similar to those performed by any of
the above designated officers and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his knowledge of and familiarity with the particular subject.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary.
"Satellite Segment" means the business involved in the marketing of
video and audio programming and data information services through transmission
media consisting of space-based satellite broadcasting services, the assets
related to the conduct of such business held by the Company and its Restricted
Subsidiaries on the Closing Date, plus all other assets acquired by the Company
or any of its Restricted Subsidiaries that are directly related to such business
(excluding, without limitation, the terrestrial television broadcasting business
and the assets related thereto and the cable television business and the assets
related thereto); provided that any assets acquired by the Company or any of its
Restricted Subsidiaries after the Closing Date that are not directly related to
such business shall not be included for purposes of this definition.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Series A Preferred Stock" means the Company's ___% Series A
Cumulative Exchangeable Preferred Stock.
"Significant Subsidiary" means any Subsidiary that would be a
"significant subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X,
promulgated pursuant to the Securities Act, as such Regulation is in effect on
the Closing Date.
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"Split Dollar Agreement" means the Split Dollar Agreement between the
Company and Nicholas A. Pagon, Holly T. Pagon and Michael B. Jordan, as trustees
of an insurance trust established by Marshall W. Pagon, as in effect on the
Closing Date.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. Sections
77aaa-77bbbb) as amended as in effect on the date of this Indenture.
"Total Interest Expense" means, with respect to any Person for any
period, the sum of (i) the consolidated interest expense of such Person and its
Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations) and (ii) the consolidated interest expense of such
Person and its Restricted Subsidiaries that was capitalized during such period,
to the extent such amounts are not included in clause (i) of this definition,
and (iii) any interest expense for such period on Indebtedness of another Person
that is Guaranteed by such Person or one of its Restricted Subsidiaries or
secured by a Lien on assets (other than Equity Interests in Unrestricted
Subsidiaries securing Indebtedness of Unrestricted Subsidiaries) of such Person
or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is
called upon) and (iv) all cash and non-cash dividend payments during such period
on any series of preferred stock of a Restricted Subsidiary of such Person.
"Trustee" means the party named as such above until a successor
replaces it in accordance with the applicable provisions of this Indenture and
thereafter means the successor serving hereunder.
"Unrestricted Subsidiary" means any Subsidiary that is designated by
the Board of Directors as an Unrestricted Subsidiary pursuant to a Board
resolution; but only to the extent that such Subsidiary (a) has no Indebtedness
other than Non-Recourse Debt; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Restricted Subsidiary of
the Company unless the terms of any such agreement, contract, arrangement or
understanding are no less favorable to the Company or such Restricted Subsidiary
than those that might be obtained at the time from Persons who are not
Affiliates of the Company; (c) is a Person with respect to which neither the
Company nor any of its Restricted Subsidiaries has any direct or indirect
obligation (x) to subscribe for additional Equity Interests or (y) to maintain
or preserve such Person's financial condition or to cause such Person to achieve
any specified levels of operating results; (d) has not guaranteed or otherwise
directly or indirectly provided credit support for any Indebtedness of the
Company or any of its Restricted Subsidiaries; and (e) has at least one
executive officer that is not a director or executive officer of the Company or
any of its Restricted Subsidiaries. Any such designation made by the Board of
Directors at a time when any Exchange Notes are outstanding shall be evidenced
to the Trustee by filing with the Trustee a certified copy of the Board
resolution giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions and was
permitted
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by the provisions of Section 4.07 hereof. If, at any time, any Unrestricted
Subsidiary would fail to meet the foregoing requirements as an Unrestricted
Subsidiary, it shall thereafter cease to be an Unrestricted Subsidiary for
purposes of this Indenture and any Indebtedness of such Subsidiary shall be
deemed to be incurred by a Restricted Subsidiary of the Company as of such date
(and, if such Indebtedness is not permitted to be incurred as of such date under
the provisions of Section 4.09 hereof (treating such Subsidiary as a Restricted
Subsidiary for such purpose for the period relevant to such covenant), the
Company shall be in default of such covenant); provided, however, that in the
event an Unrestricted Subsidiary ceases to meet the requirement set forth in
clause (e) of this definition, such Unrestricted Subsidiary shall have 60 days
to meet such requirement before such Unrestricted Subsidiary shall cease to be
an Unrestricted Subsidiary. The Board of Directors may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall be permitted only if (i) such Indebtedness
is permitted under Section 4.09 hereof (treating such Subsidiary as a Restricted
Subsidiary for such purpose for the period relevant to such covenant) and (ii)
no Default or Event of Default would be in existence following such designation.
"Voting Stock" means with respect to any specified Person, Capital
Stock with voting power, under ordinary circumstances and without regard to the
occurrence of any contingency, to elect the directors or other managers or
trustees of such Person.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (i) the sum
of the products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock (other than
Qualified Subsidiary Stock) or other ownership interests of which (other than
directors' qualifying shares) shall at the time be owned by such Person and/or
by one or more Wholly Owned Restricted Subsidiaries of such Person.
SECTION 1.02. OTHER DEFINITIONS.
Defined in
Term Section
"Affiliate Transaction"............................. 4.11
"Asset Sale Offer" ................................. 4.10
"Basket Period"..................................... 4.07
"Change of Control Offer"........................... 4.13
"Change of Control Payment"......................... 4.13
"Change of Control Payment Date".................... 4.13
"Covenant Defeasance"............................... 8.03
"Custodian"......................................... 6.01
"Designated Senior Debt"............................ 10.02
"distribution"...................................... 10.02
"DTC"............................................... 2.03
"Event of Default".................................. 6.01
"Excess Proceeds"................................... 4.10
"incur"............................................. 4.09
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"Legal Defeasance" ............................... 8.02
"Notice of Default"............................... 6.01
"Offer Amount" ................................... 3.09
"Offer Period .................................... 3.09
"outstanding"..................................... 8.02
"Paying Agent".................................... 2.03
"Payment Blockage Notice"......................... 10.04
"Payment Default"................................. 6.01
"Purchase Date" .................................. 3.09
"Registrar"....................................... 2.03
"Representative" ................................. 10.02
"Restricted Payments"............................. 4.07
"Senior Bank Debt"................................ 10.02
"Senior Debt"..................................... 10.02
SECTION 1.03. INCORPORATION BY REFERENCE OF TRUST INDENTURE ACT.
Whenever this Indenture refers to a provision of the TIA, the
provision is incorporated by reference in and made a part of this Indenture.
The following TIA terms used in this Indenture have the following
meanings:
"indenture securities" means the Exchange Notes;
"indenture security Holder" means a Holder of an Exchange Note;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the Trustee;
"obligor" on the Exchange Notes means the Company and any successor
obligor upon the Exchange Notes.
All other terms used in this Indenture that are defined by the TIA,
defined by TIA reference to another statute or defined by SEC rule under the TIA
have the meanings so assigned to them.
SECTION 1.04. RULES OF CONSTRUCTION.
Unless the context otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning assigned
to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) words in the singular include the plural, and in the plural
include the singular;
(5) provisions apply to successive events and transactions; and
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(6) references to sections of or rules under the Securities Act shall
be deemed to include substitute, replacement of successor sections or
rules adopted by the SEC from time to time.
ARTICLE 2
THE EXCHANGE NOTES
SECTION 2.01. FORM AND DATING.
The Exchange Notes and the Trustee's certificate of authentication
shall be substantially in the form of Exhibit A hereto. The Exchange Notes may
have notations, legends or endorsements required by law, stock exchange rule or
usage. Each Exchange Note shall be dated the date of its authentication.
The Exchange Notes shall be in all appropriate denominations.
The terms and provisions contained in the Exchange Notes shall
constitute, and are hereby expressly made, a part of this Indenture and the
Company and the Trustee, by their execution and delivery of this Indenture,
expressly agree to such terms and provisions and to be bound thereby.
SECTION 2.02. EXECUTION AND AUTHENTICATION.
Two Officers shall sign the Exchange Notes for the Company by manual
or facsimile signature.
If an Officer whose signature is on an Exchange Note no longer holds
that office at the time an Exchange Note is authenticated, the Exchange Note
shall nevertheless be valid.
An Exchange Note shall not be valid until authenticated by the manual
signature of the Trustee. The signature shall be conclusive evidence that the
Exchange Note has been authenticated under this Indenture.
The Trustee shall, upon a written order of the Company signed by two
Officers, authenticate Exchange Notes for original issue up to the aggregate
principal amount stated in paragraph 4 of the Exchange Notes. The aggregate
principal amount of Exchange Notes outstanding at any time may not exceed such
amount except as provided in Section 2.07 hereof.
The Trustee may appoint an authenticating agent acceptable to the
Company to authenticate the Exchange Notes. An authenticating agent may
authenticate Exchange Notes whenever the Trustee may do so. Each reference in
this Indenture to authentication by the Trustee includes authentication by such
agent. An authenticating agent has the same rights as an Agent to deal with the
Company or an Affiliate of the Company.
SECTION 2.03. REGISTRAR AND PAYING AGENT.
The Company shall maintain an office or agency where Exchange Notes
may be presented for registration of transfer or for exchange ("Registrar") and
an office or agency where Exchange Notes may be presented for payment ("Paying
Agent"). The Registrar shall keep a register of the Exchange Notes and of their
transfer and exchange. The Company may appoint one or more co-registrars and one
or more additional paying agents. The term "Registrar" includes any co-registrar
and the term "Paying Agent" includes any additional paying agent. The Company
may change any Paying Agent or Registrar without notice to any Holder. The
Company shall notify the Trustee in writing of the name
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and address of any Agent not a party to this Indenture. If the Company fails to
appoint or maintain another entity as Registrar or Paying Agent, the Trustee
shall act as such. The Company may act as Paying Agent or Registrar.
The Company initially appoints The Depository Trust Company ("DTC")
to act as Depositary with respect to the Exchange Notes.
The Company initially appoints the Trustee to act as the Registrar
and Paying Agent.
SECTION 2.04. PAYING AGENT TO HOLD MONEY IN TRUST.
The Company shall require each Paying Agent other than the Trustee to
agree in writing that the Paying Agent will hold in trust for the benefit of
Holders or the Trustee all money held by the Paying Agent for the payment of
principal, premium, if any, or interest on the Exchange Notes, and will notify
the Trustee of any default by the Company in making any such payment. While any
such default continues, the Trustee may require a Paying Agent to pay all money
held by it to the Trustee. The Company at any time may require a Paying Agent to
pay all money held by it to the Trustee. Upon payment over to the Trustee, the
Paying Agent (if other than the Company or a Subsidiary) shall have no further
liability for the money. If the Company or a Subsidiary acts as Paying Agent, it
shall segregate and hold in a separate trust fund for the benefit of the Holders
all money held by it as Paying Agent. Upon any bankruptcy or reorganization
proceedings relating to the Company, the Trustee shall serve as Paying Agent for
the Exchange Notes.
SECTION 2.05. HOLDER LISTS.
The Trustee shall preserve in as current a form as is reasonably
practicable the most recent list available to it of the names and addresses of
all Holders and shall otherwise comply with TIA ss. 312(a). If the Trustee is
not the Registrar, the Company shall furnish to the Trustee at least seven
Business Days before each interest payment date and at such other times as the
Trustee may request in writing, a list in such form and as of such date as the
Trustee may reasonably require of the names and addresses of the Holders of
Exchange Notes and the Company shall otherwise comply with TIA ss. 312(a).
SECTION 2.06. TRANSFER AND EXCHANGE.
When Exchange Notes are presented by a Holder to the Registrar with a
request to register, transfer or exchange them for an equal principal amount of
Exchange Notes of other denominations, the Registrar shall register the transfer
or make the exchange if its requirements for such transactions are met;
provided, however, that any Exchange Note presented or surrendered for
registration of transfer or exchange shall be duly endorsed or accompanied by a
written instruction of transfer in form satisfactory to the Registrar and the
Trustee duly executed by the Holder thereof or by his attorney duly authorized
in writing. To permit registrations of transfer and exchanges, the Company shall
issue and the Trustee shall authenticate Exchange Notes at the Registrar's
request, subject to such rules as the Trustee may reasonably require.
Neither the Company nor the Registrar shall be required (i) to issue
or register the transfer of Exchange Notes during a period beginning at the
opening of business on a Business Day fifteen (15) days before the day of any
selection of Exchange Notes for redemption under Section 3.02 hereof and ending
at the close of business on the day of selection, (ii) to register the transfer
of or exchange any Exchange Notes so selected for redemption, in whole or in
part, except the unredeemed portion of any
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Exchange Note being redeemed in part or (iii) to register the transfer or
exchange of an Exchange Note between a record date and the next succeeding
interest payment date.
No service charge shall be made to any Holder for any registration of
transfer or exchange (except as otherwise expressly permitted herein), but the
Company may require payment of a sum sufficient to cover any transfer tax or
similar governmental charge payable in connection therewith (other than such
transfer tax or similar governmental charge payable upon exchanges pursuant to
Sections 2.10, 3.06 or 9.05 hereof, which shall be paid by the Company).
Prior to due presentment for registration of transfer of any Exchange
Note, the Trustee, any Agent and the Company may deem and treat the Person in
whose name any Exchange Note is registered as the absolute owner of such
Exchange Note for the purpose of receiving payment of principal of, premium, if
any, and interest on such Exchange Note and for all other purposes whatsoever,
whether or not such Exchange Note is overdue, and neither the Trustee, any
Agent, nor the Company shall be affected by notice to the contrary.
SECTION 2.07. REPLACEMENT EXCHANGE NOTES.
If any mutilated Exchange Note is surrendered to the Trustee, or the
Company and the Trustee receives evidence to its satisfaction of the
destruction, loss or theft of any Exchange Note, the Company shall issue and the
Trustee, upon the written order of the Company signed by two Officers of the
Company, shall authenticate a replacement Exchange Note if the Trustee's
requirements are met. If required by the Trustee or the Company, an indemnity
bond must be supplied by the Holder that is sufficient in the judgment of the
Trustee and the Company to protect the Company, the Trustee, any Agent and any
authenticating agent from any loss that any of them may suffer if an Exchange
Note is replaced. The Company may charge for its expenses in replacing an
Exchange Note.
Every replacement Exchange Note is an additional obligation of the
Company and shall be entitled to all of the benefits of this Indenture equally
and proportionately with all other Exchange Notes duly issued hereunder.
SECTION 2.08. OUTSTANDING EXCHANGE NOTES.
The Exchange Notes outstanding at any time are all the Exchange Notes
authenticated by the Trustee except for those cancelled by it, those delivered
to it for cancellation and those described in this Section 2.08 as not
outstanding. Except as set forth in Section 2.09 hereof, an Exchange Note does
not cease to be outstanding because the Company or an Affiliate of the Company
holds the Exchange Note.
If an Exchange Note is replaced pursuant to Section 2.07 hereof, it
ceases to be outstanding unless the Trustee receives proof satisfactory to it
that the replaced Exchange Note is held by a bona fide purchaser.
If the principal amount of any Exchange Note is considered paid under
Section 4.01 hereof, it ceases to be outstanding and interest on it ceases to
accrue.
If the Paying Agent (other than the Company, a Subsidiary or an
Affiliate of any thereof) holds, by 10:00 a.m. Eastern Time on a redemption date
or maturity date, money sufficient to pay the Exchange Notes payable on that
date, then on and after that date such Exchange Notes shall be deemed to be no
longer outstanding and shall cease to accrue interest, if any.
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SECTION 2.09. TREASURY EXCHANGE NOTES.
In determining whether the Holders of the required principal amount
of Exchange Notes have concurred in any direction, waiver or consent, Exchange
Notes owned by the Company or by any Person directly or indirectly controlling
or controlled by or under direct or indirect common control with the Company,
shall be considered as though not outstanding, except that for the purposes of
determining whether the Trustee shall be protected in relying on any such
direction, waiver or consent, only Exchange Notes that the Trustee knows are so
owned shall be so disregarded. In connection with any such determination, the
Company agrees to notify the Trustee of the existence of any Exchange Notes
owned by the Company or any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company.
SECTION 2.10. TEMPORARY EXCHANGE NOTES.
Until definitive Exchange Notes are ready for delivery, the Company
may prepare and the Trustee shall authenticate temporary Exchange Notes upon a
written order of the Company signed by two Officers of the Company. Temporary
Exchange Notes shall be substantially in the form of Exchange Notes but may have
variations that the Company considers appropriate for temporary Exchange Notes
and as shall be reasonably acceptable to the Trustee. Without unreasonable
delay, the Company shall prepare and the Trustee shall authenticate Exchange
Notes in exchange for temporary Exchange Notes.
Holders of temporary Exchange Notes shall be entitled to all of the
benefits of this Indenture.
SECTION 2.11. CANCELLATION.
The Company at any time may deliver Exchange Notes to the Trustee for
cancellation. The Registrar and Paying Agent shall forward to the Trustee any
Exchange Notes surrendered to them for registration of transfer, exchange or
payment. The Trustee and no one else shall cancel all Exchange Notes surrendered
for registration of transfer, exchange, payment, replacement or cancellation and
shall destroy cancelled Exchange Notes (subject to the record retention
requirement of the Exchange Act). Certification of the destruction of all
cancelled Exchange Notes shall be delivered to the Company unless the Company
directs the Trustee to return the Exchange Notes to the Company upon written
order signed by two Officers of the Company. The Company may not issue new
Exchange Notes to replace Exchange Notes that have been paid or that have been
delivered to the Trustee for cancellation.
SECTION 2.12. DEFAULTED INTEREST.
If the Company defaults in a payment of interest on the Exchange
Notes, they shall pay the defaulted interest in any lawful manner plus, to the
extent lawful, interest payable on the defaulted interest, to the Persons who
are Holders on a subsequent special record date, in each case at the rate
provided in the Exchange Notes and in Section 4.01 hereof. The Company shall
notify the Trustee in writing of the amount of defaulted interest proposed to be
paid on each Exchange Note and the date of the proposed payment. The Company
shall fix or cause to be fixed each such special record date and payment date,
provided that no such special record date shall be less than 10 days prior to
the related payment date for such defaulted interest. At least 15 days before
the special record date, the Company (or, upon the written request of the
Company, the Trustee in the name and at the expense of the Company) shall mail
or cause to be mailed to Holders a notice that states the special record date,
the related payment date and the amount of such interest to be paid.
Notwithstanding the foregoing, such interest may be paid at any time in any
other lawful manner not inconsistent with the requirements
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of any securities exchange on which the Exchange Notes may be listed, and upon
such notice as may be required by such exchange.
ARTICLE 3
REDEMPTION AND PREPAYMENT
SECTION 3.01. NOTICES TO TRUSTEE.
If the Company elects to redeem Exchange Notes pursuant to the
optional redemption provisions of Section 3.07 hereof, it shall furnish to the
Trustee, at least 30 days (unless a shorter period may be satisfactory to the
Trustee) but not more than 60 days before a redemption date, an Officers'
Certificate setting forth (i) the clause of this Indenture pursuant to which the
redemption shall occur, (ii) the redemption date, (iii) the principal amount of
Exchange Notes to be redeemed and (iv) the redemption price.
If the Company is required to make an offer to purchase Exchange
Notes pursuant to the provisions of Section 4.13 hereof, it shall furnish to the
Trustee an Officers' Certificate setting forth (i) the Section of this Indenture
pursuant to which the purchase shall occur, (ii) the purchase date, (iii) the
principal amount of Exchange Notes to be purchased, (iv) the purchase price and
(v) a statement to the effect that a Change of Control has occurred and the
conditions set forth in Section 4.13 hereof have been satisfied, as applicable.
SECTION 3.02. SELECTION OF EXCHANGE NOTES TO BE REDEEMED.
If less than all of the Exchange Notes are to be redeemed at any
time, the Trustee shall select the Exchange Notes to be redeemed among the
Holders of the Exchange Notes in compliance with the requirements of the
principal national securities exchange, if any, on which the Exchange Notes are
listed or, if the Exchange Notes are not so listed, to be redeemed among the
Holders of Exchange Notes on a pro rata basis, by lot or by such method as the
Trustee deems fair and appropriate. In the event of partial redemption by lot,
the particular Exchange Notes to be redeemed shall be selected, unless otherwise
provided herein, not less than 30 nor more than 60 days prior to the redemption
date by the Trustee from the outstanding Exchange Notes not previously called
for redemption.
The Trustee shall promptly notify the Company in writing of the
Exchange Notes selected for redemption and, in the case of any Exchange Note
selected for partial redemption, the principal amount thereof to be redeemed.
Exchange Notes and portions of Exchange Notes selected shall be in amounts of
$1,000 or whole multiples of $1,000; except that if all of the Exchange Notes of
a Holder are to be redeemed, the entire outstanding amount of Exchange Notes
held by such Holder, even if not a multiple of $1,000, shall be redeemed. A new
Exchange Note in principal amount equal to the unredeemed portion thereof will
be issued in the name of the Holder thereof upon cancellation of the original
Exchange Note. On and after the redemption date, interest ceases to accrue on
Exchange Notes or portions of them called for redemption. Except as provided in
this Section 3.02, provisions of this Indenture that apply to Exchange Notes
called for redemption also apply to portions of Exchange Notes called for
redemption.
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SECTION 3.03. NOTICE OF REDEMPTION.
Subject to the provisions of Section 3.09 hereof, at least 30 days
but not more than 60 days before a redemption date, the Company shall mail or
cause to be mailed, by first class mail, a notice of redemption to each Holder
whose Exchange Notes are to be redeemed at its registered address.
The notice shall identify the Exchange Notes to be redeemed and shall
state:
(a) the redemption date;
(b) the redemption price;
(c) if any Exchange Note is being redeemed in part, the portion of
the principal amount of such Exchange Note to be redeemed and that, after
the redemption date upon surrender of such Exchange Note, a new Exchange
Note or Exchange Notes in principal amount equal to the unredeemed portion
shall be issued upon cancellation of the original Exchange Note;
(d) the name and address of the Paying Agent;
(e) that Exchange Notes called for redemption must be surrendered to
the Paying Agent to collect the redemption price;
(f) that, unless the Company defaults in making such redemption
payment, interest on Exchange Notes called for redemption ceases to accrue
on and after the redemption date;
(g) the paragraph of the Exchange Notes and/or Section of this
Indenture pursuant to which the Exchange Notes called for redemption are
being redeemed; and
(h) that no representation is made as to the correctness or accuracy
of the CUSIP number, if any, listed in such notice or printed on the
Exchange Notes.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at its expense; provided, however, that the
Company shall have delivered to the Trustee, at least 30 days prior to the
redemption date, an Officers' Certificate requesting that the Trustee give such
notice and setting forth the information to be stated in such notice as provided
in the preceding paragraph.
SECTION 3.04. EFFECT OF NOTICE OF REDEMPTION.
Once notice of redemption is mailed in accordance with Section 3.03
hereof, Exchange Notes called for redemption become irrevocably due and payable
on the redemption date at the redemption price. A notice of redemption may not
be conditional.
SECTION 3.05. DEPOSIT OF REDEMPTION OR PURCHASE PRICE.
One Business Day prior to 10:00 a.m. Eastern Time on the redemption
date, the Company shall deposit with the Trustee or with the Paying Agent money
in immediately available funds sufficient to pay the redemption or purchase
price of and accrued interest, if any, on all Exchange Notes to be redeemed or
purchased on that date. The Trustee or the Paying Agent shall promptly return to
the Company any money deposited with the Trustee or the Paying Agent by the
Company in excess of the
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amounts necessary to pay the redemption or purchase price of, and accrued
interest on, all Exchange Notes to be redeemed or purchased.
If Exchange Notes called for redemption or tendered in a Change of
Control Offer are paid or if the Company has deposited with the Trustee or
Paying Agent money sufficient to pay the redemption or purchase price of, and
unpaid and accrued interest, if any, on all Exchange Notes to be redeemed or
purchased, on and after the applicable redemption or purchase date, interest, if
any, ceases to accrue on the Exchange Notes or the portions of Exchange Notes
called for redemption or tendered and not withdrawn in a Change of Control Offer
(regardless of whether certificates for such Exchange Notes are actually
surrendered). If an Exchange Note is redeemed or purchased on or after an
interest record date but on or prior to the related interest payment date, then
any accrued and unpaid interest, if any, shall be paid to the Person in whose
name such Exchange Note was registered at the close of business on such record
date. If any Exchange Note called for redemption or subject to a Change of
Control Offer shall not be so paid upon surrender for redemption or purchase
because of the failure of the Company to comply with the preceding paragraph,
interest shall be paid on the unpaid principal, from the redemption or purchase
date until such principal is paid, and to the extent lawful on any interest not
paid on such unpaid principal, in each case, at the rate provided in the
Exchange Notes and in Section 4.01 hereof.
SECTION 3.06. EXCHANGE NOTES REDEEMED OR PURCHASED IN PART.
Upon surrender of an Exchange Note that is redeemed or purchased in
part, the Company shall issue and, upon the Company's written request, the
Trustee shall authenticate for the Holder at the expense of the Company a new
Exchange Note equal in principal amount to the unredeemed or unpurchased portion
of the Exchange Note surrendered.
SECTION 3.07. OPTIONAL REDEMPTION.
(a) The Exchange Notes are not redeemable, in whole or in part, at
the Company's option prior to __________, 2002. The Exchange Notes may be
redeemed, in whole or in part, at the option of the Company on or after
__________, 2002, at the redemption prices specified below (expressed as a
percentage of the principal amount thereof), in each case, together with accrued
and unpaid interest, if any, thereon to the date of redemption, upon not less
than 30 nor more than 60 days' notice, if redeemed during the 12-month period
beginning on __________ of the years indicated below:
Year Redemption
---- ----------
Rate
2002........................................................ ______%
2003........................................................ ______%
2004........................................................ ______%
2005 and thereafter......................................... 100.00%
(b) Notwithstanding the foregoing, during the first 36 months after
the Closing Date, the Company may, on any one or more occasions, use the net
proceeds of one or more offerings of its Class A Common Stock to redeem up to
25% of the aggregate principal amount of the Exchange Notes (whether issued in
exchange for Series A Preferred Stock or in lieu of cash interest payments) at
the redemption price of 110% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption; provided that, after any such
redemption, the aggregate principal amount of the Exchange Notes outstanding
must equal at least $75.0 million; and provided further, that any such
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redemption shall occur within 90 days of the date of closing of such offering of
Class A Common Stock of the Company.
SECTION 3.08. MANDATORY REDEMPTION.
Except as set forth under Sections 4.10 and 4.13 hereof, the Company
shall not be required to make mandatory redemption or sinking fund payments with
respect to the Exchange Notes.
SECTION 3.09. OFFER TO PURCHASE BY APPLICATION OF EXCESS PROCEEDS.
(a) In the event that, pursuant to Section 4.10 hereof, the Company
shall be required to commence an Asset Sale Offer, it shall follow the
procedures specified below with respect to the Holders of Exchange Notes.
(b) The Asset Sale Offer shall remain open for a period of 20
Business Days following its commencement and no longer, except to the extent
that a longer period is required by applicable law (the "Offer Period"). No
later than five Business Days after the termination of the Offer Period (the
"Purchase Date"), the Company shall purchase the principal amount of Exchange
Notes required to be purchased pursuant to Section 4.10 hereof (the "Offer
Amount") or, if less than the Offer Amount has been tendered, all Exchange Notes
tendered in response to the Asset Sale Offer. Payment for any Exchange Notes so
purchased shall be made in the same manner as interest payments are made.
(c) The Company shall comply with any tender offer rules under the
Exchange Act which may then be applicable, including Rule 14e-1, in connection
with any offer required to be made by the Company to repurchase the Exchange
Notes as a result of an Asset Sale Offer. To the extent that the provisions of
any securities laws or regulations conflict with provisions of this Section
3.09, the Company shall comply with the applicable securities laws or
regulations and shall not be deemed to have breached its obligations hereunder
by virtue thereof.
(d) If the Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
shall be paid to the Person in whose name an Exchange Note is registered at the
close of business on such record date, and no additional interest shall be
payable to Holders who tender Exchange Notes pursuant to the Asset Sale Offer.
(e) Upon the commencement of an Asset Sale Offer, the Company shall
send, by first class mail, a notice to the Trustee and each of the Holders, with
a copy to the Trustee. The notice shall contain all instructions and materials
necessary to enable such Holders to tender Exchange Notes pursuant to the Asset
Sale Offer. The Asset Sale Offer shall be made to all Holders. The notice, which
shall govern the terms of the Asset Sale Offer, shall state:
(i) that the Asset Sale Offer is being made pursuant to this
Section 3.09 and Section 4.10 hereof and the length of time the Asset Sale
Offer shall remain open;
(ii) the Offer Amount, the purchase price and the Purchase Date;
(iii) that any Exchange Note not tendered or accepted for
payment shall continue to accrue interest;
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(iv) that, unless the Company defaults in making such payment,
any Exchange Note accepted for payment pursuant to the Asset Sale Offer
shall cease to accrue interest after the Purchase Date;
(v) that Holders electing to have an Exchange Note purchased
pursuant to an Asset Sale Offer may only elect to have all of such
Exchange Note purchased and may not elect to have only a portion of such
Exchange Note purchased;
(vi) that Holders electing to have an Exchange Note purchased
pursuant to any Asset Sale Offer shall be required to surrender the
Exchange Note, with the form entitled "Option of Holder to Elect Purchase"
on the reverse of the Exchange Note completed, or transfer by book-entry
transfer, to the Company, a depositary, if appointed by the Company, or a
Paying Agent at the address specified in the notice at least three days
before the Purchase Date;
(vii) that Holders shall be entitled to withdraw their election
if the Company, the Depositary or the Paying Agent, as the case may be,
receives, not later than the expiration of the Offer Period, a telegram,
telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Exchange Note the Holder delivered for
purchase and a statement that such Holder is withdrawing his election to
have such Exchange Note purchased;
(viii) that, if the aggregate principal amount of Exchange Notes
surrendered by Holders exceeds the Offer Amount, the Company shall select
the Exchange Notes to be purchased on a pro rata basis (with such
adjustments as may be deemed appropriate by the Company so that only
Exchange Notes in denominations of $1,000, or integral multiples thereof,
shall be purchased, other than in the case of Holders whose Exchange Notes
were purchased in whole); and
(ix) that Holders whose Exchange Notes were purchased only in
part shall be issued new Exchange Notes equal in principal amount to the
unpurchased portion of the Exchange Notes surrendered (or transferred by
book-entry transfer).
(f) On or before the Purchase Date, the Company shall, to the extent
lawful, accept for payment, on a pro rata basis to the extent necessary, the
Offer Amount of Exchange Notes or portions thereof tendered pursuant to the
Asset Sale Offer, or if less than the Offer Amount has been tendered, all
Exchange Notes tendered, and shall deliver to the Trustee an Officers'
Certificate stating that such Exchange Notes or portions thereof were accepted
for payment by the Company in accordance with the terms of this Section 3.09.
The Company, the Depositary or the Paying Agent, as the case may be, shall
promptly (but in any case not later than five days after the Purchase Date) mail
or deliver to each tendering Holder of Exchange Notes an amount equal to the
purchase price of the Exchange Notes tendered by such Holder of Exchange Notes
and accepted by the Company for purchase, and the Company shall promptly issue a
new Exchange Note and the Trustee, upon written request from the Company shall
authenticate and mail or deliver such new Exchange Note to such Holder of
Exchange Notes in a principal amount equal to any unpurchased portion of the
Exchange Note surrendered. Any Exchange Note not so accepted shall be promptly
mailed or delivered by the Company to the Holder of Exchange Notes thereof. The
Company shall publicly announce the results of the Asset Sale Offer on the
Purchase Date.
(g) Other than as specifically provided in this Section 3.09, any
purchase pursuant to this Section 3.09 shall be made pursuant to the provisions
of Sections 3.01 through 3.06 hereof. No repurchase of Exchange Notes under this
Section 3.09 shall be deemed to be a redemption of Exchange Notes.
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ARTICLE 4
COVENANTS
SECTION 4.01. PAYMENT OF EXCHANGE NOTES.
The Company shall pay or cause to be paid the principal of, premium,
if any, and interest on the Exchange Notes on the dates and in the manner
provided in the Exchange Notes. Principal, premium, if any, and interest shall
be considered paid on the date due if the Paying Agent, if other than the
Company, a Subsidiary or an Affiliate of any thereof, holds as of 10:00 a.m.
Eastern Time on the due date money deposited by the Company in immediately
available funds and designated for and sufficient to pay all principal, premium,
if any, and interest then due.
The Company shall pay interest (including post-petition interest in
any proceeding under any Bankruptcy Law) on overdue principal at the rate equal
to 1% per annum in excess of the then applicable interest rate on the Exchange
Notes to the extent lawful; it shall pay interest (including post-petition
interest in any proceeding under any Bankruptcy Law) on overdue installments of
interest (without regard to any applicable grace period) at the same rate to the
extent lawful.
SECTION 4.02. MAINTENANCE OF OFFICE OR AGENCY.
The Company shall maintain in the Borough of Manhattan, the City of
New York, an office or agency (which may be an office of the Trustee or an
affiliate of the Trustee, Registrar or co-registrar) where Exchange Notes may be
surrendered for registration of transfer or for exchange and where notices and
demands to or upon the Company in respect of the Exchange Notes and this
Indenture may be served. The Company shall give prompt written notice to the
Trustee of the location, and any change in the location, of such office or
agency. If at any time the Company shall fail to maintain any such required
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee.
The Company may also from time to time designate one or more other
offices or agencies where the Exchange Notes may be presented or surrendered for
any or all such purposes and may from time to time rescind such designations;
provided, however, that no such designation or rescission shall in any manner
relieve the Company of its obligation to maintain an office or agency in the
Borough of Manhattan, the City of New York for such purposes. The Company shall
give prompt written notice to the Trustee of any such designation or rescission
and of any change in the location of any such other office or agency.
The Company hereby designates the Corporate Trust Office of the
Trustee as one such office or agency of the Company in accordance with Section
2.03 hereof. The Trustee may resign such agency at any time by giving written
notice to the Company no later than 30 days prior to the effective date of such
resignation.
SECTION 4.03. REPORTS.
Whether or not required by the rules and regulations of the SEC, so
long as any Exchange Notes are outstanding, the Company shall furnish to the
Trustee and to the Holders of Notes (a) all quarterly and annual financial
information that would be required to be contained in a filing with the SEC on
Forms 10-Q and 10-K if the Company were required to file such Forms, including a
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and, with
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respect to the annual information only, a report thereon by the Company's
certified independent accountants and (b) all current reports that would be
required to be filed with the SEC on Form 8-K if the Company were required to
file such reports. In addition, whether or not required by the rules and
regulations of the SEC, the Company shall file a copy of all such information
and reports with the SEC for public availability (unless the SEC will not accept
such a filing) and make such information available to securities analysts and
prospective investors upon request. In addition to the financial information
required by the Exchange Act, each such quarterly and annual report shall be
required to contain "summarized financial information" (as defined in Rule
1-02(aa)(1) of Regulation S-X under the Exchange Act) showing Adjusted Operating
Cash Flow for the Company and its Restricted Subsidiaries, on a consolidated
basis, where Adjusted Operating Cash Flow for the Company is calculated in a
manner consistent with the manner described under the definition of "Adjusted
Operating Cash Flow" contained herein. The summarized financial information
required pursuant to the preceding sentence may, at the election of the Company,
be included in the footnotes to audited consolidated financial statements or
unaudited quarterly financial statements of the Company and shall be as of the
same dates and for the same periods as the consolidated financial statements of
the Company and its Subsidiaries required pursuant to the Exchange Act.
SECTION 4.04. COMPLIANCE CERTIFICATE.
(a) The Company shall deliver to the Trustee, within 90 days after
the end of each fiscal year, an Officers' Certificate stating that a review of
the activities of the Company and its Subsidiaries during the preceding fiscal
year has been made under the supervision of the signing Officers with a view to
determining whether the Company has kept, observed, performed and fulfilled its
obligations under this Indenture, and further stating, as to each such Officer
signing such certificate, that to the best of his or her knowledge the Company
has kept, observed, performed and fulfilled each and every covenant contained in
this Indenture and is not in default in the performance or observance of any of
the terms, provisions and conditions of this Indenture (or, if a Default or
Event of Default shall have occurred, describing all such Defaults or Events of
Default of which he or she may have knowledge and what action the Company is
taking or proposes to take with respect thereto) and that to the best of his or
her knowledge no event has occurred and remains in existence by reason of which
payments on account of the principal of or interest on the Exchange Notes is
prohibited or if such event has occurred, a description of the event and what
action the Company is taking or proposes to take with respect thereto.
(b) So long as not contrary to the then current recommendations of
the American Institute of Certified Public Accountants, the year-end financial
statements delivered pursuant to Section 4.03 above shall be accompanied by a
written statement of the Company's independent public accountants (who shall be
a firm of established national reputation) that in making the examination
necessary for certification of such financial statements, nothing has come to
their attention that would lead them to believe that the Company has violated
any provisions of Article Four or Article Five hereof or, if any such violation
has occurred, specifying the nature and period of existence thereof, it being
understood that such accountants shall not be liable directly or indirectly to
any Person for any failure to obtain knowledge of any such violation.
(c) The Company shall, so long as any of the Exchange Notes are
outstanding, deliver to the Trustee, forthwith upon any Officer of the Company
becoming aware of any Default or Event of Default, an Officers' Certificate
specifying such Default or Event of Default and what action the Company is
taking or proposes to take with respect thereto.
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SECTION 4.05. TAXES.
The Company shall pay, and shall cause each of its Subsidiaries to
pay, prior to delinquency, all material taxes, assessments, and governmental
levies except such as are contested in good faith and by appropriate proceedings
or where the failure to effect such payment is not adverse in any material
respect to the Holders of the Exchange Notes.
SECTION 4.06. STAY, EXTENSION AND USURY LAWS.
The Company covenants (to the extent that it may lawfully do so) that
it shall not at any time insist upon, plead, or in any manner whatsoever claim
or take the benefit or advantage of, any stay, extension or usury law wherever
enacted, now or at any time hereafter in force, that may affect the covenants or
the performance of this Indenture; and the Company (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenants that it shall not, by resort to any such law, hinder, delay
or impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law has
been enacted.
SECTION 4.07. RESTRICTED PAYMENTS.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or make
any payment or distribution on account of the Company's Equity Interests
(including, without limitation, any payment in connection with any merger or
consolidation involving the Company) or on account of any Qualified Subsidiary
Stock or make any payment or distribution (other than compensation paid to, or
reimbursement of expenses of, employees in the ordinary course of business) to
or for the benefit of the direct or indirect holders of the Company's Equity
Interests or the direct or indirect holders of any Qualified Subsidiary Stock in
their capacity as such (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company); (ii) purchase, redeem
or otherwise acquire or retire for value any Equity Interests of the Company or
any direct or indirect parent of the Company or other Affiliate of the Company
(other than such Equity Interests owned by the Company or any of its Restricted
Subsidiaries and other than the acquisition of Equity Interests in Subsidiaries
of the Company solely in exchange for Equity Interests (other than Disqualified
Stock) of the Company); (iii) make any payment on, or purchase, redeem, defease
or otherwise acquire or retire for value any Indebtedness that is subordinated
to the Exchange Notes, except at final maturity; (iv) make any loan, advance,
capital contribution to or other investment in, or guarantee any obligation of,
any Affiliate of the Company other than a Permitted Investment; (v) forgive any
loan or advance to or other obligation of any Affiliate of the Company (other
than a loan or advance to or other obligation of a Wholly Owned Restricted
Subsidiary) which at the time it was made was not a Restricted Payment that was
permitted to be made; or (vi) make any Restricted Investment (all such payments
and other actions set forth in clauses (i) through (vi) above being collectively
referred to as "Restricted Payments"), unless, at the time of and immediately
after giving effect to such Restricted Payment:
(A) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(B) the Company would be permitted to incur $1.00 of additional
Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash Flow
Ratio set forth in Section 4.09(a) hereof; and
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(C) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the Closing Date (excluding Restricted Payments permitted by clause
(iii) of Section 4.07(b)), is less than the sum of (i) an amount equal to
the Cumulative Operating Cash Flow for the period (taken as one accounting
period) from the beginning of the first full month commencing after the
Closing Date to the end of the Company's most recently ended fiscal
quarter for which internal financial statements are available at the time
of such Restricted Payment (the "Basket Period") less 1.4 times the
Company's Cumulative Total Interest Expense for the Basket Period, plus
(ii) 100% of the aggregate net cash proceeds and, in the case of proceeds
consisting of assets constituting or used in a Permitted Business, 100% of
the fair market value of the aggregate net proceeds other than cash
received since the Closing Date (1) by the Company as capital
contributions to the Company (other than from a Subsidiary) or (2) from
the sale by the Company (other than to a Subsidiary) of its Equity
Interests (other than Disqualified Stock), plus (iii) without duplication,
to the extent that any Restricted Investment that was made after the
Closing Date is sold for cash or otherwise liquidated or repaid for cash,
the Net Proceeds received by the Company or a Wholly Owned Restricted
Subsidiary of the Company upon the sale of such Restricted Investment,
plus (iv) without duplication, to the extent that any Unrestricted
Subsidiary is designated by the Company as a Restricted Subsidiary, an
amount equal to the fair market value of such Investment at the time of
such designation, plus (v) $2.5 million.
(b) The foregoing provisions shall not prohibit (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of this
Indenture; (ii) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company in exchange for, or out of the net proceeds
of, the substantially concurrent sale (other than to a Subsidiary of the
Company) of other Equity Interests of the Company (other than any Disqualified
Stock); provided that the amount of any such net proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (C)(ii) of the preceding paragraph; (iii) the defeasance,
redemption or repurchase of Indebtedness with the proceeds of a substantially
concurrent issuance of Permitted Refinancing Debt in accordance with the
provisions of Section 4.09 hereof; (iv) the payment by the Company of advances
under the Split Dollar Agreement in an amount not to exceed $250,000 in any
four-quarter period; (v) the repurchase or redemption from employees of the
Company and its Subsidiaries (other than the Principal) of Capital Stock of the
Company in an amount not to exceed an aggregate of $3.0 million and (vi) cash
payments made in lieu of the issuance of additional Exchange Notes having a face
amount less than $1,000 and any cash payments representing accrued and unpaid
interest in respect thereof, not to exceed $100,000 in the aggregate in any
fiscal year.
(c) The amount of all Restricted Payments (other than cash) shall be
the fair market value on the date of the Restricted Payment of the asset(s)
proposed to be transferred by the Company or the applicable Restricted
Subsidiary, as the case may be, net of any liabilities proposed to be assumed by
the transferee and novated pursuant to a written agreement releasing the Company
and its Subsidiaries. Not later than the date of making any Restricted Payment,
the Company shall deliver to the Trustee an Officers' Certificate stating that
such Restricted Payment is permitted and setting forth the basis upon which the
calculations required by this covenant were computed, which calculations may be
based upon the Company's latest available financial statements.
(d) The Board of Directors may designate any Restricted Subsidiary to
be an Unrestricted Subsidiary if such designation would not cause a Default or
an Event of Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation (valued as set forth below) and will reduce the amount available for
Restricted Payments
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under the first paragraph of this Section 4.07. All such outstanding Investments
will be deemed to constitute Investments in an amount equal to the fair market
value of such Investments at the time of such designation. Such designation will
only be permitted only if such Restricted Payment would be permitted at such
time and if such Restricted Subsidiary otherwise meets the definition of an
Unrestricted Subsidiary.
SECTION 4.08. DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to
exist or become effective any encumbrance or restriction on the ability of any
Restricted Subsidiary to (i)(a) pay dividends or make any other distributions to
the Company or any of its Restricted Subsidiaries (1) on its Capital Stock or
(2) with respect to any other interest or participation in, or measured by, its
profits or (b) pay any Indebtedness owed to the Company or any of its Restricted
Subsidiaries, (ii) make loans or advances to the Company or any of its
Restricted Subsidiaries or (iii) transfer any of its properties or assets to the
Company or any of its Restricted Subsidiaries, except for such encumbrances or
restrictions existing under or by reasons of (a) the terms of any Indebtedness
permitted by this Indenture to be incurred by any Subsidiary of the Company, (b)
Existing Indebtedness as in effect on the Closing Date, (c) this Indenture and
the Exchange Notes, (d) applicable law, (e) any instrument governing
Indebtedness or Capital Stock of a Person acquired by the Company or any of its
Restricted Subsidiaries as in effect at the time of such acquisition (except to
the extent such Indebtedness was incurred in connection with or in anticipation
of such acquisition), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person and its
Subsidiaries, or the property or assets of the Person and its Subsidiaries, so
acquired or (f) by reason of customary non-assignment provisions in leases and
other contracts entered into in the ordinary course of business and consistent
with past practices.
SECTION 4.09. INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK.
(a) The Company shall not, and shall not permit any of its
Subsidiaries to, directly or indirectly, create, incur, issue, assume, guarantee
or otherwise become directly or indirectly liable, contingently or otherwise,
with respect to (collectively, "incur") any Indebtedness (including Acquired
Debt) and the Company shall not issue any Disqualified Stock and shall not
permit any of its Subsidiaries to issue any shares of preferred stock (other
than Qualified Subsidiary Stock); provided, however, that (i) the Company may
incur Indebtedness (including Acquired Debt) or issue shares of Disqualified
Stock and (ii) a Restricted Subsidiary of the Company may incur Indebtedness
(including Acquired Debt) or issue shares of preferred stock (including
Disqualified Stock) if, in each case, the Company's Indebtedness to Adjusted
Operating Cash Flow Ratio as of the date on which such Indebtedness is incurred
or such Disqualified Stock or preferred stock is issued would have been 7.0 to 1
or less, determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if the additional Indebtedness had been
incurred, or the Disqualified Stock or preferred stock had been issued, as the
case may be, as of the date of such calculation.
(b) The foregoing provisions shall not apply to:
(i) the incurrence by the Company's Unrestricted Subsidiaries of
Non-Recourse Debt or the issuance by such Unrestricted Subsidiaries of preferred
stock; provided, however, that if any such Indebtedness ceases to be
Non-Recourse Debt of an Unrestricted Subsidiary or any such preferred stock
becomes preferred stock (other than Qualified Subsidiary Stock) of a Restricted
Subsidiary, as the case may be, such event shall be deemed to constitute an
incurrence of Indebtedness by or an issuance of
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preferred stock (other than Qualified Subsidiary Stock) of, as the case may be,
a Restricted Subsidiary of the Company;
(ii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness pursuant to one or more Bank Facilities, so long as
the aggregate principal amount of all Indebtedness outstanding under all Bank
Facilities does not, at the time of incurrence, exceed an amount equal to $50.0
million;
(iii) the incurrence by the Company or any of its Restricted
Subsidiaries of the Existing Indebtedness;
(iv) Indebtedness under the Exchange Notes (including any
Exchange Notes issued to pay interest on outstanding Exchange Notes);
(v) the incurrence by the Company or any of its Restricted
Subsidiaries of intercompany Indebtedness between or among the Company and any
of its Wholly Owned Restricted Subsidiaries; provided, however, that (A) if the
Company is the obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations with
respect to the Exchange Notes and (B)(1) any subsequent issuance or transfer of
Equity Interests that result in any such Indebtedness being held by a Person
other than the Company or a Wholly Owned Restricted Subsidiary of the Company
and (2) any sale or other transfer of such Indebtedness to a Person that is not
either the Company or a Wholly Owned Restricted Subsidiary of the Company shall
be deemed, in each case, to constitute an incurrence of such Indebtedness by the
Company or such Restricted Subsidiary, as the case may be;
(vi) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness represented by Capital Lease Obligations, mortgage
financings or purchase money obligations, in each case incurred for the purpose
of financing all or any part of the purchase price or cost of construction or
improvement of property used in the business of the Company or such Restricted
Subsidiary, in an aggregate principal amount not to exceed $5.0 million at any
time outstanding;
(vii) the incurrence by the Company or any of its Restricted
Subsidiaries of Permitted Refinancing Debt in exchange for, or the net proceeds
of which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by this Indenture to be incurred; and
(viii) the incurrence by the Company or any of its Restricted
Subsidiaries of Indebtedness (in addition to Indebtedness permitted by any other
clause of this paragraph) in an aggregate principal amount at any time
outstanding not to exceed $5.0 million.
If an item of Indebtedness is permitted to be incurred on the basis of
Section 4.09(a) and also on the basis of one or more of clauses (i) through
(viii) above, or is permitted to be incurred on the basis of two or more of
clauses (i) through (viii) above, then the Company shall classify the basis on
which such item of Indebtedness is incurred. If an item of Indebtedness is
repaid with the proceeds of an incurrence of other Indebtedness (whether from
the same of a different creditor), the Company may classify such other
Indebtedness as having been incurred on the same basis as the Indebtedness being
repaid or on a different basis permitted under this Section 4.09. For purposes
of this Section 4.09(b), "Indebtedness" includes Disqualified Stock and
preferred stock of Subsidiaries. Accrued interest and accreted discount will not
be deemed incurrence of Indebtedness for purposes of this Section 4.09.
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SECTION 4.10. ASSET SALES.
(a) The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, engage in an Asset Sale unless (i) the Company (or the
Restricted Subsidiary, as the case may be) receives consideration at the time of
such Asset Sale at least equal to the fair value (evidenced by a resolution of
the Board of Directors set forth in an Officers' Certificate delivered to the
Trustee) of the assets or Equity Interests issued or sold or otherwise disposed
of and (ii) at least 85% of the consideration therefor received by the Company
or such Restricted Subsidiary is in the form of cash; provided that the amount
of (x) any liabilities (as shown on the Company's or such Restricted
Subsidiary's most recent balance sheet or in the notes thereto), of the Company
or any Restricted Subsidiary (other than liabilities that are by their terms
subordinated to the Exchange Notes or any guarantee thereof) that are assumed by
the transferee of any such assets and (y) any notes or other obligations
received by the Company or any such Restricted Subsidiary from such transferee
that are immediately converted by the Company or such Restricted Subsidiary into
cash (to the extent of the cash received), shall be deemed to be cash for
purposes of this provision.
(b) Notwithstanding the foregoing, the Company and its Restricted
Subsidiaries may engage in Asset Swaps (which shall not be deemed to be Asset
Sales for purposes of this Section 4.10); provided that, immediately after
giving effect to such Asset Swap, the Company would be permitted to incur at
least $1.00 of additional indebtedness pursuant to the Indebtedness to Adjusted
Operating Cash Flow ratio set forth in Section 4.09(a) hereof.
(c) Within 180 days after the receipt of any Net Proceeds from an
Asset Sale, the Company or the applicable Restricted Subsidiary may, at its
option, apply such Net Proceeds (i) to permanently reduce Indebtedness
outstanding pursuant to any Senior Debt (and to permanently reduce the
commitments thereunder by a corresponding amount), (ii) to permanently reduce
Indebtedness of any of the Company's Restricted Subsidiaries or (iii) to the
acquisition of another business, the making of a capital expenditure or the
acquisition of other long-term assets, in each case, in a Permitted Business;
provided, however, that if the Company or the applicable Restricted Subsidiary
enters into a binding agreement to reinvest such Net Proceeds in accordance with
this clause (iii) within 180 days after the receipt thereof, the provisions of
this Section 4.10 will be satisfied so long as such binding agreement is
consummated within one year after the receipt of such Net Proceeds. If any such
legally binding agreement to reinvest such Net Proceeds is terminated, then the
Company may, within 90 days of such termination, or within 180 days of such
Asset Sale, whichever is later, apply such Net Proceeds as provided in clauses
(i), (ii) or (iii) above (without regard to the proviso contained in clause
(iii) above). Pending the final application of any such Net Proceeds, the
Company or the applicable Restricted Subsidiary may temporarily reduce
Indebtedness pursuant to any Bank Facility or otherwise invest such Net Proceeds
in any manner that is not prohibited by this Indenture. A reduction of
Indebtedness pursuant to any Bank Facility is not "permanent" for purposes of
clause (i) of this Section 4.10(c) if an amount equal to the amount of such
reduction is reborrowed and used to make an acquisition described in clause
(iii) of this Section 4.10(c) within the time period specified in this Section
4.10(c). Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds."
(d) Within five days of each date on which the aggregate amount of
Excess Proceeds exceeds $10.0 million, the Company shall be required to make an
offer to all Holders of Exchange Notes and the holders of Pari Passu Debt, to
the extent required by the terms thereof (an "Asset Sale Offer") to purchase the
maximum principal amount of Exchange Notes and Pari Passu Debt that may be
purchased out of the Excess Proceeds, at an offer price in cash in an amount
equal to 100% of the principal amount thereof plus, in each case, accrued and
unpaid interest thereon, if any, to the date of purchase,
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in accordance with the procedures set forth in Section 3.09 hereof or the
agreements governing Pari Passu Debt, as applicable; provided, however, that the
Company may only purchase Pari Passu Debt in an asset sale offer that was issued
pursuant to an indenture having a provision similar to this Section 4.10.
(e) To the extent that the aggregate amount of Exchange Notes and
Pari Passu Debt tendered pursuant to an Asset Sale Offer is less than the Excess
Proceeds, the Company may use any remaining Excess Proceeds for general
corporate purposes.
(f) If the aggregate principal amount of Exchange Notes and Pari
Passu Debt surrendered by Holders thereof exceeds the amount of Excess Proceeds,
the Trustee shall select the Exchange Notes and Pari Passu Debt to be purchased
on a pro rata basis, based upon the principal amount thereof surrendered in such
Asset Sale Offer.
(g) Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero.
SECTION 4.11. TRANSACTIONS WITH AFFILIATES.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make any contract, agreement, understanding, loan, advance or guarantee with,
or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (a) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Restricted Subsidiary than those
that would have been obtained in a comparable transaction by the Company or such
Restricted Subsidiary with an unrelated Person and (b) the Company delivers to
the Trustee, on behalf of the Holders, (i) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $1.0 million, a resolution of the Board of Directors
set forth in an Officers' Certificate certifying that such Affiliate Transaction
complies with clause (a) above and that such Affiliate Transaction has been
approved by a majority of the disinterested members of the Board of Directors
and a majority of Independent Directors and (ii) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $5.0 million, an opinion as to the fairness to the
Company or such Restricted Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing; provided that the Company shall not, and shall not permit any of its
Restricted Subsidiaries to, engage in any Affiliate Transaction involving
aggregate consideration in excess of $1.0 million at any time that there is not
at least one Independent Director on the Company's Board of Directors; and
provided further that (w) any employment agreement entered into by the Company
or any of its Restricted Subsidiaries in the ordinary course of business and
consistent with the past practice of the Company or such Restricted Subsidiary,
(x) transactions between or among the Company and/or its Restricted Subsidiaries
and (y) transactions permitted by the provisions of Section 4.07 hereof, in each
case, shall not be deemed Affiliate Transactions.
SECTION 4.12. LIENS.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom, or assign or convey any right to receive income therefrom,
except Permitted Liens.
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SECTION 4.13. OFFER TO REPURCHASE UPON CHANGE OF CONTROL.
(a) Upon the occurrence of a Change of Control, each Holder of
Exchange Notes shall have the right to require the Company to repurchase all or
any part (but not, in the case of any Holder requiring the Company to purchase
less than all of the Exchange Notes held by such Holder, any Exchange Note in
principal amount less than $1,000) of such Holder's Exchange Notes pursuant to
the offer described below (the "Change of Control Offer") at an offer price in
cash equal to 101% of the principal amount thereof plus accrued and unpaid
interest, if any, thereon to the date of purchase (the "Change of Control
Payment").
(b) Within 10 days following any Change of Control, the Company shall
mail a notice to each Holder, with a copy to the Trustee, stating: (1) a
description of the transaction or transactions that constitute the Change of
Control; (2) that the Change of Control Offer is being made pursuant to this
Section 4.13 and that all Exchange Notes tendered shall be accepted for payment;
(3) the purchase price and the purchase date, which shall be no later than 30
Business Days from the date such notice is mailed (the "Change of Control
Payment Date"); (4) that any Exchange Note not tendered shall continue to accrue
interest; (5) that, unless the Company defaults in the payment of the Change of
Control Payment, all Exchange Notes accepted for payment pursuant to the Change
of Control Offer shall cease to accrue interest after the Change of Control
Payment Date; (6) that Holders electing to have any Exchange Notes purchased
pursuant to a Change of Control Offer shall be required to surrender the
Exchange Notes, with the form entitled "Option of Holder to Elect Purchase" on
the reverse of the Exchange Notes completed, to the Paying Agent at the address
specified in the notice prior to the close of business on the third Business Day
preceding the Change of Control Payment Date; (7) that Holders shall be entitled
to withdraw their election if the Paying Agent receives, not later than the
close of business on the second Business Day preceding the Change of Control
Payment Date, a telegram, telex, facsimile, transmission or letter setting forth
the name of the Holder, the principal amount of Exchange Notes delivered for
purchase, and a statement that such Holder is withdrawing his election to have
the Exchange Notes purchased; and (8) that Holders whose Exchange Notes are
being purchased only in part shall be issued new Exchange Notes equal in
principal amount to the unpurchased portion of the Exchange Notes surrendered,
which unpurchased portion must be equal to $1,000 in principal amount or an
integral multiple thereof. The Company shall comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of Exchange Notes in connection with a Change of Control.
(c) On or prior to 10:00 a.m. Eastern Time on the Change of Control
Payment Date, the Company shall, to the extent lawful, (1) accept for payment
all Exchange Notes or portions thereof properly tendered pursuant to the Change
of Control Offer, (2) deposit with the Paying Agent an amount equal to the
Change of Control Payment in respect of all Exchange Notes or portions thereof
so tendered and (3) deliver or cause to be delivered to the Trustee the Exchange
Notes so accepted together with an Officers' Certificate stating the aggregate
principal amount of Exchange Notes or portions thereof being purchased by the
Company. The Paying Agent shall promptly mail to each Holder of Exchange Notes
so tendered the Change of Control Payment for such Exchange Notes, and the
Trustee shall promptly authenticate and mail (or cause to be transferred by book
entry) to each Holder a new Exchange Note equal in principal amount to any
unpurchased portion of the Exchange Notes surrendered, if any. Prior to
complying with the provisions of this Section 4.13, but in any event within 90
days following a Change of Control, the Company shall either repay all
outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of
Exchange Notes required by this Section 4.13. The Company shall publicly
announce
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the results of the Change of Control Offer on or as soon as practicable after
the Change of Control Payment Date.
(d) The Company shall not be required to make a Change of Control
Offer upon a Change of Control if a third party makes the Change of Control
Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in this Indenture applicable to a Change of Control Offer
made by the Company, and purchases all Exchange Notes validly tendered and not
withdrawn under such Change of Control Offer.
SECTION 4.14. CONTINUED EXISTENCE.
Subject to Article 5 hereof, the Company shall do or cause to be done
all things necessary to preserve and keep in full force and effect (i) its
corporate existence, and the corporate, partnership or other existence of each
of its Restricted Subsidiaries, in accordance with the respective organizational
documents (as the same may be amended from time to time) of the Company or any
such Restricted Subsidiary and (ii) the rights (charter and statutory), licenses
and franchises of the Company and any of its Restrictive Subsidiaries; provided,
however, that the Company shall not be required to preserve any such right,
license or franchise, or the corporate, partnership or other existence of any of
its Restricted Subsidiaries, if the Board of Directors shall determine that the
preservation thereof is no longer desirable in the conduct of the business of
the Company and its Restricted Subsidiaries, taken as a whole, and that the loss
thereof is not adverse in any material respect to the Holders of the Exchange
Notes.
SECTION 4.15. LIMITATION ON LAYERING.
Notwithstanding the provisions of Section 4.09 hereof, the Company
shall not incur, create, issue, assume, guarantee or otherwise become liable for
any Indebtedness that is subordinate or junior in right of payment to any Senior
Debt and senior in any respect in right of payment to the Exchange Notes.
SECTION 4.16. LIMITATION ON ISSUANCES AND SALES OF CAPITAL STOCK OF WHOLLY OWNED
RESTRICTED SUBSIDIARIES.
The Company (a) shall not, and shall not permit any Wholly Owned
Restricted Subsidiary of the Company to, transfer, convey, sell, lease or
otherwise dispose of any Capital Stock (other than Qualified Subsidiary Stock)
of any Wholly Owned Restricted Subsidiary of the Company to any Person (other
than the Company or a Wholly Owned Restricted Subsidiary of the Company), unless
(i) such transfer, conveyance, sale, lease or other disposition is of all the
Capital Stock of such Wholly Owned Restricted Subsidiary and (ii) the cash Net
Proceeds from such transfer, conveyance, sale, lease or other disposition are
applied in accordance with Section 4.10 hereof and (b) shall not permit any
Wholly Owned Restricted Subsidiary of the Company to issue any of its Equity
Interests (other than, Qualified Subsidiary Stock and, if necessary, shares of
its Capital Stock constituting directors' qualifying shares) to any Person other
than to the Company or a Wholly Owned Restricted Subsidiary of the Company.
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ARTICLE 5
SUCCESSORS
SECTION 5.01. MERGER, CONSOLIDATION, OR SALE OF ASSETS.
The Company shall not consolidate or merge with or into (whether or
not the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another corporation, Person or
entity unless (a) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition shall have been made is a corporation organized or existing
under the laws of the United States, any state thereof or the District of
Columbia; (b) the entity or Person formed by or surviving any such consolidation
or merger (if other than the Company) or the entity or Person to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made assumes all the Obligations of the Company under the Exchange Notes
and this Indenture pursuant to a supplemental indenture in a form reasonably
satisfactory to the Trustee; (c) immediately after such transaction no Default
or Event of Default exists; (d) the Company or the entity or Person formed by or
surviving any such consolidation or merger (if other than the Company), or to
which such sale, assignment, transfer, lease, conveyance or other disposition
shall have been made shall, at the time of such transaction and after giving pro
forma effect thereto as if such transaction had occurred at the beginning of the
applicable four-quarter period, be permitted to incur at least $1.00 of
additional Indebtedness pursuant to the Indebtedness to Adjusted Operating Cash
Flow Ratio set forth in Section 4.09(a) hereof.
SECTION 5.02. SUCCESSOR CORPORATION SUBSTITUTED.
Upon any consolidation or merger, or any sale, assignment, transfer,
lease, conveyance or other disposition of all or substantially all of the assets
of the Company in accordance with Section 5.01 hereof, the successor corporation
formed by such consolidation or into or with which the Company is merged or to
which such sale, assignment, transfer, lease, conveyance or other disposition is
made shall succeed to, and be substituted for and may exercise every right and
power of the Company under this Indenture with the same effect as if such
successor Person had been named as the Company herein (so that from and after
the date of such consolidation, merger, sale, lease, conveyance or other
disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the successor corporation and not to the Company), and may
exercise every right and power of the Company under this Indenture with the same
effect as if such successor Person had been named as the Company herein;
provided, however, that the predecessor Company shall not be relieved from the
obligation to pay the principal of and interest on the Exchange Notes except in
the case of a sale of all of the Company's assets that meets the requirements of
Section 5.01 hereof.
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ARTICLE 6
DEFAULTS AND REMEDIES
SECTION 6.01. EVENTS OF DEFAULT.
Each of the following constitutes an "Event of Default":
(i) a Default by the Company in the payment of interest on the
Exchange Notes when the same becomes due and payable and the Default
continues for a period of 30 days (whether or not such payment is
prohibited by Article 10 of this Indenture);
(ii) default by the Company in the payment of the principal of
or premium, if any, on the Exchange Notes when the same becomes due
and payable at maturity, upon redemption or otherwise (whether or not
such payment is prohibited by Article 10 of this Indenture);
(iii) failure by the Company to comply with the provisions
described under Sections 3.09, 4.07, 4.09, 4.10, 4.13 or Article 5
hereof;
(iv) failure by the Company for 60 days after notice to comply
with any of its other agreements in this Indenture or the Exchange
Notes;
(v) default under any mortgage, indenture or instrument under
which there may be issued or by which there may be secured or
evidenced any Indebtedness for money borrowed by the Company or any
of its Restricted Subsidiaries (or the payment of which is guaranteed
by the Company or any of its Restricted Subsidiaries), whether such
Indebtedness or Guarantee now exists, or shall be created hereafter,
which default (a) is caused by a failure to pay principal of or
premium, if any, or interest on such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the
date of such default (a "Payment Default") or (b) results in the
acceleration of such Indebtedness prior to its express maturity and,
in each case, the principal amount of such Indebtedness, together
with the principal amount of any other such Indebtedness under which
there has been a Payment Default or the maturity of which has been so
accelerated, aggregates $5.0 million or more;
(vi) a final judgment or final judgments for the payment of
money are entered by a court or courts of competent jurisdiction
against the Company or any Restricted Subsidiary that would be a
Significant Subsidiary and such judgment or judgments remain unpaid,
undischarged or unstayed for a period of 60 days, provided that the
aggregate of all such undischarged judgments exceeds $5.0 million;
(vii) the Company, any Restricted Subsidiary that would
constitute a Significant Subsidiary or any group of Restricted
Subsidiaries that, taken together, would constitute a Significant
Subsidiary pursuant to or within the meaning of Bankruptcy Law:
(a) commences a voluntary case,
(b) consents to the entry of an order for relief against
it in an involuntary case,
(c) consents to the appointment of a Custodian of it or
for all or substantially all of its property,
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(d) makes a general assignment for the benefit of its
creditors, or
(e) generally is not paying its debts as they become due;
or
(viii) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(a) is for relief against the Company, any Restricted
Subsidiary that would constitute a Significant Subsidiary or any
group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary in an involuntary case;
(b) appoints a Custodian of the Company, any Restricted
Subsidiary that would constitute a Significant Subsidiary, or
any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary or for all or substantially
all of the property of the Company, any Restricted Subsidiary
that would constitute a Significant Subsidiary or any group of
Restricted Subsidiaries that, taken together, would constitute a
Significant Subsidiary; or
(c) orders the liquidation of the Company, any of
Restricted Subsidiary that would constitute a Significant
Subsidiary or any group of Restricted Subsidiaries that, taken
together, would constitute a Significant Subsidiary;
and the order or decree remains unstayed and in effect for 60
consecutive days.
The term "Custodian" means any receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law.
An Event of Default shall not be deemed to have occurred under clause
(iii), (v) or (vi) until the Trustee shall have received at the Corporate Trust
Office of the Trustee written notice from the Company or any of the Holders or
unless a Responsible Officer shall have actual knowledge of such Event of
Default. A Default under clause (iv) is not an Event of Default until the
Trustee notifies the Company, or the Holders of at least 25% in principal amount
of the then outstanding Exchange Notes notify the Company and the Trustee, of
the Default and the Company does not cure the Default within 60 days after
receipt of the notice. The notice must specify the Default, demand that it be
remedied and state that the notice is a "Notice of Default."
In the case of any Event of Default pursuant to the provisions of
this Section 6.01 occurring by reason of any action (or inaction) willfully
taken (or not taken) by or on behalf of the Company with the intention of
avoiding payment of the premium that the Company would have had to pay if the
Company then had elected to redeem the Exchange Notes pursuant to Section 3.07
hereof, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Exchange
Notes, anything in this Indenture or in the Exchange Notes to the contrary
notwithstanding; provided that the Trustee shall not be under any duty to
collect such premium on behalf of the Holders until such time as Holders of at
least 10% in principal amount of the then outstanding Exchange Notes so notify
the Trustee. If an Event of Default occurs prior to ______________, 2002 by
reason of any willful action (or inaction) taken (or not taken) by or on behalf
of the Company with the intention of avoiding the prohibition on redemption of
the Exchange Notes prior to __________, 2002, then the premium payable for
purposes of this paragraph for each of the years beginning on __________ of the
years set forth below shall be as set forth in the following table
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expressed as a percentage of the amount that would otherwise be due but for the
provisions of this sentence, plus accrued interest, if any, to the date of
payment:
Year Percentage
---- ----------
1997..................................................... ______%
1998..................................................... ______%
1999..................................................... ______%
2000..................................................... ______%
2001..................................................... ______%
SECTION 6.02. ACCELERATION.
If any Event of Default (other than an Event of Default specified in
clause (vii) or (viii) of Section 6.01 hereof) occurs and is continuing, the
Trustee by notice to the Company, or the Holders of at least 25% in principal
amount of the then outstanding Exchange Notes by written notice to the Company
and the Trustee may declare all the Exchange Notes to be due and payable
immediately. Upon any such declaration, the Exchange Notes shall become due and
payable immediately. Notwithstanding the foregoing, if an Event of Default
specified in clause (vii) or (viii) of Section 6.01 hereof occurs with respect
to the Company, any Restricted Subsidiary that would constitute a Significant
Subsidiary or any group of Restricted Subsidiaries that, taken together, would
constitute a Significant Subsidiary occurs, such an amount shall ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any Holder. The Holders of a majority in principal
amount of the then outstanding Exchange Notes by written notice to the Trustee
may rescind an acceleration and its consequences if the rescission would not
conflict with any judgment or decree and if all existing Events of Default
(except nonpayment of principal or interest that has become due solely because
of the acceleration) have been cured or waived.
SECTION 6.03. OTHER REMEDIES.
If an Event of Default occurs and is continuing, the Trustee may
pursue any available remedy to collect the payment of principal, premium, if
any, and interest on the Exchange Notes or to enforce the performance of any
provision of the Exchange Notes or this Indenture.
The Trustee may maintain a proceeding even if it does not possess any
of the Exchange Notes or does not produce any of them in the proceeding. A delay
or omission by the Trustee or any Holder of an Exchange Note in exercising any
right or remedy accruing upon an Event of Default shall not impair the right or
remedy or constitute a waiver of or acquiescence in the Event of Default. All
remedies are cumulative to the extent permitted by law.
SECTION 6.04. WAIVER OF PAST DEFAULTS.
Holders of not less than a majority in aggregate principal amount of
the then outstanding Exchange Notes by notice to the Trustee may on behalf of
the Holders of all of the Exchange Notes waive an existing Default or Event of
Default and its consequences hereunder, except a continuing Default or Event of
Default in the payment of the principal of, premium, if any, or interest on, the
Exchange Notes (including in connection with an offer to purchase) (provided,
however, that the Holders of a majority in aggregate principal amount of the
then outstanding Exchange Notes may rescind an acceleration and its
consequences, including any related payment default that resulted from such
acceleration). Upon any such waiver, such Default shall cease to exist, and any
Event of Default
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arising therefrom shall be deemed to have been cured for every purpose of this
Indenture; but no such waiver shall extend to any subsequent or other Default or
impair any right consequent thereon.
SECTION 6.05. CONTROL BY MAJORITY.
Holders of a majority in principal amount of the then outstanding
Exchange Notes may direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee or exercising any
trust or power conferred on it. However, the Trustee may refuse to follow any
direction that conflicts with law or this Indenture that the Trustee determines
may be unduly prejudicial to the rights of other Holders of Exchange Notes or
that may involve the Trustee in personal liability.
SECTION 6.06. LIMITATION ON SUITS.
A Holder of an Exchange Note may pursue a remedy with respect to this
Indenture or the Exchange Notes only if:
(a) the Holder of an Exchange Note gives to the Trustee written
notice of a continuing Event of Default;
(b) the Holders of at least 25% in principal amount of the then
outstanding Exchange Notes make a written request to the Trustee to pursue
the remedy;
(c) such Holder of an Exchange Note or Holders of Exchange Notes
offer and, if requested, provide to the Trustee indemnity satisfactory to
the Trustee against any loss, liability or expense;
(d) the Trustee does not comply with the request within 60 days after
receipt of the request and the offer and, if requested, the provision of
indemnity; and
(e) during such 60-day period the Holders of a majority in principal
amount of the then outstanding Exchange Notes do not give the Trustee a
direction inconsistent with the request.
A Holder of an Exchange Note may not use this Indenture to prejudice the rights
of another Holder of an Exchange Note or to obtain a preference or priority over
another Holder of an Exchange Note.
SECTION 6.07. RIGHTS OF HOLDERS OF EXCHANGE NOTES TO RECEIVE PAYMENT.
Notwithstanding any other provision of this Indenture, the right of
any Holder of an Exchange Note to receive payment of principal, premium, if any,
and interest on the Exchange Note, on or after the respective due dates
expressed in the Exchange Note (including in connection with an offer to
purchase), or to bring suit for the enforcement of any such payment on or after
such respective dates, shall not be impaired or affected without the consent of
such Holder.
SECTION 6.08. COLLECTION SUIT BY TRUSTEE.
If an Event of Default specified in Section 6.01(i) or (ii) occurs
and is continuing, the Trustee is authorized to recover judgment in its own name
and as trustee of an express trust against the Company for the whole amount of
principal of, premium, if any, and interest remaining unpaid on the Exchange
Notes and interest on overdue principal and, to the extent lawful, interest and
such further
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amount as shall be sufficient to cover the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.
SECTION 6.09. TRUSTEE MAY FILE PROOFS OF CLAIM.
The Trustee is authorized to file such proofs of claim and other
papers or documents as may be necessary or advisable in order to have the claims
of the Trustee (including any claim for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel) and the
Holders of the Exchange Notes allowed in any judicial proceedings relative to
the Company (or any other obligor upon the Exchange Notes), its creditors or its
property and shall be entitled and empowered to collect, receive and distribute
any money or other property payable or deliverable on any such claims and any
custodian in any such judicial proceeding is hereby authorized by each Holder to
make such payments to the Trustee, and in the event that the Trustee shall
consent to the making of such payments directly to the Holders, to pay to the
Trustee any amount due to it for the reasonable compensation, expenses,
disbursements and advances of the Trustee, its agents and counsel, and any other
amounts due the Trustee under Section 7.07 hereof. To the extent that the
payment of any such compensation, expenses, disbursements and advances of the
Trustee, its agents and counsel, and any other amounts due the Trustee under
Section 7.07 hereof out of the estate in any such proceeding, shall be denied
for any reason, payment of the same shall be secured by a Lien on, and shall be
paid out of, any and all distributions, dividends, money, securities and other
properties that the Holders may be entitled to receive in such proceeding
whether in liquidation or under any plan of reorganization or arrangement or
otherwise. Nothing herein contained shall be deemed to authorize the Trustee to
authorize or consent to or accept or adopt on behalf of any Holder any plan of
reorganization, arrangement, adjustment or composition affecting the Exchange
Notes or the rights of any Holder, or to authorize the Trustee to vote in
respect of the claim of any Holder in any such proceeding.
SECTION 6.10. PRIORITIES.
If the Trustee collects any money pursuant to this Article, it shall
pay out the money in the following order:
First: to the Trustee, its agents and attorneys for amounts due under
Section 7.07 hereof, including payment of all compensation, expense and
liabilities incurred, and all advances made, by the Trustee and the costs and
expenses of collection;
Second: to Holders of Exchange Notes for amounts due and unpaid on
the Exchange Notes for principal, premium, if any, and interest, ratably,
without preference or priority of any kind, according to the amounts due and
payable on the Exchange Notes for principal, premium, if any, and interest,
respectively; and
Third: to the Company or to such party as a court of competent
jurisdiction shall direct.
The Trustee may fix a record date and payment date for any payment to
Holders of Exchange Notes pursuant to this Section 6.10.
SECTION 6.11. UNDERTAKING FOR COSTS.
In any suit for the enforcement of any right or remedy under this
Indenture or in any suit against the Trustee for any action taken or omitted by
it as a Trustee, a court in its discretion may require the filing by any party
litigant in the suit of an undertaking to pay the costs of the suit, and the
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court in its discretion may assess reasonable costs, including reasonable
attorneys' fees, against any party litigant in the suit, having due regard to
the merits and good faith of the claims or defenses made by the party litigant.
This Section does not apply to a suit by the Trustee, a suit by a Holder of an
Exchange Note pursuant to Section 6.07 hereof, or a suit by Holders of more than
10% in principal amount of the then outstanding Exchange Notes.
ARTICLE 7
TRUSTEE
SECTION 7.01. DUTIES OF TRUSTEE.
(a) If an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in its exercise, as a
prudent man would exercise or use under the circumstances in the conduct of his
own affairs.
(b) Except during the continuance of an Event of Default:
(i) the duties of the Trustee shall be determined solely by the
express provisions of this Indenture and the Trustee need perform only
those duties that are specifically set forth in this Indenture and no
others, and no implied covenants or obligations shall be read into this
Indenture against the Trustee; and
(ii) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the correctness
of the opinions expressed therein, upon certificates or opinions furnished
to the Trustee and conforming to the requirements of this Indenture.
However, the Trustee shall examine the certificates and opinions to
determine whether or not they conform to the requirements of this
Indenture.
(c) The Trustee may not be relieved from liabilities for its own
negligent action, its own negligent failure to act, or its own willful
misconduct, except that:
(i) this paragraph does not limit the effect of paragraph (b) of this
Section;
(ii) the Trustee shall not be liable for any error of judgment made
in good faith by a Responsible Officer, unless it is proven that the
Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it
takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05 hereof.
(d) Whether or not therein expressly so provided, every provision of
this Indenture that in any way relates to the Trustee is subject to paragraphs
(a), (b), and (c) of this Section.
(e) No provision of this Indenture shall require the Trustee to
expend or risk its own funds or incur any liability. The Trustee shall be under
no obligation to exercise any of its rights and powers under this Indenture at
the request of any Holders, unless such Holders shall have offered to the
Trustee security and indemnity satisfactory to it against any loss, liability or
expense.
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(f) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
Money held in trust by the Trustee need not be segregated from other funds
except to the extent required by law.
SECTION 7.02. RIGHTS OF TRUSTEE.
(a) The Trustee may conclusively rely upon any document believed by
it to be genuine and to have been signed or presented by the proper Person. The
Trustee need not investigate any fact or matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may require
an Officers' Certificate or an Opinion of Counsel or both. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
such Officers' Certificate or Opinion of Counsel. The Trustee may consult with
counsel and the written advice of such counsel or any Opinion of Counsel shall
be full and complete authorization and protection from liability in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
reliance thereon.
(c) The Trustee may act through its attorneys and agents and shall
not be responsible for the misconduct or negligence of any agent appointed with
due care.
(d) The Trustee shall not be liable for any action it takes or omits
to take in good faith that it believes to be authorized or within the rights or
powers conferred upon it by this Indenture.
(e) Unless otherwise specifically provided in this Indenture, any
demand, request, direction or notice from the Company shall be sufficient if
signed by an Officer of the Company.
(f) The Trustee shall be under no obligation to exercise any of the
rights or powers vested in it by this Indenture at the request or direction of
any of the Holders unless such Holders shall have offered to the Trustee
reasonable security or indemnity against the costs, expenses and liabilities
that might be incurred by it in compliance with such request or direction.
SECTION 7.03. INDIVIDUAL RIGHTS OF TRUSTEE.
The Trustee in its individual or any other capacity may become the
owner or pledgee of Exchange Notes and may otherwise deal with the Company or
any Affiliate of the Company with the same rights it would have if it were not
Trustee. However, in the event that the Trustee acquires any conflicting
interest it must eliminate such conflict within 90 days, apply to the SEC for
permission to continue as trustee or resign. Any Agent may do the same with like
rights and duties. The Trustee is also subject to Sections 7.10 and 7.11 hereof.
SECTION 7.04. TRUSTEE'S DISCLAIMER.
The Trustee shall not be responsible for and makes no representation
as to the validity or adequacy of this Indenture or the Exchange Notes, it shall
not be accountable for the Company's use of the proceeds from the Exchange Notes
or any money paid to the Company or upon the Company's direction under any
provision of this Indenture, it shall not be responsible for the use or
application of any money received by any Paying Agent other than the Trustee,
and it shall not be responsible for any statement or recital herein or any
statement in the Exchange Notes or any other document in connection with the
sale of the Exchange Notes or pursuant to this Indenture other than its
certificate of authentication.
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SECTION 7.05. NOTICE OF DEFAULTS.
If a Default or Event of Default occurs and is continuing and if a
Responsible Officer of the Trustee has actual knowledge of such Default or Event
of Default, the Trustee shall mail to Holders of Exchange Notes a notice of the
Default or Event of Default within 90 days after it occurs. Except in the case
of a Default or Event of Default in payment of principal of, or interest on, any
Note, the Trustee may withhold the notice if and so long as a committee of its
Responsible Officers in good faith determines that withholding the notice is in
the interests of the Holders of the Exchange Notes.
SECTION 7.06. REPORTS BY TRUSTEE TO HOLDERS OF THE EXCHANGE NOTES.
Within 60 days after each May 15 beginning with the May 15 following
the date of this Indenture, and for so long as Exchange Notes remain
outstanding, the Trustee shall mail to the Holders of the Exchange Notes a brief
report dated as of such reporting date that complies with TIA Section 313(a)
(but if no event described in TIA Section 313(a) has occurred within the twelve
months preceding the reporting date, no report need be transmitted). The Trustee
also shall comply with TIA Section 313(b)(2). The Trustee shall also transmit by
mail all reports as required by TIA Section 313(c).
A copy of each report at the time of its mailing to the Holders of
Exchange Notes shall be mailed to the Company and filed with the SEC and each
stock exchange on which the Exchange Notes are listed in accordance with TIA
Section 313(d). The Company shall promptly notify the Trustee when the Exchange
Notes are listed on any stock exchange.
SECTION 7.07. COMPENSATION AND INDEMNITY.
The Company shall pay to the Trustee from time to time such
compensation for its acceptance of this Indenture and services hereunder as the
Company and Trustee have separately agreed. The Trustee's compensation shall not
be limited by any law on compensation of a trustee of an express trust. The
Company shall reimburse the Trustee promptly upon request for all reasonable
disbursements, advances and expenses incurred or made by it in addition to the
compensation for its services. Such expenses shall include the reasonable
compensation, disbursements and expenses of the Trustee's agents and counsel.
The Company shall indemnify the Trustee against any and all losses,
liabilities or expenses incurred by it arising out of or in connection with the
acceptance or administration of its duties under this Indenture, including the
costs and expenses of enforcing this Indenture against the Company (including
this Section 7.07) and defending itself against any claim (whether asserted by
the Company or any Holder or any other person) or liability in connection with
the exercise or performance of any of its powers or duties hereunder, except to
the extent any such loss, liability or expense may be attributable to its
negligence or bad faith. The Trustee shall notify the Company promptly of any
claim for which it may seek indemnity. Failure by the Trustee to so notify the
Company shall not relieve the Company of its obligations hereunder. The Company
shall defend the claim and the Trustee shall cooperate in the defense. The
Trustee may have separate counsel and the Company shall pay the reasonable fees
and expenses of such counsel. The Company need not pay for any settlement made
without its consent, which consent shall not be unreasonably withheld.
The obligations of the Company under this Section 7.07 shall survive
the satisfaction and discharge of this Indenture.
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To secure the Company's payment obligations in this Section, the
Trustee shall have a Lien prior to the Exchange Notes on all money or property
held or collected by the Trustee, except that held in trust to pay principal and
interest on particular Exchange Notes. Such Lien shall survive the satisfaction
and discharge of this Indenture.
When the Trustee incurs expenses or renders services after an Event
of Default specified in Section 6.01(vii) or (viii) hereof occurs, the expenses
and the compensation for the services (including the fees and expenses of its
agents and counsel) are intended to constitute expenses of administration under
any Bankruptcy Law.
The Trustee shall comply with the provisions of TIA Section 313(b)(2)
to the extent applicable.
SECTION 7.08. REPLACEMENT OF TRUSTEE.
A resignation or removal of the Trustee and appointment of a
successor Trustee shall become effective only upon the successor Trustee's
acceptance of appointment as provided in this Section.
The Trustee may resign in writing at any time and be discharged from
the trust hereby created by so notifying the Company. The Holders of a majority
in principal amount of the then outstanding Exchange Notes may remove the
Trustee by so notifying the Trustee and the Company in writing. The Company may
remove the Trustee if:
(a) the Trustee fails to comply with Section 7.10 hereof;
(b) the Trustee is adjudged a bankrupt or an insolvent or an order
for relief is entered with respect to the Trustee under any Bankruptcy
Law;
(c) a Custodian or public officer takes charge of the Trustee or its
property; or
(d) the Trustee becomes incapable of acting.
If the Trustee resigns or is removed or if a vacancy exists in the
office of Trustee for any reason, the Company shall promptly appoint a successor
Trustee. Within one year after the successor Trustee takes office, the Holders
of a majority in principal amount of the then outstanding Exchange Notes may
appoint a successor Trustee to replace the successor Trustee appointed by the
Company.
If a successor Trustee does not take office within 60 days after the
retiring Trustee resigns or is removed, the retiring Trustee, the Company, or
the Holders of at least 10% in principal amount of the then outstanding Exchange
Notes may petition any court of competent jurisdiction for the appointment of a
successor Trustee.
If the Trustee, after written request by any Holder of an Exchange
Note who has been a Holder of an Exchange Note for at least six months, fails to
comply with Section 7.10, such Holder of an Exchange Note may petition any court
of competent jurisdiction for the removal of the Trustee and the appointment of
a successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon, the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Holders of the Exchange
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Notes. The retiring Trustee shall promptly transfer all property held by it as
Trustee to the successor Trustee, provided all sums owing to the Trustee
hereunder have been paid and subject to the Lien provided for in Section 7.07
hereof. Notwithstanding replacement of the Trustee pursuant to this Section
7.08, the Company's obligations under Section 7.07 hereof shall continue for the
benefit of the retiring Trustee.
SECTION 7.09. SUCCESSOR TRUSTEE BY MERGER, ETC.
If the Trustee consolidates, merges or converts into, or transfers
all or substantially all of its corporate trust business to, another
corporation, the successor corporation without any further act shall be the
successor Trustee.
SECTION 7.10. ELIGIBILITY; DISQUALIFICATION.
There shall at all times be a Trustee hereunder that is a corporation
organized and doing business under the laws of the United States of America or
of any state thereof that is authorized under such laws to exercise corporate
trustee power, that is subject to supervision or examination by federal or state
authorities and that has a combined capital and surplus of at least $100 million
as set forth in its most recent published annual report of condition.
This Indenture shall always have a Trustee who satisfies the
requirements of TIA Section 310(a)(1), (2) and (5). The Trustee is subject to
TIA Section 310(b).
SECTION 7.11. PREFERENTIAL COLLECTION OF CLAIMS AGAINST COMPANY.
The Trustee is subject to TIA Section 311(a), excluding any creditor
relationship listed in TIA Section 311(b). A Trustee who has resigned or been
removed shall be subject to TIA Section 311(a) to the extent indicated therein.
ARTICLE 8
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
SECTION 8.01. OPTION TO EFFECT LEGAL DEFEASANCE OR COVENANT DEFEASANCE.
The Company may, at the option of its Board of Directors evidenced by
a resolution set forth in an Officers' Certificate, at any time, elect to have
either Section 8.02 or 8.03 hereof be applied to all outstanding Exchange Notes
upon compliance with the conditions set forth below in this Article 8.
SECTION 8.02. LEGAL DEFEASANCE AND DISCHARGE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.02, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.04 hereof, be deemed to have been
discharged from its obligations with respect to all outstanding Exchange Notes
on the date the conditions set forth below are satisfied (hereinafter, "Legal
Defeasance"). For this purpose, Legal Defeasance means that the Company shall be
deemed to have paid and discharged the entire Indebtedness represented by the
outstanding Exchange Notes, which shall thereafter be deemed to be "outstanding"
only for the purposes of Section 8.05 hereof and the other Sections of this
Indenture referred to in (a) and (b) below, and to have satisfied all of its
other Obligations under such Exchange Notes and this Indenture (and the Trustee,
on demand of and at the expense of the Company,
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shall execute proper instruments acknowledging the same), except for the
following provisions which shall survive until otherwise terminated or
discharged hereunder: (a) the rights of Holders of outstanding Exchange Notes to
receive solely from the trust fund described in Section 8.04 hereof, and as more
fully set forth in such Section, payments in respect of the principal of,
premium, if any, and interest, if any, on such Exchange Notes when such payments
are due, (b) the Company's obligations with respect to such Exchange Notes under
Article 2 and Section 4.02 hereof, (c) the rights, powers, trusts, duties and
immunities of the Trustee hereunder and the Company's obligations in connection
therewith and (d) this Article 8. Subject to compliance with this Article 8, the
Company may exercise its option under this Section 8.02 notwithstanding the
prior exercise of its option under Section 8.03 hereof.
SECTION 8.03. COVENANT DEFEASANCE.
Upon the Company's exercise under Section 8.01 hereof of the option
applicable to this Section 8.03, the Company shall, subject to the satisfaction
of the conditions set forth in Section 8.04 hereof, be released from its
obligations under the covenants contained in Sections 3.09, 4.07, 4.08, 4.09,
4.10, 4.11, 4.12, 4.13, 4.15, 4.16 and 5.01 hereof with respect to the
outstanding Exchange Notes on and after the date the conditions set forth below
are satisfied (hereinafter, "Covenant Defeasance"), and the Exchange Notes shall
thereafter be deemed not "outstanding" for the purposes of any direction,
waiver, consent or declaration or act of Holders (and the consequences of any
thereof) in connection with such covenants, but shall continue to be deemed
"outstanding" for all other purposes hereunder (it being understood that such
Exchange Notes shall not be deemed outstanding for accounting purposes). For
this purpose, Covenant Defeasance means that, with respect to the "outstanding"
Exchange Notes, the Company may omit to comply with and shall have no liability
in respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 6.01 hereof,
but, except as specified above, the remainder of this Indenture and such
Exchange Notes shall be unaffected thereby. In addition, upon the Company's
exercise under Section 8.01 hereof of the option applicable to this Section
8.03, subject to the satisfaction of the conditions set forth in Section 8.04
hereof, Sections 6.01(iv) through 6.01(viii) hereof shall not constitute Events
of Default.
SECTION 8.04. CONDITIONS TO LEGAL OR COVENANT DEFEASANCE.
The following shall be the conditions to the application of either Section
8.02 or 8.03 hereof to the outstanding Exchange Notes:
In order to exercise either Legal Defeasance or Covenant Defeasance:
(a) the Company must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Exchange Notes, cash
in United States dollars, non-callable Government Securities, or a
combination thereof, in such amounts as will be sufficient, in the
opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest
on the outstanding Exchange Notes on the stated maturity or on the
applicable redemption date, as the case may be, and the Company must
specify whether the Exchange Notes are being defeased to maturity or
to a particular redemption date;
(b) in the case of an election under Section 8.02 hereof,
the Company shall have delivered to the Trustee an Opinion of Counsel
in the United States reasonably acceptable to the Trustee confirming
that (i) the Company has received from, or there has been published
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by, the Internal Revenue Service a ruling or (ii) since the date of
this Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon
such Opinion of Counsel shall confirm that, the Holders of the
outstanding Exchange Notes will not recognize income, gain or loss
for federal income tax purposes as a result of such Legal Defeasance
and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
Legal Defeasance had not occurred;
(c) in the case of an election under Section 8.03 hereof,
the Company shall have delivered to the Trustee an Opinion of Counsel
in the United States reasonably acceptable to the Trustee confirming
that the Holders of the outstanding Exchange Notes will not recognize
income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would
have been the case if such Covenant Defeasance had not occurred;
(d) no Default or Event of Default shall have occurred and
be continuing on the date of such deposit (other than a Default or
Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as Sections 6.01(vii) or (viii) hereof
are concerned, at any time in the period ending on the 91st day after
the date of deposit (or greater period of time in which any such
deposit of trust funds may remain subject to bankruptcy or insolvency
laws insofar as those apply to the deposit by the Company);
(e) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under,
any material agreement or instrument (other than this Indenture) to
which the Company or any of its Subsidiaries is a party or by which
the Company or any of its Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an
Opinion of Counsel to the effect that, as of the date of such
opinion, (i) the trust funds will not be subject to the rights of
holders of Indebtedness other than the Exchange Notes and (ii)
assuming no intervening bankruptcy of the Company between the date of
deposit and the 91st day (or greater period of time in which any such
deposit of trust funds may remain subject to bankruptcy or insolvency
laws insofar as those apply to the deposit by the Company) following
the deposit and assuming no Holder of Exchange Notes is an insider of
the Company, after the 91st day (or later date until which any such
deposit of trust funds may remain subject to bankruptcy or insolvency
laws insofar as those apply to the deposit by the Company) following
the deposit, the trust funds will not be subject to the effects of
any applicable bankruptcy, insolvency, reorganization or similar laws
affecting creditors' rights generally under any applicable United
States or state law;
(g) the Company shall have delivered to the Trustee an
Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Exchange Notes
over the other creditors of the Company or with the intent of
defeating, hindering, delaying or defrauding creditors of the Company
or others; and
(h) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that
all conditions precedent provided for or relating to the Legal
Defeasance or the Covenant Defeasance have been complied with.
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SECTION 8.05. DEPOSITED MONEY AND GOVERNMENT SECURITIES TO BE HELD IN TRUST;
OTHER MISCELLANEOUS PROVISIONS.
Subject to Section 8.06 hereof, all money and non-callable Government
Securities (including the proceeds thereof) deposited with the Trustee (or other
qualifying trustee, collectively for purposes of this Section 8.05, the
"Trustee") pursuant to Section 8.04 hereof in respect of the outstanding
Exchange Notes shall be held in trust and applied by the Trustee, in accordance
with the provisions of such Exchange Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including the Company acting as
Paying Agent) as the Trustee may determine, to the Holders of such Exchange
Notes of all sums due and to become due thereon in respect of principal,
premium, if any, and interest, but such money need not be segregated from other
funds except to the extent required by law.
The Company shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the cash or non-callable
Government Securities deposited pursuant to Section 8.04 hereof or the principal
and interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the outstanding
Exchange Notes.
Anything in this Article 8 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Company from time to time upon the request
of the Company any money or non-callable Government Securities held by it as
provided in Section 8.04 hereof which, in the opinion of a nationally recognized
firm of independent public accountants expressed in a written certification
thereof delivered to the Trustee (which may be the opinion delivered under
Section 8.04(a) hereof), are in excess of the amount thereof that would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.
SECTION 8.06. REPAYMENT TO COMPANY.
Any money deposited with the Trustee or any Paying Agent, or then
held by the Company, in trust for the payment of the principal of, premium, if
any, or interest on any Exchange Note and remaining unclaimed for two years
after such principal, and premium, if any, or interest has become due and
payable shall be paid to the Company on its request or (if then held by the
Company) shall be discharged from such trust; and the Holder of such Exchange
Note shall thereafter, as a secured creditor, look only to the Company for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Company as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, may at the
expense of the Company cause to be published once, in the New York Times and The
Wall Street Journal (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Company.
SECTION 8.07. REINSTATEMENT.
If the Trustee or Paying Agent is unable to apply any United States
dollars or non-callable Government Securities in accordance with Section 8.02 or
8.03 hereof, as the case may be, by reason of any order or judgment of any court
or governmental authority enjoining, restraining or otherwise prohibiting such
application, then the obligations of the Company under this Indenture and the
Exchange Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 8.02 or 8.03 hereof until such time as the Trustee or Paying
Agent is permitted to apply all such money in accordance with Section 8.02 or
8.03 hereof, as the case may be; provided, however, that, if the
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Company makes any payment of principal of, premium, if any, or interest on any
Exchange Note following the reinstatement of its obligations, the Company shall
be subrogated to the rights of the Holders of such Exchange Notes to receive
such payment from the money held by the Trustee or Paying Agent.
ARTICLE 9
AMENDMENT, SUPPLEMENT AND WAIVER
SECTION 9.01. WITHOUT CONSENT OF HOLDERS OF EXCHANGE NOTES.
Notwithstanding Section 9.02 of this Indenture, the Company and the
Trustee may amend or supplement this Indenture or the Exchange Notes without the
consent of any Holder of an Exchange Note:
(a) to cure any ambiguity, defect or inconsistency;
(b) to provide for uncertificated Exchange Notes in addition to or in
place of certificated Exchange Notes;
(c) to provide for the assumption of the Company's obligations to
Holders of Exchange Notes in the case of a merger or consolidation
pursuant to Article 5 hereof, as applicable;
(d) to make any change that would provide any additional rights or
benefits to the Holders of Exchange Notes or that does not adversely
affect the legal rights hereunder of any such Holder; or
(e) to comply with the requirements of the SEC in order to effect or
maintain the qualification of this Indenture under the TIA.
Upon the request of the Company accompanied by a resolution of the
Board of Directors of the Company authorizing the execution of any such amended
or supplemental Indenture, and upon receipt by the Trustee of the documents
described in Section 7.02 hereof, the Trustee shall join with the Company in the
execution of any amended or supplemental Indenture authorized or permitted by
the terms of this Indenture and to make any further appropriate agreements and
stipulations that may be therein contained, but the Trustee shall not be
obligated to enter into such amended or supplemental Indenture that affects its
own rights, duties or immunities under this Indenture or otherwise.
SECTION 9.02. WITH CONSENT OF HOLDERS OF EXCHANGE NOTES.
Except as provided below in this Section 9.02, the Company and the
Trustee may amend or supplement this Indenture and the Exchange Notes may be
amended or supplemented with the consent of the Holders of at least a majority
in principal amount of the Exchange Notes then outstanding (including, without
limitation, consents obtained in connection with a purchase of, or tender offer
or exchange offer for, Exchange Notes), and, subject to Sections 6.04 and 6.07
hereof, any existing Default or Event of Default (other than a Default or Event
of Default in the payment of the principal of, premium, if any, or interest on
the Exchange Notes) or compliance with any provision of this Indenture or the
Exchange Notes may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Exchange Notes (including consents
obtained in connection with a purchase of, or tender offer or exchange offer for
the Exchange Notes). Any amendment to the provisions of Article 10 hereof
including the related definitions will require the consent of the Holders of at
least 75% in
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aggregate principal amount of the Exchange Notes then outstanding if such
amendment would adversely affect the rights of Holders of Exchange Notes.
Upon the request of the Company accompanied by a resolution of the
Board of Directors of the Company authorizing the execution of any such amended
or supplemental Indenture, and upon the filing with the Trustee of evidence
satisfactory to the Trustee of the consent of the Holders of Exchange Notes as
aforesaid, and upon receipt by the Trustee of the documents described in Section
7.02 hereof, the Trustee shall join with the Company in the execution of such
amended or supplemental Indenture unless such amended or supplemental Indenture
affects the Trustee's own rights, duties or immunities under this Indenture or
otherwise, in which case the Trustee may in its discretion, but shall not be
obligated to, enter into such amended or supplemental Indenture.
It shall not be necessary for the consent of the Holders of Exchange
Notes under this Section 9.02 to approve the particular form of any proposed
amendment or waiver, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Company shall mail to the Holders of Exchange Notes
affected thereby a notice briefly describing the amendment, supplement or
waiver. Any failure of the Company to mail such notice, or any defect therein,
shall not, however, in any way impair or affect the validity of any such amended
or supplemental Indenture or waiver. Subject to Sections 6.04 and 6.07 hereof,
the Holders of a majority in aggregate principal amount of the Exchange Notes
then outstanding may waive compliance in a particular instance by the Company
with any provision of this Indenture or the Exchange Notes. However, without the
consent of each Holder affected, an amendment or waiver may not (with respect to
any Exchange Notes held by a non-consenting Holder):
(a) reduce the principal amount of Exchange Notes whose Holders must
consent to an amendment, supplement or waiver;
(b) reduce the principal of or change the fixed maturity of any
Exchange Note or alter the provisions with respect to the redemption of
the Exchange Notes (other than provisions relating to Sections 3.09, 4.10
and 4.13 hereof);
(c) reduce the rate of or change the time for payment of interest,
including default interest, on any Exchange Note;
(d) waive a Default or Event of Default in the payment of principal
of or premium, if any, or interest on the Exchange Notes (except a
rescission of acceleration of the Exchange Notes by the Holders of a
majority in aggregate principal amount of the Exchange Notes and a waiver
of the payment default that resulted from such acceleration);
(e) make any Exchange Note payable in money other than that stated in
the Exchange Notes;
(f) make any change in the provisions of this Indenture relating to
waivers of past Defaults or the rights of Holders of Exchange Notes to
receive payments of principal of or premium, if any, or interest on the
Exchange Notes;
(g) waive a redemption payment with respect to any Exchange Note
(other than a payment required by the provisions of Section 3.09, 4.10 or
4.13 hereof); or
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(h) make any change in Section 6.04 or 6.07 hereof or in the
foregoing amendment and waiver provisions.
SECTION 9.03. COMPLIANCE WITH TRUST INDENTURE ACT.
Every amendment or supplement to this Indenture or the Exchange Notes
shall be set forth in a amended or supplemental Indenture that complies with the
TIA as then in effect.
SECTION 9.04. REVOCATION AND EFFECT OF CONSENTS.
Until an amendment, supplement or waiver becomes effective, a consent
to it by a Holder of an Exchange Note is a continuing consent by the Holder of
an Exchange Note and every subsequent Holder of an Exchange Note or portion of
an Exchange Note that evidences the same debt as the consenting Holder's
Exchange Notes, even if notation of the consent is not made on any Exchange
Notes. However, any such Holder of an Exchange Note or subsequent Holder of an
Exchange Note may revoke the consent as to its Exchange Notes if the Trustee
receives written notice of revocation before the date the waiver, supplement or
amendment becomes effective. An amendment, supplement or waiver becomes
effective in accordance with its terms and thereafter binds every Holder.
SECTION 9.05. NOTATION ON OR EXCHANGE OF EXCHANGE NOTES.
The Trustee may place an appropriate notation about an amendment,
supplement or waiver on any Exchange Notes thereafter authenticated. The Company
in exchange for all Exchange Notes may issue and the Trustee shall authenticate
new Exchange Notes that reflect the amendment, supplement or waiver.
Failure to make the appropriate notation or to issue a new Exchange
Notes shall not affect the validity and effect of such amendment, supplement or
waiver.
SECTION 9.06. TRUSTEE TO SIGN AMENDMENTS, ETC.
The Trustee shall sign any amendment or supplemental Indenture authorized
pursuant to this Article 9 if the amendment or supplement does not adversely
affect the rights, duties, liabilities or immunities of the Trustee. The Company
may not sign an amendment or supplemental Indenture until its Board of Directors
approves it. If it does, the Trustee may, but need not, sign it. In signing or
refusing to sign such amendment or supplemental Indenture, the Trustee shall be
entitled to receive and, subject to Section 7.01 hereof, shall be fully
protected in relying upon, an Officers' Certificate and an Opinion of Counsel as
conclusive evidence that such amendment or supplemental Indenture is authorized
or permitted by this Indenture, that it is not inconsistent herewith, and that
it will be valid and binding upon the Company in accordance with its terms.
ARTICLE 10
SUBORDINATION
SECTION 10.01. AGREEMENT TO SUBORDINATE.
The Company agrees, and each Holder by accepting an Exchange Note
agrees, that the Indebtedness evidenced by the Exchange Notes is subordinated in
right of payment, to the extent and in the manner provided in this Article 10,
to the prior payment in full of all Senior Debt, whether
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outstanding on the date hereof or hereafter created, incurred, assumed or
guaranteed, and that the subordination is for the benefit of the holders of
Senior Debt.
SECTION 10.02. CERTAIN DEFINITIONS.
"Designated Senior Debt" means any Senior Debt permitted under this
Indenture, the principal amount of which is $10.0 million or more and that has
been designated by the Company as "Designated Senior Debt."
A "distribution" may consist of cash, securities or other property,
by set-off or otherwise.
"Representative" means the indenture trustee or other trustee, agent
or representative for any Senior Debt.
"Senior Bank Debt" means any Indebtedness of the Company (including
letters of credit) outstanding under, and any other Obligations of the Company
with respect to, Bank Facilities, to the extent that any such Indebtedness and
other Obligations are permitted by this Indenture to be incurred.
"Senior Debt" means (a) the Senior Bank Debt (to the extent it
constitutes Indebtedness of the Company) and (b) any other Indebtedness of the
Company that is permitted to be incurred by the Company under this Indenture,
unless the instrument under which such Indebtedness is incurred expressly
provides that it is on a parity with or subordinated in right of payment to the
Exchange Notes. Notwithstanding anything to the contrary in the foregoing,
Senior Debt will not include (i) any liability for federal, state, local or
other taxes owed or owing by the Company, (ii) any Indebtedness of the Company
to any of its Subsidiaries or other Affiliates, (iii) any trade payables or (iv)
any Indebtedness that is incurred in violation of this Indenture.
SECTION 10.03. LIQUIDATION; DISSOLUTION; BANKRUPTCY.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, or
in an assignment for the benefit of creditors or any marshalling of the
Company's assets and liabilities:
(1) holders of Senior Debt shall be entitled to receive payment in
full of all Obligations due in respect of such Senior Debt (including
interest after the commencement of any such proceeding at the rate
specified in the applicable Senior Debt, whether or not an allowable
claim) before the Holders shall be entitled to receive any payment with
respect to the Exchange Notes (except that Holders may receive (i)
securities that are subordinated at least to the same extent as the
Exchange Notes to (a) Senior Debt and (b) any securities issued in
exchange for Senior Debt and (ii) payments made from any defeasance trust
created pursuant to Section 8.01 hereof); and
(2) until all Obligations with respect to Senior Debt (as provided in
subsection (1) above) are paid in full, any distribution to which the
Holders would be entitled but for this Article 10 shall be made to holders
of Senior Debt (except that Holders may receive (i) securities that are
subordinated at least to the same extent as the Exchange Notes to (a)
Senior Debt and (b) any securities issued in exchange for Senior Debt and
(ii) payments made from any defeasance trust created pursuant to Section
8.01 hereof), as their interests may appear.
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SECTION 10.04. DEFAULT ON DESIGNATED SENIOR DEBT.
(a) The Company may not make any payment or distribution upon or in
respect of the Exchange Notes (other than (1) securities that are subordinated
at least to the same extent as the Exchange Notes to (A) Senior Debt and (B) any
securities issued in exchange for Senior Debt and (2) payments made from any
defeasance trust created pursuant to Section 8.01 hereof) until all principal
and other Obligations with respect to the Senior Debt have been paid in full if:
(i) a default in the payment of the principal of, premium, if any, or
interest on Designated Senior Debt occurs and is continuing beyond any
applicable grace period in the agreement, indenture or other document
governing such Designated Senior Debt; or
(ii) a default, other than a default specified in Section 10.04(a)(i)
hereof, on Designated Senior Debt occurs and is continuing with respect to
Designated Senior Debt that then permits holders of the Designated Senior
Debt as to which such default relates to accelerate its maturity and the
Trustee receives a notice of such default (a "Payment Blockage Notice")
from the Company or the holders of any Designated Senior Debt who may give
it pursuant to Section 10.12 hereof. If the Trustee receives any such
Payment Blockage Notice, no subsequent Payment Blockage Notice shall be
effective for purposes of this Section 10.04 unless and until (I) at least
360 days shall have elapsed since the effectiveness of the immediately
prior Payment Blockage Notice and (II) all scheduled payments of
principal, premium, if any, and interest on the Exchange Notes that have
come due (other than by reason of acceleration) have been paid in full in
cash. No default described in this paragraph (ii) that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
(b) The Company may and shall resume payments on the Exchange Notes
(i) in the case of a default described in Section 10.04(a)(i) hereof,
upon the date on which the default is cured or waived and
(ii) in the case of a default referred to in Section 10.04(a)(ii)
hereof, the earlier of (A) the date on which such default is cured or
waived or (B) 179 days after the date on which the applicable Payment
Blockage Notice is received, unless the maturity of any Designated Senior
Debt has been accelerated
if this Article 10 otherwise permits the payment, distribution or acquisition at
the time of such payment or acquisition.
SECTION 10.05. ACCELERATION OF EXCHANGE NOTES.
If payment of the Exchange Notes is accelerated because of an Event
of Default, the Company shall promptly notify holders of Senior Debt of the
acceleration.
SECTION 10.06. WHEN DISTRIBUTION MUST BE PAID OVER.
In the event that the Trustee or any Holder receives any payment of
any Obligations with respect to the Exchange Notes at a time when a Responsible
Officer of the Trustee or such Holder, as applicable, has actual knowledge that
such payment is prohibited by Section 10.04 hereof, such payment shall be held
by the Trustee or such Holder, in trust for the benefit of, and shall be paid
forthwith over
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and delivered, upon written request, to, the holders of Senior Debt as their
interests may appear or their Representative under the indenture or other
agreement (if any) pursuant to which Senior Debt may have been issued, as their
respective interests may appear, for application to the payment of all
Obligations with respect to Senior Debt remaining unpaid to the extent necessary
to pay such Obligations in full in accordance with their terms, after giving
effect to any concurrent payment or distribution to or for the holders of Senior
Debt.
With respect to the holders of Senior Debt, the Trustee undertakes to
perform only such obligations on the part of the Trustee as are specifically set
forth in this Article 10, and no implied covenants or obligations with respect
to the holders of Senior Debt shall be read into this Indenture against the
Trustee. The Trustee shall not be deemed to owe any fiduciary duty to the
holders of Senior Debt, and shall not be liable to any such holders if the
Trustee shall pay over or distribute to or on behalf of Holders or the Company
or any other Person money or assets to which any holders of Senior Debt shall be
entitled by virtue of this Article 10, except if such payment is made as a
result of the willful misconduct or gross negligence of the Trustee.
SECTION 10.07. NOTICE BY COMPANY.
The Company shall promptly notify the Trustee and the Paying Agent of
any facts known to the Company that would cause a payment of any Obligations
with respect to the Exchange Notes to violate this Article 10, but failure to
give such notice shall not affect the subordination of the Exchange Notes to the
Senior Debt as provided in this Article 10.
SECTION 10.08. SUBROGATION.
After all Senior Debt is paid in full and until the Exchange Notes
are paid in full, Holders shall be subrogated (equally and ratably with all
other Pari Passu Debt) to the rights of holders of Senior Debt to receive
distributions applicable to Senior Debt to the extent that distributions
otherwise payable to the Holders have been applied to the payment of Senior
Debt. A distribution made under this Article to holders of Senior Debt that
otherwise would have been made to Holders is not, as between the Company and
Holders, a payment by the Company on the Senior Debt.
SECTION 10.09. RELATIVE RIGHTS.
This Article defines the relative rights of Holders and holders of
Senior Debt. Nothing in this Indenture shall:
(1) impair, as between the Company and Holders, the obligation of the
Company, which is absolute and unconditional, to pay principal of and
interest on the Exchange Notes in accordance with their terms;
(2) affect the relative rights of Holders and creditors of the
Company other than their rights in relation to holders of Senior Debt; or
(3) prevent the Trustee or any Holder from exercising its available
remedies upon a Default or Event of Default, subject to the rights of
holders and owners of Senior Debt to receive distributions and payments
otherwise payable to Holders.
If the Company fails because of this Article to pay principal of or
interest on an Exchange Note on the due date, the failure is still a Default or
Event of Default.
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SECTION 10.10. SUBORDINATION MAY NOT BE IMPAIRED BY COMPANY.
No right of any holder of Senior Debt to enforce the subordination of
the Indebtedness evidenced by the Exchange Notes shall be impaired by any act or
failure to act by the Company or any Holder or by the failure of the Company or
any Holder to comply with this Indenture.
SECTION 10.11. DISTRIBUTION OR NOTICE TO REPRESENTATIVE.
Whenever a distribution is to be made or a notice given to holders of
Senior Debt, the distribution may be made and the notice given to their
Representative.
Upon any payment or distribution of assets of the Company referred to
in this Article 10, the Trustee and the Holders shall be entitled to rely upon
any order or decree made by any court of competent jurisdiction or upon any
certificate of such Representative or of the liquidating trustee or agent or
other Person making any distribution to the Trustee or to the Holders for the
purpose of ascertaining the Persons entitled to participate in such
distribution, the holders of the Senior Debt and other Indebtedness of the
Company, the amount thereof or payable thereon, the amount or amounts paid or
distributed thereon and all other facts pertinent thereto or to this Article 10.
SECTION 10.12. RIGHTS OF TRUSTEE AND PAYING AGENT.
Notwithstanding the provisions of this Article 10 or any other
provision of this Indenture, the Trustee shall not be charged with knowledge of
the existence of any facts that would prohibit the making of any payment or
distribution by the Trustee, and the Trustee and the Paying Agent may continue
to make payments on the Exchange Notes, unless the Trustee shall have received
at its Corporate Trust Office at least five Business Days prior to the date of
such payment written notice of facts that would cause the payment of any
Obligations with respect to the Exchange Notes to violate this Article. Only the
Company or a Representative may give the notice. Nothing in this Article 10
shall impair the claims of, or payments to, the Trustee under or pursuant to
Section 7.07 hereof.
The Trustee in its individual or any other capacity may hold Senior
Debt with the same rights it would have if it were not Trustee. Any Agent may do
the same with like rights.
SECTION 10.13. AUTHORIZATION TO EFFECT SUBORDINATION.
Each Holder of an Exchange Note by the Holder's acceptance thereof
authorizes and directs the Trustee on the Holder's behalf to take such action as
may be necessary or appropriate to effectuate the subordination as provided in
this Article 10, and appoints the Trustee to act as the Holder's
attorney-in-fact for any and all such purposes.
SECTION 10.14. AMENDMENTS.
The provisions of this Article 10 shall not be amended or modified
without the written consent of the holders of all Senior Debt.
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ARTICLE 11
MISCELLANEOUS
SECTION 11.01. TRUST INDENTURE ACT CONTROLS.
If any provision of this Indenture limits, qualifies or conflicts
with the duties imposed by TIA ss.318(c), the imposed duties shall control.
SECTION 11.02. NOTICES.
Any notice or communication by the Company or the Trustee to the
others is duly given if in writing and delivered in Person or mailed by first
class mail (registered or certified, return receipt requested), telex,
telecopier or overnight air courier guaranteeing next day delivery, to the
others' address:
If to the Company:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporate Center, Suite 454
100 Matsonford Road
Radnor, PA 19087
Telecopier No.: (610) 341-1835
Attention: Marshall W. Pagon
With a copy to:
Drinker Biddle & Reath
PNB Building, 11th Floor
1345 Chestnut Street
Philadelphia, PA 19107
Telecopier No.: (215) 988-2757
Attention: Michael B. Jordan, Esq.
If to the Trustee:
First Union National Bank
123 South Broad Street
Philadelphia, PA 19109
Telecopier No.: (215) 985-7290
Attention: Corporate Trust Administration PA1249
With a copy to:
First Union National Bank of North Carolina
230 S. Tryon Street
Charlotte, NC 28288-1153
Telecopier No.: (704) 374-6114
Attention: Client Service Group
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The Company or the Trustee, by notice to the others may designate
additional or different addresses for subsequent notices or communications.
All notices and communications (other than those sent to Holders)
shall be deemed to have been duly given: at the time delivered by hand, if
personally delivered; five Business Days after being deposited in the mail,
postage prepaid, if mailed; when answered back, if telexed; when receipt
acknowledged, if telecopied; and the next Business Day after timely delivery to
the courier, if sent by overnight air courier guaranteeing next day delivery.
Any notice or communication to a Holder shall be mailed by first
class mail, certified or registered, return receipt requested, or by overnight
air courier guaranteeing next day delivery to its address shown on the register
kept by the Registrar. Any notice or communication shall also be so mailed to
any Person described in TIA Section 313(c), to the extent required by the TIA.
Failure to mail a notice or communication to a Holder or any defect in it shall
not affect its sufficiency with respect to other Holders.
If a notice or communication is mailed in the manner provided above
within the time prescribed, it is duly given, whether or not the addressee
receives it.
If the Company mails a notice or communication to Holders, it shall
mail a copy to the Trustee and each Agent at the same time.
SECTION 11.03.COMMUNICATION BY HOLDERS OF EXCHANGE NOTES WITH OTHER HOLDERS OF
EXCHANGE NOTES.
Holders may communicate pursuant to TIA Section 312(b) with other
Holders with respect to their rights under this Indenture or the Exchange Notes.
The Company, the Trustee, the Registrar and anyone else shall have the
protection of TIA Section 312(c).
SECTION 11.04. CERTIFICATE AND OPINION AS TO CONDITIONS PRECEDENT.
Upon any request or application by the Company to the Trustee to take
any action under this Indenture, the Company shall furnish to the Trustee:
(a) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 11.05 hereof) stating that, in the opinion of the signers, all
conditions precedent and covenants, if any, provided for in this Indenture
relating to the proposed action have been satisfied; and
(b) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee (which shall include the statements set forth
in Section 11.05 hereof) stating that, in the opinion of such counsel, all
such conditions precedent and covenants have been satisfied.
SECTION 11.05. STATEMENTS REQUIRED IN CERTIFICATE OR OPINION.
Each certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (other than a certificate
provided pursuant to TIA Section 314(a)(4)) shall comply with the provisions of
TIA Section 314(e) and shall include:
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(a) a statement that the Person making such certificate or opinion
has read such covenant or condition;
(b) a brief statement as to the nature and scope of the examination
or investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(c) a statement that, in the opinion of such Person, he or she has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or
condition has been satisfied; and
(d) a statement as to whether or not, in the opinion of such Person,
such condition or covenant has been satisfied.
SECTION 11.06. RULES BY TRUSTEE AND AGENTS.
The Trustee may make reasonable rules for action by or at a meeting
of Holders. The Registrar or Paying Agent may make reasonable rules and set
reasonable requirements for its functions.
SECTION 11.07. NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND
STOCKHOLDERS.
No past, present or future director, officer, employee, incorporator
or stockholder of the Company, as such, shall have any liability for any
obligations of the Company under the Exchange Notes, this Indenture or for any
claim based on, in respect of, or by reason of, such obligations or their
creation. Each Holder of Exchange Notes by accepting an Exchange Note waives and
releases all such liability. The waiver and release are part of the
consideration for issuance of the Exchange Notes.
SECTION 11.08. GOVERNING LAW.
THE INTERNAL LAW OF THE STATE OF NEW YORK SHALL GOVERN AND BE USED TO
CONSTRUE THIS INDENTURE AND THE EXCHANGE NOTES.
SECTION 11.09. NO ADVERSE INTERPRETATION OF OTHER AGREEMENTS.
This Indenture may not be used to interpret any other indenture, loan
or debt agreement of the Company or its Subsidiaries or of any other Person. Any
such indenture, loan or debt agreement may not be used to interpret this
Indenture.
SECTION 11.10. SUCCESSORS.
All agreements of the Company in this Indenture and the Exchange
Notes shall bind its respective successors. All agreements of the Trustee in
this Indenture shall bind its successors.
SECTION 11.11. SEVERABILITY.
In case any provision in this Indenture or in the Exchange Notes
shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby.
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SECTION 11.12. COUNTERPART ORIGINALS.
The parties may sign any number of copies of this Indenture. Each
signed copy shall be an original, but all of them together represent the same
agreement.
SECTION 11.13. TABLE OF CONTENTS, HEADINGS, ETC.
The Table of Contents, Cross-Reference Table and Headings of the
Articles and Sections of this Indenture have been inserted for convenience of
reference only, are not to be considered a part of this Indenture and shall in
no way modify or restrict any of the terms or provisions hereof.
[Signatures on following page]
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SIGNATURES
IN WITNESS WHEREOF, the parties have executed this Indenture as of the
date first written above.
Very truly yours,
PEGASUS COMMUNICATIONS CORPORATION
By:________________________________
Name:
Title:
FIRST UNION NATIONAL BANK
By:____________________________________
Name:
Title:
<PAGE>
EXHIBIT A
(Face of Note)
___% Senior Subordinated Exchange Notes due 2007
CUSIP:
No. $______________
Pegasus Communications Corporation
promises to pay to ________________ or registered assigns, the principal sum of
__________________ Dollars on____________, 2007.
Interest Payment Dates: __________ and ___________
Record Dates: _________ and ___________
Dated:
PEGASUS COMMUNICATIONS CORPORATION
By:______________________________
Name:
Title:
This is one of the Exchange
Notes referred to in the
within-mentioned Indenture:
FIRST UNION NATIONAL BANK,
as Trustee
By: __________________________________
Authorized Officer
A-1
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(Back of Note)
___% Senior Subordinated Exchange Notes due 2007
Capitalized terms used herein shall have the meanings assigned to them
in the Indenture referred to below unless otherwise indicated. The terms of the
Exchange Notes set forth below are not complete and are qualified in their
entirety by reference to the Indenture.
1. INTEREST. Pegasus Communications Corporation, a Delaware corporation
(the "Company") promises to pay interest on the principal amount of this
Exchange Note at ___% per annum from the date hereof until maturity. The Company
will pay interest semi-annually on _________ and _________ of each year, or if
any such day is not a Business Day, on the next succeeding Business Day (each an
"Interest Payment Date"). Interest will be payable in cash, except that on each
Interest Payment Date occurring prior to ___________, 2002, interest may be
paid, at the Company's option, by the issuance of additional Exchange Notes
having an aggregate principal amount equal to the amount of such interest. The
issuance of such additional Exchange Notes will constitute "payment" of the
related interest for all purposes of the Indenture. Interest on the Exchange
Notes will accrue from the most recent date to which interest has been paid or,
if no interest has been paid, from the date of issuance; provided that if there
is no existing Default in the payment of interest, and if this Exchange Note is
authenticated between a record date referred to on the face hereof and the next
succeeding Interest Payment Date, interest shall accrue from such next
succeeding Interest Payment Date; provided, further, that the first Interest
Payment Date shall be ___________. The Company shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
principal and premium, if any, from time to time on demand at a rate that is 1%
per annum in excess of the rate then in effect; it shall pay interest (including
post-petition interest in any proceeding under any Bankruptcy Law) on overdue
installments of interest (without regard to any applicable grace periods) from
time to time on demand at the same rate to the extent lawful. Interest will be
computed on the basis of a 360-day year of twelve 30-day months.
2. METHOD OF PAYMENT. The Company will pay interest on the Exchange
Notes (except defaulted interest) to the Persons who are registered Holders of
Exchange Notes at the close of business on the _________ or __________ next
preceding the Interest Payment Date, even if such Exchange Notes are cancelled
after such record date and on or before such Interest Payment Date, except as
provided in Section 2.12 of the Indenture with respect to defaulted interest.
Any such interest installment not punctually paid or duly provided for shall
forthwith cease to be payable to the registered Holders on such Interest Payment
Date, and may be paid to the registered Holders at the close of business on a
special interest payment date to be fixed by the Company for the payment of such
defaulted interest, notice whereof shall be given to the registered Holders not
less than 15 days prior to such special interest payment date, or may be paid at
any time in any other lawful manner not inconsistent with the requirements of
any securities exchange on which the Exchange Notes may be listed, and upon such
notice as may be required by such exchange, all as more fully provided in the
Indenture. The Exchange Notes will be payable as to principal, premium,
interest, if any, at the office or agency of the Company maintained for such
purpose within or without the City and State of New York, or, at the option of
the Company, payment of interest, if any, may be made by check mailed to the
Holders at their addresses set forth in the register of Holders, and provided
that payment by wire transfer of immediately available funds will be required
with respect to principal of and interest and premium, if any, on, all global
Exchange Notes and all other Exchange Notes the Holders of which shall have
provided wire transfer instructions to the Company or the Paying Agent. Such
payment shall be in such coin or currency of the United States of America as at
the time of payment is legal tender for payment of public and private debts.
A-2
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3. PAYING AGENT AND REGISTRAR. Initially, First Union National Bank,
the Trustee under the Indenture, will act as Paying Agent and Registrar. The
Company may change any Paying Agent or Registrar without notice to any Holder.
The Company may act in any such capacity.
4. INDENTURE. The Company issued the Exchange Notes under an Indenture
dated as of _____________ (the "Indenture") between the Company and the Trustee.
The terms of the Exchange Notes include those stated in the Indenture and those
made part of the Indenture by reference to the Trust Indenture Act of 1939, as
amended (15 U.S. Code Sections 77aaa-77bbbb) (the "TIA"). The Exchange Notes are
subject to all such terms, and Holders are referred to the Indenture and the TIA
for a statement of such terms. The Exchange Notes are general obligations of the
Company limited to $100,000,000 in aggregate principal amount, on outstanding
Exchange Notes as set forth in Paragraph 2 hereof.
5. OPTIONAL REDEMPTION.
The Exchange Notes are not redeemable at the Company's option prior to
________, 2002. Thereafter, the Exchange Notes will be subject to redemption at
the option of the Company, in whole or in part, upon not less than 30 nor more
than 60 days' notice, at the redemption prices (expressed as percentages of
principal amount) set forth below plus accrued and unpaid interest, if any,
thereon to the applicable redemption date, if redeemed during the twelve-month
period beginning on _________ of the years indicated below:
Year Redemption Rate
---- ---------------
2002....................................................... ______%
2003....................................................... ______%
2004....................................................... ______%
2005 and thereafter........................................ 100.00%
(b) Notwithstanding the foregoing, during the first 36 months after
the Closing Date, the Company may, on any one or more occasions, use the net
proceeds of one or more offerings of its Class A Common Stock to redeem up to
25% of the aggregate principal amount of the Exchange Notes (whether issued in
exchange for Series A Preferred Stock or in lieu of cash interest payments) at
the redemption price of 110% of the principal amount thereof, plus accrued and
unpaid interest to the date of redemption; provided that, after any such
redemption, the aggregate principal amount of the Exchange Notes outstanding
must equal at least $75.0 million; and provided further, that any such
redemption shall occur within 90 days of the date of closing of such offering of
Class A Common Stock of the Company.
6. MANDATORY REDEMPTION. Except as set forth in Paragraph 7 below, the
Company shall not be required to make mandatory redemption or sinking fund
payments with respect to the Exchange Notes.
7. REPURCHASE AT OPTION OF HOLDER.
(a) Upon the occurrence of a Change of Control, each Holder of
Exchange Notes shall have the right to require the Company to repurchase all or
any part (but not, in the case of any Holder requiring the Company to purchase
less than all of the Exchange Notes held by such Holder, any Exchange Note in
principal amount less than $1,000) of such Holder's Exchange Notes pursuant to
an offer (the "Change of Control Offer") at an offer price equal to 101% of the
aggregate principal amount thereof plus accrued and unpaid interest, if any,
thereon to the date of purchase (the "Change of Control
A-3
<PAGE>
Payment"). Within 10 days following any Change of Control, the Company shall
mail a notice to each Holder setting forth the procedures governing the Change
of Control Offer as required by the Indenture.
(b) If the Company or any Restricted Subsidiary consummates any Asset
Sale, within five days of each date on which the aggregate amount of Excess
Proceeds exceeds $10.0 million, the Company shall make an offer to all Holders
of Exchange Notes and the holders of Pari Passu Debt, to the extent required by
the terms thereof (an "Asset Sale Offer"), to purchase the maximum principal
amount of Exchange Notes and Pari Passu Debt that may be purchased out of the
Excess Proceeds, at an offer price in cash in an amount equal to 100% of the
principal amount thereof plus, in each case, accrued and unpaid interest
thereon, if any, to the date of purchase, in accordance with the procedures set
forth in Section 3.09 of the Indenture or the agreements governing Pari Passu
Debt, as applicable; provided, however, that the Company may only purchase Pari
Passu Debt in an Asset Sale Offer that was issued pursuant to an indenture
having a provision substantially similar to the Asset Sale Offer provision
contained in the Indenture. To the extent that the aggregate amount of Exchange
Notes and Pari Passu Debt tendered pursuant to an Asset Sale Offer is less than
the Excess Proceeds, the Company may use any remaining Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Exchange Notes
and Pari Passu Debt surrendered exceeds the amount of Excess Proceeds, the
Trustee shall select the Exchange Notes and Pari Passu Debt to be purchased on a
pro rata basis, based upon the principal amount thereof tendered in such Asset
Sale Offer. Upon completion of such offer to purchase, the amount of Excess
Proceeds shall be reset at zero. Holders of Notes that are the subject of an
Asset Sale Offer will receive notice of the Asset Sale Offer from the Company
prior to any related purchase date setting forth the procedures relating to the
offer as required by the Indenture and may elect to have such Notes purchased by
completing the form entitled "Option of Holder to Elect Purchase" on the reverse
of the Exchange Notes.
8. NOTICE OF REDEMPTION. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each Holder whose
Exchange Notes are to be redeemed at its registered address. Exchange Notes in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000, unless all of the Exchange Notes held by a Holder are to be
redeemed. On and after the redemption date interest ceases to accrue on Exchange
Notes or portions thereof called for redemption.
9. SUBORDINATION. Each Holder by accepting an Exchange Note agrees that
the payment of principal of, premium, if any, and interest on the Exchange Notes
is subordinated in right of payment, to the extent and in the manner provided in
Article 10 of the Indenture, to the prior payment in full of all Senior Debt
(whether outstanding on the date of the Indenture or thereafter incurred), and
that the subordination is for the benefit of the holders of Senior Debt.
10. DENOMINATIONS, TRANSFER, EXCHANGE. The Exchange Notes are in
registered form without coupons in all appropriate denominations. The transfer
of Exchange Notes may be registered and Exchange Notes may be exchanged as
provided in the Indenture. The Registrar and the Trustee may require a Holder,
among other things, to furnish appropriate endorsements and transfer documents
and the Company may require a Holder to pay any taxes and fees required by law
or permitted by the Indenture. The Company need not transfer or exchange any
Exchange Note selected for redemption, except for the unredeemed portion of any
Exchange Note being redeemed in part. Also, it need not transfer or exchange any
Exchange Note for a period of 15 Business Days before a selection of Exchange
Notes to be redeemed or during the period between a record date and the
corresponding Interest Payment Date.
A-4
<PAGE>
11. PERSONS DEEMED OWNERS. The registered Holder of an Exchange Note may
be treated as its owner for all purposes.
12. AMENDMENT, SUPPLEMENT AND WAIVER. Subject to certain exceptions, the
Indenture or the Exchange Notes may be amended or supplemented with the consent
of the Holders of at least a majority in principal amount of the then
outstanding Exchange Notes, and, subject to Sections 6.04 and 6.07 of the
Indenture, any existing default or compliance with any provision of the
Indenture or the Exchange Notes may be waived with the consent of the Holders of
a majority in principal amount of the then outstanding Exchange Notes. Without
the consent of any Holder of an Exchange Note, the Indenture or the Exchange
Notes may be amended or supplemented to cure any ambiguity, defect or
inconsistency, to provide for uncertificated Exchange Notes in addition to or in
place of certificated Exchange Notes, to provide for the assumption of the
Company's obligations to Holders of the Exchange Notes in case of a merger or
consolidation, to make any change that would provide any additional rights or
benefits to the Holders of the Exchange Notes or that does not adversely affect
the legal rights under the Indenture of any such Holder, or to comply with the
requirements of the SEC in order to effect or maintain the qualification of the
Indenture under the TIA. Any amendment to the provisions of Article 10 of the
Indenture including, the related definitions will require the consent of the
Holders of at least 75% in aggregate principal amount of the Exchange Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Exchange Notes.
13. DEFAULTS AND REMEDIES. Events of Default include: (i) a default by the
Company in the payment of interest on the Exchange Notes when the same becomes
due and payable and the Default continues for a period of 30 days (whether or
not such payment is prohibited by Article 10 of the Indenture); (ii) default by
the Company in the payment of the principal of or premium, if any, on the
Exchange Notes when the same becomes due and payable at maturity, upon
redemption or otherwise (whether or not such payment is prohibited by Article 10
of the Indenture); (iii) failure by the Company to comply with the provisions
described under Sections 3.09, 4.07, 4.09, 4.10, 4.13 or Article 5 of the
Indenture; (iv) failure by the Company for 60 days after notice to comply with
any of its other agreements in the Indenture or the Exchange Notes; (v) default
under any mortgage, indenture or instrument under which there may be issued or
by which there may be secured or evidenced any Indebtedness for money borrowed
by the Company or any of its Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted Subsidiaries), whether such
Indebtedness or Guarantee now exists, or shall be created hereafter, which
default (a) is caused by a failure to pay principal of or premium, if any, or
interest on such Indebtedness prior to the expiration of the grace period
provided in such Indebtedness on the date of such default (a "Payment Default")
or (b) results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of such Indebtedness, together
with the principal amount of any other such Indebtedness under which there has
been a Payment Default or the maturity of which has been so accelerated,
aggregates $5.0 million or more; (vi) a final judgment or final judgments for
the payment of money are entered by a court or courts of competent jurisdiction
against the Company or any Restricted Subsidiary that would be a Significant
Subsidiary and such judgment or judgments remain unpaid, undischarged or
unstayed for a period of 60 days; provided that the aggregate of all such
undischarged judgments exceeds $5.0 million; (vii) certain events of bankruptcy
or insolvency with respect to the Company, any Restricted Subsidiary that would
constitute a Significant Subsidiary or any group of Restricted Subsidiaries
that, taken together, would constitute a Significant Subsidiary. If any Event of
Default occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the then outstanding Exchange Notes may declare all the
Exchange Notes to be due and payable immediately. Notwithstanding the foregoing,
in the case of an Event of Default arising from certain events of bankruptcy or
insolvency, all outstanding Exchange Notes will become due and payable without
further action or notice. Holders may not enforce the Indenture or the Exchange
Notes except as provided in the Indenture. Subject to certain limitations,
A-5
<PAGE>
Holders of a majority in principal amount of the then outstanding Exchange Notes
may direct the Trustee in its exercise of any trust or power. The Trustee may
withhold from Holders of the Exchange Notes notice of any continuing Default or
Event of Default (except a Default or Event of Default relating to the payment
of principal or interest) if it determines that withholding notice is in their
interest. The Holders of a majority in aggregate principal amount of the
Exchange Notes then outstanding by notice to the Trustee may on behalf of the
Holders of all of the Exchange Notes waive any existing Default or Event of
Default and its consequences under the Indenture except a continuing Default or
Event of Default in the payment of interest and premium, if any, on, or the
principal of, the Exchange Notes. The Company is required to deliver to the
Trustee annually a statement regarding compliance with the Indenture, and the
Company is required upon becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
15. TRUSTEE DEALINGS WITH THE COMPANY. Subject to Section 7.03 of the
Indenture, the Trustee, in its individual or any other capacity, may become the
owner or pledgee of Exchange Notes and may otherwise deal with the Company or
any Affiliate of the Company with the same rights it would have if it were not
Trustee.
16. NO RECOURSE AGAINST OTHERS. No past, present or future director,
officer, employee, incorporator or stockholder of the Company, as such, shall
have any liability for any obligations of the Company under the Exchange Notes,
the Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each Holder of Exchange Notes by accepting an
Exchange Note waives and releases all such liability. The waiver and release are
part of the consideration for the issuance of the Exchange Notes.
17. AUTHENTICATION. This Exchange Note shall not be valid until
authenticated by the manual signature of the Trustee or an authenticating agent.
18. ABBREVIATIONS. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian), and U/G/M/A (= Uniform Gifts
to Minors Act).
19. CUSIP NUMBERS. Pursuant to a recommendation promulgated by the
Committee on Uniform Security Identification Procedures, the Company has caused
CUSIP numbers to be printed on the Exchange Notes and the Trustee may use CUSIP
numbers in notices of redemption as a convenience to Holders. No representation
is made as to the accuracy of such numbers either as printed on the Exchange
Notes or as contained in any notice of redemption and reliance may be placed
only on the other identification numbers placed thereon.
The Company will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporate Center
Suite 454
100 Matsonford Road
Radnor, Pennsylvania 19087
Attention: Marshall W. Pagon
A-6
<PAGE>
ASSIGNMENT FORM
To assign this Exchange Note, fill in the form below: (I) or (we) assign
and transfer this Exchange Note to
_______________________________________________________________________________
(Insert assignee's soc. sec. or tax I.D. no.)
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
_______________________________________________________________________________
(Print or type assignee's name, address and zip code)
and irrevocably appoint ____________________________________________________
to transfer this Exchange Note on the books of the Company. The agent may
substitute another to act for him.
_______________________________________________________________________________
Date:______________________
Your Signature:___________________________________
(Sign exactly as your name appears on the face of
this Exchange Note)
Signature Guarantee:______________________________
A-7
<PAGE>
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Exchange Note purchased by the
Company pursuant to Section 4.10 or 4.13 of the Indenture, check the box below:
[ ] Section 4.10 [ ] Section 4.13
If you want to elect to have only part of the Exchange Note purchased
by the Company pursuant to Section 4.10 or Section 4.13 of the Indenture, state
the amount you elect to have purchased:
$________________
Date:______________________
Your Signature:___________________________________
(Sign exactly as your name appears on the face of
this Exchange Note)
Tax Identification No.: __________________________
Signature Guarantee:______________________________
A-8
<PAGE>
DRINKER BIDDLE & REATH
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
January 17, 1997
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
100 Matsonford Road
Suite 454, 5 Radnor Corporate Center
Radnor, PA 19087
Re: Registration Statement on Form S-1
----------------------------------
Ladies and Gentlemen:
As counsel to Pegasus Communications Corporation, a Delaware
corporation (the "Company"), we have assisted in the preparation and filing of
the Company's Registration Statement on Form S-1, File No. 333-18739 (the
"Registration Statement"), filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Securities Act"), covering
100,000 units consisting of 100,000 shares of __% Series A cumulative
exchangeable preferred stock (the "Series A Preferred Stock"), and 100,000
warrants (the "Warrants") to purchase 193,600 shares of Class A common stock
(collectively, the "Units") to be sold by the Company and the Company's Senior
Subordinated Exchange Notes due 2007 in an aggregate principal amount not to
exceed $100,000,000 (the "Exchange Notes"), which are issuable by the Company
upon exchange of the Series A Preferred Stock. All of the Units will be sold by
the Company, CIBC Wood Gundy Securities Corp., Lehman Brothers Inc. and B.T.
Securities Corporation (collectively, the "Underwriters") and offered to the
public by the Underwriters.
In this connection, we have examined the originals or copies,
certified or otherwise identified to our satisfaction, of the Certificate of
Incorporation and By-laws of the Company, as amended, minutes and resolutions of
the Company's Board of Directors and such other documents and corporate records
relating to the Company and the issuance of the Units as we have deemed
appropriate for the purpose of rendering this opinion. We express no opinion
concerning the laws of any jurisdiction other than the federal law of the United
States and the Delaware General Corporation Law.
In all examinations of documents, instruments and other
papers, we have assumed the genuineness of all signatures on
<PAGE>
Pegasus Communications Corporation
January 17, 1997
Page 2
original and certified documents and the conformity with original and certified
documents of all copies submitted to us as conformed, photostatic or other
copies. As to matters of fact which have not been independently established, we
have relied upon representations of officers of the Company.
On the basis of the foregoing, it is our opinion that (i)
appropriate corporate action has been taken to authorize the sale and issuance
of up to 100,000 Units consisting of the Series A Preferred Stock and the
Warrants and the issuance of the Exchange Notes upon exchange of the Series A
Preferred Stock, (ii) when issued and sold pursuant to the terms of the
Underwriting Agreement among the Company and the several Underwriters, the
100,000 Units and 100,000 shares of Series A Preferred Stock will be legally
issued, fully paid and nonassessable, (iii) when issued and sold pursuant to the
Underwriting Agreement, the 100,000 Warrants will be legal, valid and binding
obligations of the Company, subject to bankruptcy, insolvency and other laws
affecting creditors' rights generally, and (iv) when issued in exchange for the
Series A Preferred Stock pursuant to the terms of the Company's Certificate of
Incorporation and the Indenture relating to the Exchange Notes, the Exchange
Notes will be legal, valid and binding obligations of the Company, subject to
bankruptcy, insolvency and other laws affecting creditors' rights generally.
We hereby consent to the reference to our firm under the
caption "Legal Matters" in the prospectus included in the Registration Statement
and to the filing of this opinion as an exhibit to the Registration Statement.
This does not constitute a consent under Section 7 of the Securities Act as we
have not certified any part of the Registration Statement and do not otherwise
come within the categories of persons whose consent is required under Section 7
or the rules and regulations of the Securities and Exchange Commission.
Very truly yours,
/s/ DRINKER BIDDLE & REATH
------------------------------
DRINKER BIDDLE & REATH
<PAGE>
DRINKER BIDDLE & REATH
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
January 14, 1997
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporate Center, Suite 454
100 Matsonford Road
Radnor, PA 19087
Ladies and Gentlemen:
We have acted as counsel to Pegasus Communications Corporation
(the "Company") in connection with the registration under the Securities Act of
1933, as amended, of (i) 100,000 Units consisting of 100,000 shares of ___%
Series A Cumulative Exchangeable Preferred Stock (the "Series A Preferred
Stock") and 100,000 Class A Common Stock Purchase Warrants and (ii) ___% Senior
Subordinated Exchange Notes, which shall be issuable upon exchange of the Series
A Preferred Stock, on a Registration Statement on Form S-1 (including any
amendments thereto, the "Registration Statement") (File No. 333-18739) and the
Prospectus contained in the Registration Statement (the "Prospectus").
In our opinion, the statements in the Prospectus under the
caption "Certain Federal Income Tax Considerations," to the extent they
constitute matters of law or legal conclusions, are accurate in all material
respects.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement, and we consent to the reference of our name under
the caption "Legal Matters" in the Prospectus.
Very truly yours,
/s/ Drinker Biddle & Reath
-----------------------------------
DRINKER BIDDLE & REATH
<PAGE>
NEITHER THIS AMENDMENT TO OPTION NOR THE SECURITIES ISSUABLE UPON
EXERCISE HEREOF HAVE BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED, NOR ANY APPLICABLE STATE SECURITIES
LAW, AND THEY MAY NOT BE SOLD, ASSIGNED, PLEDGED,
HYPOTHECATED OR OTHERWISE DISPOSED OR EXCEPT IN COMPLIANCE
WITH APPLICABLE FEDERAL AND STATE SECURITIES LAWS AND
THE OTHER RESTRICTIONS ON TRANSFER SET FORTH HEREIN.
----------------------------------
Date: December 19, 1996
PEGASUS MEDIA & COMMUNICATIONS, INC.
AMENDMENT TO OPTION
TO PURCHASE COMMON STOCK
The Option to Purchase Common Stock dated April 1, 1996
granted by Pegasus Media & Communications, Inc. to Donald W. Weber (the
"Option") is hereby amended as of the date hereof as follows:
The definition of "Exercise Price" shall be deleted in its
entirety and replaced with the following:
"(1) With respect to exercise of the Option before the
Effective Date, $471.00 per share of Common Stock; and
(2) With respect to exercise of the Option on and after the
Effective Date, the Exercise Price per share of Public Common Stock shall equal
$14.00 per share of Public Common Stock."
Except to the extent amended hereby, the Option shall remain
unchanged and in full force and effect, and is hereby ratified and confirmed in
all respects as amended hereby.
IN WITNESS WHEREOF, Pegasus Media & Communications, Inc. has
caused this Amendment to Option to be signed by its duly authorized officer
under its corporate seal and attested by its duly authorized officer, on the
date of this Amendment to Option.
PEGASUS MEDIA &
COMMUNICATIONS, INC.
By: /s/ Ted S. Lodge
-----------------------------------
Name: Ted S. Lodge
Title: Senior Vice President,
General Counsel, Chief
Administrative Officer and
Assistant Secretary
<PAGE>
Exhibit 10.32
[L&W DRAFT OF 1/14/97]
===============================================================================
WARRANT AGREEMENT
Dated as of January __, 1997
by and between
PEGASUS COMMUNICATIONS CORPORATION
and
FIRST UNION NATIONAL BANK,
as Warrant Agent
==============================================================================
<PAGE>
WARRANT AGREEMENT
TABLE OF CONTENTS***
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 1. Appointment of Warrant Agent.............................................................. 1
SECTION 2. Issuance of Warrants...................................................................... 1
SECTION 3. Warrant Certificates...................................................................... 1
SECTION 4. Execution of Warrant Certificates......................................................... 2
SECTION 5. Transfers of Warrants Prior to the Separation of Warrants and Notes;
Separation of Warrants and Notes.......................................................... 2
SECTION 6. Registration and Countersignature......................................................... 3
SECTION 7. Registration of Transfers and Exchanges................................................... 4
(a) Transfer and Exchange of Definitive Warrants.......................................... 4
(b) Exchange or Transfer of a Definitive Warrant for a Beneficial Interest in
a Global Warrant...................................................................... 4
(c) Transfer and Exchange of Global Warrants.............................................. 4
(d) Exchange of a Beneficial Interest in a Global Warrant for a Definitive Warrant........ 4
(e) Restrictions on Transfer and Exchange of Global Warrants.............................. 5
(f) Countersigning of Definitive Warrants in Absence of Depositary........................ 5
(g) Cancellation of Global Warrant........................................................ 5
(h) Obligations with Respect to Transfers and Exchanges of Warrants....................... 5
SECTION 8. Terms of Warrants; Exercise of Warrants................................................... 5
SECTION 9. Reports................................................................................... 7
SECTION 10. Payment of Taxes.......................................................................... 7
SECTION 11. Mutilated or Missing Warrant Certificates................................................. 8
SECTION 12. Reservation of Warrant Shares............................................................. 8
SECTION 13. Obtaining Stock Exchange Listings......................................................... 9
</TABLE>
- --------
*** This Table of Contents does not constitute a part of this Agreement or have
any bearing upon the interpretation of any of its terms or provisions.
(i)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 14. Adjustment of Exercise Price and Number of Warrant Shares Issuable........................ 9
(a) Adjustment for Change in Capital Stock.................................................... 9
(b) Adjustment for Rights Issue............................................................... 10
(c) Adjustment for Other Distributions........................................................ 10
(d) Adjustment for Common Stock Issue......................................................... 11
(e) Adjustment for Convertible Securities Issue............................................... 12
(f) Adjustment for Certain Cash Dividends..................................................... 14
(g) Adjustment for Tender Offer............................................................... 15
(h) Current Market Price...................................................................... 16
(i) Consideration Received.................................................................... 16
(j) When De Minimis Adjustment May Be Deferred................................................ 16
(k) When No Adjustment Required............................................................... 17
(l) Notice of Adjustment...................................................................... 17
(m) Voluntary Reduction....................................................................... 17
(n) Notice of Certain Transactions............................................................ 17
(o) Reorganization of the Company............................................................. 18
(p) The Company Determination Final........................................................... 18
(q) Warrant Agent's Disclaimer................................................................ 19
(r) When Issuance or Payment May Be Deferred.................................................. 19
(s) Adjustment in Number of Shares............................................................ 19
(t) Form of Warrants.......................................................................... 19
SECTION 15. No Dilution or Impairment................................................................. 20
SECTION 16. Fractional Interests...................................................................... 20
SECTION 17. Notices to Warrant Holders................................................................ 20
SECTION 18. Merger, Consolidation or Change of Name of Warrant Agent.................................. 22
SECTION 19. Warrant Agent............................................................................. 22
SECTION 20. Registration Rights....................................................................... 24
SECTION 21. Change of Warrant Agent................................................................... 26
SECTION 22. Notices to the Company and Warrant Agent.................................................. 26
SECTION 23. Supplements and Amendments................................................................ 27
SECTION 24. Successors................................................................................ 27
SECTION 25. Termination............................................................................... 27
SECTION 26. Governing Law; Jurisdiction............................................................... 27
</TABLE>
(ii)
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
SECTION 27. Benefits of this Agreement................................................................ 27
SECTION 28. Counterparts.............................................................................. 27
SECTION 29. Further Assurances........................................................................ 28
EXHIBIT A.............................................................................................. 1
</TABLE>
(iii)
<PAGE>
WARRANT AGREEMENT, dated as of January __, 1997, between
Pegasus Communications Corporation, a Delaware corporation (the "Company"), and
First Union National Bank, as warrant agent (the "Warrant Agent").
WHEREAS, the Company has entered into an underwriting
agreement (the "Underwriting Agreement"), dated January __, 1997 with CIBC Wood
Gundy Securities Corp., Lehman Brothers Inc. and BT Securities Corporation (the
"Underwriters") in which the Company has agreed to sell to the Underwriters
100,000 units (the "Units") consisting of $100,000,000 principal amount of the
Company's __% Series A Cumulative Exchangeable Preferred Stock (the "Preferred
Stock") and 100,000 warrants, as hereinafter described (the "Warrants"), to
purchase up to an aggregate of 193,600 shares of Class A Common Stock, par value
$0.01 per share (the "Common Stock"), of the Company (the Common Stock issuable
upon exercise of the Warrants being referred to herein as the "Warrant Shares").
The Preferred Stock will be governed by the Company's Certificate of
Designation, Preferences and Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions
Thereof relating to the Preferred Stock (the "Certificate of Designation") and
shall be exchangeable, in full but not in part, for the Company's ___% Series A
Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The transfer
agent for the Preferred Stock will be First Union National Bank (the "Transfer
Agent") unless and until a successor is selected by the Company pursuant to the
Certificate of Designation. The Exchange Notes, if and when issued, will be
issued pursuant to an indenture (the "Exchange Note Indenture") between the
Company and First Union National Bank, as trustee (the "Exchange Note Trustee").
Each Warrant entitles the holder of the Warrant upon exercise to receive from
the Company, as adjusted as provided herein, 1.936 fully paid and nonassessable
shares of Common Stock of the Company in exchange for the Exercise Price (as
hereinafter defined), as provided herein;
WHEREAS, the Warrants and the Preferred Stock will be sold in
units and shall not be separately transferable until the earlier to occur of (i)
April 3, 1997 and (ii) in the event a Change of Control (as defined in the
Certificate of Designation) occurs, the date the Company mails notice thereof to
holders of the Preferred Stock or the Exchange Notes, as applicable (such
earlier date referred to herein as the "Separation Date"); and
WHEREAS, the Company desires the Warrant Agent to act on
behalf of the Company, and the Warrant Agent is willing so to act, in connection
with the issuance of Warrant Certificates (as hereinafter defined) and other
matters as provided herein.
NOW, THEREFORE, in consideration of the premises and the
mutual agreements herein set forth, the parties hereto agree as follows:
SECTION 1. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the instructions set forth hereinafter in this Agreement, and the Warrant Agent
hereby accepts such appointment.
SECTION 2. Issuance of Warrants. Warrants shall be originally
issued in connection with the issuance of the Units and shall not be separately
transferable from the Preferred Stock until on or after the Separation Date as
provided in Section 5 hereof.
SECTION 3. Warrant Certificates. The Warrants will be issued
in global form (the "Global Warrants"), substantially in the form of Exhibit A
(including the text accompanying footnotes 1 and 2 thereto but excluding such
footnotes), and in definitive form (the "Definitive Warrants"), substantially in
the form of Exhibit A (not including footnotes 1 and 2 thereto or the text
accompanying such footnotes). Each Definitive Warrant shall represent such of
the outstanding Warrants as shall be
<PAGE>
specified therein and each Global Warrant shall provide that it shall represent
the aggregate amount of outstanding Warrants from time to time endorsed thereon
and that the aggregate amount of outstanding Warrants represented thereby may
from time to time be reduced or increased, as appropriate. Any endorsement of a
Global Warrant to reflect the amount of any increase or decrease in the amount
of outstanding Warrants represented thereby shall be made by the Warrant Agent
and the depositary with respect to the Global Warrants (the "Depositary") in
accordance with instructions given by the holder thereof. The Depository Trust
Company shall act as the Depositary until a successor shall be appointed by the
Company and the Warrant Agent. Upon request, a holder may receive from the
Depositary and the Warrant Agent separate Definitive Warrants as set forth in
Section 7 below. Any certificates (the "Warrant Certificates") evidencing the
Global Warrants or the Definitive Warrants to be delivered pursuant to this
Agreement shall be substantially in the form set forth in Exhibit A attached
hereto.
SECTION 4. Execution of Warrant Certificates. Warrant
Certificates shall be signed on behalf of the Company by its Chairman of the
Board, Chief Executive Officer, Chief Financial Officer, President or Vice
President and Secretary or an Assistant Secretary. Each such signature upon the
Warrant Certificates may be in the form of a facsimile signature of the present
or any future Chairman of the Board, Chief Executive Officer, Chief Financial
Officer, President or Vice President and Secretary or Assistant Secretary and
may be imprinted or otherwise reproduced on the Warrant Certificates and for
that purpose the Company may adopt and use the facsimile signature of any person
who shall have been Chairman of the Board, Chief Executive Officer, Chief
Financial Officer, President or Vice President and Secretary or Assistant
Secretary, notwithstanding the fact that at the time the Warrant Certificates
shall be countersigned and delivered or disposed of he or she shall have ceased
to hold such office. The seal of the Company shall be impressed, affixed,
imprinted or otherwise reproduced on the Warrant Certificates.
In case any officer of the Company who shall have signed any
of the Warrant Certificates shall cease to be such officer before the Warrant
Certificates so signed shall have been countersigned by the Warrant Agent, or
disposed of by the Company, such Warrant Certificates nevertheless may be
countersigned and delivered or disposed of as though such person had not ceased
to be such officer of the Company; and any Warrant Certificate may be signed on
behalf of the Company by any person who, at the actual date of the execution of
such Warrant Certificate, shall be a proper officer of the Company to sign such
Warrant Certificate, although at the date of the execution of this Warrant
Agreement any such person was not such officer.
Warrant Certificates shall be dated the date of
countersignature by the Warrant Agent.
SECTION 5. Transfers of Warrants Prior to the Separation of
Warrants and Notes; Separation of Warrants and Notes. Notwithstanding the
provisions of Section 7 hereof, on or after the Separation Date, the registered
holder of a Warrant Certificate containing a Warrant Legend (as hereinafter
defined) may surrender such Warrant Certificate accompanied by a written
instrument or instruments of transfer in form satisfactory to the Warrant Agent,
duly executed by the registered holder or holders thereof or by the duly
appointed legal representative thereof or by a duly authorized attorney to the
Warrant Agent, at its corporate trust office in ________________________ (the
"Warrant Agent Office") for the exchange of such Warrant containing a Warrant
Legend, in whole or in part, for a new Warrant Certificate or Warrant
Certificates not containing the first paragraph of the Warrant Legend (such
surrender and exchange being referred to herein as a "Separation" and the
related Warrants being referred to as "Separated").
Until the Separation Date, no Warrant may be sold, assigned or
otherwise transferred to any person unless simultaneously with such transfer,
the Warrant Agent receives confirmation from the
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Transfer Agent for the Preferred Stock or the Exchange Note Trustee, as
applicable, that the holder thereof has requested a transfer to the same
transferee of one Warrant (subject to adjustment under Section 14 hereof) for
each $1,000 in aggregate liquidation preference of Preferred Stock or $1,000
aggregate principal amount of Exchange Notes, as applicable, so transferred. In
connection with the foregoing, upon original issuance (if prior to the
Separation Date) and, thereafter, until Separation, the Warrant Certificates
will bear the following legend (the "Warrant Legend"):
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ARE NOT
TRANSFERABLE SEPARATELY FROM THE COMPANY'S __% SERIES A CUMULATIVE
EXCHANGEABLE PREFERRED STOCK (THE "PREFERRED STOCK") ORIGINALLY SOLD AS
A UNIT WITH SUCH WARRANTS UNTIL THE EARLIER TO OCCUR OF (I) APRIL 3,
1997 AND (II) IN THE EVENT A CHANGE OF CONTROL (AS DEFINED IN THE
CERTIFICATE OF DESIGNATION RELATING TO THE PREFERRED STOCK) OCCURS, THE
DATE THE COMPANY MAILS NOTICE THEREOF (THE EARLIER OF SUCH DATES BEING
HEREIN REFERRED TO AS THE "SEPARATION DATE").
THE CLASS A COMMON STOCK, PAR VALUE $0.01, OF THE COMPANY (THE
"COMMON STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE
OFFERED OR SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") AND ANY
APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM
REGISTRATION REQUIREMENTS. ACCORDINGLY, NO WARRANT HOLDER SHALL BE
ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE
TIME OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT
RELATING TO THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF
THIS WARRANT (THE "WARRANT SHARES") HAS BEEN FILED WITH, AND DECLARED
EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), AND
NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION
STATEMENT HAS BEEN ISSUED BY THE SEC OR (ii) THE ISSUANCE OF THE
WARRANT SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM THE
REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
SECTION 6. Registration and Countersignature. The Warrant
Agent, on behalf of the Company, shall number and register the Warrant
Certificates in a register as they are issued by the Company.
Warrant Certificates shall be manually countersigned by the
Warrant Agent and shall not be valid for any purpose unless so countersigned.
The Warrant Agent shall, upon written instructions of the Chairman of the Board,
Chief Executive Officer, President, Vice President or the Chief Financial
Officer of the Company, initially countersign and deliver Warrants entitling the
holders thereof to purchase not more than the number of Warrant Shares referred
to above in the first recital hereof and shall countersign and deliver Warrants
as otherwise provided in this Agreement.
The Company and the Warrant Agent may deem and treat the
registered holder(s) of the Warrant Certificates as the absolute owner(s)
thereof (notwithstanding any notation of ownership or other writing thereon made
by anyone), for all purposes, and neither the Company nor the Warrant Agent
shall be affected by any notice to the contrary.
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<PAGE>
SECTION 7. Registration of Transfers and Exchanges.
(a) Transfer and Exchange of Definitive Warrants. When
Definitive Warrants are presented to the Warrant Agent with a request:
(i) to register the transfer of the Definitive Warrants; or
(ii) to exchange such Definitive Warrants for an equal number of
Definitive Warrants of other authorized denominations,
the Warrant Agent shall register the transfer or make the exchange as requested
if its requirements for such transactions are met; provided, however, that the
Definitive Warrants presented or surrendered for registration of transfer or
exchange shall be duly endorsed or accompanied by a written instruction of
transfer in form satisfactory to the Warrant Agent, duly executed by the holder
thereof or by his attorney, duly authorized in writing. Upon any such
registration of transfer, a new Definitive Warrant shall be issued to the
transferee(s) and the surrendered Definitive Warrant shall be cancelled by the
Warrant Agent. Cancelled Definitive Warrants shall thereafter be disposed of in
a manner satisfactory to the Company.
(b) Exchange or Transfer of a Definitive Warrant for a
Beneficial Interest in a Global Warrant. A Definitive Warrant may be exchanged
for a beneficial interest in a Global Warrant upon satisfaction of the
requirements set forth below. Upon receipt by the Warrant Agent of a Definitive
Warrant, duly endorsed or accompanied by appropriate instruments of transfer, in
form satisfactory to the Warrant Agent, together with written instructions
directing the Warrant Agent to make, or to direct the Depositary to make, an
endorsement on the Global Warrant to reflect an increase in the number of
Warrants represented by the Global Warrant, then the Warrant Agent shall cancel
such Definitive Warrant and cause, or direct the Depositary to cause, in
accordance with the standing instructions and procedures existing between the
Depositary and the Warrant Agent, the number of Warrants represented by the
Global Warrant to be increased accordingly. If no Global Warrants are then
outstanding, the Company shall issue and the Warrant Agent shall countersign a
new Global Warrant representing the appropriate number of Warrants and Warrant
Shares.
(c) Transfer and Exchange of Global Warrants. The transfer and
exchange of Global Warrants or beneficial interests therein shall be effected
through the Depositary, in accordance with this Warrant Agreement and the
procedures of the Depositary therefor.
(d) Exchange of a Beneficial Interest in a Global
Warrant for a Definitive Warrant.
(i) Any person having a beneficial interest in a Global Warrant
may upon request exchange such beneficial interest for a
Definitive Warrant. Upon receipt by the Warrant Agent of
written instructions or such other form of instructions as is
customary for the Depositary from the Depositary or its
nominee on behalf of any person having a beneficial interest
in a Global Warrant then the Warrant Agent shall cause, in
accordance with the standing instructions and procedures
existing between the Depositary and Warrant Agent, the number
of Warrants represented by the Global Warrant to be reduced
and, following such reduction, the Company shall execute and
the Warrant Agent shall countersign and deliver to the
transferee a Definitive Warrant.
(ii) Definitive Warrants issued in exchange for a beneficial
interest in a Global Warrant pursuant to this Section 7(d)
shall be registered in such names as the Depositary, pursuant
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<PAGE>
to instructions from its direct or indirect participants or
otherwise, shall instruct the Warrant Agent. The Warrant Agent
shall deliver such Definitive Warrants to the persons in whose
names such Warrants are so registered.
(e) Restrictions on Transfer and Exchange of Global Warrants.
Notwithstanding any other provisions of this Warrant Agreement (other than the
provisions set forth in subsection (f) of this Section 7), a Global Warrant may
not be transferred as a whole except by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary or any such nominee to a
successor Depositary or a nominee of such successor Depositary.
(f) Countersigning of Definitive Warrants in Absence of
Depositary. If at any time:
(i) the Depositary for the Global Warrants notifies the Company
that the Depositary is unwilling or unable to continue as
Depositary for the Global Warrants and a successor Depositary
for the Global Warrants is not appointed by the Company within
90 days after delivery of such notice; or
(ii) the Company, in its sole discretion, notifies the Warrant
Agent in writing that it elects to cause the issuance of
Definitive Warrants under this Warrant Agreement,
then the Company shall execute, and the Warrant Agent, upon written instructions
signed by two officers of the Company, shall countersign and deliver Definitive
Warrants, in an aggregate number equal to the number of Warrants represented by
Global Warrants, in exchange for such Global Warrants.
(g) Cancellation of Global Warrant. At such time as all
beneficial interests in Global Warrants have either been exchanged for
Definitive Warrants, redeemed, repurchased or cancelled, all Global Warrants
shall be returned to or retained and cancelled by the Warrant Agent.
(h) Obligations with Respect to Transfers and Exchanges of
Warrants.
(i) To permit registrations of transfers and exchanges, the
Company shall execute and the Warrant Agent is hereby
authorized to countersign, in accordance with the provisions
of Section 6 and this Section 7, Definitive Warrants and
Global Warrants as required pursuant to the provisions of this
Section 7.
(ii) All Definitive Warrants and Global Warrants issued upon any
registration of transfer or exchange of Definitive Warrants or
Global Warrants shall be the valid obligations of the Company,
entitled to the same benefits under this Warrant Agreement, as
the Definitive Warrants or Global Warrants surrendered upon
such registration of transfer or exchange.
(iii) Prior to due presentment for registration of transfer of any
Warrant, the Warrant Agent and the Company may deem and treat
the person in whose name any Warrant is registered as the
absolute owner of such Warrant and neither the Warrant Agent,
nor the Company shall be affected by notice to the contrary.
(iv) No service charge shall be made to a holder for any
registration, transfer or exchange.
SECTION 8. Terms of Warrants; Exercise of Warrants. Subject to
the terms of this Agreement, each Warrant holder shall have the right, which may
be exercised on or after the Separation
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Date until 5:00 p.m., New York, New York time on ________, 2007 (the "Expiration
Date"), to exercise each Warrant and receive from the Company the number of
fully paid and nonassessable Warrant Shares which the holder may at the time be
entitled to receive on exercise of such Warrants and payment of the Exercise
Price then in effect for such Warrant Shares; provided, however, that no Warrant
holder shall be entitled to exercise such holder's Warrants at any time unless,
at the time of exercise, (i) a registration statement under the Securities Act
of 1933, as amended (the "Securities Act"), relating to the Warrant Shares has
been filed with, and declared effective by, the Securities and Exchange
Commission (the "SEC"), and no stop order suspending the effectiveness of such
registration statement has been issued by the SEC or (ii) the issuance of the
Warrant Shares is permitted pursuant to an exemption from the registration
requirements of the Securities Act. Each Warrant, when exercised, will entitle
the holder thereof to purchase 1.936 fully paid and nonassessable shares of
Common Stock at the Exercise Price. Any Warrant not exercised prior to the
Expiration Date shall become void and all rights thereunder and all rights in
respect thereof under this Agreement shall cease as of such time. No adjustments
as to dividends will be made upon exercise of the Warrants.
The Warrants may be exercised by surrendering to the Company
the Warrant Certificates evidencing the Warrants to be exercised with the
accompanying form of election to purchase properly completed and executed,
together with payment of the Exercise Price. Payment of the Exercise Price may
be made (A) by tendering shares of Preferred Stock having an aggregate
Liquidation Preference (as defined in the Certificate of Designation), plus,
without duplication, accumulated and unpaid dividends, if any, at the time of
tender equal to the Exercise Price, (B) by tendering Exchange Notes having an
aggregate principal amount, plus accrued and unpaid interest, if any, at the
time of tender equal to the Exercise Price, (C) by tendering Warrants having a
fair market value equal to the Exercise Price, (D) in the form of cash or by
certified or official bank check payable to the order of the Company or (E) by
any combination of shares of Preferred Stock, Warrants and cash or Exchange
Notes, Warrants and cash. For purposes of clause (C) above, the fair market
value of the Warrants shall be determined as follows: (A) if the Common Stock is
publicly traded and listed on the Nasdaq National Market or a national
securities exchange, the fair market value shall be equal to the greater of (1)
the difference between (a) the average closing price as quoted on the Nasdaq
National Market of the Common Stock for each of the ten trading days immediately
prior to the exercise date (or, if the Common Stock is listed on a national
securities exchange, the average closing price as reported on such national
securities exchange during such ten trading day period) and (b) the Exercise
Price, and (2) zero; or (B) if the Common Stock is not publicly traded, or
otherwise is not listed on a national securities exchange, the fair market value
shall be equal to the value per share as determined in good faith by the Board
of Directors of the Company (the "Board of Directors").
If Preferred Stock or Exchange Notes are surrendered in
payment of the Exercise Price, the Warrant Agent shall deliver such Preferred
Stock or Exchange Notes, as applicable, to the Company and the Company shall
deliver such Preferred Stock to the Transfer Agent or such Exchange Notes to the
Exchange Note Trustee, as applicable, for cancellation and the Transfer Agent or
Exchange Note Trustee, as applicable, shall notify the Company in writing
whether such Preferred Stock or Exchange Notes, as applicable, were in good form
and, if such Preferred Stock or Exchange Notes, as applicable, were in good form
the Company shall notify the Warrant Agent in writing that the Company has
received full and proper payment of the Exercise Price.
Subject to the provisions of Section 10 hereof, upon such
surrender of Warrants and payment of the Exercise Price, the Company shall issue
and cause to be delivered with all reasonable dispatch to or upon the written
order of the holder and in such name or names as the Warrant holder may
designate, a certificate or certificates for the number of full Warrant Shares
issuable upon the exercise of such Warrants together with cash, if any, as
provided in Section 16 hereof; provided, however, that
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<PAGE>
if any consolidation, merger or lease or sale of assets is proposed to be
effected by the Company as described in subsection (o) of Section 14 hereof, or
a tender offer or an exchange offer for shares of Common Stock of the Company
shall be made, upon such surrender of Warrants and payment of the Exercise Price
as aforesaid, the Successor Guarantor (as hereinafter defined) or the Company,
as applicable, shall, as soon as possible, but in any event not later than two
business days thereafter, issue and cause to be delivered the full number of
Warrant Shares issuable upon the exercise of such Warrants in the manner
described in this sentence together with cash, if any, as provided in Section 16
hereof. Such certificate or certificates shall be deemed to have been issued and
any person so designated to be named therein shall be deemed to have become a
holder of record of such Warrant Shares as of the date of the surrender of such
Warrants and payment of the Exercise Price. No fractional shares shall be issued
upon exercise of any Warrants in accordance with Section 16 hereof. The Company
will pay to the holder of the Warrant at the time of exercise an amount in cash
equal to the current market value of any such fractional share of Common Stock
less a corresponding fraction of the Exercise Price.
The Warrants shall be exercisable, at the election of the
holders thereof, either in full or from time to time in part (in whole shares)
and, in the event that a certificate evidencing Warrants is exercised in respect
of fewer than all of the Warrant Shares issuable on such exercise at any time
prior to the Expiration Date, a new certificate evidencing the remaining Warrant
or Warrants will be issued, and the Warrant Agent is hereby irrevocably
authorized to countersign and to deliver the required new Warrant Certificate or
Certificates pursuant to the provisions of this Section and of Section 4 of this
Agreement, and the Company, whenever required by the Warrant Agent, will supply
the Warrant Agent with Warrant Certificates duly executed on behalf of the
Company for such purpose.
All Warrant Certificates surrendered upon exercise of Warrants
shall be cancelled by the Warrant Agent. Such cancelled Warrant Certificates
shall then be disposed of by the Company in accordance with applicable law. The
Warrant Agent shall account promptly to the Company with respect to Warrants
exercised and concurrently pay to the Company all monies or surrender to the
Company all shares of Preferred Stock or Exchange Notes received by the Warrant
Agent for the purchase of the Warrant Shares through the exercise of such
Warrants.
The Warrant Agent shall keep copies of this Agreement and any
notices given or received hereunder available for inspection by the holders
during normal business hours at its office. The Company shall supply the Warrant
Agent from time to time with such numbers of copies of this Agreement as the
Warrant Agent may request.
SECTION 9. Reports. Whether or not required by the rules and
regulations of the SEC, so long as any Warrants are outstanding, the Company
shall furnish to the Warrant Agent and mail to the holders of Warrants (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were
required to file such Forms, including "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and, with respect to the annual
information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the SEC on Form 8-K if the Company were required to file such reports. In
addition, whether or not required by the rules and regulations of the SEC, the
Company will file a copy of all such information and reports with the SEC for
public availability (unless the SEC will not accept such a filing) and make such
information available to securities analysts and prospective investors upon
request.
SECTION 10. Payment of Taxes. No service charge shall be made
to any holder of a Warrant for any exercise, exchange or registration of
transfer of Warrant Certificates, and the Company will pay all documentary stamp
taxes attributable to the initial issuance of Warrant Shares upon the
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exercise of Warrants or to any Separation; provided, however, that the Company
shall not be required to pay any tax or taxes which may be payable in respect of
any transfer involved in the issue of any Warrant Certificates or any
certificates for Warrant Shares in a name other than that of the registered
holder of a Warrant Certificate surrendered upon the exercise of a Warrant, and
the Company shall not be required to issue or deliver such Warrant Certificates
unless or until the person or persons requesting the issuance thereof shall have
paid to the Company the amount of such tax or shall have established to the
satisfaction of the Company that such tax has been paid.
SECTION 11. Mutilated or Missing Warrant Certificates. If any
of the Warrant Certificates shall be mutilated, lost, stolen or destroyed, the
Company may in its discretion issue and the Warrant Agent may countersign, in
exchange and substitution for and upon cancellation of the mutilated Warrant
Certificate, or in lieu of and in substitution for the Warrant Certificate lost,
stolen or destroyed, a new Warrant Certificate of like tenor and representing an
equivalent number of Warrants, but only upon receipt of evidence satisfactory to
the Company and the Warrant Agent of such loss, theft or destruction of such
Warrant Certificate and indemnity and security therefor, if requested, also
satisfactory to them. Applicants for such substitute Warrant Certificates shall
also comply with such other reasonable regulations and pay such other reasonable
charges as the Company or the Warrant Agent may prescribe.
SECTION 12. Reservation of Warrant Shares. The Company will at
all times reserve and keep available, free from preemptive rights, out of the
aggregate of its authorized but unissued Common Stock or authorized and issued
Common Stock held in its treasury, for the purpose of enabling it to satisfy any
obligation to issue Warrant Shares upon exercise of Warrants, the maximum number
of shares of Common Stock which may then be deliverable upon the exercise of all
outstanding Warrants.
The Company or the transfer agent for the Common Stock (the
"Common Stock Transfer Agent") and every subsequent transfer agent for any
shares of the Company's capital stock issuable upon the exercise of any of the
rights of purchase represented by the Warrants will be irrevocably authorized
and directed at all times to reserve such number of authorized shares as shall
be required for such purpose. The Company will keep a copy of this Agreement on
file with the Common Stock Transfer Agent and with every subsequent transfer
agent for any shares of the Company's capital stock issuable upon the exercise
of the rights of purchase represented by the Warrants. The Warrant Agent is
hereby irrevocably authorized to requisition from time to time from such Common
Stock Transfer Agent the stock certificates required to honor outstanding
Warrants upon exercise thereof in accordance with the terms of this Agreement.
The Company will supply such Common Stock Transfer Agent with duly executed
certificates for such purposes and will provide or otherwise make available any
cash which may be payable as provided in Section 16 hereof. The Company will
furnish such Common Stock Transfer Agent a copy of all notices of adjustments
and certificates related thereto, transmitted to each holder pursuant to Section
17 hereof.
Before taking any action which would cause an adjustment
pursuant to Section 14 hereof to reduce the Exercise Price below the then par
value (if any) of the Warrant Shares, the Company will take all corporate action
necessary, in the opinion of its counsel (which may be counsel employed by the
Company), in order that the Company may validly and legally issue fully paid and
nonassessable Warrant Shares at the Exercise Price as so adjusted.
The Company covenants that all Warrant Shares which may be
issued upon exercise of Warrants will be, upon payment of the Exercise Price and
issuance thereof, fully paid, nonassessable, free of preemptive rights and free
from all taxes, liens, charges and security interests with respect to the issue
thereof.
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SECTION 13. Obtaining Stock Exchange Listings. The Company
shall also from time to time take all action necessary so that the Warrant
Shares, immediately upon their issuance upon the exercise of Warrants, will be
listed on the Nasdaq National Market or such other principal securities
exchanges, interdealer quotation systems and markets within the United States of
America, if any, on which other shares of Common Stock are then listed or
quoted.
SECTION 14. Adjustment of Exercise Price and Number of Warrant
Shares Issuable. The Exercise Price and the number of Warrant Shares issuable
upon the exercise of each Warrant are subject to adjustment from time to time
upon the occurrence of the events enumerated in this Section 14. For purposes of
this Section 14, "Common Stock" means the Common Stock and any other stock of
the Company, however designated, that has the right (subject to any prior rights
of any class or series of preferred stock) to participate in any distribution of
the assets or earnings of the Company without limit as to per share amount.
(a) Adjustment for Change in Capital Stock.
If the Company:
(1) pays a dividend or makes a distribution on its
Common Stock in shares of its Common Stock;
(2) subdivides its outstanding shares of Common Stock
into a greater number of shares;
(3) combines its outstanding shares of Common Stock
into a smaller number of shares;
(4) makes a distribution on its Common Stock in
shares of its capital stock other than Common Stock; or
(5) issues by reclassification of its Common Stock
any shares of its capital stock,
then the Exercise Price and the number and kind of shares of capital stock of
the Company issuable upon the exercise of a Warrant (as in effect immediately
prior to such action) shall be proportionately adjusted so that the holder of
any Warrant thereafter exercised may receive the aggregate number and kind of
shares of capital stock of the Company which he would have owned immediately
following such action if such Warrant had been exercised immediately prior to
such action.
The adjustment shall become effective immediately after the
record date in the case of a dividend or distribution and immediately after the
effective date in the case of a subdivision, combination or reclassification.
If after an adjustment a holder of a Warrant upon exercise may
receive shares of two or more classes or series of capital stock of the Company,
the Company shall determine the allocation of the adjusted Exercise Price
between the classes or series of capital stock. After such allocation, the
exercise privilege and the Exercise Price of each class or series of capital
stock shall thereafter be subject to adjustment on terms comparable to those
applicable to Common Stock in this Section 14.
Such adjustment shall be made successively whenever any event
listed above shall occur.
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(b) Adjustment for Rights Issue.
If the Company distributes any rights, options or warrants to
all holders of its Common Stock entitling them for a period expiring within 60
days after the record date mentioned below to purchase shares of Common Stock or
securities convertible into, or exchangeable or exercisable for, Common Stock at
a price per share (or with an initial conversion, exchange or exercise price)
less than the current market price per share on that record date, the Exercise
Price shall be adjusted in accordance with the following formula:
O + N x P
-----
E' = E x M
------------
O + N
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
O = the number of shares of Common Stock outstanding on the record
date.
N = the number of additional shares of Common Stock offered.
P = the offering price per share of the additional shares.
M = the current market price per share of Common Stock on the record
date.
The adjustment pursuant to this subsection (b) shall be made
successively whenever any such rights, options or warrants are issued and shall
become effective immediately after the record date for the determination of
stockholders entitled to receive the rights, options or warrants. If at the end
of the period during which such rights, options or warrants are exercisable, not
all rights, options or warrants shall have been exercised, the Exercise Price
shall be immediately readjusted to what it would have been if "N" in the above
formula had been the number of shares actually issued.
(c) Adjustment for Other Distributions.
If the Company distributes to all holders of its Common Stock
any of its assets (including cash), debt securities, preferred stock or any
rights or warrants to purchase debt securities, assets or other securities of
the Company, the Exercise Price shall be adjusted in accordance with the
following formula:
E' = E x M - F
-----
M
where:
E' = the adjusted Exercise Price.
E = the current Exercise Price.
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M = the current market price per share of Common Stock on the
record date mentioned below.
F = the fair market value on the record date of the assets,
securities, rights or warrants applicable to one share of
Common Stock. The Board of Directors shall determine the fair
market value.
The adjustment pursuant to this subsection (c) shall be made
successively whenever any such distribution is made and shall become effective
immediately after the record date for the determination of stockholders entitled
to receive the distribution.
Notwithstanding the foregoing, if "F" in the above formula
equals or exceeds "M" in the above formula, then "M" in the above formula shall
be equal to the fair market value per share of the Common Stock on the record
date as determined in good faith by the Board of Directors and described in a
Board resolution which shall be filed with the Warrant Agent.
This subsection (c) does not apply to rights, options or
warrants referred to in subsection (b) of this Section 14.
(d) Adjustment for Common Stock Issue.
If the Company issues shares of Common Stock for a
consideration per share less than the current market price per share of Common
Stock on the date the Company fixes the offering price of such additional
shares, the Exercise Price shall be adjusted in accordance with the following
formula:
P
--
E' = E x O + M
-----------
A
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares of Common Stock outstanding immediately
prior to the issuance of such additional shares.
P = the aggregate consideration received for the issuance of such
additional shares.
M = the current market price per share of Common Stock on the
date of issuance of such additional shares.
A = the number of shares of Common Stock outstanding immediately
after the issuance of such additional shares.
The adjustment pursuant to subsection (d) shall be made
successively whenever any such issuance is made, and shall become effective
immediately after such issuance.
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This subsection (d) does not apply to:
(1) any of the transactions described in subsections
(a), (b) and (c) of this Section 14;
(2) the exercise of Warrants or other warrants
outstanding on the date of this Agreement, or the conversion or
exchange of other securities convertible or exchangeable for Common
Stock;
(3) Common Stock issued to the Company's employees,
officers or directors (other than to Marshall W. Pagon (the
"Principal") or (x) any immediate family member of the Principal or (y)
any trust, corporation, partnership or other entity, more than 50% of
the voting equity interests of which are owned directly or indirectly
by, and which is controlled by the Principal and/or such other persons
referred to in the immediately preceding clause (x)) under bona fide
employee benefit plans adopted by the Board of Directors and approved
by the holders of Common Stock when required by law, if such Common
Stock would otherwise be covered by this subsection (d);
(4) Common Stock issuable upon the exercise of rights
or warrants issued to the holders of Common Stock;
(5) Common Stock issued to shareholders of any person
which merges into the Company in proportion to their stock holdings of
such person immediately prior to such merger, upon such merger;
(6) Common Stock issued in a bona fide public
offering pursuant to a firm commitment underwriting;
(7) Common Stock issued in a bona fide private
placement through a placement agent which is a member firm of the
National Association of Securities Dealers, Inc. to Persons that are
not Affiliates (as defined in the Certificate of Designation) of the
Company (except to the extent that any discount from the current market
price attributable to restrictions on transferability of the Common
Stock, as determined in good faith by the Board of Directors and
described in a Board resolution which shall be filed with the Warrant
Agent, shall exceed 20% of the then current market price); or
(8) Common Stock issued to Affiliates of the Company
simultaneous with, and resulting in at least the same net proceeds per
share of Common Stock to the Company as, an issuance referred to in
paragraphs (6) or (7) of this Section 14(d).
(e) Adjustment for Convertible Securities Issue.
If the Company issues any securities convertible into or
exchangeable for Common Stock (other than securities issued in transactions
described in subsections (a)(4), (a)(5), (b) and (c) of this Section 14) for a
consideration, per share of Common Stock initially deliverable upon conversion
or exchange of such securities, less than the current market price per share on
the date of issuance of such securities, the Exercise Price shall be adjusted in
accordance with the following formula:
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<PAGE>
P
--
E' = E x O + M
-----------
O + D
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
O = the number of shares of Common Stock outstanding immediately
prior to the issuance of such securities.
P = the aggregate consideration received for the issuance of such
securities.
M = the current market price per share on the date of issuance of such
securities.
D = the maximum number of shares of Common Stock deliverable upon
conversion of or in exchange for such securities at the initial conversion or
exchange rate.
The adjustment pursuant to this subsection (e) shall be made
successively whenever any such issuance is made, and shall become effective
immediately after such issuance.
If all of the Common Stock deliverable upon conversion or
exchange of such securities has not been issued when such securities are no
longer outstanding, then the Exercise Price shall promptly be readjusted to the
Exercise Price which would then be in effect had the adjustment upon the
issuance of such securities been made on the basis of the actual number of
shares of Common Stock issued upon conversion or exchange of such securities.
This subsection (e) does not apply to:
(1) convertible securities issued to shareholders of
any person which merges into the Company, or with a subsidiary of the
Company, in proportion to their stock holdings of such person
immediately prior to such merger, upon such merger;
(2) convertible securities issued in a bona fide
public offering pursuant to a firm commitment underwriting;
(3) convertible securities issued in a bona fide
private placement through a placement agent which is a member firm of
the National Association of Securities Dealers, Inc. (except to the
extent that any discount from the current market price attributable to
restrictions on transferability of Common Stock issuable upon
conversion, as determined in good faith by the Board of Directors and
described in a Board resolution which shall be filed with the Warrant
Agent, shall exceed 20% of the then current market price);
(4) convertible securities issued to Affiliates of
the Company simultaneous with, and resulting in at least the same net
proceeds per share of Common Stock to the Company as, an issuance
referred to in paragraphs (2) or (3) of this Section 14(e); or
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<PAGE>
(5) stock options issued to the Company's employees,
officers or directors (other than to the Principal or (x) any immediate
family member of the Principal or (y) any trust, corporation,
partnership or other entity, more than 50% of the voting equity
interests of which are owned directly or indirectly by, and which is
controlled by the Principal and/or such other persons referred to in
the immediately preceding clause (x)) under bona fide employee benefit
plans adopted by the Board of Directors and approved by the holders of
Common Stock when required by law, if such stock options would
otherwise be covered by this subsection (e).
(f) Adjustment for Certain Cash Dividends.
If the Company distributes to all holders of its Common Stock
cash in an aggregate amount that, together with (i) the aggregate amount of any
other distributions to all holders of Common Stock made exclusively in cash
within the 12 months preceding the record date for such distribution and in
respect of which no Exercise Price adjustment pursuant to subsection (c) or this
subsection (f) has been made previously and (ii) the aggregate of any cash plus
the fair market value (as determined in good faith by the Board of Directors and
described in a Board resolution) as of such record date of consideration payable
in respect of any tender offer by the Company or a subsidiary of the Company for
all or any portion of Common Stock consummated within the 12 months preceding
such record date and in respect of which no Exercise Price adjustment pursuant
to subsection (g) of this Section has been made previously, exceeds 7.50% of the
product of the current market price on such record date times the number of
shares of Common Stock outstanding on such date, the Exercise Price shall be
adjusted in accordance with the following formula:
E' = E x M - C
-----
M
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
M = the current market price per share of Common Stock on the record
date.
C = the amount of cash to be distributed applicable to one share of
Common Stock.
Notwithstanding the foregoing, if "C" in the above formula
equals or exceeds "M" in the above formula, then "M" in the above formula shall
be equal to the fair market value per share of the Common Stock on the record
date as determined in good faith by the Board of Directors and described in a
Board resolution which shall be filed with the Warrant Agent.
This subsection (f) does not apply to any cash that is
distributed as part of a distribution referred to in subsection (c) of this
Section or in connection with a transaction to which subsections (d) or (o) of
this Section applies.
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<PAGE>
(g) Adjustment for Tender Offer.
If the Company or any subsidiary of the Company consummates a
tender offer for all or any portion of Common Stock and purchases shares
pursuant to such tender offer for an aggregate consideration having a fair
market value (as determined in good faith by the Board of Directors and
described in a Board resolution) as of the last time (the "Expiration Time")
that tenders may be made pursuant to such tender offer (as it shall have been
amended) that, together with (i) the aggregate of the cash plus the fair market
value (as determined in good faith by the Board of Directors and described in a
Board resolution) of the consideration paid in respect of any other tender offer
by the Company or a subsidiary of the Company for all or any portion of Common
Stock consummated within the 12 months preceding the Expiration Time and in
respect of which no Exercise Price adjustment pursuant to this subsection (g)
has been made previously and (ii) the aggregate amount of any distributions to
all holders of Common Stock made exclusively in cash within the 12 months
preceding the Expiration Time and in respect of which no Exercise Price
adjustment pursuant to Subsection (c) of this Section has been made previously,
exceeds 7.50% of the product of the current market price immediately prior to
the Expiration Time times the number of shares of Common Stock outstanding
(including any tendered shares) at the Expiration Time, the Exercise Price shall
be adjusted in accordance with the following formula:
E' = E x (M x O) - F
-----------
M x (O - N)
where:
E' = the adjusted Exercise Price.
E = the then current Exercise Price.
M = the current market price per share of Common Stock immediately
prior to the Expiration Time.
O = the number of shares of Common Stock outstanding (including any
tendered shares) at the Expiration Time.
F = the fair market value of the aggregate consideration paid for all
shares of Common Stock purchased pursuant to the tender offer.
N = the number of shares of Common Stock accepted for payment in such
tender offer.
If the number of shares accepted for payment in such tender
offer or the aggregate consideration payable therefor have not been finally
determined by the opening of business on the day following the Expiration Time,
the adjustment required by this subsection (g) shall, pending such final
determination, be made based upon the preliminary announced results of such
tender offer, and, after such final determination shall have been made, the
adjustment required by this subsection (g) shall be based upon the number of
shares accepted for payment in such tender offer and the aggregate consideration
payable therefor as so finally determined.
Notwithstanding the foregoing, if "F" in the above formula
equals or exceeds "(M x O)" in the above formula, then "M" in the above formula
shall be equal to the fair market value per share of the Common Stock
immediately prior to the Expiration Time as determined in good faith by the
Board of Directors and described in a Board resolution which shall be filed with
the Warrant Agent.
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<PAGE>
The Company shall not and shall cause its subsidiaries not to
allow the number of shares of Common Stock accepted for payment pursuant to any
such tender offer to equal the number of shares of Common Stock outstanding
(including any tendered shares) at the Expiration Time.
In no event shall any adjustment made pursuant to this
subsection (g) be made which would increase the Exercise Price.
(h) Current Market Price.
In subsections (b), (c), (d), (e), (f) and (g) of this Section
14 and in Section 16 the current market price per share of Common Stock on any
date is the average of the Quoted Prices of the Common Stock for 30 consecutive
trading days commencing 45 trading days before the date in question. The "Quoted
Price" of the Common Stock is the last reported sales price of the Common Stock
as reported by the Nasdaq National Market or if the Common Stock is listed on a
securities exchange, the last reported sales price of the Common Stock on such
exchange which shall be for consolidated trading if applicable to such exchange,
or if not so reported or listed, the last reported bid price of the Common
Stock. In the absence of one or more such quotations, the Board of Directors
shall determine the current market price on such basis as it in good faith
considers appropriate.
(i) Consideration Received.
For purposes of any computation respecting consideration
received pursuant to subsections (d), (e), (f) and (g) of this Section 14, the
following shall apply:
(1) in the case of the issuance of shares of Common
Stock for cash, the consideration shall be the amount of such cash,
provided that in no case shall any deduction be made for any
commissions, discounts or other expenses incurred by the Company for
any underwriting of the issue or otherwise in connection therewith;
(2) in the case of the issuance of shares of Common
Stock for a consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market
value thereof as determined in good faith by the Board of Directors
(irrespective of the accounting treatment thereof), whose determination
shall be conclusive, and described in a Board resolution which shall be
filed with the Warrant Agent; and
(3) in the case of the issuance of securities
convertible into or exchangeable for shares of Common Stock, the
aggregate consideration received therefor shall be deemed to be the
consideration received by the Company for the issuance of such
securities plus the additional minimum consideration, if any, to be
received by the Company upon the conversion or exchange thereof (the
consideration in each case to be determined in the same manner as
provided in clauses (1) and (2) of this subsection).
(j) When De Minimis Adjustment May Be Deferred.
No adjustment in the Exercise Price need be made unless the
adjustment would require an increase or decrease of at least 1% in the Exercise
Price. Any adjustments that are not made shall be carried forward and taken into
account in any subsequent adjustment.
All calculations under this Section 14 shall be made to the
nearest cent or to the nearest 1/1000th of a share, as the case may be.
16
<PAGE>
(k) When No Adjustment Required.
No adjustment need be made for a transaction referred to in
subsections (a), (b), (c), (d) or (e) of this Section 14 if Warrant holders are
to participate in the transaction on a basis and with notice that the Board of
Directors determines to be fair and appropriate in light of the basis and notice
on which holders of Common Stock participate in the transaction.
No adjustment need be made for rights to purchase Common Stock
pursuant to any of the Company's plan for reinvestment of dividends or interest.
No adjustment need be made for a change in the par value, or
from par value to no par value, or from no par value to par value, of the Common
Stock.
To the extent the Warrants become convertible into cash, no
adjustment need be made thereafter as to the cash. Interest will not accrue on
the cash.
Notwithstanding any other provision of this Section 14, no
adjustment to the Exercise Price shall reduce the Exercise Price below the then
par value per share of the Common Stock, and any such purported adjustment shall
instead reduce the Exercise Price to such par value. The Company hereby
covenants not to take any action to increase the par value per share of the
Common Stock.
(l) Notice of Adjustment.
Whenever the Exercise Price is adjusted, the Company shall
provide the notices required by Section 17 hereof.
(m) Voluntary Reduction.
The Company from time to time may, as the Board of Directors
deems appropriate, reduce the Exercise Price by any amount for any period of
time if the period is at least 20 days and if the reduction is irrevocable
during the period; provided, however, that in no event may the Exercise Price be
less than the par value of a share of Common Stock.
Whenever the Exercise Price is reduced, the Company shall mail
to Warrant holders a notice of the reduction. The Company shall mail the notice
at least 15 days before the date the reduced Exercise Price takes effect. The
notice shall state the reduced Exercise Price and the period it will be in
effect.
A reduction of the Exercise Price pursuant to this Section
14(m), other than a reduction which the Company has irrevocably committed will
be in effect for so long as any Warrants are outstanding, does not change or
adjust the Exercise Price otherwise in effect for purposes of subsections (a),
(b), (c), (d), (e), (f) or (g) of this Section 14.
(n) Notice of Certain Transactions.
If:
(1) The Company takes any action that would require
an adjustment in the Exercise Price pursuant to subsections (a), (b),
(c), (d), (e), (f) or (g) of this Section 14 and if
17
<PAGE>
the Company does not arrange for Warrant holders to participate
pursuant to subsection (k) of this Section 14;
(2) The Company takes any action that would require a
supplemental Warrant Agreement pursuant to subsection (o) of this
Section 14; or
(3) there is a liquidation or dissolution of the
Company,
the Company shall mail to Warrant holders a notice stating the proposed record
date for a dividend or distribution or the proposed effective date of a
subdivision, combination, reclassification, consolidation, merger, transfer,
lease, liquidation or dissolution. The Company shall mail the notice at least 15
days before such date. Failure to mail the notice or any defect in it shall not
affect the validity of the transaction.
(o) Reorganization of the Company.
(1) If the Company consolidates or merges with or
into, or transfers or leases all or substantially all its assets to,
any person, upon consummation of such transaction the Warrants shall
automatically become exercisable for the kind and amount of securities,
cash or other assets which the holder of a Warrant would have owned
immediately after the consolidation, merger, transfer or lease if the
holder had exercised the Warrant immediately before the record date
(or, if none, the effective date) of the transaction. Concurrently with
the consummation of such transaction, the corporation formed by or
surviving any such consolidation or merger if other than the Company,
or the person to which such sale or conveyance shall have been made
(any such person, the "Successor Guarantor"), shall enter into a
supplemental Warrant Agreement so providing and further providing for
adjustments which shall be as nearly equivalent as may be practical to
the adjustments provided for in this Section 14. The Successor
Guarantor shall mail to Warrant holders a notice describing the
supplemental Warrant Agreement. If the issuer of securities deliverable
upon exercise of Warrants under the supplemental Warrant Agreement is
an affiliate of the formed, surviving, transferee or lessee
corporation, that issuer shall join in the supplemental Warrant
Agreement.
(2) Notwithstanding paragraph (1) of this Section
14(o), in the case of any merger, reverse stock split, or other
transaction in which the publicly held Common Stock shall be converted
into the right to receive a consideration consisting solely of cash,
(A) this Warrant Agreement and each Warrant shall terminate and (B)
each holder of a Warrant, without having to take any action other than
the surrendering of such Warrant to the Company, shall receive an
amount equal to the amount (if any) by which the price per share
payable to, or which would be received by, any public holder of Common
Stock in connection with such transaction exceeds the Exercise Price
effective at that time.
(3) If this subsection (o) applies, subsections (a),
(b), (c), (d), (e), (f) and (g) of this Section 14 do not apply.
(p) The Company Determination Final.
Any determination that the Company or the Board of Directors
must make pursuant to subsection (a), (c), (d), (e), (f), (g), (h), (i) or (k)
of this Section 14 is conclusive.
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<PAGE>
(q) Warrant Agent's Disclaimer.
The Warrant Agent has no duty to determine when an adjustment
under this Section 14 should be made, how it should be made or what it should
be. The Warrant Agent has no duty to determine whether any provisions of a
supplemental Warrant Agreement under subsection (o) of this Section 14 are
correct. The Warrant Agent makes no representation as to the validity or value
of any securities or assets issued upon exercise of Warrants. The Warrant Agent
shall not be responsible for the Company's failure to comply with this Section
14.
(r) When Issuance or Payment May Be Deferred.
In any case in which this Section 14 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event (i) issuing to the holder of any Warrant exercised after such record date
the Warrant Shares and other capital stock of the Company, if any, issuable upon
such exercise over and above the Warrant Shares and other capital stock of the
Company, if any, issuable upon such exercise on the basis of the Exercise Price
and (ii) paying to such holder any amount in cash in lieu of a fractional share
pursuant to Section 16 hereof; provided, however, that the Company shall deliver
to such holder a due bill or other appropriate instrument evidencing such
holder's right to receive such additional Warrant Shares, other capital stock
and cash upon the occurrence of the event requiring such adjustment.
(s) Adjustment in Number of Shares.
Upon each adjustment of the Exercise Price pursuant to this
Section 14, each Warrant outstanding prior to the making of the adjustment in
the Exercise Price shall thereafter evidence the right to receive upon payment
of the adjusted Exercise Price that number of shares of Common Stock (calculated
to the nearest thousandth) obtained from the following formula:
N'= N x E
--
E'
where:
N' = the adjusted number of Warrant Shares issuable upon exercise
of a Warrant by payment of the adjusted Exercise Price.
N = the number of Warrant Shares previously issuable upon
exercise of a Warrant by payment of the Exercise Price prior
to adjustment.
E' = the adjusted Exercise Price.
E = the Exercise Price prior to adjustment.
(t) Form of Warrants.
Irrespective of any adjustments in the Exercise Price or the
number or kind of shares purchasable upon the exercise of the Warrants, Warrants
theretofore or thereafter issued may continue to express the same price and
number and kind of shares as are stated in the Warrants initially issuable
pursuant to this Agreement.
19
<PAGE>
SECTION 15. No Dilution or Impairment. (a) If any event shall
occur as to which the provisions of Section 14 are not strictly applicable but
the failure to make any adjustment would adversely affect the purchase rights
represented by the Warrants in accordance with the essential intent and
principles of such Section 14, then, in each such case, the Company shall
appoint an investment banking firm of recognized national standing, or any other
financial expert that does not (or whose directors, officers, employees,
affiliates or stockholders do not) have a direct or material indirect financial
interest in the Company or any of its subsidiaries, who has not been, and, at
the time it is called upon to give independent financial advice to the Company,
is not (and none of its directors, officers, employees, affiliates or
stockholders are) a promoter, director or officer of the Company or any of its
subsidiaries, which shall give their opinion upon the adjustment, if any, on a
basis consistent with the essential intent and principles established in Section
14, necessary to preserve, without dilution, the purchase rights, represented by
the Warrants. Upon receipt of such opinion, the Company will promptly mail a
copy thereof to the holders of the Warrants and shall make the adjustments
described therein.
(b) The Company will not, by amendment of its certificate of
incorporation or through any consolidation, merger, reorganization, transfer of
assets, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms of the
Warrants, but will at all times in good faith assist in the carrying out of all
such terms and in the taking of all such action as may be necessary or
appropriate in order to protect the rights of the holder of the Warrants against
dilution or other impairment. Without limiting the generality of the foregoing,
the Company (1) will take all such action as may be necessary or appropriate in
order that the Company may validly and legally issue fully paid and
nonassessable shares of Common Stock on the exercise of the Warrants from time
to time outstanding and (2) will not take any action which results in any
adjustment of the Exercise Price if the total number of Warrant Shares issuable
after the action upon the exercise of all of the Warrants would exceed the total
number of shares of Common Stock then authorized by the Company's certificate of
incorporation and available for the purposes of issue upon such exercise. A
consolidation, merger, reorganization or transfer of assets involving the
Company covered by Section 14(o) shall not be prohibited by or require any
adjustment under this Section 15.
SECTION 16. Fractional Interests. The Company shall not be
required to issue fractional Warrant Shares on the exercise of Warrants. If more
than one Warrant shall be presented for exercise in full at the same time by the
same holder, the number of full Warrant Shares which shall be issuable upon the
exercise thereof shall be computed on the basis of the aggregate number of
Warrant Shares purchasable on exercise of the Warrants so presented. If any
fraction of a Warrant Share would, except for the provisions of this Section 16,
be issuable on the exercise of any Warrants (or specified portion thereof), the
Company shall notify the Warrant Agent in writing of the amount to be paid in
lieu of the fraction of a Warrant Share and concurrently pay or provide to the
Warrant Agent for payment to the Warrant holder an amount in cash equal to the
product of (i) such fraction of a Warrant Share and (ii) the difference of the
current market price of a share of Common Stock over the Exercise Price.
SECTION 17. Notices to Warrant Holders. Upon any adjustment of
the Exercise Price pursuant to Section 14 hereof, the Company shall within 15
days thereafter (i) cause to be filed with the Warrant Agent a certificate of a
firm of independent public accountants of recognized standing selected by the
Board of Directors (who may be the regular auditors of the Company) setting
forth the Exercise Price after such adjustment and setting forth in reasonable
detail the method of calculation and the facts upon which such calculations are
based and setting forth the number of Warrant Shares (or portion thereof)
issuable after such adjustment in the Exercise Price, upon exercise of a Warrant
and payment of the adjusted Exercise Price, which certificate shall be
conclusive evidence of the correctness of the matters set forth therein, and
(ii) cause to be given to each of the registered holders of the Warrant
Certificates at such registered holder's address appearing on the Warrant
register written notice of such
20
<PAGE>
adjustments by first-class mail, postage prepaid. Where appropriate, such notice
may be given in advance and included as a part of the notice required to be
mailed under the other provisions of this Section 17.
In case:
(a) the Company shall authorize the issuance to all holders of
shares of Common Stock of rights, options or warrants to subscribe for or
purchase shares of Common Stock or of any other subscription rights or warrants;
or
(b) the Company shall authorize the distribution to all
holders of shares of Common Stock of evidences of its indebtedness or assets
(other than cash dividends or cash distributions payable out of consolidated
earnings or earned surplus or dividends payable in shares of Common Stock or
distributions referred to in subsection (a) of Section 14 hereof); or
(c) of any consolidation or merger to which the Company is a
party and for which approval of any shareholders of the Company is required, or
of the conveyance or transfer of the properties and assets of the Company
substantially as an entirety, or of any reclassification or change of Common
Stock issuable upon exercise of the Warrants (other than a change in par value,
or from par value to no par value, or from no par value to par value, or as a
result of a subdivision or combination), or a tender offer or exchange offer for
shares of Common Stock; or
(d) of the voluntary or involuntary dissolution, liquidation
or winding up of the Company; or
(e) a Change of Control (as defined in the Certificate of
Designation) occurs; or
(f) the Company proposes to take any action (other than
actions of the character described in Section 14(a)) which would require an
adjustment of the Exercise Price pursuant to Section 14;
then the Company shall cause to be filed with the Warrant Agent and shall cause
to be given to each of the registered holders of the Warrant Certificates at his
address appearing on the Warrant register, at least 15 days (or 10 days in any
case specified in clauses (a) or (b) above) prior to the applicable record date
hereinafter specified, or promptly in the case of events for which there is no
record date, by first-class mail, postage prepaid, a written notice stating (i)
the date as of which the holders of record of shares of Common Stock to be
entitled to receive any such rights, options, warrants or distribution are to be
determined, or (ii) the initial expiration date set forth in any tender offer or
exchange offer for shares of Common Stock, or (iii) the date on which any such
consolidation, merger, conveyance, transfer, dissolution, liquidation or winding
up is expected to become effective or consummated, and the date as of which it
is expected that holders of record of shares of Common Stock shall be entitled
to exchange such shares for securities or other property, if any, deliverable
upon such reclassification, consolidation, merger, conveyance, transfer,
dissolution, liquidation or winding up. The failure to give the notice required
by this Section 17 or any defect therein shall not affect the legality or
validity of any distribution, right, option, warrant, consolidation, merger,
conveyance, transfer, lease, dissolution, liquidation or winding up, or the vote
upon any action.
Nothing contained in this Agreement or in any of the Warrant
Certificates shall be construed as conferring upon the holders thereof the right
to vote or to consent or to receive notice as shareholders in respect of the
meetings of shareholders or the election of Directors of the Company or any
other matter, or any rights whatsoever as shareholders of the Company.
21
<PAGE>
SECTION 18. Merger, Consolidation or Change of Name of Warrant
Agent. Any corporation into which the Warrant Agent may be merged or with which
it may be consolidated, or any corporation resulting from any merger or
consolidation to which the Warrant Agent shall be a party, or any corporation
succeeding to the business of the Warrant Agent, shall be the successor to the
Warrant Agent hereunder without the execution or filing of any paper or any
further act on the part of any of the parties hereto, provided that such
corporation would be eligible for appointment as a successor warrant agent under
the provisions of Section 21 hereof. In case at the time such successor to the
Warrant Agent shall succeed to the agency created by this Agreement, and in case
at that time any of the Warrant Certificates shall have been countersigned but
not delivered, any such successor to the Warrant Agent may adopt the
countersignature of the original Warrant Agent; and in case at that time any of
the Warrant Certificates shall not have been countersigned, any successor to the
Warrant Agent may countersign such Warrant Certificates either in the name of
the predecessor Warrant Agent or in the name of the successor to the Warrant
Agent; and in all such cases such Warrant Certificates shall have the full force
and effect provided in the Warrant Certificates and in this Agreement.
In case at any time the name of the Warrant Agent shall be
changed and at such time any of the Warrant Certificates shall have been
countersigned but not delivered, the Warrant Agent whose name has been changed
may adopt the countersignature under its prior name, and in case at that time
any of the Warrant Certificates shall not have been countersigned, the Warrant
Agent may countersign such Warrant Certificates either in its prior name or in
its changed name, and in all such cases such Warrant Certificates shall have the
full force and effect provided in the Warrant Certificates and in this
Agreement.
SECTION 19. Warrant Agent. The Warrant Agent undertakes the
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Warrants, by their
acceptance thereof, shall be bound:
(a) The statements contained herein and in the
Warrant Certificates shall be taken as statements of the Company. The
Warrant Agent assumes no responsibility for the correctness of any of
the same except such as describe the Warrant Agent or action taken or
to be taken by it. The Warrant Agent assumes no responsibility with
respect to the distribution of the Warrant Certificates except as
herein otherwise provided.
(b) The Warrant Agent shall not be responsible for
any failure of the Company to comply with any of the covenants
contained in this Agreement or in the Warrant Certificates to be
complied with by the Company.
(c) The Warrant Agent may consult at any time with
counsel satisfactory to it (who may be counsel for the Company) and the
Warrant Agent shall incur no liability or responsibility to the Company
or to any holder of any Warrant Certificate in respect of any action
taken, suffered or omitted by it hereunder in good faith and in
accordance with the opinion or the advice of such counsel.
(d) The Warrant Agent shall incur no liability or
responsibility to the Company or to any holder of any Warrant
Certificate for any action taken in reliance on any Warrant
Certificate, certificate of shares of Common Stock, notice, resolution,
waiver, consent, order, certificate, or other paper, document or
instrument believed by it to be genuine and to have been signed, sent
or presented by the proper party or parties. The Warrant Agent shall
not be bound by any notice or demand, or any waiver, modification,
termination or revision of this
22
<PAGE>
Agreement or any of the terms hereof, unless evidenced by a writing
between the Company and the Warrant Agent.
(e) The Company agrees to pay to the Warrant Agent
reasonable compensation for all services rendered by the Warrant Agent
in the execution of this Agreement, to reimburse the Warrant Agent for
all expenses, taxes (including withholding taxes) and governmental
charges and other charges of any kind and nature incurred by the
Warrant Agent in the execution, delivery and performance of its
responsibilities under this Agreement and to indemnify the Warrant
Agent and save it harmless against any and all liabilities, including
judgments, costs and counsel fees, for anything done or omitted by the
Warrant Agent in the execution, delivery and performance of its
responsibilities under this Agreement except as a result of its
negligence or bad faith.
(f) The Warrant Agent shall be under no obligation to
institute any action, suit or legal proceeding or to take any other
action likely to involve expense unless the Company or one or more
registered holders of Warrant Certificates shall furnish the Warrant
Agent with reasonable security and indemnity for any costs and expenses
which may be incurred, but this provision shall not affect the power of
the Warrant Agent to take such action as it may consider proper,
whether with or without any such security or indemnity. All rights of
action under this Agreement or under any of the Warrants may be
enforced by the Warrant Agent without the possession of any of the
Warrant Certificates or the production thereof at any trial or other
proceeding relative thereto, and any such action, suit or proceeding
instituted by the Warrant Agent shall be brought in its name as Warrant
Agent and any recovery of judgment shall be for the ratable benefit of
the registered holders of the Warrants, as their respective rights or
interests may appear.
(g) Except as required by law, the Warrant Agent, and
any stockholder, director, officer or employee of the Warrant Agent,
may buy, sell or deal in any of the Warrants or other securities of the
Company or become pecuniarily interested in any transaction in which
the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not
Warrant Agent under this Agreement. Nothing herein shall preclude the
Warrant Agent from acting in any other capacity for the Company or for
any other legal entity.
(h) The Warrant Agent shall act hereunder solely as
agent for the Company, and its duties shall be determined solely by the
provisions hereof. The Warrant Agent shall not be liable for anything
which it may do or refrain from doing in connection with this Agreement
except for its own negligence or bad faith.
(i) The Warrant Agent shall not at any time be under
any duty or responsibility to any holder of any Warrant Certificate to
make or cause to be made any adjustment of the Exercise Price or number
of the Warrant Shares or other securities or property deliverable as
provided in this Agreement, or to determine whether any facts exist
which may require any of such adjustments, or with respect to the
nature or extent of any such adjustments, when made, or with respect to
the method employed in making the same. The Warrant Agent shall not be
accountable with respect to the validity or value or the kind or amount
of any Warrant Shares or of any securities or property which may at any
time be issued or delivered upon the exercise of any Warrant or with
respect to whether any such Warrant Shares or other securities will
when issued be validly issued and fully paid and nonassessable, and
makes no representation with respect thereto.
23
<PAGE>
(j) In the absence of bad faith on its part, the
Warrant Agent may conclusively rely, as to the truth of the statements
and the correctness of the opinions expressed therein, upon
certificates or opinions furnished to the Warrant Agent and conforming
to the requirements of this Warrant Agreement. However, the Warrant
Agent shall examine the certificates and opinions to determine whether
or not they conform to the requirements of this Agreement.
(k) The Warrant Agent may rely and shall be fully
protected in relying upon any document believed by it to be genuine and
to have been signed or presented by the proper person.
SECTION 20. Registration Rights.
(a) The Company shall prepare and cause to be filed with the
SEC pursuant to Rule 415 under the Securities Act (the "Shelf Registration") a
shelf registration statement on the appropriate form (the "Registration
Statement") relating to the offer and sale by the Company of the Warrant Shares
to the holders of Warrants upon exercise of the Warrants and resales of the
Warrant Shares by the holders thereof.
(b) The Company shall use its reasonable best efforts to cause
such Registration Statement to be declared effective by the SEC on or prior to
the date of commencement of the Offering (as defined in the Underwriting
Agreement).
(c) The Company shall use its reasonable best efforts to keep
the Registration Statement continuously effective under the Securities Act in
order to permit the prospectus included therein to be lawfully delivered by the
Company to the holders exercising the Warrants until 30 days after the
Expiration Date or such shorter period that will terminate when all the Warrants
have been exercised; provided that, except as provided below with respect to any
Black Out Period (as defined below), the Company shall be deemed not to have
used its best efforts to keep the Registration Statement effective during the
requisite period if it voluntarily takes any action that would result in its not
being able to offer and sell the Warrant Shares upon exercise of the Warrants
during that period, unless such action is required by applicable law.
Notwithstanding the foregoing, the Company shall not be required to amend or
supplement the Registration Statement, any related prospectus or any document
incorporated therein by reference, for a period (a "Black Out Period") not to
exceed, for so long as this Agreement is in effect, an aggregate of 60 days in
any calendar year, in the event that (i) an event occurs and is continuing as a
result of which the Registration Statement, any related prospectus or any
document incorporated therein by reference as then amended or supplemented
would, in the Company's good faith judgment, contain an untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading, and (ii)(A) the Company determines in its good faith
judgment that the disclosure of such event at such time would have a material
adverse effect on the business, operations or prospects of the Company or (B)
the disclosure otherwise relates to a material business transaction which has
not yet been publicly disclosed; provided that no Black Out Period may be in
effect during the six months prior to the Expiration Date.
(d) The Company shall cause the Registration Statement and the
related prospectus and any amendment or supplement thereto, as of the effective
date of the Registration Statement, amendment or supplement, (i) to comply in
all material respects with the applicable requirements of the Securities Act and
the rules and regulations of the SEC and (ii) not to contain any untrue
statement of
24
<PAGE>
a material fact or omit to state a material fact required to be stated therein
or necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
(e) The Company shall give prompt written notice to the
holders of the Warrants and the Warrant Agent of (1) the effectiveness of the
Registration Statement or any post-effective amendment thereto, (2) the issuance
by the SEC of any stop order suspending the effectiveness of the Registration
Statement or the initiation or threatening of any proceedings for that purpose,
(3) the receipt by the Company or its legal counsel of any notification with
respect to the suspension of the qualification of the Warrant Shares for sale in
any jurisdiction or the initiation or threatening of any proceeding for such
purpose, (4) the happening of any event that requires the Company to make
changes in the Registration Statement or the prospectus in order to make the
statements therein not misleading and (5) the commencement and termination of
any Black Out Period.
(f) The Company shall use its reasonable best efforts to
prevent the issuance or obtain the withdrawal of any order suspending the
effectiveness of the Registration Statement at the earliest possible time.
(g) Upon the occurrence of any event contemplated by Section
20(e)(4) or (5) of this Agreement (subject to the last sentence of Section 20(c)
of this Agreement) the Company shall promptly prepare a post-effective amendment
to the Registration Statement or a supplement to the related prospectus or file
any other required document so that, as thereafter delivered to holders of the
Warrants, the prospectus will not contain an untrue statement of a material fact
or omit to state any material fact necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading and will
contain the current information required by the Securities Act.
(h) Not later than the effective date of the Registration
Statement, the Company will provide a CUSIP number for the Warrant Shares and
provide the Warrant Agent with printed certificates for the Warrant Shares.
(i) The Company will comply with all rules and regulations of
the SEC to the extent and so long as they are applicable to the Shelf
Registration.
(j) The Company shall register or qualify or cooperate with
the holders in connection with the registration or qualification of the Warrant
Shares for offer and sale by the Company upon exercise of the Warrants under the
securities or blue sky laws of such states of the United States as any holder
reasonably requests and do any and all other acts or things necessary or
advisable to enable such offer and sale in such jurisdictions; provided that the
Company shall not be required to (i) qualify to do business in any jurisdiction
in which it is not then so qualified or (ii) take any action which would subject
it to general service of process or to taxation in any jurisdiction in which it
is not then so subject.
(k) The Company shall bear all expenses incurred by it in
connection with the performance of its obligations under this Section 20.
(l) The Company acknowledges and agrees that any remedy at law
for breach of any provision of this Section 20 will be inadequate and that, in
addition to any other remedies that the holder may have, the holders shall be
entitled to the remedy of specific performance to ensure the Company performs
its obligations under this Section 20. The election of any one or more remedies
by the holders hereunder shall not constitute a waiver of the right to pursue
other available remedies.
25
<PAGE>
SECTION 21. Change of Warrant Agent. If the Warrant Agent
shall become incapable of acting as Warrant Agent or shall resign as provided
below, the Company shall appoint a successor to such Warrant Agent. If the
Company shall fail to make such appointment within a period of 30 days after it
has been notified in writing of such incapacity by the Warrant Agent or by the
registered holders of a majority of Warrants, then the registered holder of any
Warrant Certificate may apply to any court of competent jurisdiction for the
appointment of a successor to the Warrant Agent. Pending appointment of a
successor to such Warrant Agent, either by the Company or by such a court, the
duties of the Warrant Agent shall be carried out by the Company. After
appointment, the successor to the Warrant Agent shall be vested with the same
powers, rights, duties and responsibilities as if it had been originally named
as Warrant Agent without further act or deed; but the former Warrant Agent shall
deliver and transfer to the successor to the Warrant Agent any property at the
time held by it hereunder and execute and deliver any further assurance,
conveyance, act or deed necessary for the purpose. Failure to give any notice
provided for in this Section 21, however, or any defect therein, shall not
affect the legality or validity of the appointment of a successor to the Warrant
Agent.
The Warrant Agent may resign at any time and be discharged
from the obligations hereby created by so notifying the Company in writing at
least 30 days in advance of the proposed effective date of its resignation. If
no successor Warrant Agent accepts the engagement hereunder by such time, the
Company shall act as Warrant Agent.
SECTION 22. Notices to the Company and Warrant Agent. Any
notice or demand authorized by this Agreement to be given or made by the Warrant
Agent or by the registered holder of any Warrant Certificate to or on the
Company shall be sufficiently given or made when and if deposited in the mail,
first class or registered, postage prepaid, addressed (until another address is
filed in writing by the Company with the Warrant Agent), as follows:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center,
100 Matsonford Road,
Radnor, Pennsylvania 19087
Attention: Marshall W. Pagon
with a copy to:
Drinker Biddle & Reath
1345 Chestnut Street, Suite 1100
Philadelphia, Pennsylvania 19107
Attention: Michael B. Jordan, Esq.
Any notice pursuant to this Agreement to be given by the
Company or by the registered holder(s) of any Warrant Certificate to the Warrant
Agent shall be sufficiently given when and if deposited in the mail, first-class
or registered, postage prepaid, addressed (until another address is filed in
writing by the Warrant Agent with the Company) to the Warrant Agent at the
Warrant Agent Office as follows:
First Union National Bank
123 S. Broad Street, 12th floor
Philadelphia, PA 19109
Attention: Alan Finn
26
<PAGE>
Notice may also be given by facsimile transmission (effective
when receipt is acknowledged) or by overnight delivery service (effective the
next business day).
SECTION 23. Supplements and Amendments. The Company and the
Warrant Agent may from time to time supplement or amend this Agreement without
the consent of any holders of Warrant Certificates in order to cure any
ambiguity or to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provision herein, or to make any
other provisions in regard to matters or questions arising hereunder which the
Company and the Warrant Agent may deem necessary or desirable and which shall
not in any way materially adversely affect the interests of the holders of
Warrant Certificates. Any amendment or supplement to this Agreement that has a
material adverse effect on the interests of holders of the Warrants shall
require the written consent of registered holders of a majority of the then
outstanding Warrants (excluding Warrants held by the Company or any of its
Affiliates). The consent of each holder of a Warrant affected shall be required
for any amendment pursuant to which the Exercise Price would be increased or the
number of Warrant Shares purchasable upon exercise of Warrants would be
decreased (other than in accordance with Section 14, 15 or 16 hereof).
SECTION 24. Successors. All the covenants and provisions of
this Agreement by or for the benefit of the Company or the Warrant Agent shall
bind and inure to the benefit of their respective successors and assigns
hereunder, including, without limitation, any Successor Guarantor under Section
14(o) of this Agreement.
SECTION 25. Termination. This Agreement shall terminate at
5:00 p.m., New York, New York time on ___________, 2007. Notwithstanding the
foregoing, this Agreement will terminate on such earlier date on which all
outstanding Warrants have been exercised.
SECTION 26. Governing Law; Jurisdiction. This Agreement and
each Warrant Certificate issued hereunder shall be deemed to be a contract made
under the laws of the State of New York and for all purposes shall be governed
by and construed in accordance with the internal laws of said State. The parties
hereto irrevocably consent to the jurisdiction of the courts of the State of New
York and any federal court located in such state in connection with any action,
suit or proceeding arising out of or relating to this Agreement.
SECTION 27. Benefits of this Agreement. Nothing in this
Agreement shall be construed to give to any person or corporation other than the
Company, the Warrant Agent and the registered holders of the Warrant
Certificates any legal or equitable right, remedy or claim under this Agreement;
but this Agreement shall be for the sole and exclusive benefit of the Company,
the Warrant Agent and the registered holders of the Warrant Certificates.
SECTION 28. Counterparts. This Agreement may be executed in
any number of counterparts and each of such counterparts shall for all purposes
be deemed to be an original, and all such counterparts shall together constitute
but one and the same instrument.
27
<PAGE>
SECTION 29. Further Assurances. From time to time on and after
the date hereof, the Company shall deliver or cause to be delivered to the
Warrant Agent such further documents and instruments and shall do and cause to
be done such further acts as the Warrant Agent shall reasonably request (it
being understood that the Warrant Agent shall have no obligation to make such
request) to carry out more effectively the provisions and purposes of this
Agreement, to evidence compliance herewith or to assure itself that it is
protected hereunder.
[Signature Page Follows]
28
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed, as of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By: _______________________________
Name:
Title:
FIRST UNION NATIONAL BANK
By: ______________________________________
Authorized Signatory
<PAGE>
EXHIBIT A
Form of Initial Warrant Certificate
[Face]
EXERCISABLE ON OR AFTER THE SEPARATION DATE (AS DEFINED HEREIN). THE
WARRANTS EVIDENCED BY THIS CERTIFICATE ARE NOT TRANSFERABLE SEPARATELY FROM THE
COMPANY'S ___ % SERIES A CUMULATIVE EXCHANGEABLE PREFERRED STOCK (THE "PREFERRED
STOCK") ORIGINALLY SOLD AS A UNIT WITH SUCH WARRANTS UNTIL THE EARLIER TO OCCUR
OF (I) APRIL 3, 1997 AND (II) IN THE EVENT A CHANGE OF CONTROL (AS DEFINED IN
THE CERTIFICATE OF DESIGNATION RELATING TO THE PREFERRED STOCK) OCCURS, THE DATE
THE COMPANY MAILS NOTICE THEREOF (THE EARLIER OF SUCH DATES BEING HEREIN
REFERRED TO AS THE "SEPARATION DATE").
THE CLASS A COMMON STOCK, PAR VALUE $0.01, OF THE COMPANY (THE "COMMON
STOCK") FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE
UNITED STATES ABSENT REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT") AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM REGISTRATION REQUIREMENTS. ACCORDINGLY, NO WARRANT HOLDER SHALL
BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME
OF EXERCISE, (i) A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO
THE SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT (THE
"WARRANT SHARES") HAS BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES
AND EXCHANGE COMMISSION (THE "SEC"), AND NO STOP ORDER SUSPENDING THE
EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN ISSUED BY THE SEC OR (ii)
THE ISSUANCE OF THE WARRANT SHARES IS PERMITTED PURSUANT TO AN EXEMPTION FROM
THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
No. _______ _________ Warrants
Warrant Certificate
Pegasus Communications Corporation
This Warrant Certificate certifies that ______, or its
registered assigns, is the registered holder of Warrants expiring _________,
2007 (the "Warrants"), to purchase shares of the Class A Common Stock, par value
$.01 (the "Common Stock"), of Pegasus Communications Corporation, a Delaware
corporation (the "Company"). Each Warrant entitles the registered holder upon
exercise at any time from 9:00 a.m. on the Separation Date referred to below
until 5:00 p.m. New York, New York time on ________, 2007, to receive from the
Company 1.936 fully paid and nonassessable shares of Common Stock (the "Warrant
Shares") at the initial exercise price (the "Exercise Price") of $_______ per
share (A) by tendering shares of Preferred Stock having an aggregate Liquidation
Preference (as defined in the Certificate of Designation), plus, without
duplication, accumulated and unpaid dividends, if any, at the time of tender
equal to the Exercise Price, (B) by tendering Exchange Notes having an aggregate
principal amount, plus accrued and unpaid dividends, if any, at the time of
tender equal to the Exercise Price, (C) by tendering Warrants having a fair
market value equal to the Exercise Price, (D) in the form of cash or by
certified or official bank check payable to the order of the Company in the
amount of the Exercise Price or (E) by any combination of shares of Preferred
Stock, Warrants and cash or Exchange Notes, Warrants and cash, equal to the
exercise price, and upon surrender of this Warrant Certificate and such payment
of the Exercise Price at the office or agency of the Warrant Agent (as
hereinafter defined), but
<PAGE>
only subject to the conditions set forth herein and in the Warrant Agreement
referred to below. The Exercise Price and number of Warrant Shares issuable upon
exercise of the Warrants are subject to adjustment upon the occurrence of
certain events set forth in the warrant agreement (the "Warrant Agreement"),
dated as of January ___, 1997, between the Company and First Union National
Bank, as warrant agent (the "Warrant Agent"). All capitalized terms not defined
herein shall have the meanings assigned to such terms in the Warrant Agreement.
No Warrant may be exercised before the Separation Date. No
Warrant may be exercised after 5:00 p.m., New York, New York Time on _________,
2007 and to the extent not exercised by such time such Warrants shall become
void.
Reference is hereby made to the further provisions of this
Warrant Certificate set forth on the reverse hereof and such further provisions
shall for all purposes have the same effect as though fully set forth at this
place.
This Warrant Certificate shall not be valid unless
countersigned by the Warrant Agent.
This Warrant Certificate shall be governed and construed in
accordance with the internal laws of the State of New York.
<PAGE>
IN WITNESS WHEREOF, Pegasus Communications Corporation has
caused this Warrant Certificate to be signed by its President and by its
Secretary and has caused a facsimile of its corporate seal to be affixed
hereunto or imprinted hereon.
Dated: _____________, 1997
Pegasus Communications Corporation
By:
-------------------------------------
Marshall W. Pagon
President
By:
-------------------------------------
Howard E. Verlin
Secretary
(seal)
Countersigned:
First Union National Bank,
as Warrant Agent
By:
------------------------
Authorized Signatory
<PAGE>
Form of Warrant Certificate
[Reverse]
[Unless and until it is exchanged in whole or in part for
Warrants in definitive form, this Warrant may not be transferred except as a
whole by the depositary to a nominee of the depositary or by a nominee of the
depositary to the depositary or another nominee of the depositary or by the
depositary or any such nominee to a successor depositary or a nominee of such
successor depositary. The Depository Trust Company ("DTC") (55 Water Street, New
York, New York) shall act as the depositary until a successor shall be appointed
by the Company and the Warrant Agent. Unless this certificate is presented by an
authorized representative of DTC to the issuer or its agent for registration of
transfer, exchange or payment, and any certificate issued is registered in the
name of Cede & Co. or such other name as requested by an authorized
representative of DTC (and any payment is made to Cede & Co. or such other
entity as is requested by an authorized representative of DTC), ANY TRANSFER,
PLEDGE OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS
WRONGFUL inasmuch as the registered owner hereof, Cede & Co., has an interest
herein.]1
The Warrants evidenced by this Warrant Certificate are part of
a duly authorized issue of Warrants expiring ______________, 2007 entitling the
holder upon exercise to receive shares of Common Stock of the Company, and are
issued or to be issued pursuant to the Warrant Agreement duly executed and
delivered by the Company to the Warrant Agent, which Warrant Agreement is hereby
incorporated by reference in and made a part of this instrument and is hereby
referred to for a description of the rights, limitation of rights, obligations,
duties and immunities thereunder of the Warrant Agent, the Company and the
holders (the words "holders" or "holder" meaning the registered holders or
registered holder) of the Warrants.
Warrants may be exercised at any time from 9:00 a.m. on or
after the earlier to occur of (i) April 3, 1997 and (ii) in the event a Change
of Control (as defined in the Certificate of Designation) occurs, the date the
Company mails notice thereof to holders of the Preferred Stock or the Exchange
Notes, as applicable (such earlier date referred to herein as the "Separation
Date") and until 5:00 p.m., New York, New York time on ______________, 2007. The
holder of Warrants evidenced by this Warrant Certificate may exercise them by
surrendering this Warrant Certificate, with the form of election to purchase set
forth hereon properly completed and executed, together with payment of the
Exercise Price (A) by tendering shares of Preferred Stock having an aggregate
Liquidation Preference (as defined in the Certificate of Designation), plus,
without duplication, accumulated and unpaid dividends, if any, at the time of
tender equal to the Exercise Price, (B) by tendering Exchange Notes having an
aggregate principal amount, plus accrued and unpaid interest, if any, at the
time of tender equal to the Exercise Price, (C) by tendering Warrants having a
fair market value equal to the Exercise Price, (D) in the form of cash or by
certified or official bank check payable to the order of the Company in the
amount of the Exercise Price or (E) by any combination of shares of Preferred
Stock, Warrants and cash or Exchange Notes, Warrants and cash, equal to the
Exercise Price, at the office of the Warrant Agent. In the event that upon any
exercise of Warrants evidenced hereby the number of Warrants exercised shall be
less than the total number of Warrants evidenced hereby, there shall be issued
to the holder hereof or his assignee a new Warrant Certificate evidencing the
number of Warrants not exercised. No adjustment shall be made for any dividends
on any Common Stock issuable upon exercise of this Warrant.
- ----------------------
1. This paragraph is to be included only if the Warrant is in global form.
<PAGE>
The Warrant Agreement provides that upon the occurrence of
certain events the Exercise Price set forth on the face hereof may, subject to
certain conditions, be adjusted. If the Exercise Price is adjusted, the Warrant
Agreement provides that the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be adjusted. No fractions of a share of Common
Stock will be issued upon the exercise of any Warrant, but the Company will pay
the cash value thereof determined as provided in the Warrant Agreement.
The Warrant Agreement provides that the Company shall be bound
by certain registration obligations with respect to the Common Stock issuable
upon exercise of the Warrants, as set forth in the Warrant Agreement.
Warrant Certificates, when surrendered at the office of the
Warrant Agent by the registered holder thereof in person or by legal
representative or attorney duly authorized in writing, may be exchanged, in the
manner and subject to the limitations provided in the Warrant Agreement, but
without payment of any service charge, for another Warrant Certificate or
Warrant Certificates of like tenor evidencing in the aggregate a like number of
Warrants.
Upon due presentation for registration of transfer of this
Warrant Certificate at the office of the Warrant Agent, a new Warrant
Certificate or Warrant Certificates of like tenor and evidencing in the
aggregate a like number of Warrants shall be issued to the transferee(s) in
exchange for this Warrant Certificate, subject to the limitations provided in
the Warrant Agreement, without charge except for any tax or other governmental
charge imposed in connection therewith.
The Company and the Warrant Agent may deem and treat the
registered holder(s) thereof as the absolute owner(s) of this Warrant
Certificate (notwithstanding any notation of ownership or other writing hereon
made by anyone), for the purpose of any exercise hereof, of any distribution to
the holder(s) hereof, and for all other purposes, and neither the Company nor
the Warrant Agent shall be affected by any notice to the contrary. Neither the
Warrants nor this Warrant Certificate entitles any holder hereof to any rights
of a stockholder of the Company.
<PAGE>
Form of Election to Purchase
(To Be Executed Upon Exercise Of Warrant)
The undersigned hereby irrevocably elects to exercise the
right, represented by this Warrant Certificate, to receive __________ shares of
Common Stock and herewith (check item) tenders payment for such shares to the
order of Pegasus Communications Corporation in the amount of $_______ (the
"Purchase Price") in accordance with the terms hereof.
[] Shares of Preferred Stock having an aggregate Liquidation
Preference, plus, without duplication, accumulated and unpaid
dividends, equal to the Purchase Price.
[] Exchange Notes having an aggregate principal amount, plus
accrued and unpaid interest, equal to the Purchase Price.
[] Warrants having a fair market value (as defined in the Warrant
Agreement) equal to the Purchase Price.
[] Cash or certified or official bank check payable to the order
of the Company in an amount equal to the Purchase Price.
[] (A) Shares of Preferred Stock, plus, without duplication,
accumulated and unpaid dividends, (B) Warrants and (C) cash,
in an aggregate amount equal to the Purchase Price.
[] (A) Exchange Notes, plus accumulated and unpaid interest, (B)
Warrants and (C) cash, in an aggregate amount equal to the
Purchase Price.
The undersigned requests that a certificate for such shares be
registered in the name of , whose address is _________________________________
______________________________________ and that such shares be delivered to ___
whose address is ________________________________.
If said number of shares is less than all of the shares of
Common Stock purchasable hereunder, the undersigned requests that a new Warrant
Certificate representing the remaining balance of such shares be registered in
the name of _____________________, whose address is __________________, and that
such Warrant Certificate be delivered to ________________, whose address is
_____________________.
Date: ____________________
Your Signature:______________________________
(Sign exactly as your name appears on the face
of this Warrant)
Signature Guarantee:
<PAGE>
SCHEDULE OF EXCHANGES OF GLOBAL WARRANTS(2)
The following exchanges of a part of this Global Warrant for definitive Warrants
have been made:
<TABLE>
<CAPTION>
Number of Warrants
Amount of decrease Amount of increase in in this Global
in Number of Number of Warrants Warrant following Signature of
Warrants in this in this Global such decrease or authorized officer of
Date of Exchange Global Warrant Warrant increase Warrant Agent
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
</TABLE>
- --------
2. This is to be included only if the Warrant is in global form.
<PAGE>
EXHIBIT 21.1
Subsidiary Jurisdiction
- ---------- ------------
Bride Communications, Inc. Delaware
B.T. Satellite, Inc. Maine
HMW, Inc. Maine
MCT Cablevision, Limited Partnership Delaware
MCT Cablevision, Ltd. Pennsylvania
PCT SG, Inc. Puerto Rico
Pegasus Anasco Holdings, Inc. Delaware
Pegasus Broadcast Associates, L.P. Pennsylvania
Pegasus Broadcast Television, Inc. Pennsylvania
Pegasus Cable Television, Inc. Massachusetts
Pegasus Cable Television of Anasco, Inc. Puerto Rico
Pegasus Cable Television Connecticut, Inc. Connecticut
Pegasus Cable Television of San German, Inc. Delaware
Pegasus Media & Communications, Inc. Delaware
Pegasus Communications Management Company Pennsylvania
Pegasus Satellite Holdings, Inc. Delaware
Pegasus Satellite Television, Inc. Delaware
Pegasus Satellite Television of Arkansas, Inc. Delaware
Pegasus Satellite Television of Indiana, Inc. Delaware
Pegasus Satellite Television of Michigan, Inc. Delaware
Pegasus Satellite Television of Mississippi, Inc. Delaware
Pegasus Satellite Television of Ohio, Inc. Delaware
Pegasus Satellite Television of Texas, Inc. Delaware
Pegasus Satellite Television of Virginia, Inc. Delaware
Pegasus Towers, Inc. Pennsylvania
Portland Broadcasting, Inc. Maine
PP Broadcast, Inc. Delaware
WDBD License Corp. Delaware
WDSI License Corp. Delaware
WILF, Inc. Delaware
<PAGE>
Subsidiary Jurisdiction
- ---------- ------------
WOLF License Corp. Delaware
WTLH, Inc. Delaware
WTLH License Corp. Delaware
<PAGE>
HERBEIN + COMPANY INC.
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the captions "Experts"
and "Selected Historical and Pro Forma Combined Financial Data" in the Form S-1
(File No. 18739) Registration Statement of Pegasus Communications Corporation
filed with the Securities and Exchange Commission relating to the registration
of Units, consisting of Series A Cumulative Exchangeable Preferred Stock and
Class A Common Stock Warrants, and to the inclusion therein of our reports
dated March 4, 1994 with respect to the 1993 combined financial statements and
financial statement schedule of Pegasus Communications Corporation.
/s/ HERBEIN + COMPANY, INC.
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HERBEIN + COMPANY, INC.
Reading, Pennsylvania
January 17, 1997
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-18739) of our report dated May 31, 1996 except as to Note 14 for which
the date is November 8, 1996, on our audits of the combined financial statements
and financial statement schedule of Pegasus Communications Corporation. We also
consent to the reference to our firm under the caption "Experts" and "Selected
Historical and Pro Forma Combined Financial Information."
Coopers & Lybrand L.L.P.
Philadelphia, Pennsylvania
January 17, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-18739) of our report dated March 8, 1996 on our audits of the financial
statements of WTLH, Inc.
Coopers & Lybrand L.L.P.
Jacksonville, Florida
January 17, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form S-1 (File
No. 333-18739) of our report, which includes an explanatory paragraph regarding
the restatement of depreciation expense, dated August 9, 1996 except as to Note
10 for which the date is August 29, 1996, on our audits of the financial
statements of Dom's Tele-Cable, Inc.
Coopers & Lybrand L.L.P.
San Juan, Puerto Rico
January 17, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report on the balance sheets of Portland Broadcasting, Inc. as
of September 25, 1994 and September 24, 1995 and the related statements of
operations, deficiency in assets, and cash flows for each of the three fiscal
years in the period ended September 24, 1995, dated October 27, 1995, in the
Registration Statement (Form S-1 File No. 333-18739) and related Prospectus of
Pegasus Communications Corporation for the registration of its Series A
Cumulative Exchangeable Preferred Stock and Warrants.
/s/ Ernst & Young LLP
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ERNST & YOUNG LLP
Pittsburgh, Pennsylvania
January 17, 1997
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement of
Pegasus Communications Corporation on Form S-1 (File No. 333-18739) of our
report dated April 26, 1996, except for Note 9 as to which the date is October
8, 1996, on the DBS Operations of Harron Communications Corp. appearing in this
Registration Statement, and to the reference to us under the heading "Experts"
in the Prospectus.
/s/ Deloitte & Touche LLP
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DELOITTE & TOUCHE LLP
Philadelphia, Pennsylvania
January 17, 1997
