<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): September 8, 1997
PEGASUS COMMUNICATIONS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in charter)
Delaware 0-21389 51-0374669
- ----------------- -------------- --------------------
(State or other (Commission (I.R.S. Employer
jurisdiction of File Number) Identification No.)
incorporation)
c/o Pegasus Communications Management Company, 100 Matsonford Road,
5 Radnor Corporate Center, Suite 454, Radnor, Pennsylvania 19087
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 610-341-1801
Not Applicable
- --------------------------------------------------------------------------------
(Former name or former address, if changed since last report.)
================================================================================
<PAGE>
Item 5. Other Events.
(a) Completed DBS Acquisitions. From January 1, 1997 to an effective date
of September 8, 1997, Pegasus Communications Corporation ("Pegasus" and
together with its direct and indirect subsidiaries, the "Company") acquired
from 19 independent DIRECTV(R) ("DIRECTV") providers the rights to provide
DIRECTV programming in certain rural areas of 21 states and related assets (the
"Completed DBS Acquisitions"). Total consideration for the acquisitions was
approximately $114.0 million, which, depending upon the particular transaction,
consisted of cash, promissory notes, shares of Class A Common Stock, warrants
to purchase Class A Common Stock, preferred stock of a subsidiary and/or
assumed liabilities.
(b) Senior Notes Offering. On October 8, 1997, the Company announced that
it planned to make a private offering (the "Senior Notes Offering") of $100.0
million aggregate principal amount of senior notes (the "Senior Notes"). The
Senior Notes Offering will be made in reliance on Rule 144A and other
registration exemptions under the Securities Act of 1933, as amended (the
"Act"). The Company indicated in its press release that it anticipates using
the proceeds of the Senior Notes Offering to finance direct broadcast satellite
television ("DBS") acquisitions and to repay in full and terminate all
commitments under the existing credit facility of Pegasus Satellite Holdings,
Inc. ("PSH"). The entire text of the Company's press release is incorporated by
reference herein and a copy of the press release has been filed as an exhibit
to this report.
(c) Pending DBS Acquisitions. The Company has entered into letters of
intent or definitive agreements to acquire DIRECTV distribution rights and
related assets from ten independent providers of DIRECTV services (the "Pending
DBS Acquisitions"), which have exclusive DIRECTV service territories in certain
rural areas of Alabama, Georgia, Illinois, Minnesota, Nebraska, Texas, Utah and
Wyoming and whose territories include, in the aggregate, approximately 417,100
television households (including 19,200 seasonal residences), 41,100 business
locations and 30,400 subscribers. The Pending DBS Acquisitions range in
consideration from $500,000 to $18.4 million. In the aggregate, the
consideration for the Pending DBS Acquisitions is $64.1 million and consists of
$54.2 million of cash, $3.2 million in promissory notes and $6.7 million in
shares of Class A Common Stock. When negotiating the price of the Pending DBS
Acquisitions, the Company takes into account such factors as the number of
subscribers, the mix between cabled and uncabled households in the service
territory, competition, current DBS penetration rates, the structure of the
acquisition, and the form of consideration. The cash portion of certain of the
Pending DBS Acquisitions will be paid from proceeds of the Senior Notes
Offering.
The largest Pending DBS Acquisition involves total consideration of
approximately $18.4 million (subject to certain adjustments) consisting of
approximately $16.2 million in cash and a $2.2 million promissory note. As of
August 31, 1997, the territories to be acquired in this acquisition consisted
of approximately 79,000 television households (including 2,100 seasonal
residences), 6,100 business locations and 8,400 subscribers. The second largest
Pending DBS Acquisition involves the acquisition of territories and related
assets from an entity controlled by Donald W. Weber, a director of Pegasus. The
total consideration for this acquisition will be approximately $13.1 million
(subject to certain adjustments) and will consist of approximately $6.4 million
in cash and $6.7 million in shares of Class A Common Stock. As of August 31,
1997, the territories to be acquired in this acquisition consisted of
approximately 115,700 television households (including 2,700 seasonal
residences), 11,000 business locations and 5,800 subscribers.
Each of the Pending DBS Acquisitions for which there is only a letter of
intent is subject to negotiation of a definitive agreement, and all of the
Pending DBS Acquisitions are subject, if not already obtained, to the prior
approval of Hughes Electronics Corporation or one of its subsidiaries
("Hughes") and the National Rural Telecommunications Cooperative ("NRTC"). In
addition to these conditions, each of the Pending DBS Acquisitions will 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 of the Pending DBS Acquisitions or, if entered into,
that all or any of the Pending DBS Acquisitions will be completed.
(d) Subsidiaries Combination. The Company currently has two principal
operating subsidiaries: Pegasus Media & Communications, Inc. ("PM&C") and PSH.
Upon consummation of the Senior Notes Offering,
2
<PAGE>
PM&C will acquire the assets of PSH (the "Subsidiaries Combination"), which
assets consist of the stock of its subsidiaries that hold the rights to all of
the Company's DBS territories. As a result of the Subsidiaries Combination,
PM&C will be the direct or indirect parent of all of the Company's subsidiaries
that operate the Company's TV, DBS and cable businesses.
(e) New Credit Facility. Shortly after the consummation of the Senior
Notes Offering, PM&C will enter into a $180.0 million six-year, secured,
reducing revolving credit facility (the "New Credit Facility"). Borrowings
under the New Credit Facility are available for acquisitions, subject to the
approval of the lenders in certain circumstances, working capital and general
corporate purposes. The closing of the New Credit Facility is conditioned upon
the Subsidiaries Combination and the closing of the Senior Notes Offering.
Concurrently with the closing of the New Credit Facility, PM&C's existing
credit facility will be repaid in full and the commitments thereunder will be
terminated.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Acquired or to be Acquired Businesses.
Historical financial statements for the following acquired or to be
acquired businesses are attached hereto:
<TABLE>
<CAPTION>
Page
-----
<S> <C>
(i) Clearvision, Inc. (an acquired business)
Report of Poole Cunningham & Reitano, P.A. ....................................... F-1
Balance Sheet as of January 16, 1997 ............................................. F-2
Statement of Operations for the fiscal year ended January 16, 1997 ............... F-3
Statement of Stockholders' Equity for the fiscal year ended January 16, 1997 ...... F-4
Statement of Cash Flows for the fiscal year ended January 16, 1997 ............... F-5
Notes to Financial Statements ................................................... F-6
(ii) Southeastern Communication Systems, Inc. (an acquired business)
Report of Greenway, Smith & Haisten, P.C. ....................................... F-8
Statements of Net Assets to be Sold as of December 31, 1996 and March 31, 1997
(unaudited) ....................................................................... F-9
Statements of Operations of Assets to be Sold for the year ended December 31, 1996
and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited) ..... F-10
Statements of Cash Flows for the year ended December 31, 1996 and the three months
ended March 31, 1996 (unaudited) and 1997 (unaudited) ........................... F-11
Notes to Financial Statements ................................................... F-12
(iii) Northern Electric Service Corporation (an acquired business)
Report of Larson, Allen, Weishair & Co., LLP .................................... F-14
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-15
Statements of Operations and Accumulated Deficit for the year ended December 31,
1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) .... F-16
Statements of Cash Flows for the year ended December 31, 1996 and the six months
ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-17
Notes to Financial Statements ................................................... F-18
(iv) Direct Broadcast Satellites (an acquired business)
Report of Ernst & Young LLP ...................................................... F-22
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-23
Statements of Operations for the year ended December 31, 1996 and the six months
ended June 30, 1996 (unaudited) and 1997 (unaudited) ........................... F-24
Statement of Changes in Division Equity for the year ended December 31, 1996 and
the six months ended June 30, 1997 (unaudited)................................... F-25
Statements of Cash Flows for the year ended December 31, 1996 and the six months
ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-26
Notes to Financial Statements ................................................... F-27
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
Page
-----
<S> <C>
(v) Suwannee Valley Satellite, Inc. (an acquired business)
Report of Bolinger, Segars, Gilbert & Moss, L.L.P. .............................. F-30
Balance Sheets as of December 31, 1996 and April 30, 1997 (unaudited) ............ F-31
Statements of Income and Retained Earnings for the year ended December 31, 1996 and
the four months ended April 30, 1996 (unaudited) and 1997 (unaudited) ......... F-32
Statements of Cash Flows for the year ended December 31, 1996 and the four months
ended April 30, 1996 (unaudited) and 1997 (unaudited) ........................... F-33
Notes to Financial Statements ................................................... F-34
(vi) View Star Entertainment Services, Inc. (a proposed acquisition)
Report of Arthur Andersen, LLP ................................................... F-37
Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-38
Statements of Operations for the year ended December 31, 1996 and the six months
ended June 30, 1996 (unaudited) and 1997 (unaudited)........................... F-39
Statement of Stockholders' Equity for the year ended December 31, 1996 and the six
months ended June 30, 1997 (unaudited) .......................................... F-40
Statements of Cash Flows for the year ended December 31, 1996 and the six months
ended June 30, 1996 (unaudited) and 1997 (unaudited) ........................... F-41
Notes to Financial Statements ................................................... F-42
(vii) Midwest Minnesota DBS, LLC (an acquired business)
Report of Bradley R. Helmeke, Ltd. ............................................. F-51
Statements of Net Assets to be Sold as of December 31, 1996 and June 30, 1996
(unaudited) and 1997 (unaudited) ................................................ F-52
Statements of Operations of Assets to be Sold for the year ended December 31, 1996
and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ......... F-53
Statements of Cash Flows for the year ended December 31, 1996 and the six months
ended June 30, 1996 (unaudited) and 1997 (unaudited)............................. F-54
Notes to Financial Statements ................................................... F-55
(viii) DBS Operations of Turner-Vision, Inc. (an acquired business)
Report of Grigoraci, Trainer, Wright & Paterno .................................... F-57
Statement of Net Assets to be Sold as of December 31, 1996 ........................ F-58
Statement of Operations for the year ended December 31, 1996 ..................... F-59
Statement of Cash Flows for the year ended December 31, 1996 ..................... F-60
Notes to Financial Statements ................................................... F-61
(ix) DBS Operations of Pioneer Services Corporation (a proposed acquisition)
Report of Jackson, Thornton & Co., P.C. .......................................... F-64
Balance Sheets as of September 30, 1996 and June 30, 1997 (unaudited) ............ F-65
Statements of Operations and Division Deficiency for the fiscal year ended
September 30, 1996 and the nine months ended June 30, 1996 (unaudited) and
1997 (unaudited) ................................................................ F-66
Statements of Cash Flows for the fiscal year ended September 30, 1996 and the nine
months ended June 30, 1996 (unaudited) and 1997 (unaudited) ..................... F-67
Notes to Financial Statements ................................................... F-68
Page
----
(b) Pro Forma Consolidated Financial Information.
(i) Basis of Presentation ............................................................. F-71
(ii) Pro Forma Consolidated Balance Sheet ............................................ F-72
(iii) Pro Forma Consolidated Statement of Operations for the Year Ended December 31,
1996. ............................................................................ F-73
(iv) Pro Forma Consolidated Statement of Operations for the Six Months Ended June 30,
1997 ............................................................................. F-74
(v) Pro Forma Consolidated Statement of Operations for the Twelve Months Ended June
30, 1997 ........................................................................ F-75
(vi) Notes to Pro Forma Consolidated Statements of Operations .......................... F-76
(c) Exhibits.
99.1 Press release dated October 8, 1997
</TABLE>
4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEGASUS COMMUNICATIONS CORPORATION
By /s/ Robert N. Verdecchio
-------------------------------------
Robert N. Verdecchio,
Senior Vice President and
Chief Financial Officer
October 8, 1997
5
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Stockholders of
ClearVision, Inc.:
We have audited the accompanying balance sheet of ClearVision, Inc. as of
January 16, 1997, and the related statements of operations, stockholders'
equity, and cash flows for the year 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 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 financial position of ClearVision, Inc. as of
January 16, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Our audit was made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The accompanying supplementary data is presented
for purposes of additional analysis and is not a required part of the basic
financial statements. Such information has been subjected to the auditing
procedures applied in the audit of the basic financial statements, and, in our
opinion, is fairly stated in all material respects in relation to the financial
statements taken as a whole.
Poole Cunningham & Reitano, P.A.
Jackson, Mississippi
March 20, 1997
F-1
<PAGE>
CLEARVISION, INC.
Balance Sheet
January 16, 1997
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash ........................................................................... $ 62,971
Accounts receivable, net of $10,283 allowance ................................. 332,488
Notes receivable, net of $200,112 allowance .................................... 1,026,783
Inventories .................................................................. 99,282
Prepaid assets ............................................................... 8,012
----------
Total current assets ...................................................... 1,529,536
----------
Property and equipment ............................................................ 150,877
Less: accumulated depreciation ................................................ (45,563)
----------
Property and equipment, net ................................................ 105,314
----------
Other assets:
TV rights, net ............................................................... 1,251,596
Organization costs, net ...................................................... 599
----------
Total other assets, net ................................................... 1,252,195
----------
$2,887,045
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Current liabilities:
Accounts payable -- trade ................................................... $ 192,130
Accrued expenses ............................................................ 46,031
Line of credit with bank ...................................................... 1,041,356
Deferred revenue ............................................................ 226,427
----------
Total current liabilities ................................................... 1,505,944
Long-term liabilities --
Loans from stockholders ...................................................... 750,000
----------
Total liabilities ......................................................... 2,255,944
Stockholders' equity:
Common stock-$1 par value, authorized 1,500,000 shares; 900,000 shares issued and
outstanding .................................................................. 900,000
Accumulated deficit ............................................................ (268,899)
----------
Total stockholders' equity ................................................ 631,101
----------
$2,887,045
==========
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
CLEARVISION, INC.
Statement of Operations
For the Year Ended January 16, 1997
Revenue:
Programming ........................... $3,352,207
Hardware .............................. 940,077
Installation ........................... 337,901
----------
Total revenue ........................ 4,630,185
----------
Cost of sales:
Programming ........................... 2,160,202
Hardware .............................. 882,379
Installation ........................... 159,506
----------
Total cost of sales .................. 3,202,087
----------
Gross profit ..................... 1,428,098
General and administrative expenses ...... 1,730,546
----------
Operating loss .................. (302,448)
Other income (expense):
Interest income ........................ 331,616
Other income ........................... 39,071
----------
Total other income (expense) ......... 370,687
----------
Net earnings ..................... $ 68,239
==========
See accompanying notes to financial statements.
F-3
<PAGE>
CLEARVISION, INC.
Statement of Stockholders' Equity
For the Year Ended January 16, 1997
<TABLE>
<CAPTION>
Common Accumulated
Stock Deficit Total
---------- ------------ ---------
<S> <C> <C> <C>
Stockholders' Equity -- January 17, 1996 ...... $900,000 $(337,138) $562,862
Net earnings .................................... -- 68,239 68,239
--------- ---------- ---------
Stockholders' Equity -- January 16, 1997 ...... $900,000 $(268,899) $631,101
========= ========== =========
</TABLE>
See accompanying notes to financial statements
F-4
<PAGE>
CLEARVISION, INC.
Statement of Cash Flows
For the Year Ended January 16, 1997
Cash flows used in operating activities:
Net earnings .......................................... $ 68,239
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization ..................... 179,797
Increase in accounts receivable .................. (262,245)
Increase in prepaid expenses ..................... (3,507)
Decrease in inventories ........................... 205,093
Decrease in deposits .............................. 320
Decrease in accounts payable ..................... (195,854)
Decrease in accrued expenses ..................... (39,622)
Decrease in deferred revenues ..................... (161,390)
----------
Total adjustments .............................. (277,408)
----------
Net cash used in operating activities ......... (209,169)
Cash flows used in investing activities:
Purchase of property and equipment ............... (60,286)
----------
Cash flows used in financing activities:
Increase in notes receivable ..................... 494,705
Decrease in line of credit with bank ............... (201,061)
Repayment of loans to stockholders ............... (150,000)
----------
Net cash provided by financing activities ...... 143,644
----------
Net decrease in cash and cash equivalents ......... (125,811)
Cash and cash equivalents at January 17, 1996 ......... 188,782
----------
Cash and cash equivalents at January 16, 1997 ......... $ 62,971
==========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ............ $ 101,295
==========
See accompanying notes to financial statements.
F-5
<PAGE>
CLEARVISION, INC.
Notes to Financial Statements
January 16, 1997
(1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ClearVision, Inc. (the Company) was organized as an S corporation formed
under the laws of Mississippi on September 2, 1993. It is located in Madison,
Mississippi. The Company offers satellite programming services to certain
cities and counties in Mississippi.
(a) Basis of Accounting
The financial statements have been prepared using the accrual method of
accounting in accordance with generally accepted accounting principles.
(b) Year End
The company operates on a 52-53 week fiscal year with a year end date at
or near January 16.
(c) Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
short-term investments maturing within the normal operating cycle to be
cash equivalents.
(d) Concentration of Credit Risk
The Company has two sources of revenue: programming services and
equipment sales. Receivables are primarily due from residents in
ClearVision's territory. Customers' services are disconnected upon past
due over sixty days. Receivables from equipment sales result from
customers financing the purchase price of their equipment. Receivables
are secured by a lien on the equipment sold to the customers.
(e) Inventories
Inventories are stated at the lower of cost (first-in, first-out) or
market (net realizable value).
(f) Property and Equipment
Property and equipment are stated at cost. Capital additions,
improvements and major renewals which increase asset values or extend
useful lives, are capitalized as property and equipment. Maintenance and
repairs are charged to operations as incurred. The Company generally
provides for depreciation of its assets under the straight-line method
for financial reporting purposes and on the modified accelerated cost
recovery system for income tax purposes.
(g) Intangibles
The Company amortizes TV rights using the straight-line method over the
estimated economic life of the satellite which is projected to be twelve
years. Organizational costs are being amortized over sixty months using
the straight-line method. Total amortization for TV rights and
organizational costs for the period ended January 16, 1997, were $151,159
and $382, respectively.
(h) Revenue Recognition
The Company derives revenue primarily from programming services, sales of
equipment and installations. Programming revenue is received monthly
based on the date service originated. Interest on financed equipment
sales is recognized when earned.
(i) Income Taxes
The Company, with the consent of its stockholders, has elected under the
Internal Revenue Code to be taxed as an S corporation. In lieu of
corporation income taxes, the stockholders of an S corporation are taxed
on their proportionate share of the Company's taxable income. Therefore,
no provision or liability for Federal income taxes has been included in
the financial statements.
(2) NOTES RECEIVABLE
Notes receivable consist of customer financing of satellite systems
through various repayment plans. At January 16, 1997, the net notes receivable
balance was $1,226,985. Deferred revenue represents unearned
F-6
<PAGE>
CLEARVISION, INC.
Notes to Financial Statements -- (Continued)
January 16, 1997
(2) NOTES RECEIVABLE -- (Continued)
interest on the uncollected notes receivable balance. The balance of deferred
revenue at January 16, 1997 was $226,427. Management's allowances for doubtful
accounts are based upon collection practices of ClearVision, Inc. Results may
vary significantly should Pegasus (see note 7) employ collection practices
different from ClearVision, Inc.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
Depreciable
Description Lives Amount
----------- ------------ ------------
Vehicles 5 yrs $ 72,773
Leasehold improvements 3 yrs 27,889
Furniture and fixtures 3 - 7 yrs 50,215
---------
Property and equipment 150,877
Less accumulated depreciation (45,563)
---------
Property and equipment, net $ 105,314
=========
(4) ACCRUED LIABILITIES
The following is an analysis of accrued liabilities:
Description Amount
----------- --------
Accrued payroll taxes ........................ $ 7,579
Accrued sales tax .............................. 22,887
Other accrued expenses ........................ 15,565
--------
Total ....................................... $46,031
========
(5) SHORT-TERM BORROWINGS -- LINE-OF-CREDIT
The Company has entered into a line-of-credit agreement with Deposit
Guaranty National Bank whereby funds may be advanced to the Company up to a
maximum of $1,600,000. Interest on the line-of-credit is at the bank's current
prime rate plus one-half percent (1/2%). This line-of-credit is collateralized
by accounts receivable, inventories and company notes receivable. At January
16, 1997, there were $1,041,356 of advances outstanding under the agreement.
(6) LONG-TERM DEBT
The Company has non-interest bearing notes payable due to the stockholders
at January 16, 1997, in the amount of $750,000.
(7) SUBSEQUENT EVENT
The Company sold substantially all of its assets to Pegasus Communications
Corporation on February 14, 1997, pursuant to an asset purchase agreement dated
January 25, 1997.
F-7
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To Southeastern Communication Systems, Inc.
We have audited the accompanying statement of net assets to be sold of
Southeastern Communication Systems, Inc. (an "S" Corporation) as of December
31, 1996 and the related statements of operations and cash flows for the year
then ended. These statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these 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 statements referred to above are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management as well as evaluating the overall presentation of the
statements. We believe that our audit provide a reasonable basis for our
opinion.
The accompanying statement of net assets to be sold was prepared to present the
net assets of Southeastern Communication Systems, Inc. to be acquired by
Pegasus Communications Corporation pursuant to the purchase agreement described
in Note 4, and is not intended to be a complete presentation of Southeastern
Communication Systems, Inc. assets and liabilities.
In our opinion, the statements referred to above present fairly, in all
material respects, the net assets to be sold of Southeastern Communication
System, Inc. as of December 31, 1996 and the results of operations and cash
flows for the year then ended pursuant to the purchase agreement referred to in
Note 4, in conformity with generally accepted accounting principles.
Greenway, Smith & Haisten, P.C.
Griffin, Georgia
September 25, 1997
F-8
<PAGE>
SOUTHEASTERN COMMUNICATION SYSTEMS, INC.
STATEMENTS OF NET ASSETS TO BE SOLD
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Subscriber accounts receivable, less allowance for doubtful accounts of $3,314 at
December 31, 1996 and March 31, 1997 .......................................... $ 62,960 $ 65,985
---------- ---------
Total current assets ......................................................... 62,960 65,985
---------- ---------
DIRECT BROADCAST SATELLITE FRANCHISE, NET OF
ACCUMULATED AMORTIZATION ...................................................... 178,429 171,738
---------- ---------
Total assets .................................................................. 241,389 237,723
---------- ---------
CURRENT LIABILITIES:
Unearned revenue ............................................................... 128,567 164,184
---------- ---------
Total current liabilities ................................................... 128,567 164,184
---------- ---------
NET ASSETS TO BE SOLD ......................................................... $ 112,822 $ 73,539
========== =========
</TABLE>
See Independent Auditor's Report and accompanying footnotes.
F-9
<PAGE>
SOUTHEASTERN COMMUNICATION SYSTEMS, INC.
STATEMENTS OF OPERATIONS OF ASSETS TO BE SOLD
<TABLE>
<CAPTION>
Three months ended
Year ended ---------------------------
December 31, March 31, March 31,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Operating Revenues
Subscriber revenue (Programming) ...... $ 552,386 $112,381 $204,463
---------- -------- ---------
Total Operating Revenue ............... 552,386 112,381 204,463
---------- -------- ---------
Operating Expenses
Programming ........................... 377,851 62,161 130,430
Payroll and related expenses ......... 155,244 43,017 35,287
Advertising ........................... 1,985 548 134
Amortization ........................... 26,764 6,691 6,691
Commissions ........................... 30,087 2,258 8,208
Legal and Professional ............... 213 -- --
Miscellaneous ........................ 81 13 --
Rent ................................. 1,340 256 16
Supplies .............................. 4,278 919 373
Travel ................................. 3,359 784 457
Utilities and Telephone ............... 8,250 2,250 2,385
---------- -------- ---------
Total Operating Expenses ............ 609,452 118,897 183,981
---------- -------- ---------
Operating Income (Loss) ............ ($ 57,066) ($ 6,516) $ 20,482
========== ======== =========
</TABLE>
See Independent Auditor's Report and accompanying footnotes.
F-10
<PAGE>
SOUTHEASTERN COMMUNICATION SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
----------------------------
December 31, March 31, March 31,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Operating income (loss) ................................. ($ 57,066) ($ 6,516) $ 20,482
Adjustments to reconcile operating income (loss) to net cash
provided by operating activities:
Amortization ............................................. 26,764 6,691 6,691
Change in assets and liabilities:
(Increase) decrease in accounts receivable ............... (37,646) (3,854) (3,025)
Increase (decrease) in unearned revenue .................. 99,553 (6,474) 35,617
--------- --------- ---------
Net cash provided (used) by operating activities ......... 31,605 (10,153) 59,765
--------- --------- ---------
Net increase (decrease) in shareholders' equity ............ (31,605) 10,153 (59,765)
--------- --------- ---------
Net change in cash ....................................... -- -- --
Cash at beginning of period .............................. -- -- --
--------- --------- ---------
Cash at end of period .................................... $ -- $ -- $ --
========= ========= =========
</TABLE>
See Independent Auditor's Report and accompanying footnotes.
F-11
<PAGE>
SOUTHEASTERN COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of operations
Southeastern Communication Systems, Inc. markets and distributes direct
broadcast satellite (DBS) services to cable and noncable television subscribers
residing within Henry County, Georgia. Southeastern Communication System, Inc.
obtained these exclusive rights to its service territory by investment with the
National Rural Telecommunications Cooperative (NRTC).
Accounts Receivable
Subscriber accounts receivable represents amounts due from customers for
satellite television services and includes amounts billed, but unearned at
year-end.
Revenue Recognition
Southeastern Communication Systems, Inc. recognizes revenues monthly for
DBS services which have been earned through the end of the month. The unearned
portion of billed services is recorded as unearned revenue.
Advertising Costs
Advertising costs are expensed as incurred.
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 statement
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Income Taxes
Southeastern Communication Systems, Inc. has made the election to be
treated as a "Small Business Corporation" for income tax purposes. S
Corporations are generally exempt from federal and state income tax. The
shareholders of an S Corporation are taxed on their proportionate share of the
Company's taxable income. Therefore, no provision or liability for federal or
state income taxes has been included in the financial statements.
Concentrations of Credit Risk
Financial instruments that potentially subject Southeastern Communication
Systems, Inc. to concentrations of credit risk consist principally of trade
accounts receivable. The risk is limited due to the large number of individuals
comprising the Southeastern Communication Systems, Inc. customer base. Exposure
to losses on receivables is principally dependent on each customer's financial
condition. Southeastern Communication Systems, Inc. monitors the exposure for
credit losses and maintains an allowance for anticipated losses.
F-12
<PAGE>
SOUTHEASTERN COMMUNICATION SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
AS OF DECEMBER 31, 1996
(2) DIRECT BROADCAST SATELLITE FRANCHISE
In September of 1993 and 1994 Southeastern Communication System, Inc.
invested $253,685 with NRTC acquiring exclusive franchise right to market
direct broadcast satellite service to cable and noncable television subscribers
residing within the Henry County area. This investment is in an agreement with
NRTC for the rights to provide broadcast services to this service territory for
a period of approximately ten years, which is the expected life of the
satellite. The satellite was launched in late 1993 and became available for use
by Southeastern Communication System, Inc. in 1994. Amortization expense for
these rights for the year ended December 31, 1996 was $26,764.
(3) CONTINGENCY
Southeastern Communication Systems, Inc. relies on NRTC as its sole
provider of programming via Direct broadcast satellite services.
(4) SUBSEQUENT EVENTS
On March 28, 1997, Pegasus entered into an Asset Purchase Agreement with
Southeastern Communication Systems, Inc. Pursuant to the terms of the
agreement, Pegasus purchased certain net assets of Southeastern Communication
Systems, Inc. for $3,900,000 minus certain current liabilities and adjustments
on April 9, 1997.
F-13
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Northern Electric Service Corporation
DBA: Northern Horizons
(A wholly owned subsidiary Of
Northern Electric Cooperative Association)
Virginia, Minnesota
We have audited the accompanying balance sheet of Northern Electric
Service Corporation, DBA: Northern Horizons (a wholly owned subsidiary Of
Northern Electric Cooperative Association) as of December 31, 1996, and the
related statements of operations and retained deficit and cash flows for the
year 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 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 financial position of Northern Electric Service
Corporation, DBA: Northern Horizons (a wholly owned subsidiary Of Northern
Electric Cooperative Association) as of December 31, 1996, and the results of
its operations and its cash flows for the year then ended, in conformity with
generally accepted accounting principles.
LARSON, ALLEN, WEISHAIR & CO., LLP
Brainerd, Minnesota
August 5, 1997
F-14
<PAGE>
NORTHERN ELECTRIC SERVICE CORPORATION
DBA: NORTHERN HORIZONS
(A WHOLLY OWNED SUBSIDIARY OF
NORTHERN ELECTRIC COOPERATIVE ASSOCIATION)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents .......................................... $ -- $ 54,648
Accounts Receivable ................................................ 137,869 103,853
Inventory ......................................................... 90,598 3,168
Prepaid Expenses ................................................... 1,004 109
---------- ----------
Total Current Assets .......................................... 229,471 161,778
---------- ----------
PROPERTY AND EQUIPMENT (At Cost)
Furniture and Equipment ............................................. 15,139 15,139
Less: Accumulated Depreciation .................................... (4,163) (5,777)
---------- ----------
Total Property and Equipment (At Depreciated Cost) ............ 10,976 9,362
---------- ----------
OTHER ASSETS
Franchise Fees, Net of Accumulated Amortization of $96,917 and
$117,902 at December 31, 1996 and June 30, 1997, respectively ...... 532,649 511,664
Investments in Associated Organizations ........................... 13,481 30,057
Organization Costs, Net of Accumulated Amortizations of $1,452 and
$1,767 at December 31, 1996 and June 30, 1997, respectively......... 7,981 7,666
---------- ----------
Total Other Assets ............................................. 554,111 549,387
---------- ----------
Total Assets ................................................... $ 794,558 $ 720,527
========== ==========
LIABILITIES AND STOCKHOLDER'S DEFICIT
CURRENT LIABILITIES
Current Portion of Long-Term Debt ................................. $ 568,860 $ 538,257
Checks Written in Excess of Bank ................................. 3,916 --
Accounts Payable ................................................... 50,962 163,596
Unearned Revenue ................................................... 211,237 182,252
Taxes Payable Other Than Income Taxes .............................. 34,969 4,868
Other Current Liabilities .......................................... 34,298 18,462
---------- ----------
Total Current Liabilities ....................................... 904,242 907,435
---------- ----------
LONG-TERM DEBT (Net of Current Portion Shown Above) .................. 150,476 134,246
---------- ----------
Total Liabilities ................................................ 1,054,718 1,041,681
---------- ----------
STOCKHOLDER'S DEFICIT
Common Stock -- $1.00 Par Value 100,000 and 250,000 Shares
Authorized at December 31, 1996 and June 30, 1997, respectively;
100,000 Shares Issued and Outstanding ........................... 100,000 100,000
Additional Paid-In Capital .......................................... 9,433 9,433
Accumulated Deficit ................................................ (369,593) (430,587)
---------- ----------
Total Stockholder's Deficit .................................... (260,160) (321,154)
---------- ----------
Total Liabilities and Stockholder's Deficit ..................... $ 794,558 $ 720,527
========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
F-15
<PAGE>
NORTHERN ELECTRIC SERVICE CORPORATION
DBA: NORTHERN HORIZONS
(A WHOLLY OWNED SUBSIDIARY OF
NORTHEN ELECTRIC COOPERATIVE ASSOCIATION)
STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
<TABLE>
<CAPTION>
Six months ended
Year ended ----------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES
Merchandising Sales ........................... $ 339,948 $ 148,777 $ 81,399
Television Programming Sales .................. 958,551 359,910 616,174
---------- ---------- ----------
Total Operating Revenues .................. 1,298,499 508,687 697,573
---------- ---------- ----------
COST OF SALES
Cost of Merchandising Sales .................. 338,456 147,278 84,428
Cost of Television Programming Sales ......... 623,532 225,822 396,342
---------- ---------- ----------
Total Cost of Sales ........................ 961,988 373,100 480,770
---------- ---------- ----------
GROSS PROFIT .................................... 336,511 135,587 216,803
---------- ---------- ----------
OPERATING EXPENSES
Management Services ........................... 76,258 36,000 36,000
Advertising and Promotion ..................... 194,326 26,672 82,521
Other Administrative and General Expense ...... 27,066 801 2,392
Depreciation and Amortization Expense ......... 48,167 22,958 22,814
Interest ....................................... 44,582 19,481 26,019
Bad Debts .................................... 8,316 1,573 2,562
Billing and Collections ........................ 22,239 12,297 16,712
Postage ....................................... 10,204 2,160 3,415
Outside Services .............................. 14,720 13,870 1,741
Meetings ....................................... 11,332 6,452 20,831
Security System Labor ........................ 97,266 33,229 70,573
Pension ....................................... 6,620 2,172 8,027
Telephone .................................... 44,930 19,796 7,871
---------- ---------- ----------
Total Operating Expenses .................. 606,026 197,461 301,478
---------- ---------- ----------
OPERATING LOSS .................................... (269,515) (61,874) (84,675)
OTHER INCOME
Capital Credit Income ........................ 14,987 14,987 23,681
---------- ---------- ----------
NET LOSS .......................................... (254,528) (46,887) (60,994)
---------- ---------- ----------
ACCUMULATED DEFICIT, BEGINNING .................. (115,065) (115,065) (369,593)
---------- ---------- ----------
ACCUMULATED DEFICIT, ENDING ..................... $ (369,593) $ (161,952) $(430,587)
========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
F-16
<PAGE>
NORTHERN ELECTRIC SERVICE CORPORATION
DBA: NORTHERN HORIZONS
(A WHOLLY OWNED SUBSIDIARY OF
NORTHEN ELECTRIC COOPERATIVE ASSOCIATION)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the six months ended
---------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Cash Received from Customers ........................... $ 1,350,053 $ 494,941 $ 702,605
Cash Paid to Suppliers and Employees ..................... (1,436,120) (541,974) (587,442)
Interest Paid .......................................... (54,453) (29,352) (16,870)
------------ ---------- ----------
Net Cash Provided (Used) by Operating Activities ...... (140,520) (76,385) 98,293
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of Furniture and Equipment .................. (6,251) (5,357) --
Proceeds from Sale of Fixed Assets ..................... -- 627 --
Proceeds from Investments in Association Organizations ... 2,997 2,997 7,104
------------ ---------- ----------
Net Cash Provided (Used) by Investing Activities ...... (3,254) (1,733) 7,104
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in Checks Written in Excess of Cash ............ 3,216 -- (3,916)
Proceeds from Issuance of Long-Term Debt ............... 180,000 100,000 --
Principal Payments on Long-Term Debt ..................... (90,664) (45,239) (46,833)
------------ ---------- ----------
Net Cash Provided (Used) by Financing Activities ...... 92,552 54,761 (50,749)
------------ ---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................................ (51,222) (23,357) 54,648
CASH AND CASH EQUIVALENTS -- BEGINNING ..................... 51,222 51,222 --
------------ ---------- ----------
CASH AND CASH EQUIVALENTS -- ENDING ........................ $ -- $ 27,865 $ 54,648
============ ========== ==========
RECONCILIATON OF NET LOSS TO CASH FLOWS FROM
OPERATING ACTIVITIES
Net Loss ................................................ $ (222,128) $ (46,887) $ (60,994)
Adjustments to Reconcile Net Loss to Net Cash Provided by
Operating Activities:
Depreciation and Amortization ........................... 48,167 22,958 22,914
Gain on Sale of Fixed Assets ........................... -- (285) --
Capital Credit Income ................................. (14,987) (14,987) (23,681)
(Increase) Decrease in Accounts Receivable ............ (99,069) (23,696) 34,016
(Increase) Decrease in Resale Merchandise ............... (43,013) (554) 87,431
(Increase) Decrease in Prepayments ..................... (638) (415) 896
Increase (Decrease) in Accounts Payable ............... (11,234) (4,392) 118,294
Increase (Decrease) in Unearned Revenue ............... 185,423 9,950 (28,984)
Increase (Decrease) in Other Current Liabilities ...... 16,959 (18,077) (51,599)
------------ ---------- ----------
Net Cash Provided (Used) by Operating Activities ...... $ (140,520) $ (76,385) $ 98,293
============ ========== ==========
</TABLE>
See accompanying Notes to Financial Statements.
F-17
<PAGE>
NORTHERN ELECTRIC SERVICE CORPORATION
DBA: NORTHERN HORIZONS
(A WHOLLY OWNED SUBSIDIARY OF
NORTHERN ELECTRIC COOPERATIVE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
In October 1994, Northern Electric Service Corporation (NESCO) was
established as a separate legal entity from Northern Electric Cooperative
Association (the Parent). NESCO, d.b.a. Northern Horizons, is a for-profit
Minnesota corporation. The Corporation is governed by a nine member board of
directors elected by the shareholders to serve three year terms. Northern
Electric Cooperative Association is the sole shareholder and is the only voting
member of the corporation. As the sole shareholder the Cooperative owns 100,000
shares of NESCO stock at $1.00 per share. The Cooperative established the
Corporation for the purpose of promoting the sale of Direct Broadcast Service
systems and programming to members of the parent cooperative and non-members in
the NESCO franchise area, which generally coincides with the parent
cooperative's electric distribution territory.
Basis of Accounting
The Corporation prepares its financial statements on the accrual method of
accounting, recognizing income when earned and expenses when incurred.
Cash and Cash Equivalents
Cash and cash equivalents consist of deposits held primarily in two
financial institutions, as well as investments with maturities of less than
three months.
Concentration of Credit Risk
The Company's programming services are provided primarily to customers in
the geographical area covered by the parent cooperative's electric service
territory. The Company does not perform credit evaluations of its customers and
does not require collateral on the accounts. The Company does follow the
practice of disconnecting service to those customers with balances more than
forty-five days old. Historically, credit losses have not been significant;
therefore, currently, no allowance for doubtful accounts is deemed necessary by
management.
Furniture and Equipment
Furniture and equipment are recorded at original cost. Maintenance and
repairs are expensed, and additions, improvements or major renewals are
capitalized. Depreciation expense for 1996 was $2,346.
Depreciation is computed using the straight-line method over its estimated
useful life as follows:
Furniture and Equipment 5 - 10 Years
Inventories
Inventories are stated at the lower of moving average cost or market.
Advertising
Advertising costs are charged to operations when incurred. Advertising
expense was $52,141 for the year ended December 31, 1996.
F-18
<PAGE>
NORTHERN ELECTRIC SERVICE CORPORATION
DBA: NORTHERN HORIZONS
(A WHOLLY OWNED SUBSIDIARY OF
NORTHERN ELECTRIC COOPERATIVE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Income Taxes
Northern Electric Service Corporation files a corporate tax return
including only it own operating activity. The Parent is organized under the IRS
rules allowing tax-exempt cooperatives and therefore is a non-taxable entity.
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
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.
Financial Instruments
The carrying amounts for all financial instruments approximate fair
values. The carrying amounts for cash and cash equivalents, investments,
receivables, accounts payable and accrued liabilities approximate fair value
because of the short maturity of these instruments. The fair value of long-term
debt is based on current rates at which the Company could borrow funds with
similar remaining maturities.
Interim Financial Data
The interim financial data is unaudited; however, in management's opinion,
the interim data includes all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of results for the interim
periods.
NOTE 2 -- OTHER ASSETS
Franchise Fee
During 1994, the Corporation began participating, through National Rural
Telecommunications Cooperative (NRTC), in Direct Broadcast Service (DBS), a
program to sell direct TV programming. This technology allows subscribers to
receive television programming on a small satellite dish. The franchise
agreement required the Corporation to pay NRTC a committed member payment of
thirty-eight dollars for each non-cabled residence and nine dollars for each
cabled residence in the counties served by Northern Electric Cooperative
Association (the Parent) for a total of $629,566. The franchise fees are being
amortized on a straight-line basis over a fifteen year period. Accumulated
amortization totaled $96,917 at December 31, 1996.
Intangible Assets
The Corporation incurred costs related to incorporation during its
formation. The Corporation is accounting for these costs as intangible assets
and is amortizing them over a fifteen year period from the date the DBS program
was officially in place. Organization costs and accumulated amortization were
$9,433 and $1,452, respectively, at December 31, 1996.
F-19
<PAGE>
NORTHERN ELECTRIC SERVICE CORPORATION
DBA: NORTHERN HORIZONS
(A WHOLLY OWNED SUBSIDIARY OF
NORTHERN ELECTRIC COOPERATIVE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
NOTE 2 -- OTHER ASSETS -- (Continued)
Investments in Associated Organizations
The Company is a member of NRTC, which obtained the rights to distribute
Direct Broadcast Service (DBS) through its members. The members or owners share
margins realized by NRTC, on the cooperative principle, based on programming
purchased. A summary of investments in associated organizations at December 31,
1996, is as follows:
Membership Investment in NRTC ............ $ 1,000
Patronage Capital Allocation in NRTC ...... 12,481
--------
Total Investment in NRTC ............... $13,481
--------
NOTE 3 -- LONG-TERM DEBT
<TABLE>
<CAPTION>
Description Secured By 1996
- ----------------------------------------- ------------------------------------- ---------
<S> <C> <C>
Note Payable -- National Cooperative All Personal Property, Tangible and $539,336
Services Corporation, variable interest Intangible, including Inventory,
currently at 6.25%, quarterly principal Receivables and Equipment
and interest payments of approximately Guaranteed by Parent.
$23,000; due December 2001
Note Payable -- Northern Electric Furniture, Fixtures, Equipment,
Cooperative Association (Parent), Inventory, Accounts Receivble,
variable interest at prime rate plus Contract Rights, General
2%, monthly principal and interest Intangibles, and Motor Vehicles. 180,000
payments of approximately $3,780; --------
due December 2001.
Total Long-Term Debt ................................................... $719,336
Current Maturities ...................................................... 568,860
---------
Long-Term Debt -- Net of Current Maturities .............................. $150,476
=========
</TABLE>
Maturity requirements by year on long-term debt are as follows:
Years Ending December 31, Amount
-------------------------- ---------
1997 .............................. $568,860
1998 .............................. 32,460
1999 .............................. 35,680
2000 .............................. 39,220
2001 .............................. 43,116
---------
Total .............................. $719,336
---------
F-20
<PAGE>
NORTHERN ELECTRIC SERVICE CORPORATION
DBA: NORTHERN HORIZONS
(A WHOLLY OWNED SUBSIDIARY OF
NORTHERN ELECTRIC COOPERATIVE ASSOCIATION)
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
NOTE 4 -- INCOME TAXES
The Company has available at December 31, 1996, approximately $366,350 of
unused operating loss carryforwards that may be applied against future taxable
income and that will expire in various years from 2009 to 2011. The $114,360
deferred tax asset that would have been recognized related to the net operating
loss carryforward has been fully offset by a valuation allowance to reflect the
estimated amount of deferred tax benefits which may not be utilized due to the
expiration of the Company's net operating loss carryforwards. The valuation
allowance increased approximately $85,800 during 1996 as the result of net
operating losses generated during 1996 which may not be utilized.
NOTE 5 -- RELATED PARTY TRANSACTIONS
The Company paid its parent, Northern Electric Cooperative Association,
$72,000 in management fees for 1996. The Company also leased a vehicle from the
Parent on a month-to-month lease for $679 per month, for a total paid during
1996 of approximately $5,575.
NOTE 6 -- SUBSEQUENT EVENTS
At the date of the report on these financial statements, the Company's
Board of Directors has voted to accept an offer to purchase the stock of the
Company.
As a result of this sale, the Company's general manager will receive a
severance payment of $100,000 at the termination of his employment contract.
F-21
<PAGE>
Report of Independent Auditors
Management
Advanced Tel-Com Systems Corporation
We have audited the accompanying balance sheet of Direct Broadcast Satellites
(a division of Advanced Tel-Com Systems Corporation) (DBS) as of December 31,
1996, and the related statements of operations, changes in division equity, and
cash flows for the year then ended. These financial statements are the
responsibility of DBS' 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 financial position of Direct Broadcast Satellites at
December 31, 1996, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
San Antonio, Texas
July 16, 1997
F-22
<PAGE>
Direct Broadcast Satellites
(A Division of Advanced Tel-Com Systems Corporation)
Balance Sheets
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- ------------
(unaudited)
<S> <C> <C>
Assets
Current assets:
Cash .................................................................. $ 22,238 $ 46,390
Accounts receivable, net of allowance of $10,000 at December 31, 1996 and
June 30, 1997, respectively .......................................... 349,473 303,030
Inventory ............................................................ 111,279 5,959
Customer acquisition costs ............................................. 192,369 231,119
----------- -----------
Total current assets ...................................................... 675,359 586,498
Equipment, at cost ...................................................... 541,836 534,790
Less accumulated depreciation ............................................. 85,969 138,842
----------- -----------
455,867 395,948
Contract costs, net of accumulated amortization of $303,917 and $364,700 at
December 31, 1996 and June 30, 1997, respectively ........................ 911,750 850,967
Patronage dividend receivable ............................................. 47,789 80,408
Deferred federal income taxes, net ....................................... 29,788 38,033
Deferred charge, net ...................................................... 2,630 2,067
----------- -----------
991,957 971,475
----------- -----------
Total assets ............................................................ $2,123,183 $1,953,921
=========== ===========
Liabilities and Division Equity
Current liabilities:
Current maturities of long-term debt ................................. $ 183,333 $ 183,333
Accounts payable ...................................................... 395,510 470,741
Accrued taxes ......................................................... 39,704 34,635
Accrued interest ...................................................... 8,259 5,423
Advance billings ...................................................... 406,450 431,397
Deferred federal income taxes .......................................... 65,405 78,506
----------- -----------
Total current liabilities ................................................ 1,098,661 1,204,035
Long-term debt, net of current maturities ................................. 366,667 183,334
Division equity ......................................................... 657,855 566,552
----------- -----------
Total liabilities and division equity .................................... $2,123,183 $1,953,921
=========== ===========
</TABLE>
See accompanying notes.
F-23
<PAGE>
Direct Broadcast Satellites
(A Division of Advanced Tel-Com Systems Corporation)
Statements of Operations
<TABLE>
<CAPTION>
Six months ended
Year ended ----------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Operating revenues:
Lease and maintenance revenue ............... $ 117,358 $ 46,164 $ 66,136
Satellite sales and installation ............ 473,642 140,314 329,485
Programming ................................. 2,444,796 1,021,162 1,670,696
Uncollectible revenues ..................... (76,201) (23,855) (25,958)
---------- ---------- ----------
Total operating revenues ........................ 2,959,595 1,183,785 2,040,359
Operating expenses:
Cost of goods sold ........................... 408,238 126,506 275,435
Plant-specific operations .................. 20,938 6,966 8,097
Plant-nonspecific operations ............... 250,274 102,964 153,288
Customer operations ........................ 537,940 188,508 575,032
Corporate operations ........................ 112,624 53,568 66,739
Programming ................................. 1,557,993 611,933 1,086,092
Operating taxes .............................. 2,180 -- 3,000
---------- ---------- ----------
Total operating expenses ........................ 2,890,187 1,090,445 2,167,683
---------- ---------- ----------
Income (loss) from operations .................. 69,408 93,340 (127,324)
Other expenses (income):
Interest expense ........................... 50,676 27,652 19,937
Other, net ................................. (39,787) (46,268) (46,328)
---------- ---------- ----------
Income (loss) before federal income taxes ...... 58,519 111,956 (100,933)
Federal income tax provision (benefit):
Current .................................... (36,386) 38,059 (39,173)
Deferred .................................... 56,282 -- 4,856
---------- ---------- ----------
19,896 38,059 (34,317)
---------- ---------- ----------
Net income (loss) ........................... $ 38,623 $ 73,897 $ (66,616)
========== ========== ==========
</TABLE>
See accompanying notes.
F-24
<PAGE>
Direct Broadcast Satellites
(A Division of Advanced Tel-Com Systems Corporation)
Statement of Changes in Division Equity
Balance at December 31, 1995 .............................. $ 552,864
Net income ............................................. 38,623
Equity contributions, net .............................. 66,368
---------
Balance at December 31, 1996 .............................. 657,855
Net loss (unaudited) .................................... (66,616)
Return of equity, net (unaudited) ........................ (24,687)
---------
Balance at June 30, 1997 (unaudited) ........................ $ 566,552
=========
See accompanying notes.
F-25
<PAGE>
Direct Broadcast Satellites
(A Division of Advanced Tel-Com Systems Corporation)
Statements of Cash Flows
<TABLE>
<CAPTION>
Six months ended
Year ended ----------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Operating Activities
Net income (loss) .......................................... $ 38,623 $ 73,897 $ (66,616)
Adjustments to reconcile net income to net cash provided
by operating activities:
Loss on sale of equipment .............................. -- -- 7,420
Depreciation and amortization ........................... 194,811 89,743 319,185
Deferred federal income tax provision .................. 56,282 -- 4,856
Provision for bad debts ................................. 76,201 -- 25,958
Changes in current assets and current liabilities ...... 91,084 30,683 (26,201)
Changes in other assets ................................. (35,662) (36,789) (32,056)
---------- ---------- ----------
Net cash provided by operating activities .................. 421,339 157,534 232,546
Investing Activities
Cash proceeds from sale of equipment ........................ -- -- 2,679
Additions to equipment, net .............................. (333,965) (167,742) (3,053)
---------- ---------- ----------
Net cash used in investing activities ..................... (333,965) (167,742) (374)
Financing Activities
Payments on long-term debt ................................. (183,333) (183,333) (183,333)
Equity contributions (return), net ........................ 66,368 189,714 (24,687)
---------- ---------- ----------
Net cash provided by (used in) financing activities ...... (116,965) 6,381 (208,020)
---------- ---------- ----------
Net increase (decrease) in cash ........................... (29,591) (3,827) 24,152
Cash at beginning of period .............................. 51,829 51,829 22,238
---------- ---------- ----------
Cash at end of period .................................... $ 22,238 $ 48,002 $ 46,390
========== ========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ................................................ $ 53,400 $ 30,531 $ 22,773
Income taxes .......................................... 34,200 17,117 --
</TABLE>
See accompanying notes.
F-26
<PAGE>
Direct Broadcast Satellites
(A Division of Advanced Tel-Com Systems Corporation)
Notes to Financial Statements
December 31, 1996
1. Organization and Significant Accounting Policies
Basis of Presentation
Direct Broadcast Satellites (DBS) is an operating division of Advanced
Tel-Com Systems Corporation (Advanced), a Texas corporation. Advanced is a
wholly owned subsidiary of Kerrville Communications Corporation, Inc.
(Communications). DBS provides direct broadcast satellite television services
in Kerrville, Texas and its surrounding area.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Equipment
Equipment consists primarily of satellite equipment available for leasing.
These satellites are depreciated using the straight-line method over the
satellites' estimated useful lives of five years. These satellites are leased
to customers on a month-to-month basis.
Inventory
Inventory consists primarily of satellite equipment and is carried at the
lower of cost or market, with costs determined on an average cost method.
Customer Acquisition Costs
DBS incurs certain costs to obtain new subscribers to its direct satellite
television system. These costs are commissions paid to agents and employees for
acquiring new customers and selling equipment, and promotional coupons redeemed
by customers. The deferred costs are amortized over a one-year period.
Advertising Costs
DBS expenses advertising costs as incurred. Advertising expense was
approximately $107,000 for 1996.
Contract Costs
Contract costs consist of the amount paid to the National Rural Telephone
Cooperative, Inc. (NRTC) for DBS' participation in NRTC's program to provide
satellite feed television programming. Under the terms of the NRTC contract,
DBS acquired the rights to distribute such television services to 16 rural
Texas counties. The services began in July 1994, at which time these contract
costs began to be amortized over the agreement's term of ten years.
Federal Income Taxes
Advanced is a member of an affiliated group electing to file on a
consolidated basis as defined by federal income tax regulations and, as such,
the taxable income of Advanced is included in the consolidated tax return of
Communications. Under an informal tax sharing agreement, members of the
Communications consolidated group with taxable income are charged with the
amount of income taxes as if they filed separate federal income tax returns,
and members providing deductions and credits which result in income tax savings
are allocated credits for such savings. These financial statements include DBS'
share of the Advanced federal income taxes allocated based on DBS' operating
results.
F-27
<PAGE>
Direct Broadcast Satellites
(A Division of Advanced Tel-Com Systems Corporation)
Notes to Financial Statements -- (Continued)
December 31, 1996
1. Organization and Significant Accounting Policies -- (Continued)
Federal Income Taxes -- (continued):
The provision for federal income taxes includes taxes currently payable
and those deferred due to temporary differences between the financial statement
and tax bases of assets and liabilities. These differences result from the use
of different accounting methods for financial and tax reporting purposes with
respect principally to depreciation and amortization of intangibles.
Statement of Cash Flows
In order to determine net cash provided by operating activities, net
income has been adjusted by, among other things, changes in current assets and
current liabilities, excluding changes in cash and current maturities of
long-term debt. Those changes, shown as an (increase) decrease in current
assets and an increase (decrease) in current liabilities for the year ended
December 31, 1996, are as follows:
<TABLE>
<S> <C>
Receivables ............................................. $ (248,341)
Inventory ............................................. 36,381
Payables and accrued liabilities ........................ 184,413
Advance billings ....................................... 311,000
Customer acquisition costs .............................. (192,369)
-----------
Changes in current assets and current liabilities ...... $ 91,084
===========
</TABLE>
2. Related Party Transactions
Advanced and Kerrville Telephone Company (Kerrville), a wholly owned
subsidiary of Communications, have a service agreement whereby Kerrville
provides general management, financial, selling, maintenance, installation, and
other services to Advanced. Charges under this agreement allocated to DBS were
approximately $313,200 during 1996.
3. Long-Term Debt
Long-term debt of Advanced relating to DBS at December 31, 1996 is
summarized below:
<TABLE>
<S> <C>
Note payable due Norwest Bank, 8.19%, due in annual principal installments of $183,333
and quarterly interest payments to April 1999, secured by property, equipment, future
contracts, and accounts receivable related thereto ................................. $ 550,000
Less current maturities ............................................................ 183,333
----------
Long-term debt, net of current maturities .......................................... $ 366,667
==========
</TABLE>
Scheduled maturities of long-term debt for the years ending December 31,
1997 through 1999 are $183,333 annually.
Under its loan agreements, Advanced is restricted from paying cash
dividends in excess of 50% of prior year's net income. The agreements also
contain covenants restricting additional borrowings, mergers, transfer of
stock, transactions with affiliates, and sale or transfer of substantial parts
of its assets.
F-28
<PAGE>
Direct Broadcast Satellites
(A Division of Advanced Tel-Com Systems Corporation)
Notes to Financial Statements -- (Continued)
December 31, 1996
4. Income Taxes
The components of DBS' net deferred tax liability are as follows at
December 31, 1996:
Gross deferred tax liabilities .......................... $ 70,059
Gross deferred tax assets ................................ 34,442
---------
Net deferred tax liability ............................. $ 35,617
=========
5. Principal Supplier
The NRTC is the principal supplier of satellite programming services and
equipment.
6. Subsequent Event
In July 1997, Communications sold the assets of DBS to Pegasus
Communications Corporation for approximately $14.9 million in cash.
F-29
<PAGE>
INDEPENDENT AUDITORS'REPORT
Board of Trustees
Suwannee Valley Satellite, Inc.
Live Oak, Florida
We have audited the accompanying balance sheet of Suwannee Valley Satellite,
Inc. as of December 31, 1996, and the related statements of income and retained
earnings, and cash flows for the year 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 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 financial position of Suwannee Valley Satellite,
Inc. as of December 31, 1996, and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted accounting
principles.
The accompanying balance sheet of Suwannee Valley Satellite, Inc. as of April
30, 1997, and the related statements of income and retained earnings, and cash
flows for the four months ended April 30, 1997, and April 30, 1996, were not
audited by us and, accordingly, we do not express an opinion on them.
Bolinger, Segars, Gilbert & Moss, L.L.P.
Certified Public Accountants
Lubbock, Texas
February 7, 1997
F-30
<PAGE>
SUWANNEE VALLEY SATELLITE, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, April 30,
1996 1997
-------------- ------------
(unaudited)
<S> <C> <C>
ASSETS
PLANT AT COST
Property, Plant, & Equipment .............................. $ 78,056 $ 76,739
----------- ----------
78,056 76,739
Less: Accumulated Provision for Depreciation ............... 41,664 44,444
----------- ----------
36,392 32,295
----------- ----------
OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE
Patronage Capital From Associated Coop. .................. 29,262 29,262
Start Up & Organizational Cost (Net of Amortization) ...... 64,042 55,779
Franchise Costs (Net of Amortization) ..................... 563,585 544,629
----------- ----------
656,889 629,670
----------- ----------
CURRENT ASSETS
Cash - General ............................................. 152,170 131,582
Accounts Receivable ....................................... 99,350 85,967
Materials and Supplies .................................... 81,246 25,518
Other Current and Accrued Assets ........................... 429 787
----------- ----------
333,195 243,854
----------- ----------
DEFERRED CHARGES ............................................. 24,383 30,217
----------- ----------
$ 1,050,859 $ 936,036
=========== ==========
EQUITIES AND LIABILITIES
EQUITIES
Common Stock ............................................. $ 1,000 $ 1,000
Retained Earnings .......................................... (209,603) (282,957)
----------- ----------
(208,603) (281,957)
----------- ----------
LONG-TERM DEBT
Notes Payable - SVEC ....................................... 800,000 --
Notes Payable - CoBank .................................... -- 825,104
----------- ----------
800,000 825,104
----------- ----------
POSTRETIREMENT BENEFIT OBLIGATION ........................... 1,900 1,644
----------- ----------
CURRENT LIABILITIES
Accounts Payable - SVEC .................................... 107,132 124,236
Accounts Payable - Other ................................. 131,281 84,496
Accrued Interest .......................................... 41,419 14,896
Consumer Deposits .......................................... 2,250 3,750
Other Current Liabilities ................................. 42,415 32,315
Accrued Employee Compensated Absences ..................... 10,553 1,344
----------- ----------
335,050 261,037
----------- ----------
DEFERRED CREDITS ............................................. 122,512 130,208
----------- ----------
$ 1,050,859 $ 936,036
=========== ==========
</TABLE>
See accompanying notes to financial statements.
F-31
<PAGE>
SUWANNEE VALLEY SATELLITE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
<TABLE>
<CAPTION>
Four months ended
Year ended ----------------------------
December 31, April 30, April 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
OPERATING REVENUES
Sales of Programming .............................. $ 1,108,563 $ 302,814 $ 470,941
Sales of Dishes and Installation Fees ............ 90,235 59,743 45,071
Sales of Materials & Magazines ..................... 25,874 8,599 8,567
Service Fees ....................................... 3,600 -- 1,305
Other Satellite Revenue ........................... 2,711 -- 1,391
----------- ---------- ----------
Total Operating Revenue ........................ 1,230,983 371,156 527,275
----------- ---------- ----------
COST OF SALES
Cost of Programming .............................. 555,334 140,184 240,225
Cost of Dishes and Installations .................. 141,612 56,921 90,869
Cost of Materials & Magazines ..................... 19,467 6,699 6,797
Cost of Service Calls .............................. 4,902 482 650
----------- ---------- ----------
Total Cost of Sales ........................... 721,315 204,286 338,541
----------- ---------- ----------
GROSS PROFIT .......................................... 509,668 166,870 188,734
----------- ---------- ----------
OPERATING EXPENSES
Operations ....................................... 10,045 4,135 4,885
Consumer Accounts ................................. 223,631 37,059 113,703
Selling Expense .................................... 46,838 18,983 14,586
Administrative and General ........................ 98,887 19,088 62,063
Depreciation and Amortization ..................... 94,022 30,856 30,602
Taxes ............................................. 2,662 -- 6,411
Other Interest .................................... 27 -- --
----------- ---------- ----------
Total Operating Expenses ........................ 476,112 110,121 232,250
----------- ---------- ----------
OPERATING MARGINS - BEFORE FIXED CHARGES ............ 33,556 56,749 (43,516)
FIXED CHARGES
Interest on Long-Term Debt ........................ 41,419 -- 29,345
----------- ---------- ----------
OPERATING MARGINS (DEFICIT) - AFTER FIXED CHARGES (7,863) 56,749 (72,861)
Capital Credits .................................... 20,795 -- --
----------- ---------- ----------
NET OPERATING MARGINS ................................. 12,932 56,749 (72,861)
----------- ---------- ----------
NONOPERATING MARGINS
Gain (Loss) from Disposition of Property ......... (192) -- (493)
----------- ---------- ----------
NET MARGINS .......................................... 12,740 56,749 (73,354)
RETAINED EARNINGS (DEFICIT) - BEGINNING OF PERIOD ...... (222,343) (222,343) (209,603)
----------- ---------- ----------
RETAINED EARNINGS (DEFICIT) - END OF PERIOD ............ $ (209,603) $ (165,594) $(282,957)
=========== ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE>
SUWANNEE VALLEY SATELLITE, INC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Four months ended
Year ended ----------------------------
December 31, April 30, April 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Margins ............................................. $ 12,740 $ 56,749 $ (73,354)
Adjustments to Reconcile Net Income (Loss) to Net Cash Pro-
vided by Operating Activities
Depreciation and Amortization ........................ 97,230 33,845 30,602
Capital Credits - Non-cash ........................... (20,795) -- --
Accounts Receivable ................................. (43,545) (19,863) 13,383
Materials and Supplies .............................. (7,443) 54,340 55,728
Other Current Assets ................................. 26 260 (358)
Deferred Charges .................................... (23,101) 1,282 (5,834)
Accounts Payable and Other Current Liabilities ...... 267,033 17,109 (74,013)
Accumulated Provision - Pensions & Benefits ......... 1,900 -- (1,352)
Deferred Credits .................................... 86,305 19,828 7,696
------------ ---------- ----------
Net Cash Provided (Used) by Operating Activities . 370,350 163,550 (47,502)
------------ ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES
Additions to Utility Plant .............................. (10,621) 1,030 1,317
Salvage Value of Retirements and Other Credits ......... 400 -- --
Net Loss on Retirement of Plant ........................ 193 -- 493
Other Property and Investments ........................... 4,159 -- --
------------ ---------- ----------
Net Cash Provided by (Used in) Investing Activities (5,869) 1,030 1,810
------------ ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES
Advances on Line of Credit .............................. 800,000 -- (800,000)
Proceeds From Long-Term Debt, Net ........................ -- -- 825,104
Other Equities .......................................... (1,144,713) (185,264) --
------------ ---------- ----------
Net Cash Provided by (Used in) Financing Activities (344,713) (185,264) 25,104
------------ ---------- ----------
INCREASE (DECREASE) IN CASH ................................. 19,768 (20,684) (20,588)
CASH - BEGINNING OF PERIOD ................................. 132,402 132,402 152,170
------------ ---------- ----------
CASH - END OF PERIOD ....................................... $ 152,170 $ 111,718 $ 131,582
============ ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest on Long-Term Debt ........................... $ 0 $ 0 $ 55,868
============ ========== ==========
Income Taxes .......................................... $ 0 $ 0 $ 0
============ ========== ==========
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE>
SUWANNEE VALLEY SATELLITE, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Operations and Summary of Significant Accounting Policies
Nature of Operations
Suwannee Valley Satellite, Inc. (SVS), is a for-profit corporation which
distributes direct broadcast television services to subscribers in its
franchised television geographical service area in north central Florida,
headquartered in Live Oak, Florida.
Suwannee Valley Electric Cooperative, Inc. owns all the issued and
outstanding stock of the company.
Inventories
Materials and supplies inventories are valued at average unit cost.
Recognition of Income
Direct television programming revenues are billed in advance and are
recognized when earned. Unearned amounts are classified as deferred credits in
these financial statements.
Group Concentration of Credit Risk
The company's headquarters facility is located in Live Oak, Florida. The
service area includes members located in an area which extends around the city
of Live Oak, Florida. SVS records a receivable for revenues as billed on a
monthly basis. SVS requires a deposit from most of its members, which is
applied to unpaid bills and fees in the event of default. The deposit accrues
interest and is returned periodically. As of December 31, 1996, deposits on
hand totaled $2,250.
The cash balances maintained by the company are insured by the Federal
Deposit Insurance Corporation up to $100,000 per each banking institution where
deposits are held. At December 31, 1996, the cash balances exceeded insured
limits.
Patronage Capital Certificates
Patronage capital from associated companies are recorded at the stated
amount of the certificate.
Income Taxes
SVS is a for-profit taxable corporation. Due to net operating loss
carryforwards, the current provision for income taxes is $0. Tax assets or
liabilities are not significant.
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 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.
2. Assets Pledged
All assets are pledged as security for the long-term debt due RUS and the
National Rural Utilities Cooperative Finance Corporation (CFC).
F-34
<PAGE>
SUWANNEE VALLEY SATELLITE, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Property and Equipment
The major classes of plant in service are as follows:
Structures and Improvements $ 34,627
Computer Equipment 7,064
Transportation Equipment 16,487
Communication Equipment 19,878
---------
$ 78,056
=========
Provision for depreciation on nonelectric plant, property and equipment is
computed using the double-declining balance method as follows:
Structures and Improvements 5 years
Computer Equipment 7 years
Transportation Equipment 5 years
Communication Equipment 7 years
Depreciation for the year ended December 31, 1996 was $15,572, of which
$12,364 was charged to depreciation expense, and $3,208 allocated to other
accounts.
4. Other Property and Investments
Other property and investments consisted of the following at December 31,
1996:
Investments in Associated Organizations
NRTC - Patronage Capital $ 29,262
----------
Start Up and Organizational Cost
Original Cost $ 123,953
Amortization (59,911)
----------
$ 64,042
----------
Franchise Cost
Original Cost $ 701,014
Amortization (137,429)
----------
$ 563,585
----------
$ 656,889
==========
The company expensed amortization costs of $81,658 in 1996.
5. Deferred Charges
Deferred charges consist of installation rebates totaling $24,383 at
December 31, 1996.
6. Deferred Credits
Deferred credits represent direct television revenues billed in advance
totaling $122,512 at December 31, 1996.
7. Pension Benefits
Pension benefits for substantially all employees of the company are
provided through the National Rural Electric Cooperative Association (NRECA)
Retirement and Security Program, a defined benefit plan qualified under section
401 and tax-exempt under section 501(a) of the Internal Revenue Code.
F-35
<PAGE>
SUWANNEE VALLEY SATELLITE, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
7. Pension Benefits -- (Continued)
The company makes contributions to the plan equal to the amounts accrued
for pension expense. In this multi-employer plan, which is available to all
member cooperatives of NRECA, the accumulated benefits and plan assets are not
determined or allocated separately by individual employers. Effective, July 1,
1987, NRECA declared a moratorium which suspended employer contributions due to
the plan's funding limitations. In November, 1994, the moratorium was lifted
and contributions were required to April 1995 when the moratorium was
reinstated. The moratorium was once again lifted in October 1996.
The NRECA Savings Plan, a defined contribution plan, has also been made
available to employees of the company. Contributions by the company match
employee contributions up to 3 percent.
The cost to the company for these plans for the year ended December 31,
1996 was $502.
8. Benefits to Retirees
Retirees between the age of 62 and 65 are allowed to continue in the
company's group health insurance plan and are required to reimburse the company
for one-half of the premium. Upon reaching age 65, retirees are responsible for
the entire premium if they continue to participate in the plan.
Effective in 1995, the company adopted FASB Statement No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pension." Adoption of this
statement does not materially affect the financial statements. Statement 106
requires that the cost of postretirement medical benefits be recognized on the
accrual basis as employees render service to earn the benefit. The company
elected to recognize the net transition obligation of $1,600 in 1995.
Annual service and interest cost for 1996 was $300.
9. Related Party Transactions
During 1996, the company executed a note payable to Suwannee Valley
Electric Cooperative, Inc. totaling $800,000 payable upon demand. The note
bears interest at a variable rate based on the National Rural Utilities
Cooperative Finance Corporation's 30-day commercial paper rates. This rate was
5.55% at December 31, 1996. The company intends to refinance the note with
CoBank in 1997.
F-36
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
ViewStar Entertainment Services, Inc.:
We have audited the accompanying balance sheet of VIEWSTAR ENTERTAINMENT
SERVICES, INC. (a Georgia corporation) as of December 31, 1996 and the related
statements of operations, stockholders' equity, and cash flows for the year
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 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 financial position of ViewStar Entertainment
Services, Inc. as of December 31, 1996 and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
April 18, 1997 (except with respect
to Note 10, as to which the date is
September 15, 1997)
F-37
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, June 30,
1996 1997
-------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 182,181 $ 186,960
Accounts receivable:
Trade, net of allowance for doubtful accounts of $8,666 and
$7,496 at December 31, 1996 and June 30, 1997, respectively . 207,800 185,370
Other ......................................................... 11,987 7,860
Deferred promotional costs .................................... 68,984 104,804
Prepaid expenses and other .................................... 51,530 9,077
Inventory ...................................................... 27,938 55,604
------------ ------------
Total current assets ....................................... 550,420 549,675
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ....................................... 129,478 131,717
Rental satellite systems equipment ........................... 42,651 40,092
Service vehicles ............................................. 28,913 28,913
Leasehold improvements ....................................... 17,260 17,260
------------ ------------
218,302 217,982
Less accumulated depreciation ................................. (99,102) (128,073)
------------ ------------
Property and equipment, net ................................. 119,200 89,909
------------ ------------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ........................ 1,512,298 1,453,142
------------ ------------
Total assets ................................................ $ 2,181,918 $ 2,092,726
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable ................................................ $ 493,963 $ 434,061
Accounts payable ............................................. 166,420 254,020
Accrued liabilities .......................................... 147,714 104,640
Unearned revenue ............................................. 299,505 330,685
Other ......................................................... 88,844 40,498
------------ ------------
Total liabilities .......................................... 1,196,446 1,163,904
------------ ------------
DEFERRED CREDITS ................................................ 43,007 67,291
------------ ------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000,000 shares authorized and
641,680 shares issued and outstanding ........................ 2,037,525 2,037,525
Retained deficit ................................................ (1,095,060) (1,175,994)
------------ ------------
Total stockholders' equity ................................. 942,465 861,531
------------ ------------
Total liabilities and stockholders' equity .................. $ 2,181,918 $ 2,092,726
============ ============
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-38
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Six months ended
Year ended ----------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUES:
Programming ........................ $ 2,100,927 $ 939,128 $1,372,248
Equipment and installation ......... 308,082 160,059 151,702
Other .............................. 14,779 11,081 2,684
----------- ---------- ----------
Total revenues .................. 2,423,788 1,110,268 1,526,634
----------- ---------- ----------
COST OF REVENUES:
Programming ........................ 987,379 416,209 614,872
Equipment and installation ......... 250,347 124,360 143,660
Service fees ........................ 280,771 139,395 183,718
----------- ---------- ----------
Total cost of revenues ......... 1,518,497 679,964 942,250
----------- ---------- ----------
GROSS PROFIT ........................... 905,291 430,304 584,384
----------- ---------- ----------
OPERATING EXPENSES:
General and administrative ......... 694,718 309,450 240,323
Sales and marketing ............... 255,540 81,407 297,227
Depreciation and amortization ...... 226,963 112,160 112,411
----------- ---------- ----------
Total operating expenses ......... 1,177,221 503,017 649,961
----------- ---------- ----------
OPERATING LOSS ........................ (271,930) (72,713) (65,577)
----------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense .................. (76,848) (39,784) (24,750)
Loss on sale of rental units ...... (36,339) -- (1,281)
Other .............................. 9,246 37,615 10,674
----------- ---------- ----------
(103,941) (2,169) (15,357)
----------- ---------- ----------
NET LOSS .............................. $ (375,871) $ (74,882) $ (80,934)
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-39
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock
------------------------ Retained
Shares Amount Earnings Total
--------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ............... 508,340 $1,537,525 $ (719,189) $ 818,336
Conversion of note (Note 3) ............ 133,340 500,000 0 500,000
Net loss .............................. 0 0 (375,871) (375,871)
-------- ----------- ------------ ----------
BALANCE, December 31, 1996 ............... 641,680 2,037,525 (1,095,060) 942,465
Net loss (unaudited) .................. 0 0 (80,934) (80,934)
-------- ----------- ------------ ----------
BALANCE, June 30, 1997 (unaudited) ...... 641,680 $2,037,525 $ (1,175,994) $ 861,531
======== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of this statement.
F-40
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Year ended ----------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ......................................................... $ (375,871) $ (74,882) $ (80,934)
---------- --------- ---------
Adjustments to reconcile net loss to net cash provided by operating
activities:
Depreciation and amortization ................................. 226,963 112,160 112,411
Loss on sale of rental units ................................. 36,339 -- 1,281
Changes in operating assets and liabilities:
Accounts receivable, net .................................... (103,090) (43,556) 22,430
Inventory ................................................... 96,767 80,463 (27,666)
Other current assets .......................................... (46,371) 4,818 10,760
Accounts payable ............................................. 135,759 41,742 87,600
Accrued liabilities and other ................................. (6,329) (23,977) (93,342)
Unearned revenue ............................................. 199,405 3,667 31,180
---------- --------- ---------
Total adjustments .......................................... 539,443 175,317 144,654
---------- --------- ---------
Net cash provided by operating activities .................. 163,572 100,435 63,720
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................. (44,485) (30,135) 961
---------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long term debt .................................... (17,464) -- (59,902)
---------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 101,623 70,300 4,779
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ......................................................... 80,558 80,558 182,181
---------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 182,181 $ 150,858 $ 186,960
========== ========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .......................................... $ 51,308 $ 27,901 $ 25,831
========== ========= =========
Cash paid for taxes ............................................. $ 500 $ 500 $ 750
========== ========= =========
NONCASH TRANSACTIONS:
Conversion of note (Note 3) .................................... $ 500,000 $ -- $ --
========== ========= =========
Noncash patronage dividend (Note 2) .............................. $ 29,856 $ 29,856 $ 24,284
========== ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-41
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. THE COMPANY
ViewStar Entertainment Services, Inc. ("ViewStar" or the "Company") is a
full-service provider of direct broadcast satellite ("DBS") service to
approximately 4,900 customers in eight counties in North Georgia. The Company
was incorporated in Georgia on August 12, 1993 and began marketing its services
in July 1994. Through a contracted agreement with the National Rural
Telecommunications Cooperative ("NRTC"), ViewStar has the exclusive right to
market and distribute DirecTv's (a subsidiary of Hughes Aircraft) satellite
programming services to the eight-county area for a period of ten years or the
life of the DirecTv satellite, whichever is longer. The life of the satellite
is currently estimated to be 15 years.
The Company has experienced operating losses since its inception as a
result of efforts to build its customer base and develop its operations. The
Company expects to continue to focus on developing its operations while
continuing to expand its market penetration. While the Company has achieved
positive cash flows from operations during 1996, there are risks associated
with the Company's growth plans and its ability to continue to generate
positive cash flows from operations and achieve or sustain profitability.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Estimates and Assumptions
The preparation of financial statements in accordance 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.
Source of Supplies
As a distributor of DirecTv services, the Company relies on DirecTv for
programming services. Further, the NRTC provides its members certain services,
such as billing, centralized payment processing, and promotions. Any disruption
of these services could have an adverse effect on the operating results of the
Company.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers comprising the customer base.
The Company's risk of loss is also limited due to advance billings to customers
for monthly programming services. As a result, at December 31, 1996, management
does not believe that any significant concentration of credit risk exists.
Inventories
The Company maintains inventories consisting of Digital Satellite Systems
("DSS(R)") equipment and related accessories. The inventories are stated at the
lower of cost or market, determined generally by the average cost method, which
approximates the first-in, first-out ("FIFO") method.
Deferred Promotional Costs
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Effective September 1, 1996, DirecTv introduced a
national marketing program offering new purchasers of DSS(R) equipment a $200
cash rebate, called the cash back offer rebate. To be eligible, a buyer must
subscribe to and pay for one year's worth of programming in advance. The
Company has elected to defer these costs and is amortizing these expenses over
the life of the buyer's one-year contract.
F-42
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Deferred Promotional Costs (continued)
ViewStar had 407 of these customers, with gross rebate costs of $81,400,
of which $12,416 was amortized during the year. In addition, as a part of this
program, ViewStar receives $1 per month for up to five years from the NRTC for
each subscriber whose account remains active. These amounts are included as a
reduction of sales and marketing expense in the accompanying statement of
operations when earned.
Property and Equipment
Property and equipment are stated at cost. ViewStar capitalizes major
property additions and expenses maintenance and repairs which do not extend the
useful lives of these assets. Depreciation for property and equipment is
provided using the straight-line method over the estimated useful lives of the
respective assets, ranging from three to five years. Depreciation expense for
the year was $59,893. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the balance sheet and any
gain or loss is reflected in current earnings.
Depreciation is computed for financial reporting purposes based on the
following lives:
Furniture and equipment Three to five years
Rental satellite systems equipment Five years
Service vehicles Three years
Leasehold improvements Three years
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1996:
Contract rights ........................... $1,573,409
Organization costs ........................ 309,930
----------
1,883,339
Accumulated amortization .................. (417,200)
----------
1,466,139
NRTC patronage capital ..................... 43,007
Other .................................... 3,152
----------
$1,512,298
==========
Contract Rights
In 1993, the Company acquired from the NRTC the exclusive right to market
and distribute DirecTv services to households and commercial establishments in
the following eight counties located in northern Georgia: Banks, Bartow,
Dawson, Gordon, Hall, Habersham, Lumpkin, and Pickens. The Company acquired
these rights for a purchase price of $1,573,409 and for a period of ten years
or the life of the current satellite, whichever is longer. Contract rights are
being amortized over 15 years, the estimated useful life of the satellite (Note
1) operated by DirecTv which provides service under the related contracts.
Amortization expense, included in depreciation and amortization in the
accompanying statement of operations, for the year ended December 31, 1996 was
$104,894.
Organization Costs
All costs incurred prior to the commencement of operations on July 1, 1994
have been capitalized on the balance sheet as organization costs and are being
amortized over five years. Amortization expense, included in depreciation and
amortization in the accompanying statement of operations, for the year ended
December 31, 1996 was $62,176.
F-43
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
NRTC Patronage Capital
ViewStar is an affiliate member of the NRTC (Note 9). While affiliate
members have no vote, they do have an ownership interest in the NRTC in
proportion to their prior patronage. NRTC patronage capital represents the
noncash portion of NRTC patronage income. Under its bylaws, the NRTC declares a
patronage dividend of its excess of revenues over expenses each year. Of the
total patronage dividend, 20% is paid in cash and the remaining 80% is
distributed in the form of noncash patronage capital, which will be redeemed in
cash only at the discretion of the NRTC. Noncash patronage capital is included
in other assets. The Company has also deferred the recognition of income from
the noncash portion of the patronage dividend until it is realized.
Accordingly, this amount is recorded in deferred credits in the accompanying
balance sheet.
Long-Lived Assets
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Management believes that the long-lived assets in the accompanying balance
sheet are appropriately valued.
Income Taxes
Deferred income taxes are recorded using enacted tax laws and rates for
the years in which the taxes are expected to be paid. Deferred income taxes are
provided for items when there is a temporary difference in recording such items
for financial reporting and income tax reporting.
Stock-Based Compensation Plans
The Company accounts for its stock-based compensation plans under
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"). In 1996, the Company adopted the disclosure option
of Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 requires that
companies which do not choose to account for stock-based compensation as
prescribed by this statement shall disclose the pro forma effects on earnings
and earnings per share as if SFAS No. 123 had been adopted. Additionally,
certain other disclosures are required with respect to stock compensation and
the assumptions used to determine the pro forma effects of SFAS No. 123.
Advertising Costs
The Company expenses all advertising costs as incurred.
Revenue Recognition
ViewStar earns programming revenue by providing DirecTv services to its
subscribers. Programming revenue includes DirecTv services purchased by
subscribers in monthly or annual subscriptions; additional premium programming
available on an a la carte basis; sports programming available under monthly,
annual, or seasonal subscriptions; and movies and events programming available
on a pay-per-view basis. Programming purchased on a monthly, annual, or
seasonal basis, including premium programming, is billed in advance and is
recorded as unearned revenue. All programming revenue is recognized when
earned.
Equipment and installation revenues primarily consist of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue is recognized upon delivery of the equipment to the customer.
Installation revenue is recognized when the equipment is installed.
F-44
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Cost of Revenues
Cost of revenues includes the cost associated with providing DirecTv
services to the Company's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv through the NRTC, the
royalty fee paid to DirecTv, and monthly subscriber maintenance fees charged by
DirecTv, such as security fees, ground service fees, system authorization fees,
and fees for subscriber billings. Cost of equipment and installation includes
the wholesale cost of the equipment, fees paid to independent contractor
installers, and service department costs.
3. STOCKHOLDERS' EQUITY
The Company has authorized 1,000,000 shares of no par value common stock.
On August 24, 1993, the Company issued 18,750 shares of common stock for total
proceeds of $1,037,500 to the following three individuals: Donald W.
Weber--15,000 shares (80%) (the "majority stockholder"), Steven D. Weber--1,875
shares (10%), and Woodrow W. Griffin, Jr.--1,875 shares (10%). Under a
stockholder agreement dated August 24, 1993, the majority stockholder or the
Company possesses the right of first refusal to purchase shares owned by
minority stockholders before any transfer of these shares may occur.
On March 30, 1994, the Company issued 6,667 shares of common stock at $75
per share to ITC Holding Company for total proceeds of $500,025. Under a
stockholder agreement dated March 30, 1994, the majority stockholder or the
Company possesses the right of first refusal to purchase shares owned by ITC
Holding Company before any transfer of these shares may occur.
On March 30, 1994, the board of directors and stockholders approved a
restatement of the $500,000 note payable to Donald W. Weber to include the
option to convert the note to common stock at a rate of $75 per share. On
December 31, 1996, this note was converted to 133,340 shares of common stock.
Interest of $88,844 accrued on the note during the period that it was
outstanding but has not been paid.
On June 30, 1995, the board of directors and stockholders approved a
20-for-1 stock split by way of a 19-share dividend or 482,923 shares to current
stockholders on a pro rata basis.
The following table summarizes stock ownership as of December 31, 1996:
Number Percentage Total
of of Consideration
Shares Shares Paid
--------- ------------ --------------
Donald W. Weber ............... 433,340 67.54% $1,500,000
ITC Holding Company ......... 133,340 20.78 500,025
Woodrow W. Griffin, Jr. ...... 37,500 5.84 18,750
Steven D. Weber ............... 37,500 5.84 18,750
-------- -----------
Total ........................ 641,680 $2,037,525
======== ===========
4. STOCK-BASED COMPENSATION PLANS
Employee Stock Option Plan
Under the Company's 1995 stock option plan (the "Stock Option Plan"), as
adopted by the board of directors and approved by the stockholders on June 30,
1995, 75,000 shares of common stock are reserved and authorized for issuance
over a nine-year period. All permanent employees of the Company are eligible to
receive options under the Stock Option Plan. The Stock Option Plan is
administered by the board of directors. The plan is intended to provide for
incentive stock options ("ISOs") under Section 422 of the Internal
F-45
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
4. STOCK-BASED COMPENSATION PLANS -- (Continued)
Employee Stock Option Plan (continued)
Revenue Code of 1986, as amended, and for options which do not qualify as ISOs.
Options were granted at an exercise price of at least 100% of the estimated
fair value of the common stock at the dates of grant, as determined by the
board of directors based on previous equity transactions, historical financial
condition and results of operations, and other analyses.
Options are generally granted at a price (established by the board of
directors) equal to at least 100% of the estimated fair market value of the
common stock on the option grant date. Options granted become exercisable pro
rata over four years from the date of grant. The options expire on December 31,
2004.
Statement of Financial Accounting Standards No. 123
During 1995, the Financial Accounting Standards Board issued SFAS No. 123,
"Accounting for Stock-Based Compensation," which defines a fair value-based
method of accounting for an employee stock option or similar equity instrument
and which encourages all entities to adopt that method of accounting for all of
their employee stock compensation plans. However, it also allows an entity to
continue to measure compensation cost for those plans using the method of
accounting prescribed by APB No. 25, "Accounting for Stock Issued to
Employees." Entities electing to remain with the accounting methodology
required by APB No. 25 must make pro forma disclosures of net income as if the
fair value-based method of accounting defined in SFAS No. 123 was used.
The Company has elected to account for its Stock Option Plan under APB No.
25; however, the Company has computed for pro forma disclosure purposes the
value of all options granted during 1995 and 1996 using the minimum value
option pricing model as prescribed by SFAS No. 123 using the following
assumptions:
1995 1996
------------ --------------
Risk-free interest rate .................. 5.95% 6.5%
Expected dividend yield .................. 0 0
Expected lives ........................... Five years Five years
Volatility .............................. 0% 0%
Using these assumptions, the total fair value of the stock options granted
in 1996 and 1995 is $45,920 and $31,322, respectively, which would be amortized
as compensation expense over the four-year vesting period of the options. Had
compensation cost been determined consistent with the provisions of SFAS No.
123, the Company's net loss and pro forma net loss per share for 1996 would
have been as follows:
As Pro
Reported Forma
-------------- ------------
Net loss ................................. $ (375,871) $387,844
Net loss per share ........................ $ (.59) $ (.60)
F-46
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
4. STOCK-BASED COMPENSATION PLANS -- (Continued)
The following table summarizes stock option transactions under the Stock
Option Plan during 1996 and 1995:
Weighted
Number Average
of Price
Shares Per Share
----------- ----------
Granted .............................. 20,800 $ 6.00
Forfeited ........................... (1,000) 6.00
-------
Outstanding at December 31, 1995 ...... 19,800 6.00
Granted .............................. 21,250 8.00
Forfeited ........................... (2,500) 8.00
-------
Outstanding at December 31, 1996 ...... 38,550 6.97
=======
The following table sets forth the exercise price range, number of shares,
weighted average exercise price, and remaining contractual lives by groups of
similar price and grant date:
Number Weighted
Outstanding Average Weighted
Actual at Remaining Average
Exercise December 31, Contractual Exercise
Prices 1996 Life Price
- ------------------- -------------- ------------- ---------
$ 6.00 19,800 2.50 $ 6.00
8.00 18,750 3.42 8.00
------ ---- -------
38,550 2.96 6.97
======
There were 4,950 options exercisable at a weighted average exercise price
of $6 per share at December 31, 1996.
5. RELATED-PARTY TRANSACTIONS
During 1996, the Company shared administrative, executive, and accounting
functions and incurred certain costs on behalf of DBS Depot, a company which is
owned by certain common stockholders of the Company. The Company was reimbursed
by DBS Depot for all expenses at full cost. The amount due from DBS Depot as of
December 31, 1996 was $4,165.
As of December 31, 1996, the Company had outstanding a demand note payable
in the amount of $100,000 and an equipment loan payable in the amount of
$14,061 due to the principal stockholder. See Note 6 for discussion of notes
payable terms.
6. DEBT
The Company's debt obligations at December 31, 1996 are as follows:
<TABLE>
<S> <C>
Note payable to First Community Bank of Dawsonville, due March 31, 1997, interest at
prime plus 2%, secured by certain assets of the Company ........................ $375,000
Note payable to majority stockholder, due on demand, interest at prime plus 2% ... 100,000
Equipment loans from majority stockholder, due on demand, interest at 5% ......... 14,061
---------
Total outstanding ............................................................ $489,061
=========
</TABLE>
F-47
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
6. DEBT -- (Continued)
As all of the Company's debt at December 31, 1996 matures in 1997 or is
due on demand, these amounts are classified as current in the accompanying
balance sheet.
7. COMMITMENTS AND CONTINGENCIES
Leases
ViewStar leases office space and equipment. Rent expense for the year
ended December 31, 1996 was $53,878. The operating leases expire at various
dates through 2000.
At December 31, 1996, the Company's minimum rental commitments under
noncancelable operating leases with initial or remaining terms of more than one
year were as follows:
1997 ....................................... $50,000
1998 ....................................... 24,000
1999 ....................................... 5,000
2000 ....................................... 5,000
--------
Total future minimum lease payments ...... $84,000
========
Legal Proceedings
The Company is subject to legal proceedings and claims which arise in the
ordinary course of business. There are no pending legal proceedings to which
the Company is a party.
8. INCOME TAXES
Deferred income taxes reflect the net tax effect of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Company's deferred tax assets and liabilities as of December
31, 1996 are as follows:
Deferred tax assets:
Net operating loss carryforwards ............... $ 288,000
Unearned revenue ................................. 110,000
Accrued interest ................................. 34,000
Depreciation .................................... 15,000
----------
Total deferred tax assets ..................... 447,000
Deferred tax liabilities:
Other .......................................... (3,000)
----------
Net deferred tax assets ........................ 444,000
Valuation allowance for deferred tax assets ...... (444,000)
----------
Net deferred taxes ........................... $ 0
==========
The Company's net operating loss carryforwards will expire between 2008
and 2011 unless utilized. Due to the fact that the Company has incurred losses
since inception, the Company has not recognized the income tax benefit of the
net operating loss carryforwards. Management has provided a 100% valuation
reserve against its net deferred tax asset, consisting primarily of net
operating loss carryforwards. In addition, the Company's ability to recognize
the benefit from the net operating loss carryforwards could be limited under
Section 382 of the Internal Revenue Code if ownership of the Company changes by
more than 50%, as defined.
F-48
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
8. INCOME TAXES -- (Continued)
A reconciliation of the income tax provision computed at statutory tax
rates to the income tax provision for the year ended December 31, 1996 is as
follows:
Income tax benefit at statutory rate ............ 34%
State income taxes, net of federal benefit ...... 4
Deferred tax asset valuation allowance ......... (38)
Effective tax rate .............................. 0%
9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS
The NRTC has contracted with third parties to provide the NRTC members
with certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services on a monthly
basis. These fees are recorded as service fees in the accompanying statement of
operations. The NRTC also sells DSS(R) equipment to its members.
Because the Company is, through the NRTC, a distributor of DirecTv
Services, the Company would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities, or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communications Commission ("FCC") licenses to transmit radio
frequency signals from the orbital slots occupied by its satellites.
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 an agreement between the NRTC and
Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating
NRTC members acquired the exclusive rights to provide DirecTv services to
residential and commercial subscribers in certain rural DirecTv markets. In
general, upon default by the NRTC under the Hughes Agreement, the Company would
have the right to acquire DirecTv Services directly from DirecTv. The NRTC has
contracted with third parties to provide the NRTC members with certain
services, including billing services and centralized remittance processing
services. If the NRTC is unable to provide these services for whatever reason,
the Company would be required to acquire the services from other sources. There
can be no assurance that the cost to the Company to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The Company would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the Company
would no longer have the right to provide DirecTv Services. There can be no
assurance that the Company would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when
Hughes removes its current satellites from their assigned orbital locations.
Although, according to Hughes, the three DirecTv satellites have estimated
orbital lives of approximately 15 years from their respective launches in
December 1993 and 1994, there can be no assurance as to the longevity of the
satellites and thus no assurance as to how long the Company will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Company believes it will have access to DirecTv Services
following the expiration of the current Hughes Agreement by virtue of the
NRTC's right of first refusal in the Hughes Agreement and the Company's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Company from Hughes or
the NRTC, and if available, there can be no assurance with regard to the
financial and other terms under which the Company could acquire the services.
F-49
<PAGE>
VIEWSTAR ENTERTAINMENT SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS -- (Continued)
The Company's DBS business is a new business with a limited operating
history. There are numerous risks associated with satellite transmission
technology. There can be no assurance as to the longevity of the satellites or
that loss, damage, or changes in the satellites will not occur and have a
material adverse effect on DirecTv and the Company's DBS business.
DirecTv and, therefore, the Company are dependent on third parties to
provide high-quality programming that appeals to mass audiences. DirecTv's
programming agreements have terms which expire on various dates and have
different renewal and cancellation provisions. There can be no assurance that
any such agreements will be renewed or will not be canceled prior to expiration
of their original terms.
DBS operators, such as DirecTv, are free to set prices and serve
subscribers according to their business judgment without rate of return and
other regulation. However, DirecTv is subject to the regulatory jurisdiction of
the FCC.
10. SUBSEQUENT EVENT
In September 1997, the Company entered into a non-binding letter of intent
with Pegagus Communications Corporation ("Pegasus") to sell the stock of the
Company to Pegasus in exchange for a combination of cash and stock.
F-50
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Members
Midwest Minnesota DBS, LLC
Perham, Minnesota
I have audited the accompanying statement of net assets to be sold of Midwest
Minnesota DBS, LLC, as of December 31, 1996, and the related statements of
operations and cash flows for the year then ended. These financial statements
are the responsibility of the Company's management. My responsibility is to
express an opinion on these financial statements based on my audit.
I conducted my audits in accordance with generally accepted auditing standards.
Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
The accompanying statement of net assets to be sold was prepared to present the
net assets of Midwest Minnesota DBS, LLC to be acquired by Pegasus
Communications Corporation pursuant to the purchase agreement described in Note
5, and is not intended to be a complete presentation of Midwest Minnesota DBS,
LLC's assets and liabilities.
In my opinion, the statements referred to above present fairly, in all material
respects, the net assets to be sold of Midwest Minnesota DBS, LLC, as of
December 31, 1996 and the results of operations and cash flows for the year
then ended pursuant to the purchase agreement referred to in Note 6, in
conformity with generally accepted accounting principles.
Bradley R. Helmeke, Ltd.
Perham, Minnesota
July 18, 1997
F-51
<PAGE>
MIDWEST MINNESOTA DBS, LLC
STATEMENTS OF NETS ASSETS TO BE SOLD
December 31, June 30,
1996 1997
-------------- ------------
(unaudited)
ASSETS
CURRENT ASSETS
Accounts Receivable .................. $135,270 $102,495
Inventory ........................... 31,255 56,916
--------- ---------
TOTAL CURRENT ASSETS ..................... 166,525 159,411
--------- ---------
PROPERTY AND EQUIPMENT .................. 36,953 31,833
--------- ---------
OTHER ASSETS
Investment in NRTC .................. 37,705 51,058
Franchise Cost ........................ 472,810 441,292
Organization and Start-up Costs ...... 7,635 6,108
Cashback and Access Cards ............ 72,847 97,941
--------- ---------
TOTAL OTHER ASSETS ..................... 590,997 596,399
--------- ---------
TOTAL ASSETS ........................... 794,475 787,643
CURRENT LIABILITIES
Customer Deposits ..................... 1,140 1,960
Deferred Revenue ..................... 177,270 140,156
--------- ---------
TOTAL CURRENT LIABILITIES ............... 178,410 142,116
--------- ---------
NET ASSETS TO BE SOLD ..................... $616,065 $645,527
========= =========
See accompanying notes to the financial statements.
F-52
<PAGE>
MIDWEST MINNESOTA DBS, LLC
STATEMENTS OF OPERATIONS OF ASSETS TO BE SOLD
<TABLE>
<CAPTION>
Six months ended
Year ended ---------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
REVENUE
Programming Revenue ..................... $ 833,231 $ 348,714 $ 597,408
Equipment Sales ........................ 426,169 179,169 103,052
---------- --------- ---------
TOTAL REVENUE ........................ 1,259,400 527,883 700,460
COST OF REVENUE
Programming Costs ..................... 400,231 165,354 266,783
Programming Fees ..................... 131,313 53,461 86,627
Equipment Costs ........................ 345,412 146,275 93,997
Selling Commissions .................. 131,316 38,540 55,542
Installation Costs .................. 29,027 10,335 18,070
Patronage Dividend ..................... (21,956) (21,956) (19,077)
---------- --------- ---------
TOTAL COSTS OF REVENUE .................. 1,015,343 392,009 501,942
---------- --------- ---------
GROSS PROFIT ........................... 244,057 135,874 198,518
---------- --------- ---------
OPERATING EXPENSES
Salaries and Wages ..................... 84,652 44,113 46,790
Employee Benefits and Taxes ............ 9,604 4,742 7,788
Insurance ........................... 3,032 1,478 1,817
Advertising ........................... 15,992 8,226 12,725
Marketing .............................. 14,071 7,527 4,364
Depreciation and Amortization ......... 88,600 41,199 61,179
Travel and Entertainment ............... 4,853 2,092 901
Training and Development ............ 3,979 1,949 2,104
Rent ................................. 5,400 2,700 2,700
Telephone ........................... 22,300 9,782 14,055
Supplies .............................. 5,737 3,688 2,081
Postage .............................. 5,550 2,169 3,357
Accounting and Legal .................. 910 850 6,928
Bank and Finance Charges ............ 3,697 1,884 933
Bad Debts .............................. 11,484 3,591 4,441
Miscellaneous Expenses ............... 4,792 2,045 4,738
---------- --------- ---------
284,653 138,035 176,901
NET INCOME (LOSS) FROM OPERATIONS ...... $ (40,596) $ (2,161) $ 21,617
========== ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-53
<PAGE>
MIDWEST MINNESOTA DBS, LLC
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended
Year ended ---------------------------
December 31, June 30, June 30,
1996 1996 1997
-------------- ------------- ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss) from Operations .............................. $ (40,596) $ (2,161) $ 21,617
Adjustments to Reconcile Net Income (Loss) from Operations to Net
Cash Provided by Operating Activities:
Depreciation and Amortization ................................. 88,600 41,199 61,179
Changes in:
Accounts Receivable .......................................... (56,833) 2,506 32,775
Inventory ................................................... 20,421 17,636 25,661
Customer Deposits .......................................... (160) (140) 820
Deferred Revenue ............................................. 153,172 8,414 (37,114)
---------- --------- ---------
Net Cash Provided by Operating Activities ..................... 164,604 67,454 104,938
---------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment ........................... (20,122) (4,404) (23,198)
Purchases of Cash Back Offer ................................. (74,200) -- (25,000)
Purchases of Access Card Changeouts ........................... (4,110) -- --
Equity from NRTC Patronage .................................... (17,565) (17,565) (13,353)
Proceeds from Sale of Property and Equipment .................. 6,740 -- --
---------- --------- ---------
Net Cash Used in Investing Activities ........................... (109,257) (21,969) (61,551)
---------- --------- ---------
NET DECREASE IN MEMBERS' EQUITY ................................. (55,347) (45,485) (43,387)
NET CHANGE IN CASH ............................................. -- -- --
CASH -- BEGINNING OF PERIOD .................................... -- -- --
---------- --------- ---------
CASH -- END OF PERIOD .......................................... $ -- $ -- $ --
========== ========= =========
</TABLE>
See accompanying notes to the financial statements.
F-54
<PAGE>
MIDWEST MINNESOTA DBS, LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
This summary of significant accounting policies of Midwest Minnesota DBS,
LLC is presented to assist in understanding the Company's financial statements.
The financial statements and notes are representations of the Company's
management, who is responsible for their integrity and objectivity. The
accounting policies conform to generally accepted accounting principles and
have been consistently applied in the preparation of the financial statements.
Business Activity -- The Company is primarily engaged in the programming
service of Direct TV via satellite. They also retail satellite dish systems to
the general public.
Property and Equipment -- Property and equipment are carried at cost.
Depreciation is calculated on the straight-line or accelerated methods over the
estimated useful lives of the assets.
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.
Inventories -- Inventories consist primarily of digital satellite systems
(DSS) and are stated at the lower of cost (first-in, first-out) or market
value.
Amortization of Other Assets -- The cost of organizing, starting up,
acquiring franchises, and selling DSS systems is being amortized over 5-15
years on a straight line basis.
Income Taxes -- The Company is organized as an LLC partnership and all
respective income and loss items are taxed to the respective partners.
NOTE 2 -- PROPERTY AND EQUIPMENT
Property and equipment are summarized by major classifications as follows:
Computer Equipment .................. $ 17,708
Demo Equipment ..................... 22,136
Vehicle .............................. 18,293
Leasehold Improvements ............ 2,276
---------
60,413
Less Accumulated Depreciation ...... (23,460)
---------
$ 36,953
=========
NOTE 3 -- OTHER ASSETS
Other assets are summarized by major classifications as follows:
Investment in NRTC .................. $ 37,705
Franchise Cost ..................... 630,400
Marketing and Development ......... 72,905
Organization Costs .................. 2,163
Start-Up Costs ..................... 15,274
Cash Back Offer ..................... 74,200
Access Card Change-Out ............ 4,110
----------
836,757
Less Accumulated Amortization ...... (245,760)
----------
$ 590,997
==========
F-55
<PAGE>
MIDWEST MINNESOTA DBS, LLC
NOTES TO FINANCIAL STATEMENTS -- (Continued)
December 31, 1996
NOTE 3 -- OTHER ASSETS -- (Continued)
The Company co-operates with NRTC in administering the DSS programming
services. The investment in NRTC is this Company's equity in NRTC from their
participation with them for the years 1994 and 1995. This investment is not
being amortized. The remaining other assets are being amortized according to
their estimated years of value.
NOTE 4 -- TRANSACTIONS WITH RELATED PARTIES
The Company leases office space from a company that is substantially owned
by a partner of Midwest Minnesota DBS, LLC. The lease is a five-year lease
starting on August 1, 1995. The lease calls for payments of $450 per month.
Total lease payments for the year ended December 31, 1996, were $5,400.
NOTE 5 -- SEP PENSION PLAN
The Company sponsors a simplified employee pension plan (SEP) for all of
its employees. The Company will match contributions by its employees of 50% of
their contribution, up to 4%. The Company's pension contribution for the year
ended December 31, 1996, was $1,472. The Company raised the matching percentage
up to 6% at January 1, 1997.
NOTE 6 -- SUBSEQUENT EVENT
The Company has entered into an agreement to sell all of the assets and
business operations to an unrelated party. The sale is scheduled to close on
August 8, 1997.
F-56
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Shareholders
Turner-Vision, Inc.
Bluefield, West Virginia
We have audited the accompanying statement of net assets to be sold of
Turner-Vision, Inc. (an S-Corporation) DBS Operations as of December 31, 1996
and the related statements of operations and cash flows for the year 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 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.
The accompanying statement of net assets to be sold was prepared to
present the net assets of Turner-Vision, Inc. DBS Operations to be acquired by
Pegasus Communications Corporation (Pegasus) pursuant to the purchase agreement
described in Note 7, and is not intended to be a complete presentation of the
assets and liabilities of Turner-Vision, Inc. and its DBS Operation.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the net assets to be sold of Turner-Vision, Inc. DBS
Operations as of December 31, 1996 and the results of operations and cash flows
for the year then ended pursuant to the purchase agreement referred to in Note
7, in conformity with generally accepted accounting principles.
Grigoraci, Trainer, Wright & Paterno
Charleston, West Virginia
June 6, 1997
F-57
<PAGE>
TURNER-VISION, INC.
(AN S-CORPORATION)
DBS OPERATIONS
STATEMENT OF NET ASSETS TO BE SOLD
AS OF DECEMBER 31, 1996
<TABLE>
<S> <C>
CURRENT ASSETS:
Subscriber accounts receivable, less allowance for doubtful accounts of $3,813 $ 171,265
Equipment held for resale ................................................... 92,574
---------
TOTAL CURRENT ASSETS ...................................................... 263,839
---------
DIRECT BROADCAST SATELLITE FRANCHISE, net of accumulated amortization ......... 623,179
---------
PROPERTY AND EQUIPMENT, at cost:
Property and equipment ...................................................... 1,855
Less: accumulated depreciation ............................................. (719)
---------
PROPERTY AND EQUIPMENT, NET ................................................ 1,136
---------
TOTAL ASSETS ............................................................... 888,154
---------
CURRENT LIABILITIES:
Accrued liabilities ......................................................... 84,372
Customer advance payments ................................................... 15,076
Unearned revenue ............................................................ 176,139
---------
TOTAL CURRENT LIABILITIES ................................................ 275,587
---------
NET ASSETS TO BE SOLD ...................................................... $ 612,567
=========
</TABLE>
The accompanying notes are an integral part of the financial statements
F-58
<PAGE>
TURNER-VISION, INC.
(AN S-CORPORATION)
DBS OPERATIONS
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
OPERATING REVENUES:
Programming and equipment sales, net ........................ $ 2,368,081
Uncollectible operating revenues ........................... (26,570)
Other operating revenues .................................... 16,934
-----------
TOTAL OPERATING REVENUES ................................. 2,358,445
-----------
OPERATING EXPENSES:
Programming ................................................ 1,074,320
Cost of equipment sold .................................... 997,545
Payroll and payroll related expenses ........................ 183,854
Advertising, maintenance and other operating expenses ...... 762,505
Depreciation and amortization .............................. 85,576
Allocated costs (Note 5) .................................... 103,360
-----------
TOTAL OPERATING EXPENSES ................................. 3,207,160
-----------
OPERATING LOSS .......................................... $ (848,715)
===========
The accompanying notes are an integral part of the financial statements
F-59
<PAGE>
TURNER-VISION, INC.
(AN S-CORPORATION)
DBS OPERATIONS
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
CASH FLOWS FROM OPERATING ACTIVITIES:
Operating loss ....................................... $ (848,715)
ADJUSTMENT TO RECONCILE OPERATING LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES:
Depreciation and amortization ........................ 85,576
Change in assets and liabilities:
Increase in accounts receivable ..................... (95,656)
Decrease in equipment held for resale ............... 68,793
Increase in accounts payable ........................ 159,327
Increase in accrued liabilities ..................... 45,282
Increase in customer advance payments ............... 8,286
Increase in unearned revenue ........................ 124,354
Increase in amount due to Turner-Vision, Inc. ...... 537,585
-----------
Total adjustments ................................. 933,547
-----------
NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 84,832
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ................................. (2,226)
-----------
NET CHANGE IN CASH ................................. $ 82,606
===========
The accompanying notes are an integral part of the financial statements
F-60
<PAGE>
TURNER-VISION, INC.
(AN S-CORPORATION)
DBS OPERATIONS
NOTES TO FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Turner-Vision, Inc. (the Company), through its DBS operations, markets and
distributes direct broadcast satellite services to cable and noncable
television subscribers residing within a five county area in southern West
Virginia and southwestern Virginia. The Company obtained these exclusive rights
to its service territory by investment with the National Rural
Telecommunications Cooperative (NRTC).
Subscriber Accounts Receivable
Subscriber accounts receivable represents amounts due from customers for
satellite television services and includes amounts billed, but unearned at each
year-end.
Equipment Held for Resale
The Company's DBS operations sells direct broadcast satellite receivers
and dishes, and supplies and materials commonly used for satellite
installations. At December 31, 1996, the equipment is carried at the lower of
cost or market, on a specific identification method.
Property and Equipment
Property and equipment are stated at original cost and include display
equipment and various tools, equipment and supplies for installation and
maintenance of DirectTV systems. Depreciation expense for the year ended
December 31, 1996 was $3,398.
Subsequent to December 31, 1996, the Company's DBS operations acquired
five vehicles from another company controlled by the Company's shareholders.
Since the vehicles were not acquired until after December 31, 1996, they are
not included in the accompanying financial statements. The vehicles were
included in the personal property sold to Pegasus under a Contribution
Agreement between Pegasus and the Company, dated March 10, 1997.
Revenue Recognition
The Company's DBS operations recognizes revenues monthly for DBS services
which have been earned through the end of the month. The unearned portion of
billed services is recorded as unearned revenue. The Company's DBS operations
recognized revenues from DBS equipment sales at the time of sale.
Advertising Costs
Advertising costs are expensed as incurred.
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 statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
F-61
<PAGE>
TURNER-VISION, INC.
(AN S-CORPORATION)
DBS OPERATIONS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
AS OF DECEMBER 31, 1996
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Concentration of Credit Risk
Financial instruments that potentially subject the Company's DBS
operations to concentration of credit risk consist principally of trade
accounts receivable. The risk is limited due to the large number of individuals
comprising the Company's DBS customer base. Exposure to losses on receivables
is principally dependent on each customer's financial condition. The Company's
DBS operations monitors the exposure for credit losses and maintains an
allowance for anticipated losses.
NOTE 2 -- DIRECT BROADCAST SATELLITE FRANCHISE
During 1993, the Company invested $821,775 with NRTC, acquiring exclusive
franchise rights to market direct broadcast satellite services to cable and
noncable television subscribers residing within a five county area in southern
West Virginia and southwestern Virginia. This investment is in an agreement
with NRTC for the rights to provide broadcast services to this service
territory for a period of approximately ten years, which is the expected life
of the satellite. The satellite was launched in late 1993 and became available
for use by the Company in July 1994. Amortization expense for these rights for
the year ended December 31, 1996 was $82,178.
NOTE 3 -- INCOME TAXES
Effective July 1, 1988, the Company elected by unanimous consent of its
shareholders to be taxed under the provision of Subchapter S of the Internal
Revenue Code. Under such election, the Company's federal and state income or
loss is passed through to the individual shareholders. Therefore, no provision
or liability for income tax has been included in these financial statements.
NOTE 4 -- CONTINGENCY
The Company's DBS operations relies on NRTC as its sole provider of
programming via direct broadcast satellite services.
NOTE 5 -- ALLOCATED COSTS
The accompanying statements of operations include costs allocated from the
Company to the Company's DBS operations for use of common property and
services. The costs were allocated on a proportional cost basis. The Company's
management believes its method of allocation is reasonable.
NOTE 6 -- RELATED PARTY TRANSACTIONS
The Company's DBS operations purchased customer satellite installation
services from another company that is controlled by the Company's shareholders.
For the year ended December 31, 1996, charges paid by the Company's DBS
operations for installation services totaled $425,310.
NOTE 7 -- SUBSEQUENT EVENTS
Acquisition of DBS Operations
Pegasus Communications Corporation entered into a Contribution Agreement
with the Company. The effective closing date of this transaction was March 10,
1997. Pursuant to the terms of the agreement, Pegasus purchased certain net
assets of the Company's DBS operations for $7 million, plus $1,400 for each
excess subscriber over 4,800 subscribers plus or minus, as applicable, the
estimated operating adjustments. The total cash consideration paid to the
Company by Pegasus at the closing totaled $8,189,267. In addition, Pegasus
issued to the Company 3,000 shares of Pegasus Satellite Television of Virginia,
Inc., Series A preferred stock,
F-62
<PAGE>
TURNER-VISION, INC.
(AN S-CORPORATION)
DBS OPERATIONS
NOTES TO FINANCIAL STATEMENTS -- (Continued)
AS OF DECEMBER 31, 1996
NOTE 7 -- SUBSEQUENT EVENTS -- (Continued)
and assigned and transferred to the Company Pegasus warrants to purchase
283,969 shares of Pegasus Communications Corporation, Class A Common Stock. The
Series A preferred stock has a stated price of $1,000 per share and is subject
to certain transfer restrictions. The warrants have an exercise price of $11.81
per share. The historic statements herein include the net assets to be sold and
the related results of operations and cash flows for the Company's DBS
operations as of and for the year ended December 31, 1996.
The Company was notified by Pegasus by a letter dated May 28, 1997
asserting indemnification claims pursuant to the Contribution Agreement, dated
as of March 10, 1997 for an alleged overstatement in the number of active
DirectTV subscribers. Pegasus has asked for damages in the amount of $459,200.
Outside counsel for the Company has advised that at this stage no opinion can
be offered as to the probable outcome or the amount or range of potential loss.
F-63
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Pioneer Services Corporation
Greenville, Alabama
We have audited the accompanying balance sheet of the DBS Operations of
Pioneer Services Corporation (operating division of Pioneer Services
Corporation as more fully described in Note 1 to financial statements) (the
Division) as of September 30, 1996 and the related statements of operations and
retained earnings, and cash flows for the year then ended. These financial
statements are the responsibility of the Division's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
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 financial position of the DBS Operations of
Pioneer Services Corporation as of September 30, 1996 and the results of its
operations and its cash flows for the year 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
Division been unaffiliated with Pioneer Services Corporation. As discussed in
Notes 1 and 6 to the financial statements, Pioneer Services Corporation
provides financing and certain general and administrative and other corporate
services to the Division.
Jackson Thornton & Co., P.C.
Montgomery, Alabama
January 14, 1997, except for
Note 7 as to which the
date is September 26, 1997
F-64
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
GREENVILLE, ALABAMA
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
1996 1997
--------------- ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash ............................................................... $ 25,907 $ 26,347
Accounts receivable:
Customers, less provision for doubtful accounts of $20,000 at Sep-
tember 30, 1996 and June 30, 1997 338,500 340,699
Inventories ......................................................... 330,551 163,145
------------ ------------
Total current assets ............................................. 694,958 530,191
------------ ------------
EQUIPMENT:
Leased property (net of accumulated depreciation of $210,964 and
$624,124 at September 30, 1996 and June 30, 1997, respectively)...... 3,026,009 2,622,700
------------ ------------
OTHER ASSETS:
Deferred charges ...................................................... 1,884 2,656
------------ ------------
Total assets ................................................... $ 3,722,851 $ 3,155,547
============ ============
</TABLE>
LIABILITIES AND DIVISION DEFICIENCY
<TABLE>
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable ..................................................... $ 161,257 $ 217,302
Accrued liabilities .................................................. 34,758 --
Deferred credits ..................................................... 195,065 232,417
------------ ----------
Total current liabilities ...................................... 391,080 449,719
------------ ----------
LONG-TERM DEBT:
Notes payable ........................................................ 5,057,051 4,722,867
------------ ----------
Total liabilities ............................................... 5,448,131 5,172,586
------------ ----------
EQUITY:
Division deficiency .................................................. (1,725,280) (2,017,039)
------------ ---------
Total liabilities and division deficiency ....................... $ 3,722,851 $ 3,155,547
============ ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
STATEMENTS OF OPERATIONS AND DIVISION DEFICIENCY
<TABLE>
<CAPTION>
Nine months ended
Year ended -----------------------------------
September 30, June 30, June 30,
1996 1996 1997
--------------- ----------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
OPERATING REVENUES ........................ $ 3,027,960 $ 1,966,721 $ 3,912,923
OPERATING EXPENSES ........................ (2,843,580) (2,182,553) (3,922,294)
------------- ------------- -------------
INCOME (LOSS) FROM OPERATIONS ............ 184,380 (215,832) (9,371)
INTEREST EXPENSE ........................... (215,147) (156,990) (282,388)
------------- ------------- -------------
NET INCOME (LOSS) ........................ (30,767) (372,822) (291,759)
DIVISION DEFICIENCY AT BEGINNING OF PERIOD . (1,694,513) (1,694,513) (1,725,280)
------------- ------------- -------------
DIVISION DEFICIENCY AT END OF PERIOD ...... $ (1,725,280) $ (2,067,335) $ (2,017,039)
============= ============= =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine months ended
Year ended --------------------------------
September 30, June 30, June 30,
1996 1996 1997
--------------- -------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM (USED FOR) OPERATING
ACTIVITIES:
Net loss ............................................. $ (30,767) $ (372,822) $ (291,759)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization ........................ 203,739 126,614 413,160
Provision for losses on notes and accounts receivable 105,417 79,063 152,092
Decrease (increase) in operating assets and increase
(decrease) in operating liabilities:
Accounts receivable .............................. (489,836) (218,779) (154,291)
Inventories ....................................... (24,869) (182,696) 167,406
Accounts payable ................................. (69,393) 214,025 56,045
Accrued liabilities .............................. (8,050) 8,816 (34,758)
Deferred credits ................................. 138,563 58,875 37,352
------------ ------------ -----------
Net cash from (used for) operating activities (175,196) (286,904) 345,247
------------ ------------ -----------
CASH FLOWS USED FOR INVESTING ACTIVITIES:
Capital expenditures ................................. (2,796,178) (2,096,623) (9,851)
Net change in deferred assets ........................ (8,406) (1,357) (772)
------------ ------------ -----------
Net cash used for investing activities ......... (2,804,584) (2,097,980) (10,623)
------------ ------------ -----------
CASH FLOWS FROM (USED FOR) FINANCING
ACTIVITIES:
Proceeds from long-term debt ........................... 2,983,181 2,377,490 (334,184)
------------ ------------ -----------
Net cash from (used for) financing activities 2,983,181 2,377,490 (334,184)
------------ ------------ -----------
NET INCREASE (DECREASE) IN CASH ........................ 3,401 (7,394) 440
CASH AT BEGINNING OF PERIOD ........................... 22,506 22,506 25,907
------------ ------------ -----------
CASH AT END OF PERIOD ................................. $ 25,907 $ 15,112 $ 26,347
============ ============ ===========
SUPPLEMENTAL INFORMATION:
Cash paid for interest on long-term debt ............... $ 52,896 $ 41,550 $ 270,150
============ ============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
NOTE 1 - PRESENTATION AND NATURE OF BUSINESS:
Basis of presentation - The DBS operations of Pioneer Services Corporation
(the Division) are comprised of the assets and liabilities of the division of
Pioneer Services Corporation (Pioneer) which provides direct broadcast
satellite (DBS) services. Pioneer intends to sell these assets pursuant to an
agreement with Pegasus Communications Holdings, Inc. (see Note 7). This
division has no separate legal existence apart from Pioneer.
The historical financial statements of the DBS operations of Pioneer do
not necessarily reflect the results of operations or financial position that
would have existed if the DBS operations were an independent company. Pioneer
provides certain general and administrative and other corporate services to the
Division (see Note 6).
Nature of business - The Corporation sells direct broadcast satellite
equipment and programming for television to consumers in rural central Alabama
franchised by the National Rural Telecommunication Cooperative (NRTC). While
this franchise is exclusive as it relates to programming provided through NRTC,
other programming providers may offer DBS services within the Division's
market. Under the franchise agreement, NRTC leases satellite capacity through
which programming is transmitted. The NRTC provides certain billing functions
for the Division.
The Division extends credit to its customers who are primarily in the
State of Alabama.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Inventories - Inventories are stated at the lower of cost (first-in,
first-out (FIFO) method) or market.
Equipment - Equipment is stated at cost. Depreciation of equipment is
computed on a straight-line basis over the useful lives of the assets. The
useful life of equipment held at the balance sheet date was determined to be
from five to seven years. The useful life of direct broadcast satellite
equipment is estimated to be seven years. Depreciation expense on all equipment
totaled $195,958 in 1996. Leased property is leased to customers on a monthly
basis.
In 1993, the Division borrowed $1,400,520 to acquire the franchise for the
DBS service areas which it now serves. This loan was secured by the franchise
for satellite television service. This note was satisfied in full on September
30, 1995 when Pioneer Services Corporation transferred the franchise for
satellite television service to Pioneer Electric Cooperative.
Deferred credits - Deferred credits include programming charges which have
been collected in advance from the consumer. These charges are brought into
income as the service is provided to the consumer.
Revenue recognition - Revenue in connection with programming services and
associated costs are recognized when such services are provided. Revenue in
connection with the sale of equipment and installation and associated costs are
recognized when the equipment is installed.
Income taxes - Pioneer is established as a not-for-profit organization
under the laws of the State of Alabama. Pioneer is subject to federal income
tax. The Division is included in the tax return of Pioneer. Accordingly income
taxes have been presented in these financial statements as though the Division
filed a separate federal income tax return. The Division accounts 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 certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Supplier - The Division purchases all of its programming from NRTC. The
cost of programming was $1,022,400 for 1996.
F-68
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
SEPTEMBER 30, 1996
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued)
Unaudited data - The balance sheet as of June 30, 1997 and the statements
of operations and division deficiency and cash flows for the nine months ended
June 30, 1996 and 1997 have been prepared by the Division's management and have
not been audited. The data as of June 30, 1997 and for the nine months ended
June 30, 1996 and 1997 has not subjected to any auditing procedures and,
accordingly, we do not express an opinion on the data. The results of
operations for the nine months ended June 30, 1996 and 1997 are not necessarily
indicative of operating results for the full year.
NOTE 3 - CASH AND CASH EQUIVALENTS:
The Division maintains its cash accounts in a bank located in Ohio. The
account at this bank is guaranteed by the Federal Deposit Insurance Corporation
(FDIC) for up to $100,000. At September 30, 1996, all of the Division's cash
was insured.
NOTE 4 - LONG-TERM DEBT:
Long-term debt consists of the following:
<TABLE>
<S> <C>
NRUCFC - variable interest rate, currently 6.20%; secured
by all assets of Pioneer; note matures April 17, 2000 ..... $ 2,760,551
Pioneer Electric Cooperative - interest rate of 6.75%;
unsecured; note matures December 19, 1997 ................. 2,296,500
------------
Totals ................................................ $ 5,057,051
============
Annual maturities on long-term debt are as follows:
September 30, 1998 ........................................ $ 2,296,500
September 30, 2000 ........................................ 2,760,551
------------
Total ................................................. $ 5,057,051
============
</TABLE>
NOTE 5 - INCOME TAXES:
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes (SFAS 109) requires companies to record deferred tax assets or
liabilities for the deferred tax consequences of all temporary differences. The
Statement requires that deferred tax balances be adjusted to reflect new tax
rates when they are enacted into law. Also, SFAS 109 requires the establishment
of an asset and/or liability to recognize the cumulative effect of deferred tax
activity.
The provision for income taxes consists of an amount for taxes currently
payable and a provision for tax consequences deferred to future periods.
Deferred income taxes are provided for certain temporary differences
principally due to the use of accelerated depreciation for income tax purposes.
Such deferred taxes are credited to income as the related temporary differences
reverse.
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.
F-69
<PAGE>
DBS OPERATIONS OF PIONEER SERVICES CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (Continued)
SEPTEMBER 30, 1996
NOTE 5 - INCOME TAXES: -- (Continued)
Significant items comprising the Division's deferred tax assets and
liabilities at September 30, 1996 are as follows:
<TABLE>
<S> <C>
Net deferred income tax asset:
Deferred tax asset:
Benefit from net operating loss carryforwards expiring
through the year 2012 .............................. $ 194,400
Deferred tax liability:
Depreciation expense ................................. (61,560)
----------
Net deferred tax asset ................................. 132,840
Valuation allowance .................................... (132,840)
----------
Net deferred tax balance ........................... $ 0
==========
</TABLE>
NOTE 6 - RELATED PARTIES:
Some of the Pioneer Services Corporation's directors also serve as
directors of Pioneer Electric Cooperative (PEC). Pioneer Services Corporation
is managed in accordance with a management contract between Pioneer Services
Corporation and PEC.
At September 30, 1996, PEC is the guarantor of the long-term debt payable
to NRUCFC.
As disclosed in Note 4, the Division has notes payable to PEC for capital
expenditures and working capital deficiencies. Interest expense on PEC loans
for the year ended September 30, 1996 includes $60,719. Interest paid to PEC
for the year ended September 30, 1996 was $52,896.
Accrued interest payable at September 30, 1996 includes $35,507 due to
PEC.
NOTE 7 - SUBSEQUENT EVENT:
Subsequent to January 14, 1997, Pioneer entered into a letter of intent
with Pegasus Communications Holdings, Inc. (Pegasus). The terms of this letter
are subject to change pursuant to ongoing negotiations between Pegasus and
Pioneer. Under the present understanding of the terms of the negotiations as of
September 26, 1997, Pioneer would sell to Pegasus its operating assets along
with its subscribers list for the Division for a negotiated price. Although the
Division believes that this transaction will be consummated, there can be no
assurances that it will occur.
F-70
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation
Pro forma consolidated statement of operations and other data for the year
ended December 31, 1996, the six months ended June 30, 1997 and the twelve
months ended June 30, 1997 give effect to (i) the Portland, Maine TV
acquisition, which closed on January 29, 1996, and the Tallahassee, Florida TV
acquisition, which closed on March 8, 1996, (ii) the acquisition of a Puerto
Rico cable system, which closed on August 29, 1996, (iii) the Completed DBS
Acquisitions, (iv) the Pending DBS Acquisitions, (v) the sale of the New
Hampshire cable system (the "New Hampshire Cable Sale"), which closed on
January 31, 1997, (vi) Pegasus' initial public offering of 3,000,000 shares of
Class A Common Stock (the "Initial Public Offering"), which was consummated on
October 8, 1996, and Pegasus' public offering of 100,000 shares of 12 3/4%
Series A Cumulative Exchangeable Preferred Stock and warrants to purchase
193,600 shares of Class A Common Stock (the "Unit Offering"), which was
consummated on January 27, 1997, and (vii) the Senior Notes Offering, all as if
such events had occurred at the beginning of each period.
The pro forma condensed consolidated balance sheet as of June 30, 1997
gives effect to (i) payments in connection with the Completed DBS Acquisitions,
(ii) the Pending DBS Acquisitions and the New Credit Facility, which, if not
completed prior to the consummation of the Senior Notes Offering, are
anticipated to occur in the fourth quarter of 1997, (iii) the closing of an
existing credit facility and the payment of accrued interest to holders of the
PM&C 12 1/2% Series B Senior Subordinated Notes due 2005 ("PM&C Notes"), and
(iv) the Senior Notes Offerring and the proceeds thereof, as if such events had
occurred on such date.
The acquisitions are accounted for using the purchase method of
accounting. The total costs of such acquisitions are allocated to the tangible
and intangible assets acquired and liabilities assumed based upon their
respective fair values. The allocation of the purchase price included in the
pro forma financial statements is preliminary. The Company does not expect that
the final allocation of the purchase price will materially differ from the
preliminary allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. The pro forma
consolidated financial information should be read in conjunction with the Notes
to Pro Forma Consolidated Statements of Operation, as well as the financial
statements and notes thereto of the acquisitions, included elsewhere in this
report. The pro forma consolidated financial information is not necessarily
indicative of the Company's future results of operations. There can be no
assurance whether or when the Pending DBS Acquisitions will be consummated.
F-71
<PAGE>
Pro Forma Consolidated Balance Sheet
As of June 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Completed Pending
DBS DBS
Actual Acquisitions(a) Acquisitions(b)
------------ ----------------- -----------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents ......... $ 12,518 ($ 8,221)
Restricted cash ..................... 6,892
Accounts receivable, net ............ 10,482
Inventory ........................... 721
Prepaid expenses and other current
assets .............................. 4,779
Property and equipment, net ......... 25,500
Intangibles, net .................. 192,873 $45,700 64,095
Other assets ........................ 2,147
---------- -------- --------
Total assets ..................... $ 255,912 $45,700 $55,874
========== ======== ========
LIABILITIES AND EQUITY
Current liabilities ............... $ 10,440
Accrued interest .................. 5,771
Current portion of long-term debt ... 3,884
Current portion of program rights
payable ........................... 1,102
Long-term debt, net ............... 83,061 $ 3,193
PSH Credit Facility ............... $45,700 46,000
New Credit Facility ..................
Senior Notes ........................
Program rights payable ............ 1,542
Other long term liabilities ......... 1,389
Preferred Stock ..................... 105,313
Minority Interest .................. 3,000
Class A Common Stock ............... 53 3
Class B Common Stock ............... 46
Additional paid in capital ......... 59,463 6,678
Retained earnings .................. (19,152)
---------- -------- --------
Total liabilities and equity ...... $ 255,912 $45,700 $55,874
========== ======== ========
RESTUBBED TABLE
<CAPTION>
The
Senior
Notes
Other(c) Subtotal Offering(d) Pro Forma
------------ ------------ ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ......... $25,479 $ 29,776 ($ 21,150) $ 8,626
Restricted cash ..................... (6,892) --
Accounts receivable, net ............ 10,482 10,482
Inventory ........................... 721 721
Prepaid expenses and other current
assets .............................. 4,779 4,779
Property and equipment, net ......... 25,500 25,500
Intangibles, net .................. 302,668 5,550 308,218
Other assets ........................ 2,147 2,147
-------- ---------- ---------- ----------
Total assets ..................... $18,587 $ 376,073 ($ 15,600) $ 360,473
======== ========== ========== ==========
LIABILITIES AND EQUITY
Current liabilities ............... $ 10,440 $ 10,440
Accrued interest .................. ($ 5,313) 458 458
Current portion of long-term debt ... 3,884 3,884
Current portion of program rights
payable ........................... 1,102 1,102
Long-term debt, net ............... 86,254 86,254
PSH Credit Facility ............... 23,900 115,600 ($ 115,600) --
New Credit Facility .................. --
Senior Notes ........................ 100,000 100,000
Program rights payable ............ 1,542 1,542
Other long term liabilities ......... 1,389 1,389
Preferred Stock ..................... 105,313 105,313
Minority Interest .................. 3,000 3,000
Class A Common Stock ............... 56 56
Class B Common Stock ............... 46 46
Additional paid in capital ......... 66,141 66,141
Retained earnings .................. (19,152) (19,152)
-------- ---------- ---------- ----------
Total liabilities and equity ...... $18,587 $ 376,073 ($ 15,600) $ 360,473
======== ========== ========== ==========
</TABLE>
- ------------
(a) To record ten Completed DBS Acquisitions which occurred after June 30,
1997.
(b) To record ten Pending DBS Acquisitions.
(c) To record additional borrowings under an existing credit facility and the
payment of interest on July 1, 1997 to holders of the PM&C Notes.
(d) To record the proceeds from the Senior Notes Offering and the uses of such
proceeds and the use of cash to finance the Pending DBS Acquisitions and
to record costs in connection with the New Credit Facility.
F-72
<PAGE>
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1996
(Dollars in thousands)
<TABLE>
<CAPTION>
Acquisitions
------------------------------------------------------------
Completed Pending
DBS DBS
Actual TV(a) Cable(b) Acquisitions(c) Acquisitions(d)
Income Statement Data: ------------ ---------- ---------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Net Revenues:
TV .................. $ 28,488 $ 651
DBS .................. 5,829 $23,080 $10,975
Cable ............... 13,496 $4,056
Other ............... 116
---------- ------ ------ -------- -------
Total net revenues . 47,929 651 4,056 23,080 10,975
---------- ------ ------ -------- -------
Location operating
expenses:
TV .................. 18,726 537
DBS .................. 4,958 22,877 10,089
Cable ............... 7,192 2,448
Other ............... 28
Incentive
compensation ......... 985
Corporate expenses ... 1,429 33 88 1,050 464
Depreciation and amorti-
zation 12,061 17 365 1,777 989
---------- ------ ------ -------- -------
Income (loss) from
operations ......... 2,550 64 1,155 (2,624) (567)
Interest expense ...... (12,455) (585) (482) (902) (493)
Other income (expense),
net .................. 61 3 519 64
Provision (benefit) for
income taxes ......... (120) 35 20 29 (102)
Dividends on Series A
Preferred Stock ...... ---------- ------ ------ -------- -------
Income (loss) applicable
to common shares
before extraordinary
items .................. ($ 9,724) ($ 553) $ 653 ($ 3,036) ($ 894)
========== ====== ====== ======== =======
Other Data:
Location Cash Flow(r) . $ 17,025 $ 114 $1,608 $ 203 $ 886
Operating Cash Flow(r) 15,596 81 1,520 (847) 422
Capital Expenditures ... 6,294 96 4,143 1,397
RESTUBBED TABLE
<CAPTION>
The
NH Senior
Cable Previous Sub- Notes Pro
Adjustments Sale(e) Offerings(f) total Offering Forma
Income Statement Data: ----------------- ------------ -------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
TV .................. $ 17(g) $ 29,156 $ 29,156
DBS .................. 39,884 39,884
Cable ............... ($ 1,688) 15,864 15,864
Other ............... 116 116
------------- -------- ---------- --------- ---------- ---------
Total net revenues . 17 (1,688) 85,020 85,020
------------- -------- ---------- --------- ---------- ---------
Location operating
expenses:
TV .................. (43)(h) 19,220 19,220
DBS .................. (7,121)(i) 30,803 30,803
Cable ............... (249)(j) (918) 8,473 8,473
Other ............... 28 28
Incentive
compensation ......... (75) 910 910
Corporate expenses ... (1,635)(k) 1,429 1,429
Depreciation and amorti-
zation 16,137(l) (618) $ 97 30,825 $ 800(p) 31,625
------------- -------- ---------- --------- ---------- ---------
Income (loss) from
operations ......... (7,072) (77) (97) (6,668) (800) (7,468)
Interest expense ...... (16,342)(m) 11,330 (19,929) (988)(q) (20,917)
Other income (expense),
net .................. (586)(n) 61 61
Provision (benefit) for
income taxes ......... 18(o) (120) (120)
Dividends on Series A
Preferred Stock ...... (12,750) (12,750) (12,750)
Income (loss) applicable ------------- -------- ---------- --------- ---------- ---------
to common shares
before extraordinary
items .................. ($ 24,018) ($ 77) ($ 1,517) ($ 39,166) ($ 1,788) ($ 40,954)
============= ======== ========== ========= ========== =========
Other Data:
Location Cash Flow(r) .. $ 7,430 ($ 770) $ 26,496 $ 26,496
Operating Cash Flow(r) .. 9,065 (770) 25,067 25,067
Capital Expenditures ... (204) 11,726 11,726
</TABLE>
F-73
<PAGE>
Pro Forma Consolidated Statement of Operations
Six Months Ended June 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Completed Pending
DBS DBS
Actual Acquisitions(c) Acquisitions(d)
Income Statement Data: ------------- ----------------- -----------------
<S> <C> <C> <C>
Net Revenues:
TV ........................ $ 14,636
DBS ........................ 12,771 $8,109 $7,162
Cable ..................... 8,133
Other ..................... 70
--------- ------ ------
Total net revenues ......... 35,610 8,109 7,162
--------- ------ ------
Location operating expenses:
TV ........................ 9,694
DBS ........................ 9,738 7,970 6,364
Cable ..................... 4,365
Other ..................... 13
Incentive compensation ...... 521
Corporate expenses ......... 904 333 343
Depreciation and
amortization ............... 10,854 616 523
--------- ------ ------
Income (loss) from
operations ............... (479) (810) (68)
Interest expense ............ (6,024) (151) (283)
Other income (expense), net 452 68 22
Provision (benefit) for income
taxes ..................... 50 (40) 26
Dividends on Series A
Preferred Stock ............ (5,313)
--------- ------ ------
Income (loss) applicable to
common shares before
extraordinary items ......... ($ 11,414) ($ 853) ($ 355)
========= ====== ======
Other Data:
Location Cash Flow(r) ...... $ 11,800 $ 139 $ 798
Operating Cash Flow(r) ...... 10,896 (194) 455
Capital Expenditures ......... 5,233 2,191 746
<PAGE>
RESTUBBED TABLE
<CAPTION>
The
NH Senior
Cable Previous Sub- Notes Pro
Adjustments Sale(e) Offerings(f) total Offering Forma
Income Statement Data: ------------------ ------------ -------------- ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
TV ........................ $ 14,636 $ 14,636
DBS ........................ 28,042 28,042
Cable ..................... ($ 135) 7,998 7,998
Other ..................... 70 70
----------- ------- --------- --------- ---------- ---------
Total net revenues ......... (135) 50,746 50,746
----------- ------- --------- --------- ---------- ---------
Location operating expenses:
TV ........................ 9,694 9,694
DBS ........................ ($ 2,918)(i) 21,154 21,154
Cable ..................... (68) 4,297 4,297
Other ..................... 13 13
Incentive compensation ...... 521 521
Corporate expenses ......... (676)(k) 904 904
Depreciation and
amortization ............... 4,705(l) (52) 16,646 $ 400(p) 17,046
----------- ------- --------- --------- ---------- ---------
Income (loss) from
operations ............... (1,111) (15) (2,483) (400) (2,883)
Interest expense ............ (7,105)(m) $ 3,600 (9,963) (495)(q) (10,458)
Other income (expense), net (90)(n) 452 452
Provision (benefit) for income
taxes ..................... 14(o) 50 50
Dividends on Series A
Preferred Stock ............ (1,062) (6,375) (6,375)
----------- ------- --------- --------- ---------- ---------
Income (loss) applicable to
common shares before
extraordinary items ......... ($ 8,320) ($ 15) $ 2,538 ($ 18,419) ($ 895) ($19,314)
=========== ======= ========= ========= ========== =========
Other Data:
Location Cash Flow(r) ...... $ 2,918 ($ 67) $ 15,588 $ 15,588
Operating Cash Flow(r) ...... 3,594 (67) 14,684 14,684
Capital Expenditures ......... (5) 8,165 8,165
</TABLE>
F-74
<PAGE>
Pro Forma Consolidated Statement of Operations
Twelve Months Ended June 30, 1997
(Dollars in thousands)
<TABLE>
<CAPTION>
Acquisitions
------------------------------------------------
Completed Pending
DBS DBS
Actual Cable(b) Acquisitions(c) Acquisitions(d)
Income Statement Data: ------------ ---------- ----------------- -----------------
<S> <C> <C> <C> <C>
Net Revenues:
TV ..................... $ 31,192
DBS ..................... 17,032 $20,429 $13,593
Cable .................. 16,003 $ 866
Other .................. 130
--------- ------- -------- -------
Total net revenues . 64,357 866 20,429 13,593
--------- ------- -------- -------
Location operating
expenses:
TV ..................... 20,149
DBS ..................... 13,435 20,858 12,328
Cable .................. 8,470 637
Other .................. 32
Incentive
compensation ............ 1,076
Corporate expenses ...... 1,624 88 922 567
Depreciation and amorti-
zation 18,010 164 1,449 1,044
--------- ------- -------- -------
Income (loss) from
operations ............ 1,561 (23) (2,800) (346)
Interest expense ......... (12,909) (69) (499) (574)
Other income (expense),
net ..................... 424 201 64
Provision (benefit) for
income taxes ............ 63 (313) (48) (82)
Dividends on Series A
Preferred Stock ......... (5,313)
--------- ------- -------- -------
Income (loss) applicable
to common shares
before extraordinary
items .................. ($ 16,300) $ 221 ($ 3,050) ($ 774)
========= ======= ======== =======
Other Data:
Location Cash Flow(r) . $ 22,271 $ 229 ($ 429) $1,265
Operating Cash Flow(r) 20,647 141 (1,351) 698
Adjusted Operating Cash
Flow(s) ..................
Capital Expenditures ... 8,779 3,407 1,516
<PAGE>
RESTUBBED TABLE
<CAPTION>
The
NH Senior
Cable Previous Sub- Notes Pro
Adjustments Sale(e) Offerings(f) total Offering Forma
Income Statement Data: ------------------ ------------ -------------- ------------ ------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Net Revenues:
TV ..................... $ 31,192 $ 31,192
DBS ..................... 51,054 51,054
Cable .................. ($ 1,039) 15,830 15,830
Other .................. 130 130
------------- -------- --------- --------- ---------- ---------
Total net revenues . (1,039) 98,206 98,206
------------- -------- --------- --------- ---------- ---------
Location operating
expenses:
TV ..................... 20,149 20,149
DBS ..................... ($ 7,335)(i) 39,286 39,286
Cable .................. (83)(j) (552) 8,472 8,472
Other .................. 32 32
Incentive
compensation ............ (66) 1,010 1,010
Corporate expenses ...... (1,577)(k) 1,624 1,624
Depreciation and amorti-
zation 12,678(l) (358) $ 32 33,019 $ 800(p) 33,819
------------- -------- --------- --------- ---------- ---------
Income (loss) from
operations ............ (3,683) (63) (32) (5,386) (800) (6,186)
Interest expense ......... (17,314)(m) 11,330 (20,035) (882)(q) (20,917)
Other income (expense),
net ..................... (286)(n) 403 403
Provision (benefit) for
income taxes ............ 443(o) 63 63
Dividends on Series A
Preferred Stock ......... (7,437) (12,750) (12,750)
------------- -------- --------- --------- ---------- ---------
Income (loss) applicable
to common shares
before extraordinary
items .................. ($ 21,726) ($ 63) $ 3,861 ($ 37,831) ($ 1,682) ($ 39,513)
============= ======== ========= ========= ========== =========
Other Data:
Location Cash Flow(r)...... $ 7,418 ($ 487) $ 30,267 $30,267
Operating Cash Flow(r)..... 8,995 (487) 28,643 28,643
Adjusted Operating Cash
Flow(s) .................. 30,372
Capital Expenditures ... (62) 13,640 13,640
</TABLE>
F-75
<PAGE>
Notes to Pro Forma Consolidated Statements of Operations
(a) Financial results of Portland Broadcasting, Inc. and WTLH, Inc. for the
beginning of the period to the date of acquisition by the Company.
(b) Financial results of Dom's Tele Cable, Inc. for the beginning of the period
to the date of acquisition by the Company.
(c) Represents the combined financial results of the Completed DBS Acquisitions
for the beginning of the period to the date of acquisition by the Company
or the end of the period.
(d) Represents the combined financial results of the Pending DBS Acquisitions
for the period presented.
(e) Financial results of the New Hampshire operations of Pegasus Cable
Television.
(f) To remove interest expense on the debt retired with the proceeds of the
Initial Public Offering and the Unit Offering, to eliminate amortization of
deferred costs related to an old credit facility, to record amortization of
costs incurred in connection with an existing credit facility and to record
dividends on Pegasus' Series A Preferred Stock.
(g) To reduce the commissions paid by WPXT and WTLH to their national
advertising sales representative to conform to the Company's contract.
(h) To eliminate payroll expense related to staff reductions and rent expenses
incurred from prior acquisitions.
(i) Represents elimination of costs associated with 32 call centers that were
not acquired and to conform accounting policies with respect to subscriber
acquisition costs, net of the Company adding additional customer service
representatives.
(j) To reflect expense reductions, such as redundant staff, rent, professional
fees and utilities implemented in connection with acquisitions and
interconnection of its Puerto Rico cable systems.
(k) To eliminate corporate expenses charged by prior owners.
(l) To record additional depreciation and amortization resulting from the
purchase accounting treatment of the acquisitions and to conform accounting
policies with respect to subscriber acquisition costs. 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.
(m) To record the increase in net interest expense associated with the
borrowings incurred in connection with the acquisitions described above.
(n) 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.
(o) To eliminate the net tax benefit in connection with the acquisitions.
(p) To record additional amortization resulting from the Senior Notes Offering
and the New Credit Facility.
(q) Interest expense is adjusted for the Senior Notes Offering and the use of
proceeds therefrom and gives effect to the Completed DBS Acquisitions, the
New Hampshire Cable Sale, the Unit Offering, the Pending DBS Acquisitions,
the Subsidiaries Combination and the New Credit Facility (Dollars in
thousands):
<PAGE>
<TABLE>
<CAPTION>
Six Months Twelve Months
Year Ended Ended Ended
12/31/96 6/30/97 6/30/97
------------ ------------ --------------
<S> <C> <C> <C>
Interest expense:
PM&C Notes .............................. $10,625 $ 5,313 $10,625
Senior Notes ........................... 9,750 4,875 9,750
Other debt .............................. 542 270 542
-------- -------- --------
Total ................................. 20,917 10,458 20,917
Interest expense previously recorded ...... 19,929 9,963 20,035
-------- -------- --------
Adjustment ................................. $ 988 $ 495 $ 882
======== ======== ========
</TABLE>
(r) 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 businesses as
generally recognized measures of performance and are used by analysts who
report publicly on the performance of companies operating in such
businesses. 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.
(s) Adjusted Operating Cash Flow is defined as Operating Cash Flow for the four
most recent fiscal quarters less DBS cash flow for the most recent
four-quarter period plus DBS cash flow for the most recent quarterly period
multiplied by four.
F-76
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ---------- ------------------------------------
99.1 Press release dated October 8, 1997
<PAGE>
FOR IMMEDIATE RELEASE
- ---------------------
PEGASUS COMMUNICATIONS CORPORATION
ANNOUNCES PRIVATE OFFERING OF $100 MILLION OF SENIOR NOTES
RADNOR, PA October 8, 1997 -- Pegasus Communications Corporation
(Nasdaq: PGTV) announced today that it is privately offering approximately $100
million of senior notes. The Company commenced the offering today and
anticipates using the proceeds of the offering to finance DBS acquisitions and
repay borrowings under an existing credit facility. The terms of the offering
have not been finalized. The securities being offered in the private offering
will not be and have not been registered under the Securities Act of 1933 and
may not be offered or sold in the United States without registration or an
applicable exemption from registration requirements.
In connection with the offering, Pegasus would reorganize its DBS
operating subsidiaries as subsidiaries of Pegasus Media & Communications, Inc.,
a wholly-owned subsidiary of Pegasus, and would consolidate its existing credit
facilities into a new single $180 million credit facility.
Pegasus Communications Corporation operates in two growing areas of
television - direct broadcast satellite television (DBS) and broadcast televison
(TV). In DBS, Pegasus Satellite Television is the largest independent provider
of DIRECTV services in the US. Pegasus owns the exclusive right to provide
DIRECTV to approximately 2.3 million households in 27 states and serves
approximately 126,000 DBS subscribers, giving effect to pending acquisitions.
Pegasus Broadcast Television operates eight TV stations serving approximately
1.9 million households in six TV markets, giving effect to the pending launch of
two TV stations. Pegasus' TV stations are affiliated with FOX, UPN and WB.
Pegasus also serves approximately 42,000 cable subscribers in New England and
Puerto Rico.
This press release contains information about pending transactions,and
there can be no assurance that these transactions will be completed.
###
For further information, contact: Robert N. Verdecchio, CFO
- --------------------------------- Pegasus Communications Corporation
610-341-1801
