<PAGE>
As filed with the Securities and Exchange Commission on March 18, 1998
Registration No. 333-44929
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
PEGASUS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter)
---------------------
4833
(Primary Standard Industrial Classification Code Number)
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DELAWARE 51-0374669
(State or Other Jurisdiction of Incorporation of Organization) (I.R.S. Employer Identification Number)
</TABLE>
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
(610) 341-1801
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
---------------------
Marshall W. Pagon, President and Chief Executive Officer
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
Radnor, Pennsylvania 19087
(610) 341-1801
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
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Ted S. Lodge, Esq. Michael B. Jordan, Esq. H. Bryan Ives, III, Esq.
Pegasus Communications Corporation Scott A. Blank, Esq. C. Mark Kelly, Esq.
c/o Pegasus Communications Management Company Drinker Biddle & Reath LLP Nelson Mullins Riley & Scarborough, L.L.P.
Suite 454, 5 Radnor Corporate Center 1100 Philadelphia National Bank Building 2600 Nationsbank Corporate Center
100 Matsonford Road 1345 Chestnut Street 100 North Tryon Street
Radnor, Pennsylvania 19087 Philadelphia, Pennsylvania 19107-3496 Charlotte, North Carolina 28202-4000
(610) 341-1801 (215) 988-2700 (704) 417-3000
</TABLE>
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is ordered effective and all
other conditions to the merger (the "Merger") of a subsidiary of the Registrant
with Digital Television Services, Inc. ("DTS") pursuant to the Agreement and
Plan of Merger described in the enclosed Proxy Statement/Prospectus have been
satisfied or waived.
---------------------
If the securities being registered on this form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
The registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
Suite 454
5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
March __, 1998
Dear Fellow Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders of
Pegasus Communications Corporation (the "Company" or "Pegasus") on April 16,
1998, at 10:00 a.m., local time, at the law offices of Drinker Biddle & Reath
LLP, Philadelphia National Bank Building, 21st Floor, 1345 Chestnut Street,
Philadelphia, Pennsylvania.
At the Special Meeting, you will be asked to consider and vote upon, among
other things, a proposal (the "Merger Proposal") to approve and adopt the
Agreement and Plan of Merger dated January 8, 1998 (the "Merger Agreement"),
among Pegasus, Digital Television Services, Inc. ("DTS"), Pegasus DTS Merger
Sub, Inc., a wholly-owned subsidiary of Pegasus (the "Merger Sub"), certain
stockholders of Pegasus, and certain stockholders of DTS.
Pursuant to the Merger Agreement, the Merger Sub will be merged (the
"Merger") with and into DTS, and DTS will become a wholly-owned subsidiary of
Pegasus. As a result of the Merger and the transactions contemplated thereby,
(a) with certain exceptions and subject to certain immaterial adjustments, all
holders of (i) DTS capital stock will have the right to receive shares of
Pegasus Class A Common Stock, and (ii) DTS options and warrants will receive
options and/or warrants to purchase Pegasus Class A Common Stock; (b) the Board
of Directors of Pegasus will be increased to nine members, three of whom will
be designated by certain stockholders of DTS or their affiliates; and (c) I,
together with certain affiliates of mine who hold all of the Pegasus Class B
Common Stock, and certain stockholders of DTS and certain of their affiliates
will enter into a voting agreement with respect to the designation and election
of directors. Although the number of shares of Pegasus Class A Common Stock to
be issued in the Merger cannot be precisely determined until just before the
closing of the Merger, it is anticipated that approximately 5,465,500 shares
(with a value of approximately $__million based upon the closing price of the
Pegasus Class A Common Stock on March __, 1998 of $__per share) will be issued
in the Merger together with options and/or warrants to purchase approximately
223,000 shares of Pegasus Class A Common Stock. After giving effect to the
Merger, the DTS stockholders will own approximately 48.7% of the issued and
outstanding Class A Common Stock, which will represent approximately 34.6% of
the common equity of Pegasus. After giving effect to the Merger and the voting
rights of the Pegasus Class B Common Stock, the stockholders of DTS and I will
have voting power with respect to approximately 9.6% and 80.3%, respectively,
of Pegasus' common stock, subject to the terms of the voting agreement. Upon
consummation of the Merger, DTS' net liabilities, which as of March 13, 1998
were approximately $173.2 million will remain outstanding obligations of DTS;
they will not be assumed by Pegasus or any of its subsidiaries.
YOUR BOARD OF DIRECTORS BELIEVES THAT THE MERGER WILL PROVIDE SIGNIFICANT
VALUE TO PEGASUS AND ITS STOCKHOLDERS BY OFFERING OPPORTUNITIES FOR GROWTH AND
HAS DETERMINED THAT THE MERGER IS, THEREFORE, IN THE BEST INTERESTS OF PEGASUS
AND ITS STOCKHOLDERS. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE
MERGER PROPOSAL AND RECOMMENDS THAT YOU VOTE FOR THE MERGER PROPOSAL.
You should read carefully the accompanying Notice of Special Meeting of
Stockholders and the Proxy Statement/Prospectus for details of the Merger, the
other proposals to be voted upon at the Special Meeting, and additional related
information.
It is important that your shares be represented at the Special Meeting
whether or not you attend. I urge you to sign, date and return the enclosed
proxy at your earliest convenience.
Sincerely,
MARSHALL W. PAGON
President, Chief Executive Officer
and Chairman of the Board
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
Suite 454
5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON APRIL 16, 1998
-------------------
To the Stockholders of Pegasus Communications Corporation:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the
"Special Meeting") of Pegasus Communications Corporation ("Pegasus") will be
held on April 16, 1998, at 10:00 a.m., at the law offices of Drinker Biddle &
Reath LLP, Philadelphia National Bank Building, 21st Floor, 1345 Chestnut
Street, Philadelphia, Pennsylvania.
The Special Meeting will be held for the following purposes:
I. To consider and vote upon a proposal (the "Merger Proposal") to approve
and adopt the Agreement and Plan of Merger dated January 8, 1998 (the "Merger
Agreement"), among Pegasus, Digital Television Services, Inc., a Delaware
corporation ("DTS"), Pegasus DTS Merger Sub, Inc., a wholly-owned Delaware
subsidiary of Pegasus (the "Merger Sub"), certain stockholders of Pegasus and
certain stockholders of DTS, and the transactions contemplated thereby.
Pursuant to the Merger Agreement, the Merger Sub will be merged with and into
DTS (the "Merger"), and DTS will become a wholly-owned subsidiary of Pegasus.
In the Merger, (a) with certain exceptions and subject to certain immaterial
adjustments, all holders of (i) DTS capital stock will have the right to
receive an aggregate of approximately 5,465,500 shares of Pegasus Class A
Common Stock and (ii) DTS options and warrants will receive options and/or
warrants to purchase approximately 223,000 shares of Pegasus Class A Common
Stock, (b) the Board of Directors of Pegasus will be increased to nine members,
three of whom will be designated by certain stockholders of DTS or their
affiliates and (c) certain stockholders of DTS and certain of their affiliates,
myself, and certain of my affiliates who hold all of the Pegasus Class B Common
Stock will enter into a voting agreement (the "Voting Agreement") with respect
to the designation and election of directors. After giving effect to the
Merger, the DTS stockholders will own approximately 48.7% of the issued and
outstanding Class A Common Stock, which will represent approximately 34.6% of
the common equity of Pegasus. After giving effect to the Merger and the voting
rights of the Pegasus Class B Common Stock, the stockholders of DTS and I will
have voting power with respect to approximately 9.6% and 80.3%, respectively of
Pegasus' common stock, subject to the terms of the Voting Agreement.
II. To amend the Pegasus Communications Restricted Stock Plan to increase
the number of shares of Class A Common Stock that may be issued thereunder from
270,000 to 350,000.
III. To amend the Pegasus Communications 1996 Stock Option Plan to
increase the number of shares of Class A Common Stock that may be issued
thereunder from 450,000 to 970,000 and to increase the maximum number of Shares
of Class A Common Stock that may be issued under options granted to any
executive officer from 275,000 to 550,000.
IV. To amend provisions of the Certificate of Designation, Preferences and
Relative, Participating, Optional and Other Special Rights of Preferred Stock
and Qualifications, Limitations and Restrictions Thereof (the "Certificate of
Designation") relating to Pegasus' 12 3/4% Series A Cumulative, Exchangeable
Preferred Stock due 2007 (the "Series A Preferred Stock") relating to (i) the
incurrence of indebtedness and (ii) the definition of a change of control.
V. To transact such other business as may properly come before the Special
Meeting or any adjournment or postponement thereof.
Copies of the Merger Agreement, Voting Agreement and the proposed
amendments to the Restricted Stock Plan and the Stock Option Plan are attached
to the Proxy Statement/Prospectus as Annexes I through IV, respectively, and
are incorporated herein by reference.
<PAGE>
The Merger Proposal will be voted upon as a single proposal. Failure of
the Merger Proposal to be approved by the stockholders will result in the
termination of the Merger Agreement, no right of the DTS stockholders to
receive Pegasus securities, the Voting Agreement not being entered into and no
change in the Board of Directors.
The Board of Directors of Pegasus has fixed March 2, 1998 as the record
date for the determination of stockholders entitled to notice of and to vote at
the Special Meeting. The affirmative vote of holders of a majority of the
outstanding shares of Pegasus' common stock present in person or by proxy, at
the Special Meeting and entitled to vote is necessary to approve and adopt the
Merger Proposal and the other proposals to be voted upon at the Special
Meeting. I intend to vote all shares that I control in favor of all the
proposals. Since I control 88.9% of the voting power, I have sufficient voting
power to approve each of the proposals without the vote of any other
stockholder.
Holders of Pegasus' common stock are not entitled to appraisal rights
under Delaware law in connection with the Merger. The Special Meeting is not
being held in lieu of an annual meeting. Pegasus intends to hold its annual
meeting later in 1998 at which time an election of directors will take place.
ALL STOCKHOLDERS ARE CORDIALLY INVITED TO ATTEND THE SPECIAL MEETING IN
PERSON. HOWEVER, TO ENSURE YOUR REPRESENTATION AT THE SPECIAL MEETING, YOU ARE
URGED TO COMPLETE, SIGN AND DATE THE ENCLOSED PROXY CARD AND RETURN IT AS
PROMPTLY AS POSSIBLE IN THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF THE
PROXY IS MAILED IN THE UNITED STATES.
By Order of the Board of Directors,
MARSHALL W. PAGON
President, Chief Executive Officer
and Chairman of the Board
Dated: , 1998
<PAGE>
This Proxy Statement/Prospectus and the information contained herein are
subject to completion or amendment. These securities may not be sold nor may
offers to buy be accepted prior to the time the Proxy Statement/Prospectus is
delivered in final form. Under no circumstances shall this Proxy
Statement/Prospectus constitute an offer to sell or the solicitation of an
offer to buy nor shall there be any sale of these securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such
jurisdiction.
PRELIMINARY COPY -- SUBJECT TO COMPLETION -- DATED MARCH 18, 1998
PROXY STATEMENT
FOR SPECIAL MEETING OF
STOCKHOLDERS OF PEGASUS COMMUNICATIONS CORPORATION
TO BE HELD APRIL 16, 1998
----------------
PEGASUS COMMUNICATIONS CORPORATION
PROSPECTUS
5,500,000 Shares of Class A Common Stock
----------------
This Proxy Statement/Prospectus is being furnished to holders of Class A
common stock ("Class A Common Stock") and Class B common stock ("Class B Common
Stock" and together with the Class A Common Stock, the "Common Stock") of
Pegasus Communications Corporation ("Pegasus" and together with its
subsidiaries, the "Company") in connection with the solicitation of proxies by
the Board of Directors of Pegasus (the "Pegasus Board") for use at the special
meeting of stockholders of Pegasus to be held on April 16, 1998, or any
adjournment or postponement thereof (the "Special Meeting").
The Special Meeting has been called to consider and vote upon a proposal
(the "Merger Proposal") to approve and adopt the Agreement and Plan of Merger
(the "Merger Agreement") dated January 8, 1998, among Pegasus, Pegasus DTS
Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of
Pegasus ("Merger Sub"), certain of Pegasus' stockholders, Digital Television
Services, Inc., a Delaware corporation ("DTS"), and certain stockholders of
DTS, which provides for the merger of Merger Sub into DTS and the issuance,
subject to certain immaterial adjustments, of approximately 5,465,500 shares of
Class A Common Stock to the stockholders of DTS (the "Merger"). At the Special
Meeting, holders of the Common Stock will also be asked to consider and approve
proposals to amend (i) the Pegasus Communications Restricted Stock Plan (the
"Restricted Stock Plan") to increase the number of shares of Class A Common
Stock that may be issued thereunder from 270,000 to 350,000, (ii) the Pegasus
Communications 1996 Stock Option Plan (the "Stock Option Plan") to increase the
number of shares that may be issued thereunder from 450,000 to 970,000 and to
increase the maximum number of Shares of Class A Common Stock that may be
issued under options granted to any executive officer from 275,000 to 550,000
and (iii) the Certificate of Designation, Preferences and Relative,
Participating, Optional and Other Special Rights of Preferred Stock and
Qualifications, Limitations and Restrictions Thereof (the "Certificate of
Designation") relating to Pegasus' 12 3/4% Series A Cumulative, Exchangeable
Preferred Stock due 2007 (the "Series A Preferred Stock") to amend provisions
governing (A) the incurrence of Indebtedness (as this term is defined in the
Certificate of Designation) and (B) the definition of Charge of Control (as
this term is defined in the Certificate of Designation) (collectively, the
"Series A Preferred Stock Amendments"). The Special Meeting is not being held
in lieu of an annual meeting. Pegasus intends to hold its annual meeting later
in 1998, at which time an election of directors will take place.
As a result of the Merger, DTS will become a wholly owned subsidiary of
Pegasus. The Merger is intended to be a tax-free reorganization and will be
accounted for by the purchase method of accounting. The shares of Class A
Common Stock to be issued in the Merger to holders of the outstanding DTS
capital stock will constitute approximately 48.7% of the outstanding shares of
Class A Common Stock after the Merger, which will represent approximately 34.6%
of the common equity of Pegasus. After giving effect to the Merger and the
voting rights of the Class B Common Stock, the stockholders of DTS and Marshall
W. Pagon, Pegasus' President, Chief Executive Officer and Chairman of the Board
of Directors, will have voting power with respect to approximately 9.6% and
80.3%, respectively, of the Common Stock, subject to the terms of a voting
agreement.
This Proxy Statement/Prospectus also constitutes the prospectus of Pegasus
with respect to up to 5.5 million shares of Class A Common Stock that will be
issued to holders of the outstanding DTS capital stock upon consummation of the
Merger. See "THE MERGER -- The Merger Agreement" and "COMPARISON OF
STOCKHOLDERS' RIGHTS." It is anticipated that, subject to certain immaterial
adjustments, approximately 5,465,500 shares of Class A Common Stock will be
issued in the Merger.
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "PGTV." On March , 1998, the last reported sale price of the Class A
Common Stock on the Nasdaq National Market was $ per share.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 12.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the stockholders of Pegasus on or about ________________,
1998.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS HAVE
NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION
OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
The date of this Proxy Statement/Prospectus is __________, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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AVAILABLE INFORMATION .................................................................... 1
SUMMARY .................................................................................. 2
RISK FACTORS ............................................................................. 12
Risks Relating to Forward-Looking Statements ............................................ 12
Risk Factors Associated With the Merger ................................................. 12
Offer to Purchase DTS Notes ........................................................... 12
Uncertainties Relating to Integration of Operations ................................... 12
Transaction Expenses; Costs of Integration ............................................ 13
Dilutive Effect of the Merger on Pegasus' Earnings Per Share, Book Value Per Share and
Voting Power ......................................................................... 13
Risk Factors Relating to the Company's Business ......................................... 13
Substantial Indebtedness and High Degree of Leverage .................................. 13
Dependence on Network Affiliations .................................................... 14
Reliance on DBS Technology and DIRECTV ................................................ 14
Competition in the TV, DBS and Cable Businesses ....................................... 15
Risks Attendant to Acquisition Strategy ............................................... 15
Inability to Manage Growth Effectively ................................................ 16
Dependence on Key Personnel ........................................................... 16
Government Legislation, Regulation, Licenses and Franchises ........................... 16
Dividend Policy; Restrictions on Payment of Dividends ................................. 17
Concentration of Share Ownership and Voting Control By Marshall W. Pagon .............. 17
Volatility of Stock Price ............................................................. 18
Potential Anti-Takeover Provisions; Change of Control ................................. 18
Dependence on Third Party Programmers ................................................. 19
Risk of Signal Theft .................................................................. 19
Limited Consumer Adoption of Satellite Television ..................................... 19
Risk Factors Relating to DTS' Business .................................................. 20
Substantial Indebtedness and High Degree of Leverage .................................. 20
Limited Operating History, Negative Cash Flow ......................................... 21
COMPARATIVE PER SHARE DATA ............................................................... 22
MARKET PRICE INFORMATION AND DIVIDENDS ................................................... 23
Pegasus ............................................................................... 23
DTS ................................................................................... 23
THE SPECIAL MEETING ...................................................................... 23
Solicitation .......................................................................... 23
Voting Securities and Record Date ..................................................... 24
Quorum and Voting...................................................................... 24
Purpose of the Special Meeting ........................................................ 24
PROPOSAL 1: APPROVAL OF MERGER ........................................................... 25
Background of the Merger .............................................................. 25
Reasons for the Merger and Recommendations of the Pegasus Board ....................... 26
Opinion of Merrill Lynch .............................................................. 26
Interests of Certain Persons in the Merger ............................................ 30
Ownership of Pegasus After the Merger ................................................. 30
Management of Pegasus After the Merger ................................................ 30
PROPOSAL 2: AMENDMENT TO RESTRICTED STOCK PLAN ........................................... 31
PROPOSAL 3: AMENDMENT TO STOCK OPTION PLAN ............................................... 33
</TABLE>
i
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PROPOSAL 4: AMENDMENT TO SERIES A PREFERRED STOCK CERTIFICATE
OF DESIGNATION ........................................................... 36
PROPOSAL 5: OTHER MATTERS ................................................. 37
THE MERGER ................................................................ 38
The Merger Agreement ................................................... 38
Termination ............................................................ 40
Voting Agreement ....................................................... 42
Registration Rights Agreement .......................................... 43
Noncompetition Agreements .............................................. 44
Consequences Under Debt Agreements and Preferred Stock Terms ........... 44
Certain Federal Income Tax Consequences ................................ 44
Accounting Treatment ................................................... 46
Federal Securities Law Consequences .................................... 46
PEGASUS SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA ..... 47
PEGASUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................... 50
Subsidiaries Combination ............................................... 50
General ................................................................ 50
Liquidity and Capital Resources ........................................ 53
Capital Expenditures ................................................... 55
Other .................................................................. 56
DTS SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA ......... 57
DTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS .................................................... 59
Overview ............................................................... 59
Liquidity and Capital Resources ........................................ 62
"Year 2000" Issues ..................................................... 65
BUSINESS OF THE COMPANY ................................................... 66
General ................................................................ 66
Acquisition Strategy ................................................... 66
Operating Strategy ..................................................... 66
Multichannel Television ................................................ 66
DBS -- DIRECTV ...................................................... 66
Cable ............................................................... 70
TV ..................................................................... 72
Competition ............................................................ 78
Licenses, LMAs, DBS Agreements and Cable Franchises .................... 79
Legislation and Regulation ............................................. 83
Properties ............................................................. 92
Employees .............................................................. 93
Legal and Other Proceedings ............................................ 93
BUSINESS OF DTS ........................................................... 93
General ................................................................ 93
DBS -- DIRECTV ......................................................... 93
DIRECTV Programming .................................................... 93
Acquisitions by DTS .................................................... 95
Sales and Distribution ................................................. 96
Marketing .............................................................. 97
Customer Service ....................................................... 97
</TABLE>
ii
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DBS Agreements ....................................... 97
Competition .......................................... 97
DBS Industry Background .............................. 99
Legislation and Regulation ........................... 100
Facilities ........................................... 101
Employees ............................................ 101
Legal Proceedings .................................... 102
PEGASUS MANAGEMENT ...................................... 102
CERTAIN TRANSACTIONS .................................... 107
OWNERSHIP AND CONTROL ................................... 109
DESCRIPTION OF CAPITAL STOCK ............................ 113
COMPARISON OF STOCKHOLDERS' RIGHTS ...................... 114
Authorized Capital ................................... 114
Voting, Liquidation, and Other Rights ................ 115
Dividend Rights ...................................... 115
Size and Make-up of the Board of Directors ........... 116
Preemptive Rights .................................... 116
Change of Control .................................... 116
Conversion Rights and Transfer Restrictions .......... 116
Rights of First Refusal .............................. 117
Rights of Co-Sale .................................... 117
Class Voting ......................................... 117
LEGAL MATTERS ........................................... 118
EXPERTS ................................................. 118
GLOSSARY OF DEFINED TERMS ............................... G-1
FINANCIAL STATEMENT INDEX ............................... F-1
ANNEX I -- MERGER AGREEMENT ............................. I-1
ANNEX II -- VOTING AGREEMENT ............................ II-1
ANNEX III -- AMENDMENT TO RESTRICTED STOCK PLAN ......... III-1
ANNEX IV -- AMENDMENT TO STOCK OPTION PLAN .............. IV-1
ANNEX V -- MERRILL LYNCH OPINION ........................ V-1
ANNEX VI -- FORM OF PROXY ............................... VI-1
iii
<PAGE>
ALL INFORMATION CONTAINED IN THIS PROXY STATEMENT/PROSPECTUS RELATING TO
THE COMPANY HAS BEEN SUPPLIED BY PEGASUS AND ALL SUCH INFORMATION RELATING TO
DTS AND ITS SUBSIDIARIES HAS BEEN SUPPLIED BY DTS.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION NOT CONTAINED OR INCORPORATED BY REFERENCE INTO THIS PROXY
STATEMENT/PROSPECTUS AND, IF SO GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROXY
STATEMENT/PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF
AN OFFER TO BUY ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES OR AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES IN ANY JURISDICTION
OR TO ANY PERSON TO WHOM IT WOULD BE UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROXY STATEMENT/PROSPECTUS NOR THE
SALE OF ANY SECURITIES HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR DTS
SINCE THE DATE HEREOF OR THAT THE INFORMATION HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO ITS DATE.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission" or "SEC"). Any reports,
proxy statements, information statements and other information filed under the
Exchange Act may be inspected at the public reference facilities maintained by
the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
regional offices of the Commission located at 7 World Trade Center, Suite 1300,
New York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite
1400, Chicago, Illinois 60661-2511. Copies of such materials may be obtained
from the Public Reference Section of the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549 at prescribed rates. The Commission maintains a web site
at http://www.sec.gov that contains reports, proxy information statements and
other information regarding registrants, like Pegasus, that file electronically
with the Commission. The Company's Class A Common Stock is quoted on the Nasdaq
National Market, and reports, proxy statements, information statements and
other information concerning Pegasus may be inspected at the National
Association of Securities Dealers, Inc. at 1735 K Street, N.W., Washington,
D.C. 20006-1500.
This Proxy Statement/Prospectus does not contain all the information set
forth in the Registration Statement on Form S-4 (the "Registration Statement")
of which this Proxy Statement/Prospectus is a part, including exhibits relating
thereto, which has been filed with the Commission. Statements made in this
Proxy Statement/Prospectus as to the contents of any referenced contract,
agreement or other document are not necessarily complete, and each such
statement shall be deemed qualified in its entirety by reference thereto.
Copies of the Registration Statement and the exhibits and schedules, if any,
thereto may be obtained, upon payment of the fee prescribed by the Commission,
or may be examined without charge, at the office of the Commission or at the
Commission's web site.
1
<PAGE>
SUMMARY
The following is a summary of certain information contained elsewhere in
this Proxy Statement/Prospectus and is qualified in its entirety by the more
detailed information set forth elsewhere in this Proxy Statement/Prospectus,
including the Company's and DTS' Consolidated Financial Statements and notes
thereto. Unless otherwise indicated, the discussion below refers to and the
information in this Proxy Statement/Prospectus gives effect to the Transactions
and the DTS Transactions (each as defined), which if not already completed are
anticipated to occur in 1998. Portions of this Proxy Statement/Prospectus
contain certain "forward looking" statements which involve risks and
uncertainties. The Company's and DTS' actual results may differ significantly
from the results discussed in the forward looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
in "RISK FACTORS," as well as factors discussed in other filings made with the
Commission. Although the Company, with respect to statements about the Company,
and DTS, with respect to statements about DTS, believe that the assumptions
underlying the forward looking statements contained herein are reasonable, any
of the assumptions could prove inaccurate, and therefore, there can be no
assurance that the forward looking statements included herein will prove to be
accurate. See "GLOSSARY OF DEFINED TERMS," which begins on page G-1 of this
Proxy Statement/Prospectus for definitions of certain terms used in this Proxy
Statement/Prospectus.
The Companies
Pegasus.................. Pegasus Communications Corporation ("Pegasus" and
together with its subsidiaries, the "Company") is a
diversified company that operates in growing
segments of the media and communications industries.
The Company owns and operates five TV stations
affiliated with the Fox Broadcasting Company ("Fox")
and has or plans to enter into local marketing
agreements ("LMAs") to operate three television
stations, two of which are to be affiliated with The
WB Television Network ("WB") and one affiliated with
United Paramount Network ("UPN"). The Company is the
largest independent provider of DIRECTV(R)
("DIRECTV"). Giving effect to the Pending Pegasus
DBS Acquisitions, which do not give effect to the
Merger, the Company will have the exclusive right to
provide DIRECTV services to approximately 2.5
million U.S. television households in rural areas of
30 states serving a subscriber base, as of February
28, 1998, of approximately 178,300 DBS customers.
The Company also provides cable service to
approximately 28,100 subscribers in Puerto Rico and
approximately 15,100 subscribers in New England. The
Company has entered into an agreement to sell its
New England cable operations (the "New England Cable
Sale"). Management's principal executive offices are
located at Suite 454, 5 Radnor Corporate Center, 100
Matsonford Road, Radnor, Pennsylvania 19087. Its
telephone number is (610) 341-1801.
DTS...................... Digital Television Services, Inc. ("DTS") is the
second largest independent provider of DIRECTV with
an exclusive right to provide DIRECTV services to
approximately 1.8 million U.S. television households
in rural areas of 11 states serving a subscriber
base, as of February 28, 1998, of approximately
139,600 DBS customers. The principal executive
offices of DTS are located at 880 Holcomb Bridge
Road, Building C-200, Roswell, Georgia 30076. Its
telephone number is (770) 645-4440.
2
<PAGE>
The Special Meeting
Date, Time and Place
of the Special Meeting... The Special Meeting of holders of Common Stock
will be held on April 16, 1998, at 10:00 a.m., local
time, at the law offices of Drinker Biddle & Reath
LLP, Philadelphia National Bank Building, 21st
Floor, 1345 Chestnut Street, Philadelphia,
Pennsylvania.
Record Date;
Shares Entitled
to Vote.................. Holders of record of Common Stock at the close of
business on March 2, 1998, are entitled to notice of
and to vote at the Special Meeting.
Purpose of the
Special Meeting......... Holders of Common Stock will be asked to (a)
consider and vote upon the Merger Proposal, (b)
amend the Restricted Stock Plan to increase the
number of shares to be issued thereunder from
270,000 to 350,000, (c) amend the Stock Option Plan
to increase the number of shares to be issued
thereunder from 450,000 to 970,000 and to increase
the maximum number of Shares of Class A Common Stock
that may be issued under options granted to any
executive officer from 275,000 to 550,000, (d) amend
provisions of the Certificate of Designation
relating to the Series A Preferred Stock relating to
(i) the incurrence of Indebtedness (as this term is
defined in the Certificate of Designation) and (ii)
the definition of a Change of Control (as this term
is defined in the Certificate of Designation), and
(e) transact such other business as may properly
come before the Special Meeting or any adjournment
or postponement thereof.
Votes Required;
Security Ownership
of Marshall W. Pagon.... The affirmative vote of a majority of the votes
represented by the shares of Class A Common Stock
and Class B Common Stock present in person or by
proxy at the Special Meeting and entitled to vote,
voting together as a single class, is required for
approval of the Merger Proposal and the other
proposals to be voted upon at the Special Meeting.
If a proxy is marked as "Abstain" on any matter, or
if specific instructions are given that no vote be
cast on any specific matter (a "Specified
Non-Vote"), the shares represented by such proxy
will not be voted on such matter. Abstentions will
be included within the number of shares present at
the meeting and entitled to vote for purposes of
determining whether such matter has been
authorized, but broker non-votes (i.e., shares held
of record by a broker for which a proxy is not
given) and other Specified Non-Votes will not be so
included.
As of the record date, there were outstanding
5,751,850 shares of Class A Common Stock and
4,581,900 shares of Class B Common Stock. Each
record holder of Class A Common Stock will be
entitled to one vote per share, and each record
holder of Class B Common Stock will be entitled to
ten votes per share. All of the shares of Class B
Common Stock are owned beneficially by Marshall W.
Pagon, Pegasus' President, Chief Executive Officer
and
3
<PAGE>
Chairman of the Board. Thus, Mr. Pagon has voting
power to approve the Merger Proposal and the other
proposals to be voted upon at the Special Meeting
without the vote of any other stockholder. Mr.
Pagon has advised the Company that he intends to
cause the record holders of the Class B Common
Stock to vote in favor of all such proposals. Such
record holders are obligated by the terms of the
Merger Agreement to vote in favor of the Merger
Proposal.
General.................. At the Effective Time (as defined), (a) the
separate existence of the Merger Sub will cease and
the Merger Sub will be merged with and into DTS, and
DTS will be the surviving corporation (the
"Surviving Corporation"), (b) DTS will become a
wholly-owned subsidiary of Pegasus, (c) each share
of the Merger Sub's common stock outstanding prior
to the Effective Time will be converted into one
outstanding share of common stock of the Surviving
Corporation, and (d) with certain exceptions and
subject to certain immaterial adjustments, (i) the
shares of DTS capital stock outstanding immediately
prior to the Effective Time will be converted into a
total of approximately 5,465,500 shares of Class A
Common Stock, and (ii) outstanding options and
warrants of DTS, with the exception of certain
unvested warrants, will be converted into options
and/or warrants of Pegasus to purchase approximately
223,000 shares of Class A Common Stock. After giving
effect to the Merger, assuming that none of DTS'
stockholders perfect rights of appraisal, DTS'
stockholders will own approximately 48.7% of the
issued and outstanding Class A Common Stock, which
will represent approximately 34.6% of the common
equity of Pegasus. After giving effect to the Merger
and the voting rights of the Class B Common Stock,
the stockholders of DTS and Marshall W. Pagon will
have voting power with respect to approximately 9.6%
and 80.3%, respectively, of the Common Stock,
subject to the terms of the Voting Agreement.
Recommendations
of Pegasus Board........ The Pegasus Board, by unanimous vote, has
determined that the Merger is in the best interests
of the holders of the Common Stock and recommends
that holders of the Common Stock vote in favor of
the Merger Proposal. The decision of the Pegasus
Board to enter into the Merger Agreement and to
recommend that Pegasus' stockholders vote in favor
of the Merger Proposal is based upon its evaluation
of a number of factors, including, among others, the
analyses prepared by Merrill Lynch & Co. ("Merrill
Lynch"), and the opinion of Merrill Lynch delivered
to the Pegasus Board, dated December 31, 1997, to
the effect that, based upon and subject to certain
factors and assumptions stated therein, as of such
date, the Consideration (as defined in such opinion)
to be paid by Pegasus in the Merger is fair from a
financial point of view to Pegasus. The full text of
the Merrill Lynch written opinion which sets forth a
description of the assumptions made, factors
considered and limitations on the review undertaken,
is attached hereto as Annex V. Pegasus stockholders
are urged to read the Merrill Lynch opinion
carefully in its entirety. See "PROPOSAL 1: APPROVAL
OF MERGER -- Opinion of Merrill Lynch" and "PROPOSAL
1: APPROVAL OF MERGER -- Background of the Merger."
4
<PAGE>
With respect to the proposals relating to the
Restricted Stock Plan, the Stock Option Plan, and
the Series A Preferred Stock Amendments, the
Pegasus Board has determined, by unanimous vote,
that (i) the amendment to increase the number of
shares of Class A Common Stock that may be issued
under the Restricted Stock Plan is advisable in
light of the increased number of employees who will
be eligible to participate in that plan after the
Merger is consummated, (ii) the amendments to
increase the number of options that may be granted
under the Stock Option Plan are advisable because
options for the maximum number of shares that may
be issued under the plan have already been issued,
because of the number of options that will need to
be issued under the plan to replace outstanding
options to purchase DTS common stock and because of
the increased number of directors who are eligible
to participate in this plan, and (iii) the Series A
Preferred Stock Amendments are necessary to allow
the Company greater flexibility in conducting its
affairs.
Opinion of
Merrill Lynch............ Merrill Lynch delivered its oral opinion on December
31, 1997 to the Pegasus Board, which was confirmed
by its written opinion, dated December 31, 1997, to
the effect that, based upon and subject to certain
factors and assumptions stated therein, as of such
date, the Consideration (as defined in such opinion)
to be paid by Pegasus in the Merger is fair from a
financial point of view to Pegasus. Merrill Lynch
confirmed its written opinion dated December 31,
1997 with its written opinion dated as of January 8,
1998, to the effect that, based upon and subject to
certain factors and assumptions stated therein, as
of such date, the Consideration (as defined in such
opinions) to be paid by Pegasus in the Merger is
fair from a financial point of view to Pegasus
(collectively the "Merrill Lynch Opinions"). The
full text of the Merrill Lynch Opinions, each of
which sets forth a description of the assumptions
made, factors considered and limitations on the
review undertaken, is attached hereto as Annex V.
Pegasus stockholders are urged to read the Merrill
Lynch Opinions carefully in their entirety. See
"PROPOSAL 1: APPROVAL OF MERGER -- Opinion of
Merrill Lynch."
Interests of Certain
Persons in the Merger... Pursuant to the Voting Agreement to be entered
into at the closing of the Merger, Marshall W. Pagon
and certain of DTS' stockholders will each have the
right to designate three members of the nine member
Pegasus Board. In addition, certain stockholders of
DTS will have registration rights in connection with
the issuance of shares of Class A Common Stock to
them. See "THE MERGER."
Management of Pegasus
After the Merger........ At the Effective Time, the Pegasus Board will be
increased to
nine members, including three directors to be
designated by cer-tain of DTS' stockholders or
their affiliates pursuant to the
VotingAgreement: Harry F. Hopper, III, Michael C.
Brooks and Riordon B. Smith. See "PROPOSAL 1:
APPROVAL OF MERGER -- Management of Pegasus After
the Merger" and "PEGASUS MANAGEMENT."
5
<PAGE>
Accounting Treatment..... The Merger will be accounted for under the
purchase method of accounting in accordance with
generally accepted accounting principles. The
Company expects that DTS' intangible assets will
increase by approximately $106.0 million, which will
be amortized over a ten-year period resulting in a
charge to earnings of approximately $10.6 million
for each of the years in this period. Additionally,
the Company expects a one-time restructuring charge
of approximately $3.0 million in connection with the
Merger. See "THE MERGER -- Accounting Treatment."
Certain Federal Income
Tax Consequences........ The Merger is intended to be a tax-free
reorganization for federal income tax purposes so
that no gain or loss will be recognized by the DTS
stockholders, Pegasus or DTS, except as a result of
cash received in lieu of fractional shares or as a
result of cash received following a DTS
stockholder's exercise of dissenters' or appraisal
rights. See "THE MERGER -- Certain Federal Income
Tax Consequences."
Federal Securities Law
Consequences............ All shares of Class A Common Stock received in the
Merger by DTS' stockholders (other than persons who
are affiliates of DTS prior to the Merger or Pegasus
after the Merger) will be freely transferable,
except that certain stockholders of DTS have agreed
not to transfer shares of Class A Common Stock
received by them in the Merger before November 5,
1998. Pegasus has agreed, under certain
circumstances, to register shares of Class A Common
Stock held by certain stockholders of DTS. See "THE
MERGER -- Federal Securities Law Consequences" and
"THE MERGER -- Registration Rights Agreement."
Dissenters' Rights....... In connection with the Merger, none of Pegasus'
stockholders will have dissenters' appraisal rights;
however, the DTS stockholders will have such rights
under Delaware law. If the DTS stockholders choose
to exercise such rights, the number of shares of
Class A Common Stock to be issued in the Merger
would be reduced. It is a condition to Pegasus'
consummation of the Merger that dissenters'
appraisal rights not be perfected by holders of the
DTS capital stock entitled to receive more than 5.0%
of the Class A Common Stock to be issued in the
Merger.
Conditions to the Merger;
Termination of the
Merger Agreement ....... The obligations of Pegasus and DTS to consummate the
Merger are subject to the fulfillment of various
conditions, including (a) approval of the Merger
Proposal by holders of the Common Stock and the
stockholders of DTS, (b) the execution and delivery
of the Voting Agreement, Registration Rights
Agreement and various noncompetition agreements, (c)
the expiration or termination of the waiting period
under the Hart-Scott-Rodino Antitrust Improvements
Act of 1976, (d) the obtaining of all necessary
consents, and (e) the accuracy of the
representations and warranties made by the other
party and the compliance by the other party with
applicable covenants.
6
<PAGE>
The Merger Agreement is subject to termination by
either Pegasus or DTS upon the occurrence of
certain events, including (a) termination by DTS if
Pegasus makes certain types of acquisitions which
exceed $25.0 million without DTS' consent, or (b)
termination by Pegasus if DTS makes certain types
of acquisitions that singly or in the aggregate
exceed $15.0 million without Pegasus' consent. The
Merger Agreement may not be terminated by either
Pegasus or DTS due to fluctuations in the price of
the Class A Common Stock.
Comparison of Stockholder
Rights.................. Both Pegasus and DTS are incorporated under the
laws of the State of Delaware. For information
comparing the rights of stockholders, see
"COMPARISON OF STOCKHOLDERS' RIGHTS."
Risk Factors
An investment in the Class A Common Stock involves a high degree of risk
and there are risks associated with the business of DTS and with the Merger.
Accordingly, certain risk factors should be considered by stockholders of
Pegasus in evaluating the Merger and by DTS' stockholders before making an
investment decision. See "RISK FACTORS."
7
<PAGE>
Pegasus Summary Historical and Pro Forma Consolidated Financial Data
(Dollars in thousands)
The following table sets forth summary historical and pro forma
consolidated financial data for the Company. This information should be read in
conjunction with the Company's Consolidated Financial Statements and the notes
thereto and its Management's Discussion and Analysis of Financial Condition and
Results of Operations, which are included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------------------
Pro
Forma
1993 1994 1995 1996 1997 1997(a)
---------- ----------- ----------- ------------ ------------- ------------
(unaudited)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data:
Net revenues:
DBS ................................. $ 174 $ 1,469 $ 5,829 $ 38,254 $ 129,926
Cable ............................... $ 9,134 10,148 10,606 13,496 16,688 10,364
TV .................................. 10,353 17,869 20,073 28,604 31,876 31,876
-------- -------- -------- --------- ---------- ---------
Total net revenues ................. 19,487 28,191 32,148 47,929 86,818 172,166
-------- -------- -------- --------- ---------- ---------
Location operating expenses:
DBS ................................. -- 210 1,379 4,958 26,042 118,336
Cable ............................... 4,655 5,545 5,791 7,192 8,693 5,547
TV .................................. 7,580 12,398 13,971 18,754 21,377 21,377
Incentive compensation(b) ............. 192 432 528 985 1,274 1,720
Corporate expenses .................... 1,265 1,506 1,364 1,429 2,256 2,256
Depreciation and amortization ......... 5,978 6,940 8,751 12,061 27,792 71,571
-------- -------- -------- --------- ---------- ---------
Income (loss) from operations ......... (183) 1,160 364 2,550 (6,588) (48,641)
Other Data:
Pre-SAC Location Cash Flow(c) ......... $ 7,252 $ 10,038 $ 11,419 $ 17,671 $ 30,706 $ 50,244
Location Cash Flow(c) ................. 7,252 10,038 11,007 17,025 24,734 26,907
Operating Cash Flow(c) ................ 5,795 8,100 9,287 15,596 22,478 24,650
Capital expenditures .................. 885 1,264 2,640 6,294 9,929 18,401
Net cash provided by (used for):
Operating activities ................ 1,694 4,103 6,195 4,332 12,993
Investing activities ................ (106) (3,571) (6,459) (82,451) (146,624)
Financing activities ................ (1,020) (658) 10,859 74,727 169,098
As of December 31,
---------------------------------------------------------------------------------
Pro
Forma
1993 1994 1995 1996 1997 1997(a)
----------- ------------ ----------- ---------- ---------- ------------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents ............... $ 1,506 $ 1,380 $ 21,856 $ 8,582 $45,269 $ 89,630
Net working capital (deficiency) ........ (3,844) (23,074) 17,566 6,430 32,347 1,795
Total assets ............................ 76,386 75,394 95,770 173,680 380,862 803,507
Total debt (including current) .......... 72,127 61,629 82,896 115,575 208,355 420,710
Total liabilities ....................... 78,954 68,452 95,521 133,354 239,234 532,563
Redeemable preferred stock .............. -- -- -- -- 111,264 111,264
Minority interest ....................... -- -- -- -- 3,000 3,000
Total common stockholders' equity(d)..... (2,427) 6,942 249 40,326 27,364 156,680
</TABLE>
8
<PAGE>
Notes to Pegasus Summary Historical and Pro Forma
Consolidated Financial Data
(a) Pro forma income statement and other data for the year ended December 31,
1997 give effect to the Transactions and the Merger, as if such events had
occurred at the beginning of such periods. The pro forma balance sheet
data as of December 31, 1997 give effect to the Transactions that occurred
after December 31, 1997 and the Merger, as if such events had occurred on
such date.
(b) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and the Company's 401(k) plans.
(c) Pre-SAC Location Cash Flow is defined as Location Cash Flow plus subscriber
acquisition costs. Location Cash Flow is defined as net revenues less
location operating expenses. Location operating expenses consist of
programming, barter programming, general and administrative, technical and
operations, marketing and selling expenses. Operating Cash Flow is defined
as income (loss) from operations plus, (i) depreciation and amortization
and (ii) non-cash incentive compensation. The difference between Location
Cash Flow and Operating Cash Flow is that Operating Cash Flow includes
cash incentive compensation and corporate expenses. Although Location Cash
Flow and Operating Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that
Location Cash Flow and Operating Cash Flow are accepted within the
Company's business segments as generally recognized measures of
performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
(d) The Company has not paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Payment of
cash dividends on the Company's Common Stock is restricted by the terms of
the Series A Preferred Stock, and the Exchange Notes, if issued. The terms
of the Series A Preferred Stock and the Exchange Notes permit the Company
to pay dividends and interest thereon by issuance, in lieu of cash, of
additional shares of Series A Preferred Stock and additional Exchange
Notes, if issued, respectively. The Senior Notes Indenture restricts the
Company's ability to pay cash dividends on the Series A Preferred Stock or
cash interest on the Exchange Notes, if issued, prior to July 1, 2002.
9
<PAGE>
Summary Historical and Pro Forma
Consolidated Financial Data of DTS
(Dollars in thousands)
The following table presents Summary Historical and Pro Forma Consolidated
Financial Data relating to DTS' unaudited pro forma balance sheet data as of
December 31, 1997 and DTS' unaudited pro forma statement of operations data for
the year ended December 31, 1997, each as adjusted to give effect to the DTS
Transactions (as defined in the "Glossary of Defined Terms"). The historical
data for the period from January 30, 1996 (date of formation) to December 31,
1996 and the year ended December 31, 1997, have been derived from the financial
statements of DTS audited by Arthur Andersen LLP, independent public
accountants. The data set forth in this table should be read in conjunction
with DTS' Consolidated Financial Statements and the notes thereto and its
Management's Discussion and Analysis, included elsewhere herein.
<TABLE>
<CAPTION>
January 30, 1996 Year Ended December 31,
(inception) ---------------------------
to Pro Forma
December 31, 1996 1997 1997
------------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Programming revenue .................... $ 3,085 $ 41,753 $ 52,720
Equipment sales and installation
revenue ............................... 324 5,690 7,085
--------- --------- ---------
Total revenue ......................... 3,409 47,443 59,805
Cost of revenue ........................ 2,270 31,147 39,500
--------- --------- ---------
Total gross profit .................... 1,139 16,296 20,305
Operating expenses excluding
depreciation and amortization ......... 2,732 17,366 20,350
Total depreciation and amortization. 1,148 14,509 20,046
--------- --------- ---------
Operating loss ......................... (2,741) (15,579) (20,091)
Interest expense, net .................. (818) (14,457) (25,605)
Other income (expense)(a) .............. 24 (112) (196)
--------- --------- ---------
Net loss(a)(b) ......................... $ (3,535) $ (30,148) $ (45,892)
========= ========= =========
Other Data:
EBITDA(a)(c) ............................. $ (1,593) $ (1,070) $ (45)
December 31, 1997
--------------------------
Historical Pro Forma
------------ ------------
(unaudited)
(Dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable investment securities(d) $ 39,113 $ 39,492
Total assets .................................................. 257,662 268,415
Total debt (including current portion) ........................ 192,592 202,092
Members' equity/stockholders' equity .......................... $ 16,637 $ 16,637
</TABLE>
10
<PAGE>
Notes to Summary Historical and Pro Forma
Consolidated Financial Data of DTS
(a) Pro forma other income (expense) amounts do not include additional interest
income which would have been recognized on amounts included in the
placement of approximately $37.0 million in an interest escrow account
(the "Interest Escrow Account"). If such additional interest income was
included, the pro forma net loss for the year ended December 31, 1997
would be approximately $44.8 million.
(b) Prior to October 10, 1997, when DTS effected its conversion to a
corporation (the "Corporate Conversion"), DTS was a limited liability
company (the "LLC") and was not required to pay United States federal
income taxes.
(c) "EBITDA" represents earnings before net interest expense, other income
(expense), taxes, depreciation and amortization. EBITDA is presented
because it is a widely accepted financial measure in the communications
industry and is similar to "Consolidated Operating Cash Flow," a financial
measure used in DTS indenture (the "DTS Indenture") to determine whether
DTS has complied with certain covenants and differs from cash flows from
operating activities. Pursuant to the DTS Indenture, Consolidated
Operating Cash Flow is calculated with respect to any period by adding to
the consolidated net income of DTS and its Restricted Subsidiaries for
such period (i) consolidated income tax expense for such period to the
extent deducted in determining consolidated net income for such period,
(ii) consolidated interest expense for such period to the extent deducted
in determining consolidated net income for such period, (iii) all
dividends on preferred equity interests to the extent not taken into
account in determining consolidated net income for such period and (iv)
depreciation, amortization and any other noncash items for such period to
the extent deducted in determining consolidated net income for such
period. EBITDA 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 DTS' operating performace
or liquidity which is calculated in accordance with generally accepted
accounting principles. EBITDA as presented for DTS may not be comparable
to similarly titled measures reported by other companies.
(d) Excludes the Interest Escrow Account to fund, together with the proceeds
from the investment thereof, the first four semi-annual interest payments
on the DTS Notes.
11
<PAGE>
RISK FACTORS
The following factors should be considered carefully by the stockholders
of Pegasus in determining whether to vote in favor of the Merger Proposal. DTS'
stockholders should be aware that ownership of the Class A Common Stock
involves certain risks, including those described below, which could adversely
affect the value of their holdings of Class A Common Stock. The Company does
not make, nor has it authorized any other person to make, any representation
about the future market value of the Class A Common Stock. In addition to the
other information contained in this Proxy Statement/Prospectus, the following
factors should be considered carefully in evaluating an investment in the
shares of Class A Common Stock offered hereby. After the Effective Time, the
risks factors described under "Risk Factors Relating to DTS' Business" will
continue to relate to DTS in its capacity as a subsidiary of the Company.
Risks Relating to Forward-Looking Statements
Certain statements contained in this Proxy Statement/Prospectus,
including, without limitation, statements containing the words "anticipates,"
"believes," "estimates," "expects," "intends," and "projects" and words of
similar import, constitute forward-looking statements. Such forward-looking
statements involve known and unknown risks, uncertainties and other factors
that may cause the actual results, performance or achievements of the Company,
DTS or industry results to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Such factors include, among others, the following: general economic
and business conditions, both nationally, internationally and in the regions in
which the Company and DTS operate; demographic changes; existing government
regulations and changes in, or the failure to comply with, government
regulations; competition; the loss of any significant numbers of subscribers or
viewers; changes in business strategy or development plans; technological
developments and difficulties (including any associated with the Year 2000);
the ability to attract and retain qualified personnel; the significant
indebtedness of the Company and DTS; the availability and terms of capital to
fund the expansion of the Company's and DTS' businesses; and other factors
referenced in this Proxy Statement/Prospectus. Certain of these factors are
discussed in more detail below and elsewhere in this Proxy
Statement/Prospectus. Given these uncertainties, Pegasus' and DTS' stockholders
are cautioned not to place undue reliance on such forward-looking statements.
The Company and DTS disclaim any obligations to update any such factors or
publicly announce the result of any revisions to any developments.
Risk Factors Associated With the Merger
Offer to Purchase DTS Notes
The Merger will constitute a "Change of Control" of DTS within the meaning
of the DTS Indenture governing the DTS Notes. This will require DTS to make an
offer to the holders of the DTS Notes to purchase the DTS Notes (the "Offer to
Purchase") for 101% of their principal amount (approximately $155.0 million)
plus accrued interest. DTS has entered into a commitment letter with CIBC
Oppenheimer Corp. ("CIBC Oppen-heimer") under which CIBC Oppenheimer agrees to
purchase any and all DTS Notes tendered in response to the Offer to Purchase.
CIBC Oppenheimer's commitment is subject to the execution of definitive
documentation and customary closing conditions. If DTS and CIBC Oppenheimer are
unable to agree on definitive documentation, or if DTS is unable to satisfy the
closing conditions, DTS or Pegasus would attempt to make alternative
arrangements. There can be no assurances that such alternative arrangements
will be available or, if available, on terms satisfactory to DTS or Pegasus. If
they were unable to do so, substantially all of DTS' indebtedness would be in
default; however, Pegasus does not intend to assume, guarantee or otherwise
become liable on the DTS Notes.
Uncertainties Relating to Integration of Operations
The anticipated benefits of the Merger may not be achieved unless the
operations of DTS are combined successfully with those of the Company in a
coordinated, timely and efficient manner, and there can be no assurance that
this will occur. Even if the two companies' operations are integrated
successfully, there can be no assurance that the benefits anticipated by the
Merger will be achieved. The transition to a combined company will require
substantial attention from management. The diversion of the attention of
management and any difficulties encountered in the transition process could
have an adverse impact on the revenues and operating results of the combined
companies. These difficulties will be increased by the fact that Pegasus
intends to operate DTS and its subsidiaries as "Unrestricted Subsidiaries" for
purposes of the Senior Notes Indenture and the Certificate of Designation, and
the fact that Pegasus and DTS will have separate and independent sources of
debt financing and will be subject to separate financial covenants and
operating restrictions. These facts will require that
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transactions between Pegasus and DTS be carried out on an arm's-length basis
and with a greater degree of formality than is normally the case for companies
and their wholly-owned subsidiaries. See "THE MERGER -- Consequences Under Debt
Agreements and Preferred Stock Terms." These difficulties may also be increased
by the necessity of integrating personnel with disparate business backgrounds
and combining two different corporate cultures. In addition, the process of
combining the two organizations could cause the interruption of, or a loss of
momentum in, the activities of either or both of the companies' businesses,
which could have an adverse effect on their combined operations. The
uncertainties associated with such integration may result in the loss of key
management and other employees. Failure to achieve the anticipated benefits of
the Merger or to integrate successfully the operations of the companies could
have a material adverse effect upon the business, operating results and
financial condition of the Company after the Merger. Even if the benefits of
the Merger are achieved and the two companies' operations are integrated
successfully, there can be no assurance that the operating results and
financial condition of the Company after the Merger will not be materially and
adversely affected by any number of economic, market or other factors that are
not related to the Merger, including those described below.
Transaction Expenses; Costs of Integration
Pegasus and DTS estimate that they will together incur direct transaction
costs (including financial advisors, legal, accounting, registration and
printing fees) of approximately $2.3 million associated with the Merger. In
addition, following the Merger, Pegasus expects to incur additional expenses,
which at this time are not expected to exceed $500,000, relating to information
systems integration, promotional materials reflecting the Merger, integration
of benefit plans, and travel and other costs relating to transitional planning
and implementation. These costs (except for any such costs which are
capitalized) are expected to be charged against income of Pegasus in the fiscal
period in which they are incurred. There can be no assurance that Pegasus will
not incur unforeseen costs, which could be material, in subsequent periods to
reflect additional costs associated with the Merger.
Dilutive Effect of the Merger on Pegasus' Earnings Per Share, Book Value
Per Share and Voting Power
On a pro forma basis, the Merger is dilutive to Pegasus' net loss per
share for the year ended December 31, 1997. See "COMPARATIVE PER SHARE DATA"
for per share amounts. There can be no assurance that the Merger will not
similarly dilute Pegasus' net income (loss) per share in the future.
The Company expects that as a result of the Merger DTS' intangible assets
will increase by approximately $106.0 million, which will be amortized over a
ten-year period resulting in a charge to earnings of approximately $10.6
million for each of the years in this period. Additionally, the Company expects
to incur a one-time restructuring charge of approximately $3.0 million in
connection with the Merger.
The actual number of shares of Class A Common Stock to be issued in the
Merger cannot yet be determined; however, it is anticipated that approximately
5,465,500 shares of Class A Common will be issued. As a result of the number of
shares being issued in the Merger, stockholders currently holding all of the
Class A Common Stock will hold 51.3% of the Class A Common Stock after the
Merger. After giving effect to the voting power of the Class B Common Stock,
all of which shares are controlled by Marshall W. Pagon, Pegasus' President and
Chief Executive Officer, and without giving effect to the Voting Agreement,
current holders of the Class A Common Stock will have in the aggregate a
decrease in voting power from 11.1% to 10.1%.
Risk Factors Relating to the Company's Business
Substantial Indebtedness and High Degree of Leverage
The Company is highly leveraged. As of December 31, 1997, on a pro forma
basis after giving effect to the Transactions and the Merger, including the New
England Cable Sale, the Company would have had indebtedness of $420.7 million,
total common stockholders' equity of $156.7 million, Preferred Stock of $111.3
million and, assuming certain conditions are met, $162.0 million available
under the Credit Facility and $40.8 million available under the DTS Credit
Facility. For the year ended December 31, 1997 on a pro forma basis after
giving effect to the Transactions and the Merger, including the New England
Cable Sale, the Company's earnings
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would have been inadequate to cover its combined fixed charges and dividends on
Series A Preferred Stock by approximately $108.8 million. The Company is not
required under the terms of the Series A Preferred Stock to pay, and is
restricted under the terms of the Senior Notes Indenture from paying dividends
in cash prior to July 1, 2002. The ability of the Company to repay its existing
indebtedness will depend upon future operating performance, which is subject to
the success of the Company's business strategy, prevailing economic conditions,
regulatory matters, levels of interest rates and financial, business and other
factors, many of which are beyond the Company's control. There can be no
assurance that the Company's growth strategy will be successful in generating
the substantial increases in cash flow from operations that will be necessary
for the Company to meet its obligations. The current and future leverage of the
Company could have important consequences, including the following: (i) the
ability of the Company to obtain additional financing for future working
capital needs or financing for possible future acquisitions or other purposes
may be limited, (ii) a substantial portion of the Company's cash flow from
operations will be dedicated to payment of the principal and interest on its
indebtedness, thereby reducing funds available for other purposes, and (iii)
the Company may be more vulnerable to adverse economic conditions than some of
its competitors and, thus, may be limited in its ability to withstand
competitive pressures. The agreements with respect to the Company's
indebtedness, including the Credit Facility, the Senior Notes Indenture, the
PM&C Indenture, the Certificate of Designation and the Exchange Note Indenture,
contain numerous financial and operating covenants, including, among others,
restrictions on the ability of the Company to incur additional indebtedness, to
create liens or other encumbrances, to pay dividends and to make certain other
payments and investments, and to sell or otherwise dispose of assets or merge
or consolidate with another entity. A failure to comply with the obligations
contained in any agreement with respect to any indebtedness could result in
events of default which could permit acceleration of such indebtedness and
acceleration of indebtedness under the debt agreements that may contain
cross-acceleration or cross-default provisions.
Dependence on Network Affiliations
Certain of the Company's TV stations are affiliated with the Fox network,
which provides the stations with up to 40 hours of programming time per week,
including 15 hours of prime time programming, in return for the broadcasting of
Fox-inserted commercials by the stations during such programming. The Company
programs, or intends to program, pursuant to LMAs, other TV stations as
affiliates of UPN or WB. As a result, the successful operation of the Company's
TV stations is highly dependent on the Company's relationship with its
broadcast networks and upon the success of such broadcast networks. All of the
Company's affiliation agreements with Fox expire on October 31, 1998 with the
exception of the affiliation agreement with respect to TV station WTLH, which
expires on March 7, 2001. Thereafter, the affiliation agreements may be
extended for additional two-year terms by Fox in its sole discretion. Fox has,
in the past, changed affiliates in certain markets where it acquired a
significant ownership position in a station in such market. In the event that
Fox, directly or indirectly, acquires any significant ownership and/or
controlling interest in any TV station licensed to any community within the
Company's TV markets, Fox has the right to terminate the affiliation agreement
of the Company's TV station serving that market. As a consequence, there is no
assurance that Fox could not enter into such an arrangement in one of the
Company's markets. Although the Company's affiliation agreement with UPN
expires on January 15, 2001, the affiliation agreement may be terminated
earlier under certain circumstances. The Company has entered into commitments
to program TV stations WOLF and WGFL as affiliates of WB and is currently in
the process of negotiating agreements with respect to these stations, although
there can be no assurance that a definitive affiliation agreement will result.
There can also be no assurance that Fox, UPN or WB programming will continue to
be as successful as in the past or that such networks will continue to provide
programming to their respective affiliates on the same basis as they currently
do, all of which matters are beyond the Company's control. The non-renewal or
termination of the affiliation of one or more of the Company's stations could
have a material adverse effect on the Company's operations.
Reliance on DBS Technology and DIRECTV
There are numerous risks associated with DBS technology, in general, and
DIRECTV, in particular. DBS technology is highly complex and requires the
manufacture and integration of diverse and advanced components that may not
function as expected. Although the DIRECTV satellites are estimated to have
orbital lives at least through the year 2007, there can be no assurance as to
the longevity of the satellites or that loss, damage or changes in the
satellites as a result of acts of war, anti-satellite devices, electrostatic
storms or collisions with
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space debris will not occur and have a material adverse effect on DIRECTV and
the Company's DBS business. Furthermore, the digital compression technology
used by DBS providers is not standardized and is undergoing rapid change. Since
the Company serves as an intermediary for DIRECTV, the Company would be
adversely affected by material adverse changes in DIRECTV's financial
condition, programming, technological capabilities or services (including any
Year 2000 problems that DIRECTV may incur), and such effect could be material
to the Company's prospects. There can also be no assurance that there will be
sufficient demand for DIRECTV services since such demand depends upon consumer
acceptance of DBS, the availability of equipment and related components
required to access DIRECTV services and the competitive pricing of such
equipment.
The National Rural Telecommunications Cooperative (the "NRTC") is a
cooperative organization whose members and affiliate members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the U.S. Pursuant to agreements between Hughes Electronics Corporation
or one of its subsidiaries ("Hughes") and the NRTC (the "Hughes/NRTC
Agreement") and between the NRTC and participating NRTC members and affiliate
members (the "NRTC Member Agreement" and, together with the Hughes/NRTC
Agreement, the "DBS Agreements"), participating NRTC members and affiliate
members acquired the exclusive right to provide DIRECTV programming services to
residential and commercial subscribers in certain service areas. The DBS
Agreements authorize the NRTC and participating NRTC members and affiliate
members to provide all commercial services offered by DIRECTV that are
transmitted from the frequencies that the Federal Communications Commission
(the "FCC") has authorized for DIRECTV's use at its present orbital location
for a term running through the life of the current satellites. The NRTC has
advised the Company that the Hughes/NRTC Agreement also provides the NRTC a
right of first refusal to acquire comparable rights in the event that DIRECTV
elects to launch successor satellites upon the removal of the present
satellites from active service. The financial terms of any such purchase are
likely to be the subject of negotiations. Any exercise of such right is
uncertain and will depend, in part, on DIRECTV's costs of constructing,
launching and placing in service such successor satellites. The Company is,
therefore, unable to predict whether substantial additional expenditures by the
NRTC and its members and affiliate members, including the Company, will be
required in connection with the exercise of such right of first refusal.
Competition in the TV, DBS and Cable Businesses
Each of the markets in which the Company operates is highly competitive.
Many of the Company's competitors have substantially greater resources than the
Company and may be able to compete more effectively than the Company in the
Company's markets. In addition, the markets in which the Company operates are
in a constant state of change due to technological, economic and regulatory
developments. The Company is unable to predict what forms of competition will
develop in the future, the extent of such competition or its possible effects
on the Company's businesses. The Company's TV stations compete for audience
share, programming and advertising revenue with other television stations in
their respective markets and with other direct to home ("DTH") providers
including DBS operators, cable operators and wireless-cable operators, and
compete for advertising revenue with other advertising media, such as
newspapers, radio, magazines, outdoor advertising, transit advertising, yellow
page directories, direct mail and local cable systems. The Company's DBS
business faces competition from other current or potential multichannel
programming distributors, including other DBS operators, other DTH providers,
cable operators, wireless cable operators and local exchange and long-distance
telephone companies, which may be able to offer more competitive packages or
pricing than the Company or DIRECTV. The Company's cable systems face
competition from television stations, SMATV systems, wireless cable systems,
DTH and DBS systems.
Risks Attendant to Acquisition Strategy
The Company regularly considers the acquisition of media and
communications properties and, at any given time, is in various stages of
considering such opportunities. As of March 12, 1998, the Company has entered
into agreements or letters of intent to acquire a number of properties,
including 14 pending DBS acquisitions the ("Pending Pegasus DBS Acquisitions")
and the acquisition of DTS. Each of the Pending Pegasus DBS Acquisitions is
subject to the negotiation of a definitive agreement, if not already entered
into, and, among other conditions, the prior approval of Hughes and the NRTC.
In addition to these conditions, each of the Pending Pegasus DBS Acquisitions
is expected to be subject to conditions typical in acquisitions of this nature,
certain of which
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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 Pegasus DBS Acquisitions or, if entered
into, that all or any of the Pending Pegasus DBS Acquisitions will be
completed. The Company sometimes structures its acquisitions, like the
acquisition of DTS, to qualify for tax-free treatment. There is no assurance
that such treatment will be respected by the Internal Revenue Service. There
can also be no assurance that the anticipated benefits of any of the
acquisitions described herein or future acquisitions will be realized. The
process of integrating acquired operations into the Company's operations may
result in unforeseen operating difficulties, could absorb significant
management attention and may require significant financial resources that would
otherwise be available for the ongoing development or expansion of the
Company's existing operations. See "Risk Factors Associated With the Merger."
The Company's acquisition strategy may be unsuccessful since the Company may be
unable to identify acquisitions in the future or, if identified, to arrive at
prices and terms comparable to past acquisitions, especially in light of the
competition the Company faces from other well-financed organizations. The
competition has resulted and is expected to further result in increased
acquisition prices for such acquisitions. The successful completion of an
acquisition may depend on consents from third parties, including federal, state
and local regulatory authorities or private parties such as Fox, UPN, WB, the
NRTC, DIRECTV and, in certain circumstances, lenders under the Company's credit
facility, all of whose consents are beyond the Company's control. Possible
future acquisitions by the Company could result in dilutive issuances of equity
securities, the incurrence of additional debt and contingent liabilities, and
additional amortization expenses related to goodwill and other intangible
assets, which could materially adversely affect the Company's financial
condition and operating results.
Inability to Manage Growth Effectively
The Company has experienced a period of rapid growth primarily as a result
of its acquisition strategy. In order to achieve its business objectives, the
Company expects to continue to expand largely through acquisitions, which could
place a significant strain on its management, operating procedures, financial
resources, employees and other resources. The Company's ability to manage its
growth may require it to continue to improve its operational, financial and
management information systems, and to motivate and effectively manage its
employees. If the Company's management is unable to manage growth effectively,
the Company's results of operations could be materially adversely affected.
Dependence on Key Personnel
The Company's future success may depend to a significant extent upon the
performance of a number of the Company's key personnel, including Marshall W.
Pagon, Pegasus' President and Chief Executive Officer. The loss of Mr. Pagon or
other key management personnel or the failure to recruit and retain personnel
could have a material adverse effect on the Company's business. The Company
does not maintain "key-man" insurance and has not entered into employment
agreements with respect to any such individuals.
Government Legislation, Regulation, Licenses and Franchises
The Company's businesses are subject to extensive and changing laws and
regulations, including those of the FCC and local regulatory bodies. Many of
the Company's operations are subject to licensing and franchising requirements
of federal, state and local law and are, therefore, subject to the risk that
material licenses and franchises will not be obtained or renewed in the future.
The U.S. Congress and the FCC have in the past, and may in the future, adopt
new laws, regulations and policies regarding a wide variety of matters,
including rulemakings arising as a result of the Telecommunications Act of 1996
(the "1996 Act"), that could, directly or indirectly, affect the operations of
the Company's businesses. The business prospects of the Company could be
materially adversely affected by the application of current FCC rules or
policies in a manner leading to the denial of pending applications by the
Company, by the adoption of new laws, policies and regulations, or changes in
existing laws, policies and regulations, including changes to their
interpretations or applications, that modify the present regulatory environment
or by the failure of certain rules or policies to change in the manner
anticipated by the Company.
To the extent that the Company expects to program stations through the use
of LMAs, there can be no assurance that the licensees of such stations will not
exercise rights to preempt the programming of the Company, in a fashion which
interferes with the Company's business objectives, or that the licensees of
such stations
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will continue to maintain the transmission facilities of the stations in a
manner sufficient to broadcast a high quality signal over the station. As the
licensees must also maintain all of the qualifications necessary to be a
licensee of the FCC, and as the principals of the licensees are not under the
control of the Company, there can be no assurance that these licenses will be
maintained by the entities which currently hold them. There can also be no
assurance that any LMAs entered into by the Company, whether or not in
conjunction with the sale of a TV station by the Company or the acquisition of
an LMA by the Company with an option to purchase the underlying station, will
not be questioned by the FCC as being attributable to the Company due to the
relationship between the Company and the holder or proposed holder of the
license. In such an instance, the FCC may force the Company to terminate the
LMA or other arrangements entered into in connection with the operation or
programming of such station.
Pursuant to the 1996 Act, the continued performance of then existing LMAs
was generally grandfathered. The LMA for TV station WPME (the "Portland LMA")
was entered into prior to the adoption of the 1996 Act but the Company did not
begin programming the station until August 1997 upon completion of construction
of the station. The FCC suggested in a rulemaking proposal that LMAs entered
into after November 6, 1996 will not be grandfathered. The Company cannot
predict if the Portland LMA will be grandfathered. Currently, television LMAs
are not considered attributable interests under the FCC's multiple ownership
rules. However, the FCC is considering proposals which would make such LMAs
attributable, as they generally are in the radio broadcasting industry. If the
FCC were to adopt a rule that makes such interests attributable, without
modifying its current prohibitions against the ownership of more than one
television station in a market, the Company could be prohibited from entering
into such arrangements with other stations in markets in which it owns
television stations and could be required to modify or terminate any then
existing LMA arrangements. Such a change in the FCC rules could affect the
contemplated LMA with the new owner of WOLF, and could affect the LMAs with the
owners of WXFU and WPME.
Additionally, irrespective of the FCC rules, the Department of Justice and
the Federal Trade Commission (the "Antitrust Agencies") have the authority to
determine that a particular transaction presents antitrust concerns. The
Antitrust Agencies have recently increased their scrutiny of the television and
radio industry, and have indicated their intention to review matters related to
the concentration of ownership within markets (including through LMAs) even
when the ownership or LMA in question is permitted under the regulations of the
FCC. There can be no assurance that future policy and rulemaking activities of
the Antitrust Agencies will not affect the Company's operations (including
existing stations or markets) or expansion strategy.
The FCC has recently adopted orders requiring that television stations
begin operating digital television stations on new channels by May 1, 2002, and
cease operating their current analog channels by 2006. The costs of this
conversion is currently unknown. As digital television allows a single station
to broadcast multiple channels of programming, the impact of this conversion on
audience share, advertising revenues, and program availability is unknown.
Also, the FCC's orders allotted television stations which currently
operate on VHF channels substantially higher power levels for their digital
operations than were permitted for stations which currently operate on the UHF
band. As the Company's stations all operate on the UHF band, this power
disparity, if not reconsidered by the FCC, could have an adverse impact on the
competitive posture of the Company's TV stations after the digital conversion
takes place.
Dividend Policy; Restrictions on Payment of Dividends
Pegasus does not anticipate paying cash dividends in the foreseeable
future. The Certificate of Designation and the Senior Notes Indenture also
impose restrictions on Pegasus' ability to pay dividends on its Common Stock.
Moreover, Pegasus is a holding company, and its ability to pay dividends is
dependent upon the receipt of dividends from its direct and indirect
subsidiaries. Pegasus' credit facility and the PM&C Indenture each impose
substantial restrictions on PM&C's ability to pay dividends to Pegasus. Upon
consummation of the Merger, the DTS Credit Facility and the DTS Indenture will
restrict DTS' ability to pay dividends to Pegasus.
Concentration of Share Ownership and Voting Control By Marshall W. Pagon
Pegasus' Common Stock is divided into two classes with different voting
rights. Holders of Class A Common Stock are entitled to one vote per share on
all matters submitted to a vote of stockholders generally and holders of Class
B Common Stock are entitled to ten votes per share. Both classes vote together
as a single class
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on all matters except in connection with certain amendments to Pegasus' Amended
and Restated Certificate of Incorporation, the authorization or issuance of
additional shares of Class B Common Stock, and except where class voting is
required under the Delaware General Corporation Law ("DGCL"). As a result of
his beneficial ownership of all the outstanding voting stock of the sole
general partner of a limited partnership that indirectly controls Pegasus'
parent and two subsidiaries of Pegasus' parent and of his control of the only
other holder of Class B Common Stock, Marshall W. Pagon, the President and
Chief Executive Officer of Pegasus, beneficially owns all of the Class B Common
Stock of Pegasus. After giving effect to the greater voting rights attached to
the Class B Common Stock and the shares of Class A Common Stock to be issued in
the Merger, Mr. Pagon will be able to effectively vote 80.3% of the combined
voting power of the outstanding Common Stock and will have sufficient power
(without the consent of the holders of the Class A Common Stock) to elect the
entire Board of Directors of Pegasus and, in general, to determine the outcome
of matters submitted to the stockholders for approval, subject to the terms of
the Voting Agreement. Pursuant to the Voting Agreement, Mr. Pagon will be
obliged to cause the three nominees for director designated by certain of the
DTS stockholders or their affiliates to be elected and to cause three
independent directors to be elected to the Pegasus Board. Except as required
under the DGCL and the Certificate of Designation, holders of the Series A
Preferred Stock have no voting rights.
Volatility of Stock Price
There may be significant volatility in the market price of the Class A
Common Stock due to factors that may or may not relate to the Company's
performance. The market price of the Class A Common Stock may be significantly
affected by various factors such as economic forecasts, financial market
conditions, acquisitions, quarterly variations in the Company's results of
operations, the issuance of additional shares of Class A Common Stock, and the
volume of sales of the Class A Common Stock in the open market (including any
substantial sales by the DTS stockholders pursuant to their registration
rights).
Potential Anti-Takeover Provisions; Change of Control
Pegasus' Amended and Restated Certificate of Incorporation contains, among
other things, provisions authorizing the issuance of "blank check" preferred
stock and two classes of Common Stock with different voting rights. In
addition, the Company is subject to the provisions of Section 203 of the DGCL.
These provisions could delay, deter or prevent a merger, consolidation, tender
offer, or other business combination or change of control involving the Company
that some or a majority of the Company's stockholders might consider to be in
their best interests, including tender offers or attempted takeovers that might
otherwise result in such stockholders receiving a premium over the market price
for the Class A Common Stock.
Upon a Change of Control (as defined in the Senior Notes Indenture, the
Certificate of Designation and, if the Exchange Notes are issued, the Exchange
Note Indenture, as applicable), Pegasus will be required to offer to purchase
all Senior Notes, shares of Series A Preferred Stock or Exchange Notes, as the
case may be, then outstanding at 101% of, in the case of Series A Preferred
Stock, the liquidation preference thereof plus, without duplication,
accumulated and unpaid dividends to the repurchase date or, in the case of each
of the Senior Notes and the Exchange Notes, the aggregate principal amount,
plus accrued and unpaid interest, if any. The repurchase price is payable in
cash. There can be no assurance that, were a Change of Control to occur,
Pegasus would have sufficient funds to pay the purchase price for the Senior
Notes, the shares of Series A Preferred Stock or Exchange Notes, as the case
may be, which Pegasus might be required to purchase. There can also be no
assurance that the subsidiaries of Pegasus would be permitted by the terms of
their outstanding indebtedness, including pursuant to the PM&C Indenture and
the Credit Facility, to pay dividends to Pegasus to permit Pegasus to purchase
the Senior Notes, the shares of the Series A Preferred Stock or Exchange Notes,
as applicable. Any such dividends are currently prohibited. In addition, any
such Change of Control transaction may also be a change of control under the
Credit Facility and the PM&C Indenture, which would require PM&C to prepay all
amounts owing under the Credit Facility and to reduce the commitments
thereunder to zero and to offer to purchase all outstanding PM&C Notes at a
price of 101% of the aggregate principal amount thereof, plus accrued and
unpaid interest thereon to the date of purchase. In the event Pegasus does not
have sufficient funds to pay the purchase price of the Senior Notes, the Series
A Preferred Stock or the Exchange Notes, as the case may be, upon a Change of
Control, Pegasus could be required to seek third party financing to the extent
it did not have sufficient funds available to meet its purchase obligations,
and there can be no assurance that Pegasus would be able to obtain such
financing on favorable terms, if at all. In addition, any change of control
would be subject to the prior approval of the FCC.
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Dependence on Third Party Programmers
DIRECTV, and therefore the Company, is 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 different
renewal and cancellation provisions. There can be no assurance that any such
agreements will be renewed or will not be cancelled prior to expiration of
their original term. In the event any such agreements are not renewed or are
cancelled, there is no assurance that DIRECTV would be able to obtain or
develop substitute programming, or that such substitute programming would be
comparable in quality or cost to the Company's existing programming. The
ability of the Company to compete successfully will depend on DIRECTV's ability
to continue to obtain desirable programming and attractively package it to its
customers at competitive prices.
Pursuant to the Cable Television Consumer Protection and Competition Act
of 1992 (the "Cable Act") and the FCC's rules, programming developed by
vertically integrated cable-affiliated programmers generally must be offered to
all multichannel video programming distributors on non-discriminatory terms and
conditions. The Cable Act and the FCC's rules also prohibit certain exclusive
programming contracts. The Company anticipates that DIRECTV will continue to
purchase a substantial percentage of its programming from cable-affiliated
programmers. Certain of the restrictions on cable-affiliated programmers will
expire in 2002 unless extended by the FCC. As a result, any expiration of,
amendment to, or interpretation of, the Cable Act and the FCC's rules that
permits the cable industry or programmers to discriminate in the sale of
programming against competing businesses, such as that of DIRECTV could
adversely affect DIRECTV's ability to acquire programming or acquire
programming on a cost-effective basis and, therefore, impact adversely upon the
Company.
Risk of Signal Theft
DIRECTV's delivery of subscription programming requires the use of
encryption technology. Signal theft or "piracy" in the C-band DTH, cable
television and European DBS industries has been widely reported. There can be
no assurance that the encryption technology used in the DSS equipment will
remain totally effective. If the DSS equipment encryption technology is
compromised in a manner which is not promptly corrected, the Company's revenue
could be adversely affected. Recent published reports indicate that the DSS
equipment encryption systems have been compromised. There can be no assurance
that theft of DIRECTV programming will not adversely affect the Company's
operations in the future.
DIRECTV and the Company are prohibited from providing DIRECTV services
outside the United States. Despite subscribers' assurances that they receive
programming within one of the Company's service territories, a portion of the
Company's subscribers may, in fact, be receiving DIRECTV services outside the
Company's markets. If the Company must disconnect a significant portion of its
subscribers because they receive services outside the Company's service
territories, the Company's financial condition and results of operations could
be adversely affected.
Limited Consumer Adoption of Satellite Television
The Company believes that one of the largest hurdles to the mass market
adoption of DBS has been the cost to the subscriber of purchasing the DSS
equipment, currently ranging from $149 to $299 depending upon the level of
features desired and number of television sets to be connected. While the
Company believes that the suppliers of the subscriber equipment have strong
incentives to supply equipment at affordable prices as the subscriber base
expands and as competition increases among equipment vendors, there can be no
assurance that such costs will in fact remain at a level that will allow the
Company to continue to build its subscriber base. To the extent that the cost
of the equipment remains an obstacle to increased demand for satellite services
offered by the Company, the growth of the Company's subscriber base could be
delayed, adversely affecting the Company's financial condition and results of
operations.
Another potential hurdle to widespread adoption of DBS is that subscribers
do not receive local news and sports. While all of the major DBS providers,
including DIRECTV, offer broadcast network channels on an a la carte or package
basis, the issue of the extent to which FCC regulations prohibit satellite
providers from selling network programming to households that can receive a
signal from that network's local affiliate station using traditional off-air
antennae remains unresolved. Certain subscribers may not be willing to purchase
DBS because of this uncertainty.
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Unlike a common carrier, such as a telephone company or cable operator,
DBS operators such as DIRECTV are free to set prices and serve customers
according to their business judgment, without rate of return and other
regulation. However, there are laws and regulations that affect DIRECTV and,
therefore indirectly, the Company. As an operator of a privately owned United
States satellite system, DIRECTV is subject to the regulatory jurisdiction of
the FCC, primarily with respect to (i) licensing of satellites, (ii) avoidance
of interference with other broadcasting signals, and (iii) compliance with
rules that the FCC has established specifically for DBS satellite licenses.
State and local authorities in some jurisdictions (including some
residential developments) restrict or prohibit the use of satellite dishes
pursuant to zoning and other regulations. The FCC has recently adopted new
rules that preempt state and local regulations that affect satellite dishes
that are (i) three feet or less in diameter in any area, or (ii) six feet or
less in diameter in any area where commercial or industrial uses are generally
permitted by local land use regulation. As the DSS dishes are only 18 inches in
diameter, the FCC's rules are expected to ease local regulatory burdens on the
use of such dishes.
The Satellite Home Viewer Act (the "SHVA") establishes a "compulsory"
copyright license that allows a DTH operator, for a statutorily-established
fee, to retransmit network programming to subscribers for private home viewing
so long as that retransmission is limited to those persons in unserved
households. In general, an "unserved household" is one that cannot receive,
through the use of a conventional outdoor rooftop antenna, a sufficient
over-the-air network signal, and has not, within 90 days prior to subscribing
to the DTH service, subscribed to a cable service that provides that network
signal. Although DIRECTV and the Company have implemented guidelines to
safeguard against violations of the SHVA, certain subscribers within the
Company's service territories receive network programming due to their
misrepresentation that they are unserved households. Although not mandated by
law, DIRECTV and the Company presently disconnect such subscribers which any
local network affiliate maintains are not unserved households. Pending
Congressional action or administrative rulemaking, the inability of DIRECTV and
the Company to provide network programming to subscribers in service
territories could adversely affect the Company's average programming revenue
per subscriber and subscriber growth.
Risk Factors Relating to DTS' Business
In addition to the risk factors described under "Risk Factor Relating to
the Company's Business" which relate to the DBS business and, as a consequence,
would be applicable to both the Company and DTS, the following risk factors
also relate to DTS:
Substantial Indebtedness and High Degree of Leverage
DTS has a substantial amount of indebtedness outstanding. At December 31,
1997, total consolidated long-term indebtedness of DTS, on a pro forma basis
was approximately $202.1 million, representing approximately 92% of DTS' total
capitalization. DTS also may incur up to $90.0 million of indebtedness under
the DTS Credit Facility (of which approximately $40.8 million, on a pro forma
basis, after giving effect to the offering of the DTS Notes and the DTS
Transactions, is available) and is currently permitted by the DTS Indenture to
incur up to $75.0 million of indebtedness thereunder. The ability of DTS to
make payments of principal and interest on the DTS Notes will be largely
dependent upon its future operating performance. Such operating performance can
be subject to many factors, some of which will be beyond DTS' control, such as
prevailing economic conditions. There can be no assurance that DTS will be able
to generate sufficient cash flow to service required interest and principal
payments. Borrowings under the revolving credit facility established pursuant
to the DTS Credit Facility become due and payable on July 31, 2003 and
borrowings under the term loan established pursuant thereto are required to be
repaid in 20 consecutive quarterly installments of $200,000 commencing
September 30, 1998 with the remaining balance due on July 31, 2003. If DTS does
not have sufficient available resources to repay any indebtedness under the DTS
Credit Facility at such time, DTS may find it necessary to refinance such
indebtedness, and there can be no assurance that such refinancing would be
available, or available on reasonable terms.
The level of DTS' indebtedness also could have other adverse consequences
including the effect of such indebtedness on: (i) DTS' ability to fund
internally, or obtain additional debt or equity financing in the future
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for acquisitions, working capital, operating losses, capital expenditures and
other purposes; (ii) DTS' flexibility in planning for, or reacting to, changes
to its business and market conditions; (iii) DTS' ability to compete with less
highly leveraged competitors; and (iv) DTS' financial vulnerability in the
event of a downturn in its business or the general economy.
Limited Operating History, Negative Cash Flow
DTS has had a limited operating history during which time it has generated
negative cash flows and net losses. For the year ended December 31, 1997, DTS
incurred a net loss of $30.1 million. The negative cash flows can be attributed
to the costs incurred to purchase DIRECTV service territories, to develop and
implement its business plan and to generate the subscriber base required to
cover general corporate overhead expenses. DTS expects negative cash flows and
net losses to continue into at least 1998 as DTS acquired an additional DIRECTV
service territory and plans to incur substantial sales and marketing expenses
to build its subscriber base. The ability to generate positive cash flow in the
future is dependent upon many factors, including general economic conditions,
the level of market acceptance for DTS' services and the degree of competition
encountered by DTS. There can be no assurance when or if DTS will generate
positive operating cash flow or net income.
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COMPARATIVE PER SHARE DATA
Set forth below are unaudited losses from operations per common share,
cash dividends declared and book value per common share data of Pegasus and DTS
on both historical and pro forma bases. Pegasus - Pro Forma - Transactions loss
from operations per share is derived from the pro forma information referenced
herein, which gives effect to the Transactions as if they had occurred at
January 1, 1997, with respect to losses from operations and cash dividends and
as of December 31, 1997 for book value data. DTS - Pro Forma - Transactions
loss from operations per share is derived from the pro forma information
referenced herein, which gives effect to the DTS Transactions as if they had
occurred at January 1, 1997 with respect to losses from operations and cash
dividends and as of December 31, 1997 for book value data. Pegasus - Pro Forma
- - Transactions and Merger loss from operations per share is derived from the
pro forma information referenced herein, which gives effect to the Transactions
and Merger as if they had occurred at January 1, 1997, with respect to losses
from operations and cash dividends and as of December 31, 1997 for book value
data. The information set forth below should be read in conjunction with the
respective audited and unaudited financial statements of Pegasus and DTS and
Pegasus' pro forma consolidated information, all of which are included
elsewhere in this Proxy Statement/Prospectus.
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
---------------------
<S> <C>
Pegasus - Historical:
Loss from operations - fully diluted ......... $ (3.02)
Cash dividends ............................... 0
DTS - Historical:
Loss from operations ......................... (14.11)
Cash dividends ............................... 0
Pegasus - Pro Forma - Transactions:
Loss from operations -fully diluted .......... ( 5.26)
Cash dividends ............................... 0
DTS - Pro Forma - Transactions:
Loss from operations ......................... (21.47)
Cash dividends ............................... 0
Pegasus - Pro Forma - Transactions and Merger:
Loss from operations - fully diluted ......... ( 7.03)
Cash dividends ............................... 0
December 31, 1997
Pegasus - Historical:
Book value ................................... $ 2.65
DTS - Historical:
Book value ................................... 7.79
Pegasus - Pro Forma - Transactions:
Book value ................................... 2.72
DTS - Pro Forma - Transactions:
Book value ................................... 7.79
Pegasus - Pro Forma - Transactions and Merger:
Book value ................................... 2.13
</TABLE>
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MARKET PRICE INFORMATION AND DIVIDENDS
Pegasus
The Class A Common Stock is traded on the Nasdaq National Market under the
symbol "PGTV." The stock prices listed below represent the high and low bids
for shares of the Class A Common Stock, as reported by the Nasdaq National
Market, for the periods subsequent to Pegasus' initial public offering on
October 3, 1996. The quotations reflect inter-dealer prices, without retail
mark-ups, mark-downs or commissions, and may not necessarily represent actual
transactions.
High Low
--------- ---------
1996
Fourth Quarter (from October 4, 1996) ......... $16 $11 1/4
1997
First Quarter ................................. $14 $10 3/4
Second Quarter ................................ $11 3/8 $ 8 1/8
Third Quarter ................................. $21 1/2 $10 1/2
Fourth Quarter ................................ $25 1/2 $19
1998
First Quarter (through March 17, 1998) ......... $26 $19 7/8
On November 5, 1997, the last trading day prior to the public announcement
of the Merger, the high and low bid prices of the Class A Common Stock on the
Nasdaq National market were $20.00 and $19.25, respectively.
On __________________, the last trading day prior to the mailing of this
Proxy Statement/Prospectus to Pegasus' stockholders, the last reported sales
price of the Class A Common Stock on the Nasdaq National Market was $____. As
of the Record Date, there were approximately 128 record holders of the Class A
Common Stock.
No established public trading market exists for shares of Pegasus' Class B
Common Stock. Each share of Class B Common Stock is convertible at the option
of the holder into one share of Class A Common Stock. Subject to the terms of
the Voting Agreement, all of the Class B Common Stock is owned beneficially by
Marshall W. Pagon, Pegasus' President and Chief Executive Officer.
Pegasus has not paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Payment of cash
dividends on the Common Stock is restricted by the terms of the Series A
Preferred Stock, and the Exchange Notes, if issued. The terms of the Series A
Preferred Stock and the Exchange Notes permit Pegasus to pay dividends and
interest thereon by issuance, in lieu of cash, of additional shares of Series A
Preferred Stock and additional Exchange Notes, if issued, respectively. The
Senior Notes Indenture restricts Pegasus' ability to pay cash dividends on the
Series A Preferred Stock or cash interest on the Exchange Notes, if issued,
prior to July 1, 2002. Pegasus' ability to obtain cash from its subsidiaries
with which to pay cash dividends is also restricted by the Credit Facility and
the PM&C Indenture.
DTS
DTS is a privately-held company and its securities are not listed for
quotation on the Nasdaq National Market or a stock exchange.
THE SPECIAL MEETING
Solicitation
The accompanying proxy is solicited on behalf of the Pegasus Board. In
addition to the use of the mails, proxies may be solicited by the directors,
officers and employees of Pegasus, without additional compensation, by personal
interview, telephone, telegram, or otherwise. Arrangements also may be made
with brokerage houses and other custodians, nominees and for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and Pegasus may reimburse them for their reasonable out-of-pocket and
clerical expenses.
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<PAGE>
Voting Securities and Record Date
Only holders of Common Stock of record at the close of business on March
2, 1998 will be entitled to vote at the Special Meeting. Each record holder of
Class A Common Stock will be entitled to one vote per share, and each record
holder of Class B Common Stock will be entitled to ten votes per share. As of
the Record Date, there were 5,751,850 shares of Class A Common Stock and
4,581,900 shares of Class B Common Stock issued and outstanding. Holders of the
Class A Common Stock and Class B Common Stock voting as one class will be asked
to vote upon each matter to be voted upon at the Special Meeting.
Quorum and Voting
Holders of shares of Common Stock representing a majority of the votes
entitled to vote at the Special Meeting who attend the Special Meeting in
person or who validly complete a proxy will be counted for purposes of
determining a quorum regardless how such stockholders vote with respect to any
matter (including abstaining from voting). Approval of each of the proposals to
be voted upon at the Special Meeting requires the affirmative vote of the
holders of a majority of the shares present, in person or by proxy, at the
Special Meeting and entitled to vote. If a proxy is marked as "Abstain" on any
matter, or if specific instructions are given that no vote be cast on any
specific matter (a "Specified Non-Vote"), the shares represented by such proxy
will not be voted on such matter. Abstentions will be included within the
number of shares present at the meeting and entitled to vote for purposes of
determining whether such matter has been authorized, but broker non-votes
(i.e., shares held of record by a broker for which a proxy is not given) and
other Specified Non-Votes will not be so included.
Purpose of the Special Meeting
At the Special Meeting, holders of Class A Common Stock and Class B Common
Stock, voting together as one class, will vote upon the proposed merger of DTS
and the Merger Sub pursuant to the Merger Agreement (see "PROPOSAL 1: APPROVAL
OF MERGER"). The Merger Agreement has been approved by the Pegasus Board (by
the affirmative votes of all of its directors) and is attached hereto as Annex
I. Under the terms of the Merger Agreement, and subject to the satisfaction of
the conditions set forth therein, (i) DTS will merge with the Merger Sub and
become a wholly-owned subsidiary of Pegasus, (ii) with certain exceptions and
subject to certain immaterial adjustments, (a) holders of DTS' capital stock
will receive an aggregate of approximately 5,465,500 shares of Class A Common
Stock and, in lieu of the issuance of fractional shares, cash based on the
Market Price (as defined in the Merger Agreement), and (b) holders of
outstanding DTS options and warrants will receive options and/or warrants to
purchase approximately 223,000 shares of Class A Common Stock, (iii) the
Pegasus Board will be increased to nine members, including three directors to
be designated by certain stockholders of DTS or their affiliates, and (iv)
certain stockholders of DTS and certain of their affiliates, Marshall W. Pagon,
Pegasus' President, Chief Executive Officer and Chairman of the Board, and
certain affiliates of Mr. Pagon who hold all of the Class B Common Stock will
enter into the Voting Agreement, which provides for the designation and
election of directors.
At the Special Meeting, in addition to voting on the approval and adoption
of the Merger Agreement, holders of the Common Stock will also vote upon the
following proposals: (i) that the Restricted Stock Plan be amended to increase
the number of shares of Class A Common Stock that may be issued thereunder from
270,000 to 350,000 (see "PROPOSAL 2: AMENDMENT TO RESTRICTED STOCK PLAN"), (ii)
that the Stock Option Plan be amended to increase the number of shares of Class
A Common Stock that may be issued thereunder from 450,000 to 970,000 and to
increase the maximum number of Shares of Class A Common Stock that may be
issued under options granted to any executive officer from 275,000 to 550,000
(see "PROPOSAL 3: AMENDMENT TO STOCK OPTION PLAN") and (iii) amendments to
provisions of the Series A Preferred Stock Certificate of Designation relating
to (A) the incurrence of Indebtedness (as this term is defined in the
Certificate of Designation) and (B) the definition of a Change of Control (as
this term is defined in the Certificate of Designation) (see "PROPOSAL 4:
AMENDMENT TO SERIES A PREFERRED STOCK CERTIFICATE OF DESIGNATION"). If any
other business is brought before the Special Meeting, proxies will be voted, to
the extent permitted by the rules and regulations of the Commission, in
accordance with the judgment of the persons voting the proxies. Pegasus is
unaware at this time of any other matters which will come before the Special
Meeting.
24
<PAGE>
As of the Record Date, there were 5,751,850 shares of Class A Common Stock
and 4,581,900 shares of Class B Common Stock issued and outstanding. Each
record holder of Class A Common Stock will be entitled to one vote per share,
and each record holder of Class B Common Stock will be entitled to ten votes
per share. All of the Class B Common Stock (representing approximately 88.9% of
the voting power) is owned beneficially by Mr. Pagon. Thus, Mr. Pagon has
voting power sufficient to approve the Merger Agreement and the other proposals
to be voted upon at the Special Meeting. Mr. Pagon has advised the Company that
he intends to cause the record holders of the Class B Common Stock to vote in
favor of all such proposals. Such record holders are obligated by the terms of
the Merger Agreement to vote in favor of the Merger Proposal.
A form of proxy for use by the holders of the Common Stock at the Special
Meeting and a return envelope for each form of proxy are enclosed with this
Proxy Statement/Prospectus. Stockholders may revoke the authority granted by
their execution of proxies at any time before the effective exercise thereof by
filing with the Secretary of Pegasus a written notice of revocation or a duly
executed proxy bearing a later date, or by voting in person at the Special
Meeting. A form of proxy is attached as Annex VI hereto. Unless otherwise
indicated on the form of proxy, shares represented by any proxy in the
appropriate enclosed form, if the proxy is properly executed and received by
Pegasus prior to the Special Meeting and not revoked, will be voted in favor of
all the matters to be presented to the Special Meeting, as described above.
PROPOSAL 1: APPROVAL OF MERGER
Background of the Merger
Following its October 1996 initial public offering, Pegasus has pursued
its acquisition strategy of acquiring DIRECTV service territories from other
independent providers of DIRECTV who are members or affiliate members of the
NRTC. In 1997, Pegasus acquired DBS territories and related assets in certain
rural portions of 23 states from 25 independent providers of DIRECTV for total
consideration of approximately $162.3 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. As of March 12, 1998, without giving
effect to the Merger, Pegasus has also entered into letters of intent or
definitive agreements to acquire DIRECTV distribution rights and related assets
from 14 independent providers of DIRECTV services (the "Pending Pegasus DBS
Acquisitions"). After giving effect to the Pending Pegasus DBS Acquisitions,
which do not give effect to the Merger, the Company will have the exclusive
right to provide DIRECTV services to approximately 2.5 million U.S. television
households in rural areas of 30 states serving a subscriber base, as of
February 28, 1998, of approximately 178,300 DBS customers. The Company believes
that there is an opportunity for additional growth through the acquisition of
DIRECTV territories held by the other approximately 165 NRTC members and
affiliate members. The Company also believes that as the largest independent
provider of DIRECTV services that it is well positioned to achieve economies of
scale through the acquisition of DIRECTV territories held by other NRTC members
and affiliate members.
In furtherance of its DBS acquisition strategy, Pegasus met with DTS in
April 1997 to discuss a proposal to engage in a business combination with DTS,
the second largest independent provider of DIRECTV services with the exclusive
right to provide DIRECTV services within certain rural territories in the U.S.
encompassing approximately 1.8 million U.S. television households in rural
areas of 11 states serving a subscriber base, as of February 28, 1998, of
approximately 139,600 DBS customers. In the weeks that followed, members of the
senior management of each of Pegasus and DTS, together with representatives of
DTS' principal stockholders and their respective legal and other advisors, held
a series of meetings to discuss possible terms of a business combination and
exchanged financial and due diligence materials with the objective of entering
into a binding agreement in principle. In July 1997, Pegasus and DTS determined
that they were not able to reach an agreement at that time and terminated their
discussions. In October 1997, Pegasus and DTS resumed discussions. On November
6, 1997, Pegasus and DTS entered into an agreement in principle (the "Agreement
in Principle") and made a public announcement about the proposed merger.
The terms of the Merger, including the consideration to be paid, were the
result of arm's-length negotiations among Pegasus, Marshall W. Pagon, DTS and
its principal stockholders. DTS' principal stockholders proposed that the
Voting Agreement be entered into at the consummation of the Merger in order to
provide them, as substantial stockholders in Pegasus following the Merger, with
certain corporate governance rights; the terms of the Voting Agreement were
also determined by arm's-length negotiation.
25
<PAGE>
On December 18 and 19, 1997, the Pegasus Board held a meeting to consider
the proposed Merger Agreement and the transactions contemplated thereby,
including the proposed consideration to be paid to DTS' stockholders. At this
meeting, members of Pegasus' senior management, together with its legal
advisors, reviewed with the Pegasus Board, among other things, the strategic
fit between the two companies, the background of the proposed transaction, the
financial evaluation analyses of the transaction, and the terms of the Merger
Agreement. In addition, at the December 18, 1997 meeting, Merrill Lynch
presented financial analyses regarding the proposed transaction to the Pegasus
Board. After discussion and consideration, the Pegasus Board unanimously
authorized Pegasus' executive officers to further negotiate the Merger
Agreement. On December 31, 1997, the Pegasus Board met again, and Merrill Lynch
presented its updated analyses regarding the proposed transaction and delivered
its oral opinion which was confirmed by its written opinion, dated December 31,
1997, to the effect that, based upon and subject to certain factors and
assumptions stated therein, as of such date, the Consideration (as defined in
such opinion) to be paid by Pegasus in the Merger is fair from a financial
point of view to Pegasus. The Pegasus Board unanimously approved the Merger
Agreement and authorized the execution of the Merger Agreement on such terms
with such changes as the executive officers approved.
On January 8, 1998, Pegasus, the Merger Sub, holders of Pegasus' Class B
Common Stock, DTS and certain of DTS' stockholders entered into the Merger
Agreement, and Merrill Lynch confirmed its opinion dated December 31, 1997 with
its written opinion dated as of January 8, 1998, to the effect that, based upon
and subject to certain factors and assumptions stated therein, as of such date,
the Consideration (as defined in such opinion) to be paid by Pegasus in the
Merger is fair from a financial point of view to Pegasus. The full text of the
Merrill Lynch Opinions, each of which sets forth a description of the
assumptions made, factors considered and limitations on the review undertaken,
is attached hereto as Annex V. Pegasus stockholders are urged to read the
Merrill Lynch Opinions carefully in their entirety. See "PROPOSAL 1: APPROVAL
OF MERGER -- Opinion of Merrill Lynch."
Reasons for the Merger and Recommendations of the Pegasus Board
At the meeting held on December 31, 1997, the Pegasus Board, by unanimous
vote, determined that the terms of the Merger Agreement and the Merger are in
the best interests of Pegasus and its stockholders and approved the Merger
Agreement and the Merger. At such meeting, the Pegasus Board also recommended
that Pegasus' stockholders approve the Merger Proposal. In reaching these
conclusions and recommendations, the principal factors considered by the
Pegasus Board were the strategic fit between the businesses of Pegasus and DTS,
the terms of the Merger Agreement and the financial analysis presented by
Merrill Lynch, which is described in the next section.
ACCORDINGLY, THE PEGASUS BOARD UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS
VOTE FOR THE MERGER PROPOSAL.
Opinion of Merrill Lynch
Pegasus retained Merrill Lynch to act as its exclusive financial advisor
in connection with the Merger. On December 31, 1997, Merrill Lynch delivered to
the Pegasus Board its oral opinion, confirmed by its written opinion dated
December 31, 1997 (the "Merrill Lynch Opinion"), to the effect that, based upon
and subject to certain factors and assumptions stated therein, as of such date,
the Consideration (as defined in the Merrill Lynch Opinion as 5,500,000 shares
of the common stock of Pegasus as adjusted for certain options, warrants and
other obligations of DTS) to be paid by Pegasus in the Merger is fair from a
financial point of view to Pegasus. Merrill Lynch confirmed its written opinion
dated December 31, 1997 with its written opinion dated as of January 8, 1998 to
the effect that, based upon and subject to certain factors and assumptions
stated therein, as of such date, the Consideration (as defined in such opinion)
to be paid by Pegasus in the Merger is fair from a financial point of view to
Pegasus (collectively the "Merrill Lynch Opinions")
The full text of the Merrill Lynch Opinions, each of which sets forth a
description of the assumptions made, general procedures followed, factors
considered and limitations on the review undertaken, is attached hereto as
Annex V and is incorporated herein by reference. The Merrill Lynch Opinions
were provided to the Pegasus Board for its information and are directed only to
the fairness from a financial point of view to Pegasus of the Consideration to
be paid by Pegasus in the Merger, do not address the merits of the underlying
decision by
26
<PAGE>
Pegasus to engage in the Merger and do not constitute a recommendation to any
Pegasus stockholder as to how such stockholder should vote on the Merger or any
transaction related thereto. Pegasus stockholders are urged to read the Merrill
Lynch Opinions carefully in their entirety, especially with regard to the
assumptions made and factors considered by Merrill Lynch. The summary of the
Merrill Lynch Opinions set forth in this Proxy Statement/Prospectus is
qualified in its entirety by reference to the full text of such opinion.
The Consideration was determined through arms-length negotiations between
Pegasus and DTS and was approved by the Pegasus Board.
The summary set forth below does not purport to be a complete description
of the analyses underlying the Merrill Lynch Opinions or the presentation made
by Merrill Lynch to the Pegasus Board. The preparation of a fairness opinion is
a complex analytical process involving various determinations as to the most
appropriate and relevant methods of financial analysis and the applications of
those methods to the particular circumstances and, therefore, such an opinion
is not readily susceptible to partial analysis or summary description. In
arriving at its opinions, Merrill Lynch did not attribute any particular weight
to any analysis or factor considered by it, but rather made qualitative
judgments as to the significance and relevance of each analysis and factor.
Accordingly, Merrill Lynch believes that its analyses must be considered as a
whole and that selecting portions of its analyses, without considering all of
its analyses, would create an incomplete view of the process underlying the
Merrill Lynch Opinions.
In performing its analyses, numerous assumptions were made with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of Merrill
Lynch, Pegasus or DTS. Any estimates contained in the analyses performed by
Merrill Lynch are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than suggested by
such analyses. Additionally, estimates of the value of businesses or securities
do not purport to be appraisals or to reflect the prices at which such
businesses or securities might actually be sold. Accordingly, such analyses and
estimates are inherently subject to substantial uncertainty. In addition, as
described above, the Merrill Lynch Opinion and Merrill Lynch's presentation to
the Pegasus Board were among several factors taken into consideration by the
Pegasus Board in making its determination to approve and adopt the Merger
Agreement. Consequently, the Merrill Lynch analyses described below should not
be viewed as determinative of the decision of the Pegasus Board with respect to
the fairness of the Consideration.
In arriving at its opinions, Merrill Lynch, among other things: (i)
reviewed certain publicly available business and financial information relating
to DTS and Pegasus that Merrill Lynch deemed to be relevant; (ii) reviewed
certain information, including financial forecasts, relating to the business,
earnings, cash flow, assets, liabilities and prospects of DTS and Pegasus
furnished to Merrill Lynch by DTS and Pegasus, as well as the amount and timing
of the cost savings and related expenses expected to result from the Merger
(the "Expected Synergies") furnished to Merrill Lynch by Pegasus; (iii)
conducted discussions with members of senior management of DTS and Pegasus
concerning the matters described in clauses (i) and (ii) above, as well as
their respective businesses and prospects before and after giving effect to the
Merger and the Expected Synergies; (iv) reviewed the market prices for Pegasus'
Class A Common Stock and valuation multiples for DTS capital stock and Pegasus
Class A Common Stock and compared them with those of certain publicly traded
companies that Merrill Lynch deemed to be relevant; (v) reviewed the results of
operations of DTS and Pegasus and compared them with those of certain publicly
traded companies that Merrill Lynch deemed to be relevant; (vi) compared the
proposed financial terms of the Merger with the financial terms of certain
other transactions that Merrill Lynch deemed to be relevant; (vii) reviewed a
draft dated December 30, 1997 of the Merger Agreement and the Merger Agreement
as executed January 8, 1998, respectively, and (viii) reviewed such other
financial studies and analyses and took into account such other matters as
Merrill Lynch deemed necessary, including Merrill Lynch's assessment of general
economic, market and monetary conditions.
In preparing its opinions, Merrill Lynch assumed and relied on the
accuracy and completeness of all information supplied or otherwise made
available to Merrill Lynch, discussed with or reviewed by or for Merrill Lynch,
or publicly available, and Merrill Lynch did not assume any responsibility for
independently verifying such information, did not undertake an independent
evaluation or appraisal of any of the assets or liabilities of DTS or Pegasus
and was not furnished with any such evaluation or appraisal. In addition,
Merrill Lynch did not assume any obligation to conduct, nor did Merrill Lynch
conduct, any physical inspection of the properties or
27
<PAGE>
facilities of DTS or Pegasus. With respect to the financial forecast
information and the Expected Synergies furnished to or discussed with Merrill
Lynch by DTS or Pegasus, Merrill Lynch assumed that they were reasonably
prepared and reflected the best currently available estimates and judgment of
DTS or Pegasus management as to the expected future financial performance of
DTS or Pegasus, as the case may be, and the Expected Synergies. Merrill Lynch
further assumed that the Merger will be accounted for as a purchase under
generally accepted accounting principles and that it will qualify as a tax-free
reorganization for U.S. federal income tax purposes.
The Merrill Lynch Opinions are necessarily based upon market, economic and
other conditions as they existed and could be evaluated on, and on the
information made available to Merrill Lynch as of, the date of such opinions.
Merrill Lynch assumed that in the course of obtaining the necessary regulatory
or other consents or approvals (contractual or otherwise) for the Merger, no
restrictions, including any divestiture requirements or amendments or
modifications, will be imposed that will have a material adverse effect on the
contemplated benefits of the Merger. Merrill Lynch also assumed that no
increase in the amount of Consideration or other payments and no incurrence of
other liabilities that in any case would be material to Merrill Lynch's
analysis will be required under the Merger Agreement. Merrill Lynch was not
asked to consider, and the Merrill Lynch Opinions do not in any manner address,
the prices at which shares of Pegasus Class A Common Stock will trade following
the announcement or consummation of the Merger.
The following is a brief summary of the material analyses performed by
Merrill Lynch in connection with its preparation of the Merrill Lynch Opinions.
Historical Trading Analysis. Merrill Lynch reviewed the historical stock
market performance of Pegasus's Class A Common Stock. This analysis indicated
that since Pegasus' initial public offering through December 30, 1997, the
price of a share of Pegasus Class A Common Stock ranged between $9.25 and
$24.50 and averaged $14.27.
Selected Publicly Traded Comparable Companies Analysis. Using publicly
available information, Merrill Lynch reviewed the stock prices (as of December
30, 1997) and market multiples of common stocks of the following companies:
Echostar Communications Corporation, TCI Satellite Entertainment, Inc., United
States Satellite Broadcasting Company, Inc. and Pegasus. Merrill Lynch believes
these companies are engaged in lines of business that are generally comparable
to those of DTS. Merrill Lynch determined the equity market value and derived
the unlevered value (defined as equity market value plus the book value of debt
less cash and cash equivalents) for these comparable companies. Merrill Lynch
calculated a range of such unlevered values as a multiple of current DBS
subscribers and earnings before interest, taxes, depreciation, amortization and
subscriber acquisition costs ("Pre-SAC EBITDA"). Unlevered value as a multiple
of current subscribers ranged from 2,100x to 2,200x, compared to an implied
transaction multiple of 2,055x for DTS. Unlevered value as a multiple of
estimated 1998 Pre-SAC EBITDA ranged from 11.5x to 12.5x, compared to an
implied transaction multiple of 12.6x estimated 1998 Pre-SAC EBITDA based on
the DTS Projections (as defined below) and an implied transaction multiple of
13.2x estimated 1998 Pre-SAC EBITDA based on the Adjusted Projections (as
defined below).
Selected Acquisition Transaction Analysis. Using publicly available
information, Merrill Lynch reviewed the purchase prices and multiples paid in
selected completed and pending mergers and acquisitions involving DIRECTV
territories which Merrill Lynch deemed relevant in evaluating the Merger.
Merrill Lynch reviewed the acquisitions of rural DIRECTV territories by Pegasus
and DTS during 1996 and 1997. Merrill Lynch reviewed the acquisition of Indiana
territories by DTS, the pending acquisition of a Georgia territory by DTS, and
the acquisition of various territories by Pegasus. Multiples of unlevered value
of the transactions (consideration offered for the equity plus the book value
of debt less cash and cash equivalents) to the DBS subscribers of the acquired
businesses ranged from 2,000x to 2,150x, compared to an implied transaction
multiple of 2,055x for DTS. The multiples of Pre-SAC EBITDA for the forward 12
months after the acquisition ranged from 13.5x to 14.5x, compared to an implied
transaction multiple of 12.6x estimated 1998 Pre-SAC EBITDA based on the DTS
Projections (as defined below) and an implied transaction multiple of 13.2x
estimated 1998 Pre-SAC EBITDA based on the Adjusted Projections (as defined
below).
No company, transaction or business used in the analysis described under
"--Selected Publicly Traded Comparable Companies Analysis" and "--Selected
Acquisition Transaction Analysis" is identical to Pegasus,
28
<PAGE>
DTS or the Merger. Accordingly, an analysis of the results thereof necessarily
involves complex considerations and judgements concerning differences in
financial and operating characteristics and other factors that could affect the
transaction or the public trading or other values of the company or companies
to which they are being compared. Mathematical analysis (such as determining
the average or median) is not in itself a meaningful method of using comparable
acquisition or company data.
Discounted Cash Flow Analysis. Merrill Lynch performed a discounted cash
flow analysis of DTS using two different versions of underlying operating
projections, each of which was based upon the forecasts prepared by the
management of DTS. The first version is referred to as the "DTS Projections."
The second version, which was adjusted by Pegasus management (the "Adjusted
Projections"), differed from the DTS Projections in that they assumed lower
average monthly subscriber revenue in 1998 through 2000, a higher Pre-SAC
EBITDA margin and higher subscriber acquisition costs as compared to the DTS
Projections. Utilizing these two versions of projections for DTS, Merrill Lynch
calculated the theoretical unlevered discounted present value for DTS by adding
together the present value of (i) the projected stream of unlevered free cash
flow through the fiscal year 2002 for DTS and (ii) the projected value of DTS
at the end of the fiscal year 2002 (the "DTS Terminal Value"). Merrill Lynch
also performed a discounted cash flow analysis of Pegasus on a stand alone
basis using a set of underlying operating projections which were based upon the
forecasts provided by management of Pegasus (the "Pegasus Projections").
Utilizing the Pegasus Projections, Merrill Lynch calculated the theoretical
unlevered discounted present value for Pegasus by adding together the present
value of (i) the projected stream of unlevered free cash flow through the
fiscal year 2002 for Pegasus and (ii) the projected value of Pegasus at the end
of the fiscal year 2002 (the "Pegasus Terminal Value"). Each DTS Terminal Value
and the Pegasus Terminal Value were calculated based upon earnings before
interest, taxes, depreciation, amortization and net new subscriber acquisition
costs ("Adjusted EBITDA") multiples ranging from 6.0x to 8.0x. The unlevered
after-tax discount rates used in the discounted cash flow analyses ranged from
16.0% to 20.0%.
The theoretical value of DTS based on the DTS Projections produced a range
of values for DTS' equity of $119.2 million to $261.2 million. The theoretical
value of DTS based on the Adjusted Projections produced a range of values for
DTS' equity of $95.2 million to $214.0 million. Merrill Lynch noted that, based
on the closing price of Pegasus on December 30, 1997, the implied value of
$111.4 million of the Consideration was within the range of theoretical value
based on the Adjusted Projections. The theoretical value of Pegasus based on
the Pegasus Projections produced a range of values per share of Pegasus Common
Stock of $19.15 to $36.55. Merrill Lynch noted that the closing price of
Pegasus Common Stock on December 30, 1997, $20.25, was within the range of
theoretical value based on the Pegasus Projections.
In addition, Merrill Lynch calculated the theoretical value of DTS and
Pegasus combined based on the Adjusted Projections, the Pegasus Projections and
the Expected Synergies. The theoretical value of Pegasus based on DTS and
Pegasus combined produced a range of value per share of Pegasus Common Stock of
$19.37 to $38.29. Merrill Lynch noted that the per share values were above the
comparable per share values for Pegasus on a stand alone basis.
Contribution Analysis. Merrill Lynch analyzed the percentage of revenue,
Pre-SAC EBITDA, households, subscribers and unlevered value and equity value
that each of Pegasus and DTS would contribute to the total of the combined
entity based upon the Adjusted Projections and Pegasus Projections referred to
above. Based upon the Adjusted Projections and Pegasus Projections, Pegasus'
contribution to the combined entity ranged from 61.6% to 72.4%. Merrill Lynch
noted that, based upon the Consideration of 5.5 million shares of Pegasus Class
A Common Stock for DTS capital stock, the Pegasus stockholders would own
approximately 66% of the combined entity, within the range of contribution
based upon the statistics considered.
Pegasus retained Merrill Lynch on the basis of its experience and
expertise. Merrill Lynch is an internationally recognized investment banking
and advisory firm which, as a part of its investment banking business,
regularly is engaged in the valuation of businesses and securities in
connection with mergers and acquisitions, negotiated underwritings, competitive
bidding, secondary distributions of listed and unlisted securities, private
placements and valuations for corporate and other purposes. In the past,
Merrill Lynch has provided financial advisory and financing services to Pegasus
and may continue to do so, and has received, and may receive, fees for the
rendering of such services. In addition, in the ordinary course of its
business, Merrill Lynch may actively trade the equity securities of Pegasus and
DTS for its own account and for the accounts of its customers and, accordingly,
may at any time hold a long or short position in such securities.
29
<PAGE>
Pursuant to the engagement letter, dated as of November 1, 1997, between
Pegasus and Merrill Lynch, Pegasus has agreed to pay Merrill Lynch a fee of
$1,350,000 for services rendered in connection with the Merger. Of this amount,
$100,000 was payable on the date of the engagement letter, $400,000 was payable
upon the execution of the definitive agreement and $850,000 will be payable
upon the consummation of the Merger. Pegasus has also agreed to reimburse
Merrill Lynch for the expenses reasonably incurred by it in connection with its
engagement (including reasonable counsel fees and disbursements) and to
indemnify Merrill Lynch and its affiliates from and against certain
liabilities, including liabilities under the federal securities laws, arising
out of its engagement.
Interests of Certain Persons in the Merger
At Closing, the Voting Agreement will be entered into by Marshall W. Pagon
and the holders of the Class B Common Stock, and by certain stockholders of DTS
and certain of their affiliates, including Columbia Capital Corporation
("Columbia"), Whitney Equity Partners, L.P. ("Whitney") and Chisholm Partners
III, L.P. ("Chisholm"). The Voting Agreement provides that during the term of
the Voting Agreement the Pegasus Board will consist of at least nine members,
subject to reduction in certain circumstances, and will initially consist of
three independent directors, three directors designated by Mr. Pagon, and one
director to be designated initially by each of Columbia, Whitney and Chisholm.
The three independent directors will initially consist of James J. McEntee,
III, Mary C. Metzger, and Donald W. Weber. Mr. Pagon's designees consist of
himself, Robert N. Verdecchio (Pegasus' chief financial officer) and a person
to be determined by Mr. Pagon. All of the independent directors and Messrs.
Pagon and Verdecchio are currently members of the Pegasus Board. Columbia,
Whitney and Chisholm informed the Company that they intend to initially
designate Harry F. Hopper, III, Michael C. Brooks and Riordon B. Smith,
respectively, to serve as their designees to the Pegasus Board. The Voting
Agreement also specifies that the Pegasus Board will have a nominating
committee, an audit committee and a compensation committee. Each such committee
will consist of one director designated by a majority of the Columbia, Whitney
and Chisholm designees, one independent director and one director designated by
Mr. Pagon. The Voting Agreement terminates with respect to any of Columbia,
Whitney and Chisholm and their respective related parties (and thus their
respective rights to designate a director) when any of them and their
respective specified related parties cease to own collectively at least half
the shares of Class A Common Stock received by them in the Merger and certain
other events. A copy of the Voting Agreement to be entered into is attached as
Annex II to this Proxy Statement/Prospectus. See "THE MERGER -- Voting
Agreement."
At Closing, a Registration Rights Agreement will also be entered into by,
among others, Pegasus, certain of DTS' stockholders, and members of DTS' senior
management who elect to do so. The Registration Rights Agreement will provide
certain underwritten demand, shelf and piggyback registration rights to holders
of Class A Common Stock received in the Merger who are parties to this
agreement. See "THE MERGER -- Registration Rights Agreement."
In connection with the Merger, noncompetition agreements will be entered
into by certain members of DTS' Senior Management and by certain DTS
stockholders and certain of their respective affiliates. The noncompetition
agreements will restrict each of these individuals or entities from engaging in
certain business activities relating to the satellite television business.
Ownership of Pegasus After the Merger
Upon completion of the Merger, there will be outstanding 11,217,350 shares
of Class A Common Stock (assuming no additional shares are issued before the
Effective Time), of which approximately 5,465,500, or 48.7%, will be owned by
the DTS stockholders, and 4,581,900 shares of Class B Common, all of which will
be beneficially owned by Mr. Pagon. Giving effect to the voting rights of the
Class B Common Stock, the DTS stockholders and Mr. Pagon will have voting power
with respect to approximately 9.6% and 80.3%, respectively, of the Common
Stock, subject to the terms of the Voting Agreement. For information relating
to ownership of the Pegasus Common Stock, both before and after the Merger, see
"OWNERSHIP AND CONTROL."
Management of Pegasus After the Merger
It is not expected that there will be any change in the executive officers
of Pegasus as a result of the Merger. For information concerning the
composition of the Pegasus Board following the Merger, see "THE MERGER --
Voting Agreement" and "PEGASUS MANAGEMENT."
30
<PAGE>
PROPOSAL 2: AMENDMENT TO RESTRICTED STOCK PLAN
The Restricted Stock Plan, which was adopted in September 1996, provides
for the issuance of up to 270,000 shares of Class A Common Stock pursuant to
restricted stock awards. Awards for an aggregate of 106,167 shares of Class A
Common Stock have been granted thus far under the plan.
The Restricted Stock Plan was adopted to further the growth and success of
the Company by providing an incentive to eligible employees which increases
their direct involvement in the future success of the Company and which
generally rewards these employees in proportion to increases in Location Cash
Flow.
The Pegasus Board is proposing that the Restricted Stock Plan be amended
to provide for an increase in the maximum number of shares of Class A Common
Stock which may be issued under the plan from 270,000 to 350,000. In proposing
this amendment, the Pegasus Board took into consideration the number of awards
made under the plan and the substantially larger employee base that will result
upon consummation of the Merger.
Approval of the proposed amendment is contingent upon approval and
effectiveness of the Merger.
THE PEGASUS BOARD RECOMMENDS VOTING "FOR" THE PROPOSAL TO AMEND THE
RESTRICTED STOCK PLAN TO INCREASE THE NUMBER OF SHARES OF CLASS A COMMON STOCK
FOR WHICH AWARDS MAY BE GRANTED FROM 270,000 TO 350,000.
Restricted Stock Plan
The Restricted Stock Plan provides for four types of restricted stock
awards that are made in the form of Class A Common Stock: (i) profit sharing
awards to general managers, department managers and corporate managers (other
than executive officers); (ii) special recognition awards for consistency (team
award), initiative (a team or individual award), problem solving (a team or
individual award) and individual excellence; (iii) excess awards that are made
to the extent that an employee does not receive a matching contribution under
the Company's U.S. 401(k) Plan or Puerto Rico 401(k) Plan because of
restrictions of the Internal Revenue Code of 1986, as amended (the "Code") or
the Puerto Rico Internal Revenue Code, respectively; and (iv) discretionary
restricted stock awards.
Awards under the Restricted Stock Plan (other than excess and
discretionary awards) are in proportion to annual increases in Location Cash
Flow. For this purpose Location Cash Flow is automatically adjusted for
acquisitions such that, for the purpose of calculating the annual increase in
Location Cash Flow, the Location Cash Flow of the acquired properties is
included as if it had been a part of the Company's financial results for the
comparable period of the prior year.
The Company believes that the Restricted Stock Plan results in greater
increases in stockholder value than results from a conventional stock option
program because it creates a clear cause and effect relationship between
initiatives taken to increase Location Cash Flow and the amount of incentive
compensation that results therefrom.
Although the Restricted Stock Plan like conventional stock option programs
provides compensation to employees as a function of growth in stockholder
value, the tax and accounting treatments of this program are different. For tax
purposes, incentive compensation awarded under the Restricted Stock Plan (upon
vesting) is fully tax deductible as compared to conventional stock option
grants which generally are only partially tax deductible upon exercise. For
accounting purposes, conventional stock option programs generally do not result
in a charge to earnings while compensation under the Restricted Stock Plan does
result in a charge to earnings. The Company believes that these differences
result in a lack of comparability between the Operating Cash Flow of companies
that utilize conventional stock option programs and the Operating Cash Flow of
the Company.
31
<PAGE>
The table below lists the specific maximum components of the Restricted
Stock Plan (other than excess and discretionary awards) in terms of a $1
increase in annual Location Cash Flow.
<TABLE>
<CAPTION>
Component Amount
- --------- ------
<S> <C>
Restricted Stock grants to general managers based on the increase in
annual Location Cash Flow of individual business units ................ 6 Cents
Restricted Stock grants to department managers based on the increase
in annual Location Cash Flow of individual business units ............. 6
Restricted Stock grants to corporate managers (other than executive
officers) based on the Company-wide increase in annual Location
Cash Flow ............................................................. 3
Restricted Stock grants to employees selected for special recognition... 5
---------
Total ............................................................... 20 Cents
</TABLE>
As of December 31, 1997, the Company had 8 general managers, 31 department
managers and 5 corporate managers.
Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the Restricted Stock Plan. Executive officers are
eligible to receive awards under the Restricted Stock Plan consisting of (i)
special recognition awards, (ii) excess awards made to the extent that an
employee does not receive a matching contribution under either of the Company's
401(k) plans because of restrictions of the Code and (iii) discretionary awards
determined by a committee of not fewer than two non-employee directors of
Pegasus or the entire Pegasus Board.
Administration. The Restricted Stock Plan is administered by a committee
that is authorized by the Pegasus Board. With respect to special recognition
awards made to officers and discretionary awards, the Restricted Stock Plan is
administered by a committee of not fewer than two non-employee directors of
Pegasus or the entire Pegasus Board.
Vesting. Restricted Stock Awards other than special recognition awards
vest on the following schedule: 34% after two years of service with the Company
(including years before the Restricted Stock Plan was established), 67% after
three years of service and 100% after four years of service. A grantee also
becomes fully vested in his outstanding restricted stock award(s) upon death or
disability. If a grantee's employment is terminated for a reason other than
death or disability before completing four years of service, his unvested
restricted stock awards other than special recognition awards will be
forfeited. Restricted stock is held by the Company prior to becoming vested.
The grantee will, however, be entitled to vote the restricted stock and receive
any dividends of record prior to vesting. Effective April 30, 1998, special
recognition awards (including outstanding awards) will become fully vested on
the later of April 30, 1998, or the date the special recognition is granted.
(Prior to April 30, 1998, special recognition awards vest on the same schedule
as other restricted stock awards.)
Duration and Amendment of Restricted Stock Plan. The Restricted Stock Plan
became effective in September 1996, and will terminate in September 2006. The
Pegasus Board may amend, suspend or terminate the Restricted Stock Plan, and
the Restricted Stock Plan administrator may amend any outstanding restricted
stock awards, at any time, subject to stockholder approval under certain
circumstances, including increases in the number of shares authorized under the
plan. A grantee must approve any suspension, discontinuance or amendment, if
such action would materially impair the rights of the grantee under any
restricted stock award previously granted to him.
32
<PAGE>
Restricted Stock Awards. The following special recognition awards (for
1996) and discretionary awards were made under the Restricted Stock Plan in
1997:
<TABLE>
<CAPTION>
Number
of
Name and Position Shares(1)
- ----------------- ---------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ 9,090
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel and
Secretary .............................................................................. 3,636
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant 4,545
Secretary
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary 9,090
Executive Group ......................................................................... 26,361
Non-Executive Director Group ............................................................ N/A(2)
Non-Executive Officer Employee Group .................................................... 22,171
-------
Total ................................................................................ 48,532
=======
</TABLE>
- ------------
(1) Number of shares of Class A Common Stock.
(2) Non-executive directors are not eligible to receive awards under the
Restricted Stock Plan.
The following profit sharing awards were made under the Restricted Stock
Plan in 1997 on the basis of 1996 results.
<TABLE>
<CAPTION>
Number
of
Name and Position Shares(1)
- ----------------- ---------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ N/A(2)
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel and
Secretary .............................................................................. N/A(2)
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant N/A(2)
Secretary
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary N/A(2)
Executive Group ......................................................................... N/A(2)
Non-Executive Director Group ............................................................ N/A(2)
Non-Executive Officer Employee Group .................................................... 37,191
------
Total ................................................................................ 37,191
======
</TABLE>
- ------------
(1) Number of shares of Class A Common Stock.
(2) The Company's executive officers and non-executive directors are not
eligible to receive profit sharing awards under the Restricted Stock Plan.
Registration Statement on Form S-8. The 270,000 shares of Class A Common
Stock that may be currently granted under the Restricted Stock Plan have been
registered for sale under the Securities Act, pursuant to a Registration
Statement on Form S-8. If the proposal to increase the number of shares covered
by the Restricted Stock Plan is approved, the Company intends to file with the
SEC an amendment to the Registration Statement on Form S-8 to register the
additional 80,000 shares of Class A Common Stock that may be granted pursuant
to the plan.
PROPOSAL 3: AMENDMENT TO STOCK OPTION PLAN
The Stock Option Plan, which was adopted in September 1996, provides for
the issuance of up to 450,000 shares of Class A Common Stock pursuant to
options granted under the plan. Options to acquire an aggregate of 460,000
shares of Class A Common Stock are currently outstanding under the Stock Option
Plan (including options to acquire 10,000 shares which are subject to the
approval of this proposal).
The Stock Option Plan was adopted to further the growth and success of the
Company by providing an incentive to eligible employees and directors which
increases their direct involvement in the future success of the Company.
33
<PAGE>
The Pegasus Board is proposing that the Stock Option Plan be amended to
provide for an increase in the maximum number of shares of Class A Common Stock
which may be granted under the Plan from 450,000 to 970,000 and to increase the
maximum number of Shares of Class A Common Stock that may be issued under
options granted to any executive officer from 275,000 to 550,000. In proposing
this amendment, the Pegasus Board took into consideration the number of options
already granted under the plan, the number of options that will need to be
issued under the plan to replace outstanding options to purchase DTS common
stock (see "THE MERGER -- The Merger Agreement -- Treatment of Certain
Outstanding DTS Warrants and Options") and the number of additional
non-employee directors that will result upon consummation of the Merger.
Approval of the proposed amendment is not contingent upon approval and
effectiveness of the Merger.
THE PEGASUS BOARD RECOMMENDS VOTING "FOR" THE PROPOSAL TO AMEND THE STOCK
OPTION PLAN TO INCREASE THE NUMBER OF SHARES OF CLASS A COMMON STOCK FOR WHICH
OPTIONS MAY BE ISSUED FROM 450,000 TO 970,000 AND TO INCREASE THE MAXIMUM
NUMBER OF SHARES OF CLASS A COMMON STOCK THAT MAY BE ISSUED UNDER OPTIONS
GRANTED TO ANY EXECUTIVE OFFICER FROM 275,000 TO 550,000.
Stock Option Plan
Executive officers, who are not eligible to receive profit sharing awards
under the Restricted Stock Plan, are eligible to receive nonqualified stock
options ("NQSOs") or options qualifying as incentive stock options ("ISOs")
under the Stock Option Plan, but no executive officer may be granted options
covering more than 275,000 shares of Class A Common Stock under the plan
(550,000 shares if the proposal is approved). Directors of Pegasus who are not
employees of the Company, are eligible to receive NQSOs under the Stock Option
Plan. Currently, four executive officers and three non-employee directors are
eligible to receive options under the Stock Option Plan. After giving effect to
the Merger, four executive officers and up to seven non-employee directors will
be eligible to receive options under the Stock Option Plan.
Administration. The Stock Option Plan is administered by a committee of
not fewer than two non-employee directors of Pegasus, or the entire Pegasus
Board (the "Stock Option Plan Committee"). Executive officers and non-employee
directors selected by the Stock Option Plan Committee will be eligible to
receive options based on an executive officer's or non-employee director's
contribution to the achievement of the Company's objectives and other relevant
matters.
Terms and Conditions of Options. When an option is granted at the
discretion of the Stock Option Plan Committee, the Stock Option Plan Committee
determines the term of the option (which may not be more than ten years), the
exercise price (which may not be less than the fair market value of Class A
Common Stock on the date of grant), and the date(s) on which the option becomes
exercisable. However, ISOs granted to a person who owns more than 10% of the
combined voting power of the stock of Pegasus (or of a subsidiary or parent)
must have a term of not more than five years, and an exercise price of not less
than 110% of the fair market value of Class A Common Stock on the date of
grant. Options automatically become exercisable upon a Change of Control (as
defined in the Stock Option Plan).
The Stock Option Plan Committee may also provide that the term of an
option will be shorter than it otherwise would have been if an optionee
terminates employment or Board membership (for any reason, including death or
disability). However, an ISO will expire no later than (i) three months after
termination of employment for a reason other than death or disability, or (ii)
one year after termination of employment on account of disability. Also, no
option may be exercised more than three years after an optionee's death.
The exercise price and tax withholding obligations on exercise may be paid
in various methods, including a cash payment and/or surrendering shares subject
to the option or previously acquired shares of Class A Common Stock.
DTS Options. Subject to the approval and effectiveness of the Merger,
certain outstanding DTS options will be exercisable under the plan in
accordance with their terms, and will not be subject to any inconsistent
provisions of the Stock Option Plan. Such outstanding options of DTS will not,
however, automatically become exercisable on a Change of Control of the
Company.
34
<PAGE>
Duration and Amendment of Stock Option Plan. The Stock Option Plan will
terminate in September 2006 (ten years after it was adopted by the Pegasus
Board). The Pegasus Board may amend, suspend or terminate the Stock Option
Plan, and the Stock Option Plan Committee may amend any outstanding options, at
any time. Nevertheless, certain amendments listed in the Stock Option Plan
require stockholder approval. Examples of amendments which require stockholder
approval include an amendment increasing the number of shares which may be
subject to options, an amendment increasing the limit on shares subject to
options granted to executive officers and an amendment increasing the duration
of the Stock Option Plan with respect to ISOs. Further, an optionee must
approve any suspension, discontinuance or amendment, if such action would
materially impair the rights of the optionee under any option previously
granted to him or her.
Market Value. As of March , 1998, the closing sale price of the Class A
Common Stock on the Nasdaq National Market was $ .
Federal Income Tax Treatment of Options.
ISOs. If the requirements of Section 422 of the Code are met, an optionee
recognizes no income upon the grant or exercise of an ISO (unless the
alternative minimum tax rules apply), and the Company is not entitled to a
deduction.
NQSOs. An optionee recognizes no income at the time an NQSO is granted.
Upon exercise of the NQSO, the optionee recognizes ordinary income for federal
income tax purposes in an amount generally measured as the excess of the then
fair market value of Class A Common Stock over the exercise price. Subject to
Section 162(m) of the Code, the Company will be entitled to a tax deduction in
the amount and at the time that an optionee recognizes ordinary income with
respect to an NQSO.
Option Grants. As of February 28, 1998, the following options have been
granted under the Stock Option Plan:
<TABLE>
<CAPTION>
Number
of
Name and Position Units(1)
- ----------------- ---------
<S> <C>
Marshall W. Pagon, President and Chief Executive Officer ................................ 170,000
Ted S. Lodge, Senior Vice President, Chief Administrative Officer, General Counsel and
Secretary .............................................................................. 100,000(2)
Robert N. Verdecchio, Senior Vice President, Chief Financial Officer and Assistant 80,000
Secretary
Howard E. Verlin, Vice President, Cable and Satellite Television and Assistant Secretary 80,000
Executive Group ......................................................................... 430,000
Non-Executive Director Group ............................................................ 30,000
Non-Executive Officer Employee Group .................................................... N/A(3)
--------
Total ................................................................................ 460,000
========
</TABLE>
- ------------
(1) Reflects the number of shares issuable upon exercise of the option grants.
(2) Includes an option to purchase 10,000 shares, which is subject to
stockholder approval of the amendments to the Stock Option Plan.
(3) The Company's employees who are not executive officers are not eligible to
receive options under the Stock Option Plan.
Registration Statement on Form S-8. The 450,000 shares of Class A Common
Stock that may be currently issued under the Stock Option Plan have been
registered for sale under the Securities Act, pursuant to a Registration
Statement on Form S-8. If the proposal to increase the number of shares covered
by the Stock Option Plan is approved, the Company intends to file with the SEC
an amendment to the Registration Statement on Form S-8 to register the
additional 520,000 shares of Class A Common Stock that may be issued pursuant
to the plan.
35
<PAGE>
PROPOSAL 4: AMENDMENT TO SERIES A PREFERRED
STOCK CERTIFICATE OF DESIGNATION
Two amendments (the "Series A Preferred Stock Amendments") are being
proposed to the Certificate of Designation, relating to Pegasus' Series A
Preferred Stock. Pegasus is separately soliciting consents to the Series A
Preferred Stock Amendments from the holders of the Series A Preferred Stock. To
be adopted, the Series A Preferred Stock Amendments require the approval of the
holders of a majority of the Series A Preferred Stock and the approval of the
holders of a majority of the Common Stock (with the holders of Class A Common
Stock and Class B Common Stock voting together and not as separate classes).
Pegasus intends to solicit written consents to the Series A Preferred Stock
Amendments directly from the holders of the Series A Preferred Stock and
anticipates that it will pay a consent fee, the amount of which has not yet
been determined, to consenting holders. No consent fee will be paid to any
holder of Common Stock.
The Series A Preferred Stock Amendments, if approved, will identically
affect the terms of the Exchange Note Indenture governing the Exchange Notes,
if issued.
Debt Incurrence
The Certificate of Designation limits the ability of the Company to incur
Indebtedness (as defined in the Certificate of Designation). The basic
limitation is that after giving effect to an incurrence of Indebtedness, the
Company's Indebtedness to Adjusted Operating Cash Flow Ratio (as defined in the
Certificate of Designation) must be 7.0 to 1.0 or less. (Indebtedness incurred
under this basic limitation is referred to herein as "Ratio Debt.") There are
several exceptions that permit the Company to incur Indebtedness even if this
ratio is exceeded. One exception permits the Company to incur Indebtedness
under Bank Facilities (as defined in the Certificate of Designation) so long as
the aggregate principal amount of all Indebtedness outstanding under all Bank
Facilities does not exceed $50.0 million.
The Company believes that the way this exception is stated creates a
certain anomaly. For example, if the Company's Indebtedness to Adjusted
Operating Cash Flow Ratio was exactly 7.0 to 1.0 and it wished to incur
additional Indebtedness under a Bank Facility, whether it could do so would
depend on the nature of Ratio Debt already incurred. If all of the Ratio Debt
that existed at the time consisted of capital market debt such as publicly
issued or privately placed debt securities, the Company could incur an
additional $50.0 million under the Bank Facility exception. If, however, the
existing Indebtedness included $50.0 million or more of Indebtedness that had
been incurred as Ratio Debt under a Bank Facility, the Company could make no
use of the Bank Facility exception because that exception requires that all
Indebtedness outstanding under all Bank Facilities not exceed $50.0 million.
The reason the Company considers this result anomalous is that it does not
affect the total amount of Indebtedness the Company can occur. In the above
example, the Company could refinance its existing Bank Facility Indebtedness
with capital market Indebtedness, as Ratio Debt, without affecting its
Indebtedness to Adjusted Operating Cash Flow Ratio, which would remain at 7.0
to 1.0. It could then use the Bank Facility exception to incur $50.0 million of
Indebtedness in excess of the amount of allowed Ratio Debt. Requiring the
Company to do this results in inefficiency and expense.
Accordingly, the first proposed Amendment would amend the Bank Facility
exception to allow the Company to incur Indebtedness (excluding Indebtedness
incurred as Ratio Debt under Bank Facilities) under the exception so long as
the total amount outstanding that had been incurred under the exception itself
does not exceed $50.0 million.
Change of Control Amendment
The Certificate of Designation provides that if a Change of Control occurs
Pegasus must offer to redeem all outstanding shares of Series A Preferred
Stock. As defined, a "Change of Control" occurs if, among other things, any
"person" becomes the "beneficial owner" (each as defined in the Certificate of
Designation) of more of the Class A Common Stock than is "beneficially owned"
by Marshall W. Pagon and his related parties. Mr. Pagon
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and his related parties directly own only 182,699 shares of Class A Common
Stock, but they "beneficially own" 4,764,599 shares of Class A Common Stock
because 4,581,900 shares of Class B Common Stock directly owned by them are
convertible into the same number of shares of Class A Common Stock.
Because the Class B Common Stock is entitled to ten votes per share and
the Class A Common Stock one vote per share, the fact that a third party
acquires more Class A Common Stock than is "beneficially owned" by Mr. Pagon
and his related parties would not of itself cause control of the Company to
change, and the Company believes that it should not be treated as a "Change of
Control" under the Certificate of Designation. Accordingly, the second proposed
Amendment would replace this portion of the definition with a provision under
which a Change of Control would occur if any "person" (other than Mr. Pagon,
his related parties or any "group" that includes him or any of them) becomes
the "beneficial owner" of more than 50% of the total number of outstanding
shares of Common Stock (including both Class A and Class B).
The Merger will not constitute a Change of Control under either the
existing definition or the amended definition.
THE PEGASUS BOARD RECOMMENDS VOTING "FOR" THE PROPOSED AMENDMENTS TO THE
CERTIFICATE OF DESIGNATION.
PROPOSAL 5: OTHER MATTERS
The Pegasus Board knows of no matters to be presented for action at the
Special Meeting other than those set forth in the attached notice and customary
procedural matters. However, if any other matters should properly come before
the meeting or any adjournments or postponements thereof, the proxies solicited
hereby will be voted on such matters, to the extent permitted by the rules and
regulations of the Commission, in accordance with the judgment of the persons
voting such proxies.
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THE MERGER
The following is a brief summary of the material provisions of the Merger
Agreement and the transactions and agreements, including the Voting Agreement
and Registration Rights Agreement, contemplated thereby. This summary is
qualified in its entirety by reference to the full and complete text of the
Merger Agreement, the Voting Agreement and the Registration Rights Agreement. A
copy of the Merger Agreement and the form of Voting Agreement are attached as
Annex I and II, respectively, to this Proxy Statement/Prospectus and the form
of Registration Rights Agreement is filed as exhibit to the Registration
Statement of which this Proxy Statement/Prospectus forms a part. All of these
documents are incorporated herein by reference. Capitalized terms used herein
but not defined herein or in this Proxy Statement/Prospectus have the
respective meanings assigned to them in the Merger Agreement, Voting Agreement
and Registration Rights Agreement, as applicable.
The Merger Agreement
At the Effective Time, the Merger Sub will be merged with and into DTS
(the "Merger"), and DTS will be the surviving corporation and will continue its
corporate existence under the laws of the State of Delaware (the "Surviving
Corporation"). At the Effective Time, the separate existence of the Merger Sub
will cease. All properties, franchises and rights belonging to DTS and the
Merger Sub will be vested in the Surviving Corporation, which will thereafter
be responsible for all the liabilities and obligations of each of them. The
Merger will become effective at the time and date that the certificate of
merger is accepted for filing by the Secretary of State of the State of
Delaware (the "Effective Time").
Conversion of DTS Capital Stock
At the Effective Time, all of the shares of DTS capital stock then
outstanding will be converted into a total of 5,500,000 shares of Class A
Common Stock less approximately 34,500 shares, or approximately 5,465,500
shares. The purpose of the reduction is to give Pegasus credit for a portion of
the "in-the-money" value of certain DTS options and warrants to be assumed and
replaced by Pegasus, as described below. The actual reduction from 5,500,000
shares will vary according to the "trading value" of the Class A Common Stock,
as described below under "-- Conversion Ratios." The 34,500-share reduction
described above is based on a trading value of $21.00 per share. A decrease or
increase of 10% in the assumed trading value would change the reduction by
fewer than 250 shares. If certain employee notes held by DTS are paid prior to
the Merger rather than used to redeem shares held by the employees, then the
shares of Class A Common Stock issued in the Merger will be increased by up to
41,452 shares, assuming a market price for the Class A Common Stock of $21.00.
See "-- Conversion Ratios."
All treasury shares of DTS will be cancelled and extinguished and nothing
will be issued or paid in respect thereof. Each share of common stock, par
value $1.00 per share, of the Merger Sub issued and outstanding immediately
before the Effective Time will be converted into one share of common stock, par
value $1.00 per share, of the Surviving Corporation. Pegasus may deduct,
withhold, and be credited for such amounts as required under the Code or any
other provision of tax law. At the Effective Time, DTS' stock transfer books
will be closed without any further registration of DTS' capital stock on the
records of DTS.
Conversion Ratios
DTS has outstanding two classes of capital stock, common stock (the "DTS
Common Stock") and Series A Payment-In-Kind Convertible Preferred Stock (the
"DTS Preferred Stock"). After giving effect to the redemption of approximately
41,452 shares of DTS Common Stock from certain employees in exchange for such
employees' promissory notes held by DTS anticipated to occur before the Closing
Date, there are expected to be 2,095,597 shares of DTS Common Stock and
1,404,056 shares of DTS Preferred Stock outstanding. It is estimated that the
conversion ratios applicable to the DTS capital stock will be approximately
1.53 shares of Class A Common Stock for each share of DTS Common Stock and
approximately 1.61 shares of Class A Common Stock for each share of DTS
Preferred Stock. The difference between the two conversion ratios is
attributable to the accumulation of dividends on the DTS Preferred Stock.
Dividends accumulate on the DTS Preferred Stock from October 10, 1997,
when it was issued, at the rate of $1.80 per share per year. DTS has advised
the Company that it intends to accumulate, rather than to pay, dividends
through the Closing Date, and that the dollar amount of accumulated and unpaid
dividends will be satisfied in the form of Class A Common Stock valued at its
"trading value" for the period of five trading days (or
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such longer period as may be necessary so that the total volume of Class A
Common Stock traded during such period is at least 150,000 shares) ending on
and including the second day before the Closing Date. The "trading value" of
the Class A Common Stock is the average of its daily volume-weighted average
price as reported by Bloomberg.
The estimated conversion ratios stated above assume a Closing Date of
April 17, 1998 and a trading value of $21.00 per share of Class A Common Stock.
Neither a one-month delay in the Closing Date nor a 10% variation in the
trading value would have a material effect on the estimated conversion ratios
or on the total amount of Class A Common Stock to be issued in the Merger.
Fractional Shares
In lieu of issuing fractional shares in the Merger, cash equal to the
product of the fractional amount and the Market Price of the Class A Common
Stock on the Closing Date will be paid with respect thereto.
Treatment of Certain Outstanding DTS Warrants and Options
As of the date of the Merger Agreement, DTS had outstanding an aggregate
of 124,000 warrants and 43,633 options, including both vested and unvested
options and warrants. The Merger Agreement prohibits DTS from issuing
additional warrants and options between the date of the Merger Agreement and
the Closing Date.
At the Effective Time, Pegasus will assume all of DTS' outstanding options
and warrants, with the exception of 21,819 unvested warrants, and will replace
them with options and/or warrants to purchase approximately 223,030 shares of
Class A Common Stock at an exercise price of approximately $14.71 per share.
The number of replacement options and/or warrants actually issued and their
exercise price will depend on the actual Closing Date and the "trading value"
of the Class A Common Stock, (as described above in "-- Conversion Ratios")
These approximations are based on an assumed trading value of $21.00. A 10%
variation in the trading value would change the number of replacement options
and/or warrants by fewer than 500 and the exercise price by three cents. The
issuance of a portion of these replacement options and/or warrants will reduce
the number of shares of Class A Common Stock otherwise issuable in the Merger
(see " -- Conversion of DTS Capital Stock").
Representations and Warranties
The Merger Agreement contains various customary representations and
warranties relating to, among other things: (i) the organization and
qualification of the Sellers and the Pegasus Parties, (ii) the capitalization
of DTS and Pegasus, (iii) the authority of each party to enter into and perform
its respective obligations under the Merger Agreement, (iv) conflicts with, or
required filings or consents under, other agreements or applicable laws, (v)
financial and Registration Statement information, (vi) information concerning
the parties' respective businesses, including compliance with legal
requirements and contracts, (vii) as to DTS, the adequacy of its credit
facility to satisfy future cash requirements, and (viii) disclosure as to
subsequent events.
Certain Covenants
The Merger Agreement contains certain covenants by the Sellers and the
Pegasus Parties between the date of the Merger Agreement and the Effective
Time. These covenants include, among other things: (i) the agreement by DTS and
of certain of its principal stockholders not to permit DTS, subject to certain
exceptions provided for in the Merger Agreement or with the prior written
consent of Pegasus, to engage in any acquisition unless the acquisition
complies with certain criteria, amend the DTS Indenture, amend the DTS Credit
Facility, declare or pay dividends or make other distributions to its
stockholders, redeem or repurchase any stock, issue additional stock or
warrants or options to acquire stock, incur any material debt, or make any
loans other than in the ordinary course; and (ii) the agreement by Pegasus and
the holders of the Class B Common Stock to cause Pegasus to conduct its
business in the ordinary course.
For the period following Closing the parties agree that (i) none of the
principal DTS stockholders will take any action that is designed or intended to
have the effect of discouraging any lessor, licensor, subscriber, supplier, or
other business associate of DTS, its subsidiaries, or its business from
maintaining the same business relationships with Pegasus, the Surviving
Corporation and its subsidiaries after Closing as it maintained with
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DTS and its subsidiaries prior to Closing and (ii) Pegasus will not amend DTS'
certificate of incorporation or by-laws to adversely affect indemnification
rights of directors and officers of DTS relating to matters before the Closing
and will maintain insurance coverage for such matters for a period of six years
after the Closing Date.
Conditions
All obligations of the Pegasus Parties and the Sellers under the Merger
Agreement will be subject to the fulfillment by the other party at or prior to
closing of, among other things, each of the following conditions, any of which
may be waived by the respective party in its sole discretion, except as not
permitted by law: (i) the accuracy of the representations and warranties made
by the other party and the compliance by the other party with applicable
covenants, (ii) the obtaining of all requisite consents or approval by any
governmental authority or other persons (including the approval of the NRTC;
the NRTC has indicated that its board of directors has given such approval),
and the expiration or termination of the waiting period under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, (iii) the approval of the
Merger Proposal by Pegasus' and DTS' stockholders, (iv) the absence of a
material adverse change with respect to the other party, (v) the absence of
certain litigation or related actions affecting the other party, and (vi) the
delivery of certain documents by the parties.
The obligation of the Pegasus Parties to effect the Merger is also subject
to, among other things, the following conditions, any of which may be waived by
the Pegasus Parties in their sole discretion, except as not permitted by law:
(i) the period for the assertion of dissenters' rights pursuant to Section 262
of the DGCL shall have expired and the holders of the DTS capital stock
entitled to receive less than 5.0% of Class A Common Stock to be issued in the
Merger shall have perfected their dissenters' appraisal rights under Section
262 of the DGCL in connection with the Merger, and (ii) a certificate or letter
from the NRTC to the effect that as of the Closing Date DTS is in compliance
with its NRTC Member Agreements and that there are no payments due by DTS under
its NRTC Member Agreements, other than payments for fees in the ordinary course
and not yet payable.
Termination
The Merger Agreement may be terminated at any time prior to Closing as
provided below: (i) by mutual consent of Pegasus and DTS, (ii) by either party,
if any of the other parties have materially breached any representation,
warranty, or covenant contained in the Merger Agreement, such other party was
notified of the breach and the breach continued without cure for 30 days after
such notice, (iii) by DTS if any of following non- breaching events occur
before the closing without the consent of DTS: (a) Pegasus or any of its
subsidiaries makes any acquisition or an investment in any business, in any
single transaction or series of related transactions for total consideration in
excess of $25.0 million, other than of a DIRECTV service territory, (b) Pegasus
or any of its subsidiaries dispose of any of its assets out of the ordinary
course of business in any single transaction or series of related transactions
for consideration in excess of $25.0 million, other than in connection with the
New England Cable Sale, (c) Pegasus or any of its subsidiaries issues equity
securities or securities convertible into or exchangeable for equity securities
in any single transaction or series of related transactions at an offering
price that is both greater than $25.0 million in the aggregate and less than
$25.00 per share on a common stock equivalent basis, other than in connection
with acquisitions, under existing employee benefit plans, or in payment in kind
of regularly scheduled dividends on the Series A Preferred Stock, (d) Pegasus
or any of its subsidiaries incurs indebtedness in excess of $15.0 million in
the aggregate other than in connection with acquisitions and other than under
the Credit Facility, (e) Pegasus declares or pays any dividend or other
distribution on its capital stock or redeems or repurchases any of its capital
stock, other than regularly scheduled dividend payments on the Series A
Preferred Stock and other than redemptions or repurchases of shares of
employees in connection with the termination of their employment, or (f)
Pegasus or any of its subsidiaries enters into any transaction or series of
related transactions, other than in the ordinary course of business and other
than transactions of the nature described in the immediately preceding clauses
(a) through (e), resulting in an expenditure or commitment in excess of $15.0
million, (iv) by the Pegasus Parties, if DTS or any of its subsidiaries enters
into any agreement to make an acquisition of or investment in any business for
consideration in excess of $15.0 million in any single transaction or series of
related transactions that does not comply with certain criteria, and (v) by
either party, if the Closing shall not have occurred on or before June 1, 1998,
otherwise than because
of a breach by the terminating party of any of its representations, warranties
or covenants under the Merger Agreement. The Merger Agreement may not be
terminated by either Pegasus or DTS due to fluctuations in the price of the
Class A Common Stock.
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Survival of Representations and Warranties
The representations and warranties of the parties contained in the Merger
Agreement will not survive Closing or the termination of the agreement other
than those relating to DTS' and Pegasus' outstanding warrants and options, DTS'
undisclosed liabilities, the Company's undisclosed liabilities, the Company's
financial statements for the year ended December 31, 1997, and DTS' financial
statements for the year ended December 31, 1997, all of which expire on
November 5, 1998 unless a breach is asserted prior to such date. The Merger
Agreement provides that certain covenants and agreements of the parties will
expire upon closing or termination of the Merger Agreement and that others
survive indefinitely.
Indemnification Provisions
The DTS stockholders (solely out of the escrow described below) will be
required to indemnify Pegasus, the Surviving Corporation and certain of their
related parties (the "Pegasus Indemnitees") from breaches of representations
and warranties that survive the Closing (See "-- Survival of Representations
and Warranties") and from material misstatements in and omissions from the
registration statement relating to the DTS Notes (as supplemented by DTS
through the Closing Date). In addition, the Principal Company (i.e., DTS)
Shareholders, the Successor Principal Company (i.e., DTS) Shareholders and the
Columbia Principals (each as defined in the Merger Agreement to include certain
stockholders of DTS and certain of their affiliates) will be required to
indemnify the Pegasus Indemnitees from the same matters. Indemnification is
available to the Pegasus Indemnitees only for claims asserted on or before
November 5, 1998, and is subject to the limitations described below.
Pegasus and the Surviving Corporation will be required to indemnify the
DTS stockholders and the former directors, offices, employees and agents of DTS
and its affiliates (the "DTS Indemnitees") from breaches of Pegasus'
representations and warranties that survive the Closing (see "-- Survival of
Representations and Warranties") and from certain material misstatements in and
omissions from the Registration Statement of which this Proxy
Statement/Prospectus is a part. Indemnification is available to the DTS
Indemnitees only for claims asserted on or before November 5, 1998, and is
subject to the limitations described below.
The Pegasus Indemnitees and the DTS Indemnitees will be entitled to
indemnification only if the total of all claims exceed $2.0 million in the
aggregate, and then only for the excess of claims over $1.15 million. These
limitations do not apply to breaches of representations and warranties
concerning DTS' and Pegasus' outstanding warrants and options.
In general, the indemnity obligation of Pegasus and its affiliates, on the
one hand, and DTS and its affiliates, on the other hand, is limited to 15% of
the number of shares of Class A Common Stock issued and received in the Merger.
Of the shares of Class A Common Stock issued in the Merger, 10% of the total
number of shares that would be issuable if no DTS stockholder exercises
dissenters' appraisal rights will be deposited into escrow. Indemnity claims
established in favor of the Pegasus Indemnitees will first be satisfied by
delivery of escrowed shares, valued at the Market Price on the Closing Date.
After the escrowed shares are exhausted, indemnity claims established in favor
of the Pegasus Indemnitees will be satisfied by delivery by the Principal
Company (i.e., DTS) Shareholders, the Successor Principal Company (i.e., DTS)
Shareholders and the Columbia Principals of shares of Class A Common Stock,
valued at the Market Price on the Closing Date (or, at the option of the person
required to make delivery, cash of equal value). The indemnity obligation of
the DTS stockholders as a group is limited to the escrowed shares. The
additional indemnity obligation of the Principal Company (i.e., DTS)
Shareholders, the Successor Principal Company (i.e., DTS) Shareholders and the
Columbia Principals is limited to 5% of the number of shares of Class A Common
Stock received by them in the Merger. These limitations do not apply to
breaches and representations and warranties concerning outstanding DTS warrants
and options. If shares of Class A Common Stock are required to be transferred,
any dividends and other distributions previously made on such shares are
required to be transferred as well.
Indemnity claims established in favor of the DTS Indemnitees will be
satisfied only by the delivery by Pegasus of additional shares of Class A
Common Stock, valued at the Market Price on the Closing Date, and are limited
to 15% of the number of shares of Class A Common Stock issued in the Merger. If
Pegasus pays any dividend or makes any other distribution on its Class A Common
Stock before delivering additional shares in satisfaction of an indemnity
claim, it will also be required to deliver the amount of cash, securities or
other property that the DTS Indemnitees would have received if they had owned
the additional shares on the date of the dividend or distribution.
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Assignment
Without the prior written consent of the other parties, no party may
assign the Merger Agreement or any of its rights or interests or delegate any
of its duties under the Merger Agreement; provided, however, that Pegasus may
collaterally assign its rights to any persons providing debt financing.
Voting Agreement
The Voting Agreement covers all shares of Class B Common Stock and other
voting securities of Pegasus held at any time by Pegasus Capital L.P., Pegasus
Communications Holdings, Inc. ("PCH") its two subsidiaries, or Mr. Pagon and
all shares of Class A Common Stock received in the Merger by Columbia, Whitney,
Chisolm and any other DTS stockholders that are party to the Voting Agreement
(collectively, the "Covered Shares").
Voting; Size of the Pegasus Board; Committees
During the term of the Voting Agreement, the Pegasus Board will consist of
at least nine members (subject to reduction as provided below) of which three
will be designated by Mr. Pagon, three will be Independent Directors (as
defined in the Voting Agreement), who will be Mr. McEntee, Ms. Metzger and Mr.
Weber or their successors nominated by the nominating committee of the Pegasus
Board (the "Nominating Committee"), and one will be designated by each of
Columbia, Whitney and Chisholm. Each party to the Voting Agreement will be
required to vote all of its Covered Shares for such persons' election as
directors.
If any of Columbia, Whitney or Chisholm ceases to be entitled to designate
a director (see "-- Termination"), such person's designee will be required to
resign, and the Pegasus Board (excluding such person's designee) will determine
whether or not to eliminate the directorship held by such person's designee. In
the event the Pegasus Board determines not to so reduce its size, the
Nominating Committee will nominate an Independent Director to fill the vacancy.
The parties to the Voting Agreement will have no obligation to vote for any
such nominee, but will be obligated to vote for a person who satisfies the
definition of "Independent Director." In the event of an increase in the size
of the Pegasus Board, the position so created must be filled by an Independent
Director, but no party to the Voting Agreement will have any obligation to vote
for the Nominating Committee's nominee to fill such position.
The Voting Agreement also specifies that committees of the Pegasus Board
will consist of an audit committee, a compensation committee, and a nominating
committee. Each committee will consist of one director designated by a majority
of the designees of the DTS stockholders, one of the three Independent
Directors referred to in the first paragraph under this heading, and one
director designated by Mr. Pagon.
Termination
The Voting Agreement will be terminated with respect to any Covered Share
upon any sale or other transfer of such share to any Person other than
Permitted Transferees (as defined in the Voting Agreement) of Mr. Pagon,
Pegasus Capital, L.P. or PCH. The PCH Subsidiaries that hold Class B Common
Stock are Permitted Transferees.
A DTS Stockholder will lose its right to designate its director if a
majority of the Independent Directors determine (i) that its designee has
committed a breach of fiduciary duty to Pegasus or a material violation of any
federal or state securities law in connection with the purchase or sale of any
of Pegasus' securities; (ii) that it (or, in the case of Columbia, any Columbia
Principal who owns at the time 100,000 or more shares of Class A Common Stock)
has committed a material violation of any federal or state securities law in
connection with the purchase or sale of any of Pegasus' securities; (iii) that
it (or, in the case of Columbia, any Columbia Principal) violates its
noncompetition or confidentiality agreement with Pegasus; (iv) that it (or, in
the case of Columbia, any Columbia Principal) owns, controls, manages or is
financially interested, directly or indirectly, in any business (other than a
less than 5% interest in a publicly held company) that competes with the
Company in any geographic area in which the Company does business; but this
clause (iv) will not apply (1) to investments held on November 5, 1997, the
date of the Agreement in Principle, (2) to any investment in a business that
comes into competition with the Company as a result of the Company's
acquisition or establishment of a new business or its expansion into a
geographic area in which it did not previously operate if such person shall
have held such investment before Pegasus' management proposes to the Pegasus
Board such acquisition, establishment or
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expansion, (3) to any investment in an investment fund or pool that itself
makes or holds an investment in a competitive business if the DTS Stockholder
or Columbia Principal (a) is regularly engaged in making investment of that
kind and (b) does not have the power to, and does not in fact, exercise an
influence on the decision of the fund or pool in making the investment in the
competitive business, and (4) unless prior to the exercise by a majority of the
Independent Directors of the right to terminate the DTS Stockholder's right to
designate a director, such DTS stockholder is given notice of the potential
applicability of this clause (iv) and is given a reasonable opportunity to cure
or modify the relationship to the satisfaction of a majority of the Independent
Directors; (v) such DTS stockholder violates its voting obligations under the
Voting Agreement; or (vi) such person's designee shall take or omit to take any
action in his capacity as a director of Pegasus or member of any committee of
the Pegasus Board in a manner materially inconsistent with the Voting
Agreement, and the person who has the right to designate such director has not
obtained his resignation within 30 days after being requested to do so by the
Pegasus Board.
In the event that all three DTS stockholders lose their right to designate
a director as provided above, the Voting Agreement will terminate and its
voting provisions and requirements concerning the Nominating Committee will not
apply to the next election of directors.
DTS Designees
Columbia, Whitney and Chisholm have advised the Company that they propose
to designate Harry F. Hopper, III, Michael C. Brooks and Riordon B. Smith,
respectively, to the Pegasus Board. For biographical information with respect
to Messrs. Hopper, Brooks and Smith, see "PEGASUS MANAGEMENT."
Registration Rights Agreement
On the Closing Date, a Registration Rights Agreement will be entered into
which will provide certain of DTS' stockholders, each Columbia Principal and
certain members of DTS' senior management (collectively, the "Holders") with
certain registration rights, including underwritten demand, shelf and piggyback
registration rights.
Transfer Restrictions
Each Holder will agree in the Registration Rights Agreement not to sell,
transfer or otherwise dispose of any of the shares covered by the Registration
Rights Agreement before November 5, 1998.
Underwritten Demand Registrations
The Holders will be entitled to two demand registrations, each covering
sales of Class A Common Stock in an underwritten public offering. Each such
demand registration right may be exercised between November 5, 1998 and the
fifth anniversary of the Closing Date. The Holders' request must include at
least 10% of the Class A Common Stock issued in the Merger. With certain
exceptions, Holders will not be entitled to a demand registration for 360 days
after the effective date of a registration filed by Pegasus for an underwritten
public offering if Pegasus offered to include the Holders' shares of Class A
Common Stock in such registration statement. The Holders' underwritten demand
registration rights are subject to certain suspension rights by Pegasus in case
of material developments.
S-3 Shelf Registrations
Each request for a shelf registration may be exercised between November 5,
1998 and the fifth anniversary of the Closing Date by Holders requesting to
include not fewer than 100,000 shares of Class A Common Stock. Any shelf
registration statement will not be required to remain effective for more than
90 days and may not be requested earlier than 90 days after the expiration of
the immediately preceding shelf registration. The Holders' right to sell under
any shelf registration statement is subject to certain suspension rights by
Pegasus in case of material developments.
Piggyback Registrations.
Holders will be entitled to piggyback registration rights, which will be
pari passu with those of existing stockholders, subject to certain "cut-back"
and similar provisions.
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Expenses.
Pegasus will generally bear registration expenses incurred under the
Registration Rights Agreement with the exception of underwriting, broker and
other similar selling expenses.
Noncompetition Agreements
The Merger Agreement requires certain of DTS' stockholders, the Columbia
Principals and certain members of DTS' senior management to enter into
agreements not to compete with the Company or DTS in certain direct-to-home
multichannel satellite service activities, as more fully specified in the
agreements, in certain territories in the United States, including NRTC service
areas. Each of the agreements has a term of three years from the Closing Date,
except that the activities of the individual members of DTS' senior management
outside NRTC service areas are restricted only until September 1, 1998.
Consequences Under Debt Agreements and Preferred Stock Terms
Pegasus intends to designate DTS and its subsidiaries as "Unrestricted
Subsidiaries" under the Senior Notes Indenture relating to the Senior Notes and
under the Certificate of Designation relating to the Series A Preferred Stock.
The consequences of this are, among other things, that DTS and its subsidiaries
will not be subject to compliance with many of the covenants and operating
restrictions imposed by the Senior Notes Indenture and the Certificate of
Designation; that neither their indebtedness nor the results of their
operations will enter into the determination of Pegasus' ability to incur
indebtedness or make dividends, investments and other restricted payments; that
Pegasus and its "Restricted Subsidiaries" may not make loans to or guarantee
indebtedness of DTS and its subsidiaries; that neither DTS nor any of its
subsidiaries may make loans to or guarantee indebtedness of Pegasus or any of
its Restricted Subsidiaries; and that all transactions between Pegasus and its
Restricted Subsidiaries, on the one hand, and DTS and its subsidiaries, on the
other hand, must be carried out on arm's-length terms and, in certain cases,
must be supported by a fairness opinion from an investment banking firm of
national standing.
Pegasus' existing DBS business is conducted by Restricted Subsidiaries of
PM&C, a first-tier subsidiary of Pegasus. The PM&C Indenture requires that
transactions between PM&C and its subsidiaries, on the one hand, and affiliates
of PM&C, such as DTS will be after the Closing, on the other hand, must be
carried out on arm's-length terms and, in certain cases, must be supported by a
fairness opinion from an investment banking firm of national standing. The DTS
Indenture contains similar provisions that will affect transactions between DTS
and Pegasus, PM&C and their subsidiaries. The Credit Facility and the DTS
Credit Facility contain similar requirements regarding arm's-length treatment.
Because of these provisions, dealings between DTS' DBS business and
Pegasus' other DBS businesses will need to be carried out with a greater degree
of formality than is normally the case among wholly-owned subsidiaries of a
common parent, and Pegasus will not have the same degree of flexibility to
finance DTS' continuing operations as a parent company not subject to these
provisions would have. This may adversely affect the ability of the Company to
fully integrate DTS' business with the Company's other DBS businesses and may
limit the advantages of the Merger.
Certain Federal Income Tax Consequences
THE FOLLOWING SUMMARY OF MATERIAL FEDERAL INCOME TAX CONSEQUENCES IS NOT
INTENDED TO CONSTITUTE ADVICE REGARDING THE FEDERAL INCOME TAX CONSEQUENCES OF
THE MERGER. THIS SUMMARY DOES NOT DISCUSS TAX CONSEQUENCES UNDER THE LAWS OF
STATES OR LOCAL GOVERNMENTS OR OF ANY OTHER JURISDICTION OR TAX CONSEQUENCES TO
CATEGORIES OF STOCKHOLDERS THAT MAY BE SUBJECT TO SPECIAL RULES, SUCH AS
FOREIGN PERSONS, TAX-EXEMPT ENTITIES, INSURANCE COMPANIES, FINANCIAL
INSTITUTIONS AND DEALERS IN STOCKS AND SECURITIES. EACH HOLDER OF PEGASUS
COMMON STOCK AND/OR DTS CAPITAL STOCK IS URGED TO OBTAIN, AND SHOULD RELY ONLY
UPON, HIS OR HER OWN TAX ADVICE.
44
<PAGE>
The Merger is intended to be a tax-free reorganization for federal income
tax purposes so that no gain or loss will be recognized by DTS' stockholders,
Pegasus' stockholders, DTS or Pegasus, except as a result of cash received in
lieu of fractional shares or a DTS stockholder's exercise of appraisal rights.
Pegasus has received an opinion (the "Tax Opinion") from its counsel to
the effect that, for federal income tax purposes, the Merger will constitute a
"reorganization" within the meaning of Section 368(a)(2)(E) of the Internal
Revenue Code of 1986, as amended (the "Code"), and that the federal income tax
consequences of the Merger to the DTS stockholders, DTS and Pegasus will be as
follows:
(i) No gain or loss will be recognized to the stockholders of DTS upon
their receipt of shares of Class A Common Stock in exchange for their DTS
capital stock;
(ii) The basis in the shares of Class A Common Stock to be received by
the stockholders of DTS in the Merger will be the same as their basis in
the DTS capital stock exchanged therefor, reduced by the basis allocable to
fractional shares;
(iii) The holding period of the shares of Class A Common Stock to be
received by the stockholders of DTS will include the period during which
they held their DTS capital stock exchanged therefor, provided such DTS
capital stock was held as a capital asset at the time of the Merger;
(iv) Neither DTS nor Pegasus will recognize gain or loss as a result of
the Merger;
(v) Cash payments received by holders of the DTS capital stock in lieu
of a fractional share will be treated as if a fractional share of Class A
Common Stock had been issued in the Merger and then redeemed by Pegasus for
cash. A holder of DTS capital stock will generally recognize gain or loss
upon such payment, equal to the difference (if any) between such holder's
basis in the fractional share and the amount of cash received; and
(vi) A holder of DTS capital stock who exercises appraisal rights in
respect to all of such holder's shares will generally recognize gain or
loss for federal income tax purposes, measured by the difference between
the holder's basis in such shares and the amount of cash received, provided
that the payment is not essentially equivalent to a dividend within the
meaning of Section 302 of the Code, which will be the case if the
dissenting stockholder does not directly or constructively own any shares
of Class A Common Stock or DTS capital stock after the Merger. Such gain or
loss will be a capital gain or loss, provided that such shares are held as
a capital asset at the time of the Merger. If the payment is essentially
equivalent to a dividend, it will be treated as ordinary income to the
extent of DTS' current and accumulated earnings and profits, and any
remaining amount will first be applied against the holder's basis in his,
her, or its shares and will then be treated as gain from the exchange of
property, as described above.
DTS' obligation to complete the Closing is subject to its receipt of an
opinion to similar effect from its counsel.
The parties are not requesting a ruling from the Internal Revenue Service
("IRS") in connection with the Merger. The Tax Opinion neither binds the IRS or
the courts nor preclude the IRS from adopting a contrary position. In addition,
the Tax Opinion is subject to certain assumptions and qualifications and is
based on the truth and accuracy of certain representations made by DTS, Pegasus
and certain stockholders of DTS. Of particular importance are those assumptions
and representations relating to the "continuity of interest," "control" and
"continuity of business enterprise" requirements.
To satisfy the "continuity of interest" requirement, DTS' stockholders
must not, pursuant to a plan or intent existing at or prior to the Merger,
dispose of or transfer so much of either (i) their DTS capital stock prior to
the Merger or (ii) their shares of Class A Common Stock to be received in the
Merger (collectively, "Planned Dispositions"), such that the DTS stockholders,
as a group, would no longer have a substantial proprietary interest in the DTS
business being conducted by Pegasus after the Merger. Planned Dispositions
include, among other things, shares disposed of pursuant to the exercise of
dissenters' or appraisal rights. DTS' stockholders will generally be regarded
as having retained a substantial proprietary interest as long as the shares of
Class A Common Stock received in the Merger (after reduction for any Planned
Dispositions), in the aggregate, represent at least 50% of the entire
consideration received by the DTS stockholders in the Merger. To satisfy the
"continuity of
45
<PAGE>
business enterprise" requirement, Pegasus must either (i) continue the historic
business conducted by DTS, or (ii) use a significant portion of the historic
business assets of DTS in a business. To satisfy the "control" requirement, DTS
stockholders owning (1) at least 80% of the total voting power of all classes
of DTS capital stock entitled to vote, and (2) at least 80% of the total number
of shares of all other classes of DTS capital stock must exchange their shares
of DTS capital stock for shares of Class A Common Stock. For purposes of the
"control" requirement, the amount of stock constituting control is measured
immediately before the transaction, and therefore, is affected by the number of
shares of DTS capital stock voted against the merger by stockholders who
thereafter exercise their appraisal rights as dissenting stockholders and
receive cash provided by Pegasus.
A successful IRS challenge to the "reorganization" status of the Merger
(as a result of a failure to satisfy the "continuity of interest," "control" or
"continuity of business enterprise" requirements or otherwise) would result in
a DTS stockholder recognizing gain or loss with respect to each share of DTS
capital stock surrendered equal to the difference between the stockholder's
basis in such share and the fair market value, as of the Effective Time of the
Merger, of the shares of Class A Common Stock received in exchange therefor. In
such event, a stockholder's aggregate basis in the shares of Class A Common
Stock so received would equal their fair market value and the holding period
for such shares would begin the day after the Merger.
Holders of warrants and options to acquire shares of DTS capital stock
will not recognize income upon the conversion of the warrants and options into
warrants and/or options to purchase Class A Common Stock. Holders will
recognize ordinary income when the warrants and/or options (other than
incentive stock options and other than Pegasus warrants and/or options that
replace DTS warrants issued in exchange for property rather than services) are
exercised in an amount equal to the difference between the fair market value of
the Class A Common Stock received upon exercise and the exercise price of the
options.
Accounting Treatment
Upon consummation of the Merger, Pegasus will account for the acquisition
of DTS using the purchase method of accounting. Accordingly, the consideration
to be paid in the Merger will be allocated to assets acquired and liabilities
assumed based on their estimated fair values at the Effective Time. Income (or
loss) of DTS prior to the Effective Time will not be included in income of the
combined company. The Company expects that as a result of the Merger that DTS'
intangible assets will increase by approximately $106.0 million, which will be
amortized over a ten-year period resulting in a charge to earnings of
approximately $10.6 million for each of the years in this period. Additionally,
the Company expects to incur a one-time restructuring charge of approximately
$3.0 million in connection with the Merger.
Federal Securities Law Consequences
All shares of Class A Common Stock received by the DTS stockholders in the
Merger will be freely transferable (subject to the agreement of certain DTS
stockholders, contained in the Registration Rights Agreement, not to sell their
shares of Class A Common Stock before November 5, 1998), except that shares of
Class A Common Stock received by any person who is deemed to be an "affiliate"
(as such term is defined under the Securities Act of 1933, as amended (the
"Securities Act") of DTS prior to the Merger or Pegasus after the Merger may be
resold by them only in transactions permitted by the resale provisions of Rule
145 promulgated under the Securities Act (or Rule 144 in the case of a person
who becomes an affiliate of Pegasus) or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of DTS or Pegasus
generally include individuals or entities that control, are controlled by, or
are under common control with, such party and may include certain officers and
directors of such party as well as principal stockholders of such party.
46
<PAGE>
Pegasus Selected Historical and
Pro Forma Consolidated Financial Data
(dollars in thousands)
The selected historical consolidated financial data for the year ended
December 31, 1993 has been derived from the Company's audited Consolidated
Financial Statements for such periods. The selected historical consolidated
financial data for the years ended December 31, 1994, 1995, 1996 and 1997 have
been derived from the Company's Consolidated Financial Statements for such
periods, which have been audited by Coopers & Lybrand L.L.P., as indicated in
their report included elsewhere herein. The selected pro forma consolidated
financial data for the year ended December 31, 1997 should be read in
conjunction with the Consolidated Financial Statements and the notes thereto.
"--PEGASUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS" and "Pro Forma Consolidated Financial Information,"
which are included elsewhere herein.
47
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------
1993 1994 1995
----------- ----------- ------------
<S> <C> <C> <C>
Income Statement Data:
Net revenues:
DBS ......................................... $ 174 $ 1,469
Cable ....................................... $ 9,134 10,148 10,606
TV .......................................... 10,353 17,869 20,073
-------- -------- --------
Total net revenues ......................... 19,487 28,191 32,148
-------- -------- --------
Direct operating expenses:
DBS ......................................... -- 210 1,379
Cable ....................................... 4,655 5,545 5,791
TV .......................................... 7,580 12,398 13,971
Incentive compensation (b) ................... 192 432 528
Corporate expenses ........................... 1,265 1,506 1,364
Depreciation and amortization ................ 5,978 6,940 8,751
-------- -------- --------
Income (loss) from operations ................ (183) 1,160 364
Interest expense ............................. (4,402) (5,973) (8,817)
Interest income .............................. -- -- 370
Other expense, net ........................... (220) (65) (44)
Provision (benefit) for income taxes ......... -- 140 30
Gain on sale of cable system ................. -- -- --
Extraordinary gain (loss), net ............... -- (633) 10,211
-------- -------- --------
Net income (loss) ............................ (4,805) (5,651) 2,054
Dividends on Preferred Stock ................. -- -- --
-------- -------- --------
Net income (loss) applicable to common
shares ...................................... $ (4,805) $ (5,651) $ 2,054
======== ======== ========
Income (loss) per share:
Loss before extraordinary item .............. $ (1.59)
Extraordinary item .......................... 1.99
--------
Net income (loss) per share ................. $ 0.40
========
Weighted average shares outstanding .......... 5,140
Other Data:
Pre-SAC Location Cash Flow (e) ............... $ 7,252 $ 10,038 $ 11,419
Location Cash Flow (e) ....................... 7,252 10,038 11,007
Operating Cash Flow (e) ...................... 5,795 8,100 9,287
Capital expenditures ......................... 885 1,264 2,640
Net cash provided by (used for):
Operating activities ........................ 1,694 4,103 6,195
Investing activities ........................ (106) (3,571) (6,459)
Financing activities ........................ (1,020) (658) 10,859
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------
Pro
Forma
1996 1997 1997(a)
------------ ------------ ----------------
(unaudited)
<S> <C> <C> <C>
Income Statement Data:
Net revenues:
DBS ......................................... $ 5,829 $ 38,254 $ 129,926
Cable ....................................... 13,496 16,688 10,364
TV .......................................... 28,604 31,876 31,876
--------- ---------- ---------
Total net revenues ......................... 47,929 86,818 172,166
--------- ---------- ---------
Direct operating expenses:
DBS ......................................... 4,958 26,042 118,336
Cable ....................................... 7,192 8,693 5,547
TV .......................................... 18,754 21,377 21,377
Incentive compensation (b) ................... 985 1,274 1,720
Corporate expenses ........................... 1,429 2,256 2,256
Depreciation and amortization ................ 12,061 27,792 71,571
--------- ---------- ---------
Income (loss) from operations ................ 2,550 (6,588) (48,641)
Interest expense ............................. (12,455) (16,094) (49,447)
Interest income .............................. 232 1,539 2,979
Other expense, net ........................... (171) (723) (2,322)
Provision (benefit) for income taxes ......... (120) 200 200
Gain on sale of cable system ................. -- 4,451 --(c)
Extraordinary gain (loss), net ............... (250) (1,656) --(d)
--------- ---------- ---------
Net income (loss) ............................ (9,974) (19,272) (97,631)
Dividends on Preferred Stock ................. -- 12,215 13,156
--------- ---------- ---------
Net income (loss) applicable to common
shares ...................................... $ (9,974) $ (31,487) $(110,787)
========= ========== =========
Income (loss) per share:
Loss before extraordinary item .............. $ (1.56) $ (3.02) $ (7.03)
Extraordinary item .......................... (0.04) (0.17) --
--------- ---------- ---------
Net income (loss) per share ................. $ (1.60) $ (3.19) $ (7.03)
========= ========== =========
Weighted average shares outstanding .......... 6,240 9,858 15,754
Other Data:
Pre-SAC Location Cash Flow (e) ............... $ 17,671 $ 30,706 $ 50,244
Location Cash Flow (e) ....................... 17,025 24,734 26,907
Operating Cash Flow (e) ...................... 15,596 22,477 24,650
Capital expenditures ......................... 6,294 9,929 18,401
Net cash provided by (used for):
Operating activities ........................ 4,332 12,993
Investing activities ........................ (82,451) (146,624)
Financing activities ........................ 74,727 169,098
Year ended December 31,
----------------------------------------------------------------------------
Pro
Forma
1993 1994 1995 1996 1997 1997(a)
----------- ------------ ----------- ---------- ---------- ------------
(unaudited)
Balance Sheet Data:
Cash and cash equivalents ..................... $ 1,506 $ 1,380 $ 21,856 $ 8,582 $ 45,269 $ 89,630
Net working capital (deficiency) .............. (3,844) (23,074) 17,566 6,430 32,347 1,795
Total assets .................................. 76,386 75,394 95,770 173,680 380,862 803,507
Total debt (including current) ................ 72,127 61,629 82,896 115,575 208,355 420,710
Total liabilities ............................. 78,954 68,452 95,521 133,354 239,234 532,563
Redeemable preferred stock .................... -- -- -- -- 111,264 111,264
Minority interest ............................. -- -- -- -- 3,000 3,000
Total common stockholders' equity (f) ......... (2,427) 6,942 249 40,326 27,364 156,680
</TABLE>
48
<PAGE>
Notes to Pegasus Selected Historical and Pro Forma Consolidated Financial Data
(a) Pro forma income statement and other data for the year ended December 31,
1997 give effect to the Transactions and the Merger, as if such events had
occurred at the beginning of such periods. The pro forma balance sheet
data as of December 31, 1997 give effect to the Transactions that occurred
after December 31, 1997 and the Merger, as if such events had occurred on
such date.
(b) Incentive compensation represents compensation expenses pursuant to the
Restricted Stock Plan and the Company's 401(k) plans.
(c) The pro forma income statement data for the year ended December 31, 1997
does not include a $4.5 million and a $22.1 million gain resulting from
the New Hampshire Cable Sale and the New England Cable Sale, respectively.
(d) The pro forma income statement date for the year ended December 31, 1997
does not include a $1.7 million write off resulting from the refinancing
of the old credit facilities.
(e) Pre-SAC Location Cash Flow is defined as Location Cash Flow plus subscriber
acquisition costs, Location Cash Flow is defined as net revenues less
location operating expenses. Location operating expenses consist of
programming, barter programming, general and administrative, technical and
operations, marketing and selling expenses. Operating Cash Flow is defined
as income (loss) from operations plus, (i) depreciation and amortization
and (ii) non-cash incentive compensation. The difference between Location
Cash Flow and Operating Cash Flow is that Operating Cash Flow includes
cash incentive compensation and corporate expenses. Although Location Cash
Flow and Operating Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that
Location Cash Flow and Operating Cash Flow are accepted within the
Company's business segments as generally recognized measures of
performance and are used by analysts who report publicly on the
performance of companies operating in such segments. Nevertheless, these
measures should not be considered in isolation or as a substitute for
income from operations, net income, net cash provided by operating
activities or any other measure for determining the Company's operating
performance or liquidity which is calculated in accordance with generally
accepted accounting principles.
(f) The Company has not paid any cash dividends and does not anticipate paying
cash dividends on its Common Stock in the foreseeable future. Payment of
cash dividends on the Company's Common Stock is restricted by the terms of
the Series A Preferred Stock, and the Exchange Notes, if issued. The terms
of the Series A Preferred Stock and the Exchange Notes permit the Company
to pay dividends and interest thereon by issuance, in lieu of cash, of
additional shares of Series A Preferred Stock and additional Exchange
Notes, if issued, respectively. The Senior Notes Indenture restricts the
Company's ability to pay cash dividends on the Series A Preferred Stock or
cash interest on the Exchange Notes, if issued, prior to July 1, 2002.
49
<PAGE>
PEGASUS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto which are included
elsewhere herein. This Proxy Statement/Prospectus contains certain
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not limited
to, those set forth under "RISK FACTORS" and elsewhere in this Proxy
Statement/Prospectus.
Subsidiaries Combination
The Company's Consolidated Financial Statements include the accounts of
PSH, PSH's subsidiaries, Pegasus Media & Communications, Inc. ("PM&C"), PM&C's
subsidiaries, Pegasus Towers Inc., Pegasus Communications Management Company
("PCMC") and Pegasus Development Corporation ("PDC"). See Note 1 to the
Company's Consolidated Financial Statements, which are included elsewhere
herein. Concurrently with the consummation of the Senior Notes Offering, in
connection with the Subsidiaries Combination, PM&C purchased the assets of PSH
and, as a consequence, all of the Company's DBS territories and TV and cable
properties are held directly or indirectly by PM&C.
General
The Company is a diversified company operating in growing segments of the
media and communications industries: multichannel television and broadcast
television. Pegasus Multichannel Television includes DBS and cable businesses.
As of December 31, 1997, the Company's DBS operations consisted of providing
DIRECTV services to approximately 132,000 subscribers in certain rural areas of
27 states in which the Company holds the exclusive right to provide such
services. Its cable operations consist of systems in New England (Connecticut
and Massachusetts) and Puerto Rico. The Company sold its New Hampshire cable
system effective January 31, 1997. On January 16, 1998, the Company entered
into an agreement to sell its remaining New England cable systems. Pegasus
Broadcast Television owns and operates five TV stations affiliated with FOX and
operates one affiliated with UPN and another affiliated with WB. It has entered
into an agreement to operate an additional TV station, which will be affiliated
with WB and it is anticipated will commence operations in 1998.
On January 8, 1998 the Company entered into an agreement to acquire DTS.
Upon completion of the merger of the Merger Sub into DTS (the "Merger" or "DTS
Acquisition"), DTS will become a wholly owned subsidiary of Pegasus. As of
December 31, 1997, DTS' operations, pro forma for its then pending acquisition,
consisted of providing DIRECTV services to approximately 131,000 subscribers in
certain rural areas of 11 states in which DTS holds the exclusive right to
provide such services.
Multichannel revenues are derived from monthly customer subscriptions,
pay-per-view services, subscriber equipment rentals, home shopping commissions,
advertising time sales and installation charges. Broadcast revenues are derived
from the sale of broadcast airtime to local and national advertisers.
The Company's location operating expenses consist of (i) programming
expenses, (ii) marketing and selling costs, including advertising and promotion
expenses, local sales commissions, and ratings and research expenditures, (iii)
technical and operations costs, (iv) general and administrative expenses, and
(v) expensed subscriber acquisition costs. Multichannel programming expenses
consist of amounts paid to program suppliers, DSS authorization charges and
satellite control fees, each of which is paid on a per subscriber basis, and
DIRECTV royalties which are equal to 5% of DBS program service revenues.
Broadcast programming expenses include the amortization of long-term program
rights purchases, music license costs and "barter" programming expenses which
represent the value of broadcast air time provided to television program
suppliers in lieu of cash.
The Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs ("SAC"),
which were being capitalized and amortized over a twelve-month period, are
currently being charged to operations in the period incurred. This change
became effective October 1, 1997. Subscriber acquisition costs charged to
operations are excluded from pre-SAC location operating expenses.
50
<PAGE>
Results of Operations
Year ended December 31, 1997 compared to year ended December 31, 1996
The Company's net revenues increased by approximately $38.9 million or 81%
for the year ended December 31, 1997 as compared to the same period in 1996.
Multichannel Television net revenues increased $35.6 million or 184% and
Broadcast Television net revenues increased $3.3 million or 11%. The net
revenues increased as a result of (i) a $32.4 million or 556% increase in DBS
revenues of which $2.6 million or 8% was due to the increased number of DBS
subscribers in territories owned at the beginning of 1996 and $29.8 million or
92% resulted from acquisitions made subsequent to the third quarter of 1996,
(ii) a $3.2 million or 24% increase in Cable revenues which was the net result
of a $804,000 or 8% increase in same system revenues due primarily to rate
increases, a $3.9 million increase due to the system acquired effective
September 1, 1996 and a $1.6 million reduction due to the sale of the Company's
New Hampshire cable system effective January 31, 1997, (iii) a $3.2 million or
11% increase in TV revenues of which $1.9 million or 57% was due to ratings
growth which the Company was able to convert into higher revenues, $1.1 million
or 34% was the result of acquisitions made in the first quarter of 1996 and
$289,000 or 9% was due to the two new stations launched on August 1, 1997 and
October 17, 1997, and (iv) a $34,000 increase in Tower rental income.
The Company's total location operating expenses, as described above,
before DBS subscriber acquisition costs increased by approximately $25.9
million or 85% for the year ended December 31, 1997 as compared to the same
period in 1996. Multichannel Television pre-SAC location operating expenses
increased $23.2 million or 202% and Broadcast Television location operating
expenses increased $2.6 million or 14%. The pre-SAC location operating expenses
increased as a result of (i) a $21.7 million or 504% increase in operating
expenses generated by the Company's DBS operations due to a same territory
increase in programming and other operating costs totaling $1.5 million
(resulting from the increased number of DBS subscribers in territories owned at
the beginning of 1996) and a $20.2 million increase attributable to territories
acquired subsequent to the third quarter of 1996, (ii) a $1.5 million or 21%
increase in Cable operating expenses as the net result of a $157,000 or 3%
increase in same system operating expenses due primarily to increases in
programming costs, a $2.2 million increase attributable to the system acquired
effective September 1, 1996 and a $852,000 reduction due to the sale of the
Company's New Hampshire cable system effective January 31, 1997, and (iii) a
$2.6 million or 14% increase in TV operating expenses as the result of a
$535,000 or 4% increase in same station operating expenses, a $1.4 million
increase attributable to stations acquired in the first quarter of 1996 and a
$650,000 increase attributable to the two new stations launched on August 1,
1997 and October 17, 1997.
DBS subscriber acquisition costs, which consist of regional sales costs,
advertising and promotion, and commissions and subsidies, totaled $10.2 million
or $281 per gross subscriber addition for the year ended December 31, 1997, of
which $5.3 million was expensed.
Incentive compensation, which is calculated from increases in pro forma
Location Cash Flow, increased by approximately $289,000 or 29% for the year
ended December 31, 1997 as compared to the same period in 1996.
Corporate expenses increased by $827,000 or 58% for the year ended
December 31, 1997 as compared to the same period in 1996 primarily due to
increased staffing as a result of internal and acquisition related growth,
enhanced public relations activities and additional public reporting
requirements for the Company.
Depreciation and amortization expense increased by approximately $15.7
million or 130% for the year ended December 31, 1997 as compared to the same
period in 1996 as the Company increased its fixed and intangible asset base as
a result of five completed acquisitions during 1996 and twenty-five completed
acquisitions during 1997.
As a result of these factors, the Company reported a loss from operations
of $6.6 million for the year ended December 31, 1997 as compared to income from
operations of $2.6 million for the same period in 1996.
Interest expense increased by approximately $3.6 million or 29% for the
year ended December 31, 1997 as compared to the same period in 1996 as a result
of an increase in debt associated with the Company's acquisitions (see
"Liquidity and Capital Resources -- Financings").
The Company's net loss increased by approximately $9.3 million for the
year ended December 31, 1997 as compared to the same period in 1996 as a net
result of an increase in the loss from operations of approximately
51
<PAGE>
$9.1 million, an increase in interest expense of $3.6 million, an increase in
the provision for income taxes of $320,000, a decrease in other expenses of
approximately $755,000, an increase in the extraordinary loss on extinguishment
of debt of $1.4 million and a gain on the sale of the New Hampshire cable
system of approximately $4.5 million.
The Company declared preferred stock dividends amounting to $12.2 million
which were paid by issuing shares of Series A Preferred Stock.
Year ended December 31, 1996 compared to year ended December 31, 1995
The Company's net revenues increased by approximately $15.8 million or 49%
for the year ended December 31, 1996 as compared to the same period in 1995 as
a result of (i) a $8.5 million or 43% increase in TV revenues of which $1.5
million or 17% was due to ratings growth which the Company was able to convert
into higher revenues and $7.0 million or 83% was the result of acquisitions
made in the first quarter of 1996, (ii) a $4.4 million or 297% increase in DBS
revenues of which $2.7 million or 63% was due to the increased number of DBS
subscribers and $1.7 million or 37% resulting from acquisitions made in the
fourth quarter of 1996, (iii) a $2.0 million or 51% increase in Puerto Rico
cable revenues due primarily to an acquisition effective September 1, 1996,
(iv) a $864,000 or 13% increase in New England cable revenues due primarily to
rate increases and new combined service packages, and (v) a $16,000 increase in
Tower rental income.
The Company's total location operating expenses increased by approximately
$9.8 million or 46% for the year ended December 31, 1996 as compared to the
same period in 1995 as a result of (i) a $4.8 million or 34% increase in TV
operating expenses as the net result of a $115,000 or 1% decrease in same
station direct operating expenses and a $4.9 million increase attributable to
stations acquired in the first quarter of 1996, (ii) a $3.6 million or 260%
increase in operating expenses generated by the Company's DBS operations due to
an increase in programming costs of $1.4 million, royalty costs of $138,000,
marketing expenses of $455,000, customer support charges of $199,000 and other
DIRECTV costs such as security, authorization fees and telemetry and tracking
charges totaling $237,000, all generated from the increased number of DBS
subscribers, and a $1.1 million increase attributable to territories acquired
in the fourth quarter of 1996 (iii) a $912,000 or 37% increase in Puerto Rico
cable operating expenses as the net result of a $64,000 or 3% decrease in same
system direct operating expenses and a $976,000 increase attributable to the
system acquired effective September 1, 1996, (iv) a $489,000 or 15% increase in
New England cable operating expenses due primarily to increases in programming
costs associated with the new combined service packages, and (v) a $10,000
decrease in Tower administrative expenses.
As a result of these factors, incentive compensation which is calculated
from increases in pro forma Location Cash Flow increased by approximately
$457,000 or 87% for the year ended December 31, 1996 as compared to the same
period in 1995.
Corporate expenses increased by $65,000 or 5% for the year ended December
31, 1996 as compared to the same period in 1995 primarily due to the initiation
of public reporting requirements for PM&C and Pegasus.
Depreciation and amortization expense increased by approximately $3.3
million or 38% for the year ended December 31, 1996 as compared to the same
period in 1995 as the Company increased its fixed and intangible assets as a
result of five completed acquisitions during 1996.
As a result of these factors, income from operations increased by
approximately $2.2 million for the year ended December 31, 1996 as compared to
the same period in 1995.
Interest expense increased by approximately $3.6 million or 42% for the
year ended December 31, 1996 as compared to the same period in 1995 as a result
of a combination of the Company's issuance of the PM&C Notes on July 7, 1995
and an increase in debt associated with the Company's 1996 acquisitions. A
portion of the proceeds from the issuance of the PM&C Notes was used to retire
floating debt on which the effective interest rate was lower than the 12.5%
interest rate under the PM&C Notes. The PM&C Notes, however, have more
favorable terms such as no requirement for principal repayment, subject to
certain conditions, until the end of the term.
52
<PAGE>
The Company reported a net loss of approximately $10.0 million for the
year ended December 31, 1996 as compared to net income of approximately $2.0
million for the same period in 1995. The $12.0 million change was the net
result of an increase in income from operations of approximately $2.2 million,
an increase in interest expense of $3.6 million, a decrease in extraordinary
items of $10.5 million from extinguishment of debt, a decrease in the provision
for income taxes of $150,000 and an increase in other expenses of approximately
$265,000.
Liquidity and Capital Resources
The Company's primary sources of liquidity have been the net cash provided
by its TV and cable operations, credit available under its credit facilities
and proceeds from public and private offerings. The Company's principal use of
its cash has been to fund acquisitions, to meet debt service obligations, to
fund investment in its TV and cable technical facilities and to fund subscriber
acquisition costs.
Pre-SAC Location Cash Flow increased by $13.0 million or 74% for the year
ended December 31, 1997 as compared to the same period in 1996. Multichannel
Television Pre-SAC Location Cash Flow increased $12.4 million or 158% and
Broadcast Television Location Cash Flow increased $649,000 or 7%. Pre-SAC
Location Cash Flow increased as a result of (i) a $10.7 million or 705%
increase in DBS Pre-SAC Location Cash Flow of which $1.0 million or 10% was due
to an increase in same territory Pre-SAC Location Cash Flow and $9.7 million or
90% was attributable to territories acquired subsequent to the third quarter of
1996, (ii) a $1.7 million or 27% increase in Cable Location Cash Flow which was
the net result of a $646,000 or 14% increase in same system Location Cash Flow,
a $1.7 million increase due to the system acquired effective September 1, 1996
and a $703,000 reduction due to the sale of the Company's New Hampshire cable
system effective January 31, 1997, (iii) a $615,000 or 6% increase in TV
Location Cash Flow as the net result of a $1.3 million or 17% increase in same
station Location Cash Flow, a $343,000 decrease attributable to stations
acquired in the first quarter of 1996 and a $361,000 decrease attributable to
the two new stations launched on August 1, 1997 and October 17, 1997, and (iv)
a $34,000 increase in Tower Location Cash Flow.
The Company is required to maintain a letter of credit in favor of the
NRTC to collateralize payment of the NRTC billings. As of December 31, 1997,
this letter of credit amounted to approximately $8.5 million. The Company is
required to increase this amount with any DBS acquisition by an amount equal to
the acquired DBS entity's highest month of billings times three.
During the year ended December 31, 1997, net cash provided by operating
activities was approximately $13.0 million, which together with $8.6 million of
cash on hand, $6.9 million of net proceeds from the sale of the New Hampshire
cable system and $169.1 million of net cash provided by the Company's financing
activities was used to fund other investing activities totaling $153.6 million.
Financing activities consisted of raising $95.8 million in net proceeds from
the Unit Offering and $111.0 million in net proceeds from the Senior Notes
Offering, borrowing $94.2 million under the PSH's credit facility (the "PSH
Credit Facility"), repayment of $94.2 million of indebtedness under the PSH
Credit Facility and $29.6 million of indebtedness under the PM&C is credit
facility (the "PM&C Credit Facility"), net repayment of approximately $657,000
of other long-term debt, placing $1.2 million in restricted cash to
collateralize a letter of credit and the incurrence of approximately $6.2
million in debt issuance costs associated with the PSH Credit Facility and
Credit Facility. Investing activities, net of the proceeds from the sale of the
New Hampshire cable system, consisted of (i) the acquisition of DBS assets from
four independent DIRECTV providers during the first quarter of 1997 for
approximately $34.0 million, (ii) the acquisition of DBS assets from five
independent DIRECTV providers during the second quarter of 1997 for
approximately $22.5 million, (iii) the acquisition of DBS assets from ten
independent DIRECTV providers during the third quarter of 1997 for
approximately $42.7 million, (iv) the acquisition of DBS assets from six
independent DIRECTV providers during the fourth quarter of 1997 for
approximately $34.4 million, (v) broadcast television transmitter, tower and
facility constructions and upgrades totaling approximately $5.8 million, (vi)
the interconnection and expansion of the Puerto Rico cable systems amounting to
approximately $1.8 million, (vii) DBS subscriber acquisition costs, which were
being capitalized through September 30, 1997 and amortized over a twelve-month
period, of approximately $4.9 million, (viii) payments of programming rights
amounting to $2.6 million, and (ix) maintenance and other capital expenditures
and intangibles totaling approximately $5.0 million. As of December 31, 1997,
the Company's cash on hand approximated $44.0 million.
53
<PAGE>
Location Cash Flow increased by $6.0 million or 55% for the year ended
December 31, 1996 as compared to the same period in 1995 as a result of (i) a
$3.7 million or 62% increase in TV Location Cash Flow of which $1.6 million or
42% was due to an increase in same station Location Cash Flow and $2.1 million
or 58% was due to an increase attributable to stations acquired in the first
quarter of 1996, (ii) a $781,000 or 868% increase in DBS Location Cash Flow of
which $312,000 or 40% was due to an increase in same territory Location Cash
Flow and $469,000 or 60% was due to an increase attributable to the territories
acquired in the fourth quarter of 1996, (iii) a $1.1 million or 72% increase in
Puerto Rico cable Location Cash Flow of which $126,000 or 11% was due to an
increase in same system Location Cash Flow and $998,000 or 89% was due to the
system acquired effective September 1, 1996, (iv) a $375,000 or 11% increase in
New England cable Location Cash Flow, and (v) a $26,000 increase in Tower
Location Cash Flow.
During the year ended December 31, 1996, net cash provided by operating
activities was approximately $4.3 million, which together with $12.0 million of
cash on hand, $9.9 million of restricted cash and $74.7 million of net cash
provided by the Company's financing activities was used to fund investing
activities totaling $82.5 million. Investment activities consisted of (i) the
Portland, Maine and Tallahassee, Florida TV acquisitions for approximately
$16.6 million, (ii) the San German, Puerto Rico cable acquisition for
approximately $26.0 million, (iii) the acquisition of DBS assets from two
independent DIRECTV providers during the third quarter of 1996 for
approximately $29.9 million, (iv) the purchase of the Pegasus Cable Television
of Connecticut, Inc. ("PCT-CT") office facility and headend facility for
$201,000, (v) the fiber upgrade in the PCT-CT cable system amounting to
$323,000, (vi) the purchase of DSS units used as rental and lease units
amounting to $832,000, (vii) payments of programming rights amounting to $1.8
million, and (viii) maintenance and other capital expenditures and intangibles
totaling approximately $6.7 million. As of December 31, 1996, the Company's
cash on hand approximated $8.6 million.
During the year ended December 31, 1995, net cash provided by operations
was approximately $6.2 million, which together with $1.4 million of cash on
hand and $10.9 million of net cash provided by the Company's financing
activities was used to fund a $12.5 million distribution to Pegasus' parent and
to fund investing activities totaling $6.5 million. Investment activities
consisted of (i) the final payment of the deferred purchase price for the
Company's New England DBS rights of approximately $1.9 million, (ii) the
purchase of a new WDSI studio and office facility for $520,000, (iii) the
purchase of a LIBOR cap for $300,000, (iv) the purchase of DSS units used as
rental and lease units for $157,000, (v) payments of programming rights
amounting to $1.2 million, and (vi) maintenance and other capital expenditures
and intangibles totaling approximately $2.3 million.
Financings
On January 27, 1997, the Company completed the Unit Offering ("Unit
Offering") in which it sold 100,000 units, consisting of 100,000 shares of
12.75% Series A Cumulative Exchangeable Preferred Stock and 100,000 Warrants to
purchase 193,600 shares of Class A Common Stock ("Warrants"). The Unit Offering
resulted in net proceeds to the Company of $95.8 million. The Company applied
the net proceeds from the Unit Offering as follows: (i) $30.1 million to the
repayment of all outstanding indebtedness under the PM&C Credit Facility and
expenses related thereto, and (ii) $56.5 million for the payment of the cash
portion of the purchase price in the acquisition of DBS assets from nine
independent DIRECTV providers. The remaining net proceeds were used for working
capital, general corporate purposes and to finance other acquisitions.
On July 9, 1997, PSH entered into a $130.0 million credit facility (the
"PSH Credit Facility"), which was collateralized by substantially all of the
assets of PSH and its subsidiaries. The facility consisted of a $40.0 million
seven-year senior term loan and a $90.0 million six-year senior revolving
credit facility. As of October 21, 1997, the Company had drawn $94.2 million
under the PSH Credit Facility in connection with various DBS acquisitions. On
October 21, 1997, outstanding balances under the PSH Credit Facility were
repaid from the proceeds of the Senior Notes Offering, and commitments under
the PSH Credit Facility were terminated. Deferred financing fees relating to
the $130.0 million revolving credit facility were written off, resulting in an
extraordinary loss of $1.2 million on the refinancing transaction.
On October 21, 1997, the Company completed the Senior Notes Offering in
which it sold $115.0 million of 9.625% Series A Senior Notes, resulting in net
proceeds to the Company of approximately $111.0 million.
54
<PAGE>
The Company applied the net proceeds from the Senior Notes Offering as follows:
(i) $94.2 million to the repayment of all outstanding indebtedness under the
PSH Credit Facility, and (ii) $16.8 million for the payment of the cash portion
of the purchase price for the acquisition of DBS assets from various
independent DIRECTV providers.
On December 10, 1997, PM&C entered into the Credit Facility. The Credit
Facility is a $180.0 million six-year, collateralized, reducing revolving
credit facility. Borrowings under the Credit Facility are available for
acquisitions, subject to the approval of the lenders in certain circumstances,
working capital, capital expenditures and for general corporate purposes.
Concurrently with the closing of the Credit Facility, the PM&C Credit Facility
was terminated. A portion of the deferred financing fees relating to the PM&C
Credit Facility were written off, resulting in an extraordinary loss of
$460,000 on the refinancing transaction.
The Company is highly leveraged. As of December 31, 1997, the Company has
indebtedness of $208.4 million, total common stockholders' equity of $27.4
million, preferred stock of $111.3 million and, assuming certain conditions are
met, $171.5 million available under the Credit Facility. For the year ended
December 31, 1997, the Company's earnings were inadequate to cover its combined
fixed charges and dividends on Series A Preferred Stock by approximately $31.3
million.
The Company is restricted by the Senior Notes Indenture from paying
dividends on the Series A Preferred Stock in cash prior to July 1, 2002.
Additionally, the PM&C Indenture and Credit Facility contain certain financial
and operating covenants, including restrictions on PM&C to incur additional
indebtedness, create liens and to pay dividends.
The ability of the Company to repay its existing indebtedness, pay
dividends on its Series A Preferred Stock and to redeem the Series A Preferred
Stock at maturity will depend upon future operating performance, which is
subject to the success of the Company's business strategy, prevailing economic
conditions, regulatory matters, levels of interest rates and financial,
business and other factors, many of which are beyond the Company's control.
Pre-SAC Location Cash Flow is defined as net revenues less location
operating expenses before subscriber acquisition costs. Location Cash Flow is
defined as net revenues less location operating expenses. Although Pre-SAC
Location Cash Flow and Location Cash Flow are not measures of performance under
generally accepted accounting principles, the Company believes that Pre-SAC
Location Cash Flow and Location Cash Flow are accepted within the Company's
business segments as generally recognized measures of performance and are used
by analysts who report publicly on the performance of companies operating in
such segments. Nevertheless, these measures should not be considered in
isolation or as a substitute for income from operations, net income, net cash
provided by operating activities or any other measures for determining the
Company's operating performance or liquidity which is calculated in accordance
with generally accepted accounting principles.
The Company closely monitors conditions in the capital markets to identify
opportunities for the effective and prudent use of financial leverage. In
financing its future expansion and acquisition requirements, the Company would
expect to avail itself of such opportunities and thereby increase its
indebtedness, which could result in increased debt service requirements. There
can be no assurance that such debt financing can be completed on terms
satisfactory to the Company or at all. The Company may also issue additional
equity to fund its future expansion and acquisition requirements.
Capital Expenditures
The Company's capital expenditures aggregated $9.9 million in 1997 as
compared to $6.3 million in 1996. The Company expects recurring renewal and
refurbishment capital expenditures to total approximately $2.0 million per
year. In addition to these maintenance capital expenditures, the Company's 1998
capital projects include (i) DBS facility upgrades of approximately $500,000,
and (ii) approximately $2.6 million of TV expenditures for broadcast television
transmitter, tower and facility constructions and upgrades. Effective October
1, 1997, the Company no longer requires new DBS customers to sign a one-year
programming contract and, as a result, subscriber acquisition costs, which were
being capitalized through September 30, 1997 and amortized over a twelve-month
period, will be charged to operations in the period incurred. The Company
commenced the programming of two new TV stations, WPME on August 1, 1997 and
WGFL on October 17, 1997 and its plans are to commence programming of an
additional station in 1998. There can be no assurance that the Company's
capital expenditure plans will not change in the future.
55
<PAGE>
Other
The Company has reviewed all of its systems as to the Year 2000 issue. The
Company has in the past three years replaced or upgraded, or is in the process
of replacing or upgrading, all of its TV traffic systems, cable billing systems
and corporate accounting systems. All of these new systems will be in place by
the third quarter of 1998. The Company relies on outside vendors for the
operation of its DBS satellite control and billing systems, including DIRECTV,
the NRTC and their respective vendors. The Company has established a policy to
ensure that its vendors are currently in compliance with the Year 2000 issue or
have a plan in place to be in compliance with the Year 2000 issue by the first
quarter of 1999. Costs to be incurred beyond 1997 relating to the Year 2000
issue are expected to be immaterial.
The Company believes that it has adequate resources to meet its working
capital, maintenance capital expenditure and debt service obligations. The
Company believes that cash on hand, together with available borrowings under
the Credit Facility and future indebtedness which may be incurred by the
Company and its subsidiaries will give the Company the ability to fund
acquisitions and other capital requirements in the future. The Company engages
in discussions with respect to acquisition opportunities in media and
communications businesses on a regular basis. However, there can be no
assurance that the future cash flows of the Company will be sufficient to meet
all of the Company's obligations and commitments.
On January 8, 1998 the Company entered into the Agreement and Plan of
Merger to acquire DTS for approximately 5.5 million shares of Pegasus' Class A
Common Stock. As of December 31, 1997, DTS' operations, pro forma for its then
pending acquisition, consisted of providing DIRECTV services to approximately
131,000 subscribers in certain rural areas of eleven states in which DTS holds
the exclusive right to provide such services. Upon completion of the DTS
Acquisition, DTS will become a wholly owned subsidiary of Pegasus.
On January 16, 1998 the Company entered into an agreement to sell its
remaining New England cable systems to Avalon Cable of New England, L.L.C. for
a purchase price of at least $28 million and not more than $31 million.
As a holding company, Pegasus' ability to pay dividends is dependent upon
the receipt of dividends from its direct and indirect subsidiaries. Under the
terms of the PM&C Notes Indenture, PM&C is prohibited from paying dividends
prior to July 1, 1998. Under the terms of the Credit Facility, PM&C is
restricted from paying dividends. In addition, Pegasus' ability to pay
dividends and Pegasus' and its subsidiaries' ability to incur indebtedness are
subject to certain restrictions contained in the Senior Notes Indenture and the
Certificate of Designation governing the Series A Preferred Stock.
PM&C's ability to incur additional indebtedness is limited under the terms
of the PM&C Notes Indenture and Credit Facility. These limitations take the
form of certain leverage ratios and are dependent upon certain measures of
operating profitability. Under the terms of the Credit Facility, capital
expenditures and business acquisitions in excess of certain agreed upon levels
will require lender consent.
The Company's revenues vary throughout the year. As is typical in the
broadcast television industry, the Company's first quarter generally produces
the lowest revenues for the year, and the fourth quarter generally produces the
highest revenues for the year. The Company's operating results in any period
may be affected by the incurrence of advertising and promotion expenses that do
not necessarily produce commensurate revenues in the short-term until the
impact of such advertising and promotion is realized in future periods.
The Company believes that inflation has not been a material factor
affecting the Company's business. In general, the Company's revenues and
expenses are impacted to the same extent by inflation. Substantially all of the
Company's indebtedness bears interest at a fixed rate.
The Company has adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share." The Company has
reviewed the provisions of SFAS No. 130, "Reporting Comprehensive Income" and
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information", and the implementation of the above standards is not expected to
have any significant impact on its consolidated financial statements.
56
<PAGE>
DTS SELECTED HISTORICAL AND
PRO FORMA CONSOLIDATED FINANCIAL DATA
(Dollars in thousands)
The following table presents Selected Historical and Pro Forma
Consolidated Financial Data relating to DTS' unaudited pro forma balance sheet
data as of December 31, 1997 and DTS' unaudited pro forma statement of
operations data for the year ended December 31, 1997, each as adjusted to give
effect to the DTS Transactions (as defined in the "Glossary of Defined Terms").
The historical data for the period from January 30, 1996 (date of formation) to
December 31, 1996 and the year ended December 31, 1997, have been derived from
the financial statements of DTS audited by Arthur Andersen LLP, independent
public accountants. The data set forth in this table should be read in
conjunction with DTS' Consolidated Financial Statements and the notes thereto
and its Management's Discussion and Analysis, included elsewhere herein.
<TABLE>
<CAPTION>
January 30, 1996
(inception) Year Ended December 31,
to ---------------------------
December 31, Pro Forma
1996 1997 1997
----------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Statement of Operations Data:
Programming revenue ..................... $ 3,085 $ 41,753 $ 52,720
Equipment sales and installation
revenue ............................... 324 5,690 7,085
--------- -------- --------
Total revenue .......................... 3,409 47,443 59,805
Cost of revenue ......................... 2,270 31,147 39,500
--------- -------- --------
Total gross profit ..................... 1,139 16,296 20,305
Operating expenses excluding
depreciation and amortization ......... 2,732 17,366 20,350
Total depreciation and amortization. 1,148 14,509 20,046
--------- -------- --------
Operating loss .......................... (2,741) (15,579) (20,091)
Interest expense, net ................... (818) (14,457) (25,605)
Other income (expense)(a) ............... 24 (112) (196)
--------- -------- --------
Net loss(a)(b) .......................... $ (3,535) ($ 30,148) ($ 45,892)
========= ======== ========
Other Data:
EBITDA(a)(c) ............................ (1,593) (1,070) (45)
December 31, 1997
---------------------------
Historical Pro Forma
------------ ------------
(unaudited)
(dollars in thousands)
Balance Sheet Data:
Cash, cash equivalents and marketable investment securities(d) ......... $ 39,113 $ 39,492
Total assets ........................................................... 257,662 268,415
Total debt (including current portion) ................................. 192,592 202,092
Members' equity/stockholders' equity ................................... $ 16,637 $ 16,637
</TABLE>
57
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Notes to DTS Selected Historical and Pro Forma
Consolidated Financial Data
(a) Pro forma other income (expense) amounts do not include additional interest
income which would have been recognized on amounts included in the
placement of approximately $37.0 million in an interest escrow account
(the "Interest Escrow Account"). If such additional interest income was
included, the pro forma net loss for the year ended December 31, 1997
would be approximately $44.8 million.
(b) Prior to October 10, 1997, when DTS effected its conversion to a
corporation (the "Corporate Conversion"), DTS was a limited liability
company (the "LLC") and was not required to pay United States federal
income taxes.
(c) "EBITDA" represents earnings before net interest expense, other income
(expense), taxes, depreciation and amortization. EBITDA is presented
because it is a widely accepted financial measure in the communications
industry and is similar to "Consolidated Operating Cash Flow," a financial
measure used in the DTS Indenture (the "DTS Indenture") to determine
whether DTS has complied with certain covenants and differs from cash
flows from operating activities. Pursuant to the indenture (the "DTS
Indenture"), Consolidated Operating Cash Flow is calculated with respect
to any period by adding to the consolidated net income of DTS and its
Restricted Subsidiaries for such period (i) consolidated income tax
expense for such period to the extent deducted in determining consolidated
net income for such period, (ii) consolidated interest expense for such
period to the extent deducted in determining consolidated net income for
such period, (iii) all dividends on preferred equity interests to the
extent not taken into account in determining consolidated net income for
such period and (iv) depreciation, amortization and any other non cash
items for such period to the extent deducted in determining consolidated
net income for such period. EBITDA is not intended to be a substitute for
a measure of performance in accordance with generally accepted accounting
principles and should not be relied on as such. EBITDA as presented for
DTS may not be comparable to similarly titled measures reported by other
companies.
(d) Excludes the Interest Escrow Account to fund, together with the proceeds
from the investment thereof, the first four semi-annual interest payments
on the DTS Notes.
58
<PAGE>
DTS MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations of DTS should be read in conjunction with DTS' Consolidated
Financial Statements and related notes thereto which are included elsewhere
herein. This Proxy Statement/Prospectus contains certain forward-looking
statements that involve risks and uncertainties. DTS' actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those set forth
under "RISK FACTORS" and elsewhere in this Proxy Statement/Prospectus.
The following discussion provides an assessment of the historical results
of operations and liquidity and capital resources of DTS and its wholly-owned
subsidiaries. This discussion should be read in conjunction with the audited
consolidated financial statements of DTS and the related notes thereto,
appearing elsewhere herein. As a result of the growth of DTS through
acquisitions and possible future acquisitions, the historical audited financial
information of DTS may not be indicative of the financial position or results
of operations to be reported in the future.
On October 10, 1997, DTS effected its conversion from a limited liability
company (the "LLC") to a corporation (the "Corporate Conversion"). The LLC
merged with and into WEP Intermediate Corp., a Delaware corporation ("WEP"),
pursuant to which (i) the member interests in the LLC held by WEP were
canceled, (ii) all of the outstanding capital stock of WEP was converted into
Series A Payment-in-Kind Convertible Preferred Stock (the "DTS Series A
Preferred Stock"), (iii) the member interests in the LLC evidenced by the Class
A Units (the "Class A Units") were converted into DTS Series A Preferred Stock,
(iv) the member interests in the LLC evidenced by the Class B Units (the "Class
B Units") were converted into DTS Common Stock, (v) the member interests in the
LLC evidenced by the Class C Units (the "Class C Units") were converted into
the right to purchase shares of DTS Common Stock, (vi) the member interests in
the LLC evidenced by the Class D Units (the "Class D Units") were converted
into warrants to purchase DTS Common Stock, (vii) all of the resulting capital
stock of DTS became subject to the DTS Stockholders Agreement and (viii) the
surviving entity changed its name to "Digital Television Services, Inc."
Subsequent to the Corporate Conversion, substantially all of the
outstanding shares of the resulting corporation are owned by the holders of the
equity interests in the LLC. Therefore, the Corporate Conversion has been
treated for accounting purposes as the acquisition of WEP by the LLC. The LLC's
assets and liabilities have been recorded at historical cost and WEP's assets
and liabilities have been recorded at fair value. However, given that WEP's
only asset consisted of its investment in the LLC, no goodwill was recognized.
Following the Corporate Conversion, the historical financial statements of the
LLC became the historical financial statements of WEP and include the
businesses of both companies.
Overview
DTS was formed on January 30, 1996, to acquire, own and manage rights to
distribute DIRECTV services to residential households and commercial
establishments in rural DIRECTV service territories. As of December 31, 1997,
DTS had acquired the rights to provide DIRECTV services to approximately
1,632,000 households for approximately $170.9 million or $105 per household,
excluding adjustments recorded to reflect the discount of certain of DTS'
seller notes at the 9% interest rate under DTS' bank credit facility (the "DTS
Credit Facility"). Of the total purchase price, approximately $129.1 million
was paid in cash and approximately $41.8 million was financed through the
issuance of promissory notes of DTS in favor of the sellers. DTS also completed
the acquisition of certain rural DIRECTV service territories in Georgia on
January 30, 1998, pursuant to which it acquired the rights to provide DIRECTV
service to an additional 37,000 households for an aggregate purchase price of
approximately $9.5 million in cash or approximately $257 per household. The
following table presents information regarding DTS' acquisitions as of December
31, 1997.
59
<PAGE>
<TABLE>
<CAPTION>
Subscribers at Subscribers at
Acquisition Acquisition December 31,
System Location Date Acquired Price Date 1997
- ------------------------------- ------------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Completed Acquisitions -- 17
Rural DIRECTV Markets:
New Mexico ................. March 1, 1996 $ 512,000 404 1,080
California ................. April 1, 1996 5,980,000 3,385 7,143
New Mexico ................. August 28, 1996 9,683,000 2,931 5,554
New York ................... August 28, 1996 4,860,000 3,970 5,355
South Carolina ............. November 26, 1996 12,700,000 5,759 9,415
Kentucky ................... January 2, 1997 30,000,000 19,908 24,979
Kansas ..................... January 31, 1997 19,425,000 11,520 15,173
Vermont .................... February 18, 1997 38,000,000 20,778 28,306
Georgia .................... May 9, 1997 21,190,000 14,409 16,833
Indiana .................... December 31, 1997 28,500,000 12,864 12,864
------------ ------ ------
Subtotal -- Acquisitions $170,850,000 95,928 126,702
------------ ------ -------
Pending Acquisitions -- 1 Rural
DIRECTV Markets:
Georgia .................... January 30, 1998 9,500,000 4,750
------------ -------
Subtotal -- Pending
Acquisitions ........... $ 9,500,000 4,750
------------ -------
Total ................ $180,350,000 131,452
============ -------
</TABLE>
DTS generates revenues by providing DIRECTV services to its subscribers.
DIRECTV services consist of programming purchased in a monthly or annual
subscription, additional premium programming available on an a la carte basis,
sports programming available under a monthly, yearly or seasonal subscription,
and movies and events programming available on a pay per view basis.
Although the majority of DSS equipment is sold to subscribers through
independent dealers, DTS also generates revenue from the direct sale, rental
and installation of satellite receivers and related equipment. During 1996 and
1997, DTS offered price subsidies on DSS equipment to further stimulate the
demand for DIRECTV services. The retail sales price of DSS equipment ranged
from $199 to $599 during 1996 and 1997, depending upon the type of equipment
sold. These sales prices were approximately $25 to $135 below DTS' cost for
such equipment. DTS records revenue from the sale of DSS equipment and related
accessories based on the amount paid by the customer and recognizes a loss on
the sale for DTS' cost in excess of the amount collected. DTS offers
installation services at prices ranging from $99 to $199.
DTS' major cost of providing DIRECTV services to its subscribers is the
direct wholesale cost of purchasing related program offerings from DIRECTV,
which averaged approximately 52% and 50% of programming revenues during 1996
and 1997, respectively. Additionally, DTS purchases other contract services
from DIRECTV through the NRTC. These costs consist of recurring monthly
subscriber maintenance fees, including security fees, ground services fees,
system authorization fees and fees for subscriber billing.
Since inception through December 31, 1997, DTS has invested significant
working capital to implement extensive distribution networks and promotional
programs to stimulate the acquisition of new subscribers. Costs associated with
subscriber acquisition are a significant component of DTS' operating expenses.
These expenses include variable commission expenses, fixed and variable
promotional expenses and marketing salaries and benefits. As discussed above,
DTS also subsidizes the cost of DSS equipment to the subscriber, thereby
incurring a loss on the sale of satellite receivers and related equipment sold.
DTS' policy is to expense all subscriber acquisition costs at the time the sale
is made or, in the case of cash back promotions on annual subscriptions, to
amortize the promotion expense over 12 months. During the period beginning on
January 30, 1996 (inception) and ending December 31, 1997, subscriber
acquisition costs, including the loss on DSS equipment sales, averaged
approximately $236 for each new subscriber addition (other than subscribers
added through acquisitions). Based on this expenditure level and the current
average subscriber cash contribution, DTS will recover its subscriber
acquisition costs in approximately 20 months. DTS anticipates that it will
continue to incur a significant
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level of subscriber acquisition costs in conjunction with the growth of its
subscriber base, and that these costs could increase as a result of increased
competition and a downward pressure on the retail price of satellite equipment
sold. Potential increases in subscriber acquisition costs as well as
significant subscriber growth is expected to have a short term negative impact
on operating cash flow of DTS.
General and administrative costs include administrative costs associated
with DTS' sales and subscriber service operations, as well as accounting and
general administration. Although these expenses will continue to increase as
DTS' scope of operations increases, such expenses are primarily fixed in nature
and, accordingly, should not increase directly in proportion to the future
increase to DTS' subscriber base.
DTS has yet to achieve positive operating cash flow due to cash expended
in implementing its sales and administrative infrastructure, marketing expenses
associated with adding new subscribers and interest and other debt servicing
costs associated with financing activities. DTS expects to continue its focus
on increasing its subscriber base which is expected to have a negative impact
on short-term operating results. In addition, a changing competitive
environment may increase the marketing expenditures necessary to acquire new
subscribers. There can be no assurance that DTS' subscriber base and revenues
will continue to increase or that DTS will be able to achieve or sustain
profitability or positive operating cash flow.
Results of Operations
Year Ended December 31, 1997 Compared to Period Ended from Inception (January
30, 1996) to December 31, 1996
DTS acquired the rights to provide DIRECTV services to approximately
97,000 households during March and April 1996, and acquired an additional
286,000 households by December 31, 1996. Programming revenue generated during
the year ended December 31, 1996 (the "1996 Period"), consisted of DIRECTV
services provided to the approximately 16,500 subscribers associated with these
acquisitions. During 1997, DTS added approximately 1,249,000 households, and
acquired approximately 66,600 subscribers, which contributed revenue to DTS for
all or a portion of the year ended December 31, 1997 (the "1997 Period").
Programming revenue was approximately $41,753,000 for the 1997 Period compared
to approximately $3,085,000 for the 1996 Period. This increase resulted
primarily from revenue generated from (i) the subscribers acquired in
conjunction with DTS' acquisitions during 1997 and, to a lesser extent, from
the inclusion of a full year of revenue from subscribers acquired in DTS' 1996
acquisitions and from net subscribers added in 1997 from DTS' sales and
marketing activities. During the 1997 Period, DTS added approximately 39,500
new subscribers offset by approximately 11,900 disconnects. Average monthly
programming revenue per subscriber during the 1997 Period was approximately
$39, which was consistent with the average monthly programming revenue per
subscriber during the 1996 Period.
Equipment sales and installation revenue totaled approximately $5,690,000
during the 1997 Period compared to approximately $324,000 during the 1996
Period. This increase resulted from the sale of DSS equipment and related
installations to new subscribers added during the 1997 Period.
Costs directly associated with providing programming, equipment sales and
installation revenue totaled approximately $31,147,000 during the 1997 Period
compared with approximately $2,270,000 during the 1996 Period. These costs
increased in direct proportion to the increase in the number of subscribers
subscribing to DIRECTV services and the increase in DSS units sold between
years. For the 1997 Period, the gross profit on programming revenue after
recurring service fees was consistent with the 1996 Period. During the 1997
Period, DTS sold DSS equipment installed at average prices of approximately 12%
below DTS' cost as compared to 19% during the 1996 Period. This reduced subsidy
resulted from declining DSS unit costs to DTS associated with volume purchases.
DTS expects to continue to subsidize the cost of DSS equipment and anticipates
increased subsidies as retail prices may decline as a result of increased
competition.
DTS incurred direct selling expenses of approximately $9,413,000 during
the 1997 Period as compared to $853,000 during the 1996 Period. These costs
included advertising and promotion expenses, sales commissions to both DTS'
employee and dealer distribution channels, and marketing salaries and benefits.
Including subsidies on DSS equipment sales, DTS incurred approximately $239 of
selling expenses for each new subscriber added
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(other than subscribers added through acquisitions) during the 1997 Period
compared with $214 of selling expenses for each new subscriber added during the
1996 Period. Selling expenses per subscriber addition increased between periods
as a direct result of increased advertising and fixed selling expenses
associated with implementation of DTS' direct distribution channels.
General and administrative expenses totaled approximately $8,707,000
during the 1997 Period or approximately 18% of revenues compared with
$1,954,000 or 57% of revenues for the 1996 Period. These expenses consisted
primarily of salaries and expenses associated with customer service operations,
retail store and installation facility expenses, general office expenses, and
other general administrative expenses. General and administrative expenses are
expected to continue to further decline as a percent of total revenues in 1998
as the majority of these expenses are fixed in nature.
Depreciation expense totaled approximately $510,000 for the 1997 Period
compared to approximately $48,000 during the 1996 Period and has increased in
conjunction with the addition of general office assets, retail store assets,
and the purchase of installation service vehicles. Amortization expense totaled
approximately $13,999,000 for the 1997 Period compared with approximately
$1,100,000 during the 1996 Period. Of the 1997 Period amount, approximately
$12,647,000 relates to the acquisition of contract rights by DTS, approximately
$242,000 relates to fees incurred in connection with the formation of DTS and
its subsidiaries and approximately $1,110,000 relates to amortization of
subscriber acquisition costs under DTS' cash back offer program.
DTS generated a Consolidated Operating Cash Flow deficit pursuant to the
terms of its indenture governing the DTS Notes (the "DTS Indenture") of
approximately $1,070,000 for the 1997 Period compared with approximately
$1,593,000 for the 1996 Period. This improvement to Operating Cash Flow deficit
resulted from increased revenues associated with increased subscriber
penetration. DTS expects to incur an Operating Cash Flow deficit during 1998 as
a result of selling expenses associated with subscriber growth.
Interest expense for the 1997 Period, including amortization of debt
discount and debt issuance costs, totaled approximately $15,924,000 as compared
to approximately $818,000 for the 1996 Period. This increase is associated with
an increase in average borrowings under the DTS Credit Facility, seller
financing and interest associated with the DTS Notes issued in July 1997.
During the 1997 Period, DTS also earned interest revenue totaling approximately
$1,467,000 on the over funded portion of the DTS Notes.
DTS was considered a partnership for federal and state income tax purposes
for the period from inception (January 30, 1996) to October 10, 1997. All
taxable income or loss was allocated to the members of DTS in accordance with
the terms of the member agreement. Accordingly, no provision for income taxes
has been made for the 1996 Period. DTS became a taxable entity for federal and
state income tax purposes, effective with its conversion to a corporation on
October 10, 1997.
Liquidity and Capital Resources
DTS has required significant capital since its formation in order to
acquire the rights to provide DIRECTV services and for the start up of its
operations. DTS has financed acquisitions and its other capital needs through
the proceeds received from the private sale of equity securities, the issuance
of seller notes, through borrowings under the DTS Credit Facility and issuance
of the DTS Notes. Cash flows from financing activities for the 1996 Period
totaled approximately $27,873,000, including $9,400,000 borrowed under the DTS
Credit Facility, approximately $32,000 from the issuance of installment notes,
and approximately $18,441,000 from the sale of equity interests. In addition,
DTS issued approximately $24,156,000 of seller notes during the 1996 Period to
finance a portion of the purchase price for certain rural DIRECTV service
territories which DTS acquired. Cash flows from financing activities during the
1997 Period totaled approximately $273,333,000, including approximately
$88,269,000 borrowed under the DTS Credit Facility, approximately $344,000 from
the issuance of installment notes, approximately $152,841,000, net of
discounts, from the issuance of the DTS Notes, and approximately $31,879,000
from the sale of equity interests. In addition, DTS issued approximately
$17,552,000 of seller notes during the 1997 Period to finance a portion of the
purchase price for certain rural DIRECTV service territories which DTS
acquired.
DTS used proceeds from the financings during the 1996 Period (i) to
consummate acquisitions of certain rural DIRECTV service territories for
approximately $33,700,000, excluding adjustments recorded to reflect the
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discount of certain of DTS' seller notes at the 9% interest rate under the DTS
Credit Facility at December 31, 1996, (ii) to pay approximately $3,150,000 in
deposits toward acquisitions during the 1997 Period, (iii) to pay certain fees
totaling approximately $3,516,000 incurred in conjunction with DTS' formation
and fees associated with the DTS Credit Facility, (iv) to repay approximately
$9,047,000 of seller notes and other notes payable, (v) for capital
expenditures totaling approximately $386,000, and (vi) for operating cash needs
totaling approximately $634,000. DTS used proceeds from the financings during
the 1997 Period (i) to consummate acquisitions for approximately $107,143,000,
excluding adjustments recorded to reflect the discount of certain of DTS'
seller notes at the 9% interest rate under the DTS Credit Facility at December
31, 1996, (ii) to repay approximately $82,169,000 of borrowings under the DTS
Credit Facility, (iii) to pay certain fees and expenses totaling approximately
$9,650,000 associated with the procurement of debt financing, (iv) to repay
approximately $6,202,000 of seller notes and other notes payable, (v) for
capital expenditures totaling approximately $2,611,000, (vi) expenses incurred
in connection with DTS' formation totaling approximately $1,259,000, and (vi)
for operating cash needs totaling approximately $7,307,000.
In conjunction with the acquisitions of the exclusive rights to provide
DIRECTV services in certain areas of California, New Mexico, Colorado, New
York, South Carolina and Georgia, DTS issued promissory notes totaling
approximately $41,705,000 in favor of the sellers. The promissory notes accrue
interest at per annum rates ranging from 3% to 15%. Notes with interest rates
below 9% have been discounted to reflect the 9% interest rate under the DTS
Credit Facility. One of the promissory notes carries a contingent payment
amount, which is dependent upon the number of subscribers in DTS' California
system at October 1, 1998. The amounts due under the terms of the contingent
note were approximately $4,223,000 and $6,251,000 at December 31, 1996 and
1997, respectively.
On July 30, 1997, DTS raised approximately $146.0 million, net of
underwriting discount and expenses, through the issuance of $155.0 million of
the Series A DTS Notes, which were sold in a transaction exempt from
registration under the Securities Act. The DTS Notes mature in 2007 and bear
interest at 12 1/2%, payable semi-annually on February 1 and August 1. DTS used
the net proceeds to fund an interest escrow account for the first four
semi-annual interest payments and to repay outstanding indebtedness under the
DTS Credit Facility. On January 26, 1998, DTS exchanged the Series A DTS Notes
with Series B DTS Notes registered under the Securities Act. The terms of the
Series B DTS Notes are identical in all material respects (including principal
amount, interest rate, maturity, security and ranking) to the terms of the
Series A DTS Notes (which they replace), except that the Series B DTS Notes:
(i) bear a Series B designation, (ii) are registered under the Securities Act
and, therefore, do not bear legends restricting their transfer, and (iii) are
not entitled to certain registration rights and certain liquidated damages
which were applicable to the Series A DTS Notes. The Series B DTS Notes are
unconditionally guaranteed, on a senior subordinated basis, as to payment of
principal, premium, if any, and interest, jointly and severally, by all direct
and indirect subsidiaries of DTS (the "Guarantors"). The Guarantors consist of
all of the subsidiaries of DTS, except DTS Capital, Inc., which is a co-issuer
of the Series B DTS Notes and has no separate assets or operations. DTS does
not have assets or operations apart from the assets and operations of its
subsidiaries.
In connection with the issuance of the DTS Notes, DTS amended and restated
the DTS Credit Facility to provide for a revolving credit facility in the
amount of $70.0 million, with a $50.0 million sublimit for letters of credit,
and a $20.0 million term loan facility. The proceeds of the DTS Credit
Facility, as amended, may be used (i) to refinance certain existing
indebtedness, (ii) prior to December 31, 1998, to finance the acquisition of
certain rural DIRECTV service territories and related costs and expenses, (iii)
to finance capital expenditures of DTS and its subsidiaries and (iv) for
general corporate purposes and the working capital needs of DTS and its
subsidiaries.
The $20.0 million term loan facility must be drawn no later than July 30,
1998, and any amounts not so drawn by that date will be cancelled. The term
loan shall be repaid in 20 consecutive quarterly installments of $200,000 each
commencing September 30, 1998 with the remaining balance due on July 30, 2003.
Borrowings under the revolving credit facility established pursuant to the DTS
Credit Facility will be available to DTS until July 31, 2003; however, if the
then unused portion of the commitments exceeds $10.0 million on December 31,
1998, the commitments will be reduced on such date by an amount equal to the
unused portion of such commitments minus $10.0 million. Thereafter, the
commitments thereunder will reduce quarterly commencing on
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September 30, 1999 at a rate of 3.50% through 1999, 5.75% in 2000, 7.0% in
2001, 9.0% in 2002 and 3.0% until June 30, 2003. All of the loans outstanding
will be repayable on July 31, 2003. The making of each loan under the DTS
Credit Facility will be subject to the satisfaction of certain conditions,
including not exceeding a certain "borrowing base" based on the number of
paying subscribers and households within the rural DIRECTV service territories
served by DTS; maintaining minimum subscriber penetration throughout the term
of the DTS Credit Facility; maintaining annualized contribution per paying
subscriber throughout the term of the DTS Credit Facility based on net income
plus certain sales, administrative and payroll expenses; maintaining a maximum
ratio of total debt to equity beginning in the first quarter of 2000 and
continuing throughout the term of the DTS Credit Facility; maintaining a
maximum ratio of total senior debt to annualized operating cash flow and a
ratio of total debt to annualized operating cash flow beginning in the first
quarter of 2000 and continuing throughout the term of the DTS Credit Facility;
maintaining a maximum ratio of total debt to adjusted annualized operating cash
beginning in the first quarter of 1999 and continuing until the last quarter of
2000; and maintaining a maximum percentage of general and administrative
expenses to revenues beginning in the first quarter of 1998 and continuing for
the duration of the DTS Credit Facility. DTS is in compliance with those
covenants with which it is required to comply as of the date of this Proxy
Statement/Prospectus. In addition, the DTS Credit Facility provides that DTS
will be required to make mandatory prepayments of the DTS Credit Facility from,
subject to certain exceptions, the net proceeds of certain sales or other
dispositions by DTS or any of its subsidiaries of material assets and with 50%
of any excess operating cash flow with respect to any fiscal year after the
fiscal year ending December 31, 1998.
Borrowings by DTS under the DTS Credit Facility are unconditionally
guaranteed by each of DTS' direct and indirect subsidiaries, and such
borrowings are secured by (i) an equal and ratable pledge of all of the equity
interests in DTS' subsidiaries, (ii) a first priority security interest in all
of their assets, and (iii) a collateral pledge of DTS' NRTC Member Agreements.
The DTS Credit Facility provides that DTS may elect that all or a portion
of the borrowings under the DTS Credit Facility bear interest at a rate per
annum equal to either (i) the CIBC Alternate Base Rate plus the Applicable
Margin or (ii) the Eurodollar Rate plus the Applicable Margin. When applying
the CIBC Alternate Base Rate with respect to borrowings pursuant to the
revolving credit facility, the Applicable Margin will be (w) 2.25% per annum
(when the ratio of total indebtedness of DTS to annualized operating cash flow
(the "Leverage Ratio") is greater than or equal to 6.75 to 1.00), (x) 2.00%
(when the Leverage Ratio is less than 6.75 to 1.00 but greater than or equal to
6.25 to 1.00), (y) 1.50% (when the Leverage Ratio is less than 6.25 to 1.00 but
greater than or equal to 5.75 to 1.00) or (z) 1.25% (when the Leverage Ratio is
less than 5.75 to 1.00). When applying the Eurodollar Rate with respect to
borrowings pursuant to the revolving credit facility, the Applicable Margin
will be (w) 3.50% per annum (when the Leverage Ratio is greater than or equal
to 6.75 to 1.00), (x) 3.25% (when the Leverage Ratio is less than 6.75 to 1.00
but greater than or equal to 6.25 to 1.00), (y) 2.75% (when the Leverage Ratio
is less than 6.25 to 1.00 but greater than or equal to 5.75 to 1.00) or (z)
2.50% (when the Leverage Ratio is less than 5.75 to 1.00). The Applicable
Margin for borrowings pursuant to the term loan facility will be the Applicable
Margin for borrowings pursuant to the revolving credit facility, plus 0.25%. As
used herein, "CIBC Alternate Base Rate" means the higher of (i) CIBC's prime
rate and (ii) the federal funds effective rate from time to time plus 1/2% per
annum. As used herein, "Eurodollar Rate" means the rate at which eurodollar
deposits for one, two, three and six months (as selected by DTS) are offered to
CIBC in the interbank eurodollar market. The DTS Credit Facility will also
provide that at any time when DTS is in default in the payment of any amount
due thereunder, the principal of all loans made under the DTS Credit Facility
will bear interest at 2% per annum above the rate otherwise applicable thereto
and overdue interest and fees will bear interest at a rate of 2% per annum over
the CIBC Alternative Base Rate.
Pursuant to a recent amendment to the NRTC Member Agreements, DTS and all
other NRTC Members whose monthly obligations to the NRTC have exceeded $500,000
in the past six months are required to keep and maintain in full force and
effect a standby letter of credit in favor of the NRTC to secure their
respective payment obligations to the NRTC under the NRTC Member Agreements.
The amount of the letter of credit issued at the request of DTS pursuant to the
DTS Credit Facility is equal to three times DTS' single largest monthly invoice
from the NRTC, exclusive of amounts payable for DSS equipment purchased by DTS
from the NRTC, or $6.28 million, and must be increased as DTS makes additional
acquisitions of rural DIRECTV service territories and when DTS' obligations to
the NRTC exceed the amount of the original letter of credit by 167%.
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DTS' cash and financing needs for 1998 and beyond will be dependent on
DTS' level of subscriber growth and the related marketing costs to acquire new
subscribers, and the working capital needs necessary to support such growth.
During 1998, DTS has commitments totaling approximately $9.5 million to acquire
additional contract rights, principal repayment obligations on its seller and
installment notes totaling approximately $9.5 million, and commitments under
various operating leases for office space and equipment. DTS expects to make
capital expenditures of approximately $1.5 million during 1998. Capital
expenditures will be primarily for leasehold improvements, furniture and
equipment and software enhancements associated with DTS' centralized customer
call center and the opening of retail stores. DTS plans to fund these
obligations and operating cash requirements using borrowings under the DTS
Credit Facility and cash generated from operations. At December 31, 1997, DTS
had approximately $41 million of borrowings immediately available under the DTS
Credit Facility. DTS believes that the available borrowings under the DTS
Credit Facility will provide sufficient funds to enable DTS to make additional
acquisitions and fund debt service and operations through the maturity date of
the DTS Credit Facility in 2003. DTS believes that consummation of the Merger
will not adversely affect the ability of DTS to fund debt service and
operations through such period, provided the DTS Credit Facility is amended to
permit the Merger to be consummated without an event of default (due to a
change in control of DTS). Such an amendment is a condition to the closing of
the Merger. Other future acquisitions by DTS may become less likely as a result
of the Merger especially if such amendment to the DTS Credit Facility is
conditioned upon a reduction in amounts available thereunder. The consummation
of the Merger will also cause a Change of Control to occur under the DTS
Indenture, and the issuers will be required to make an Offer to Purchase the
DTS Notes at 101% of the principal amount thereof, plus accrued and unpaid
interest thereon, if any, to the date of purchase. DTS has entered into a
commitment letter with CIBC Oppenheimer under which CIBC Oppenheimer agrees to
purchase any and all DTS Notes tendered in response to the Offer to Purchase.
CIBC Oppenheimer's commitment is subject to the execution of definitive
documentation and customary closing conditions. DTS' business strategy
contemplates additional acquisitions of rural DIRECTV service territories which
will require additional capital. DTS' operations do not currently generate
positive cash flow. While DTS anticipates funding any additional acquisitions
through borrowings under the DTS Credit Facility, seller financing in
connection with such acquisitions, additional debt and/or equity offerings and
cash from operations, there can be no assurance that such funding would be
available at the time of such acquisitions or available on favorable terms.
"Year 2000" Issues
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or at the Year
2000. The Year 2000 issue affects virtually all companies and organizations,
including DTS. DTS, however, purchases customer authorization, billing services
and centralized remittance processing services from the NRTC pursuant to the
NRTC Member Agreements. The NRTC has informed DTS that the computer system
which provides such services is Year 2000 compatible. While minor difficulties
could arise by or at the Year 2000, DTS does not expect an adverse effect on
DTS.
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BUSINESS OF THE COMPANY
General
Pegasus is a diversified company that operates in growing segments of the
media and communications industries.
The Company owns and operates five TV stations affiliated with Fox and has
or plans to enter into LMAs to operate three television stations, two of which
are to be affiliated with WB and one affiliated with UPN. The Company is the
largest independent provider of DIRECTV. Giving effect to the Pending Pegasus
DBS Acquisitions and the Merger, the Company will have the exclusive right to
provide DIRECTV services to approximately 4.3 million U.S. television
households in rural areas of 35 states serving a subscriber base, as of
February 28, 1998, of approximately 318,000 DBS subscribers. The Company also
provides cable service to approximately 43,000 subscribers in New England and
Puerto Rico. On January 16, 1998 the Company entered into an agreement to sell
its New England cable systems.
Acquisition Strategy
The Company's acquisition strategy is to identify media and communications
businesses exhibiting the following characteristics:
Significant Revenue Growth Potential. The Company targets media segments
whose revenues are growing (and in which it believes revenues will continue to
grow) consistently at rates of growth exceeding that of the U.S. economy as a
whole (as measured by gross domestic product).
Fragmented Ownership. The Company targets media segments where ownership
is fragmented and where it believes consolidation will result in benefits to
consumers as well as improved profitability.
Opportunity to Increase Market Share. The Company seeks to acquire or
start companies within media segments whose market share can be significantly
increased.
Operating Leverage. The Company seeks businesses in media segments
characterized by high levels of operating leverage and where Location Cash Flow
margins rise with increases in revenues.
Operating Strategy
The Company's operating strategy is designed to capitalize upon these
business characteristics in order to generate consistent and significant
increases in Location Cash Flow by:
Aggressive Sales and Marketing. The Company builds aggressive sales and
marketing organizations to enable it to significantly increase its market
share.
Careful Cost Controls. The Company maintains careful cost controls to
capitalize upon the operating leverage intrinsic to its businesses.
Focus on Cash Flow Growth. The Company rewards all of its employees for
growth in Location Cash Flow through an innovative profit-sharing plan which it
believes ensures that all employees of the Company are focused on the goal of
consistent and significant increases in Location Cash Flow.
Multichannel Television
DBS -- DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
U.S. television households in 1994. DIRECTV currently offers in excess of 175
channels of near laser disc quality video and CD quality audio programming and
transmits via three high-power Ku band satellites, each containing 16
transponders. As of December 31, 1997, there were approximately 3.2 million
DIRECTV subscribers.
The equipment required for reception of DIRECTV services (a DSS unit)
includes an 18-inch satellite antenna, a digital receiver approximately the
size of a standard VCR and a remote control, all of which are used
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with standard television sets. Each DSS receiver includes a "smart card" which
is uniquely addressed to it. The smart card, which can be removed from the
receiver, prevents unauthorized reception of DIRECTV services and retains
billing information on pay-per-view usage, which information is sent at regular
intervals from the DSS receiver telephonically to DIRECTV's authorization and
billing system. DSS units also enable subscribers to receive United States
Satellite Broadcasting Company, Inc. ("USSB") programming. USSB is a DBS
service whose programming consists of 28 channels of video programming
transmitted via five transponders it owns on DIRECTV's first satellite. USSB
primarily offers Time Warner and Viacom premium satellite programming services,
such as multiple channels of HBO and Showtime, which are not available through
DIRECTV but which are generally complementary to DIRECTV programming.
The commercial launch of DSS equipment, which was introduced in 1994, is
widely regarded as the most successful major consumer electronics product
launch in U.S. history, eclipsing the television, the VCR and the compact disc
player. DSS equipment is now produced by major manufacturers under the brand
names RCA, GE, ProScan, Sony, Hughes, Panasonic, Hitachi, Toshiba, Uniden,
Magnavox, Sanyo, Samsung, Daewoo and Memorex. DSS equipment is currently sold
through over 30,000 retail outlets throughout the U.S. for prices typically
ranging from $149 to $299, depending upon the generation of the equipment, the
level of features and the retail outlet. Prices for DSS equipment have declined
consistently since introduction, thereby further stimulating demand for DIRECTV
services.
The Company believes that DIRECTV services are superior to those provided
by other DTH service providers. The Company believes DIRECTV's extensive
programming, including up to 60 channels of pay-per-view movies and events,
various sports packages and the exclusive NFL Sunday Ticket(TM), will continue
to contribute to the growth of DIRECTV's subscriber base and DIRECTV's market
share for DTH services in the future. In addition, the Company believes that
DIRECTV's national marketing campaign provides the Company with significant
marketing advantages over other DTH competitors. DIRECTV's share of current DBS
and medium power DTH subscribers was approximately 51% as of December 31, 1997,
and DIRECTV obtained approximately 50% of all new subscribers to DBS and medium
power DTH services for each calendar quarter in 1996, despite the entrance of
two new competitors in the DTH marketplace. During the year ended December 31,
1997, DIRECTV added 832,000 new subscribers (net of churn), which was a greater
increase than any other DBS provider and accounted for approximately 46% of all
new DBS subscribers. Although DIRECTV's share of new subscribers can be
expected to decline as existing and new DTH providers aggressively compete for
new subscribers, the Company expects DIRECTV to remain the leading provider of
DBS and medium power DTH services in an expanding market.
Business Strategy
As the exclusive provider of DIRECTV services in its purchased
territories, the Company provides a full range of services, including
installation and authorization for new subscribers as well as billing,
collections and customer service support for existing subscribers. The
Company's operating strategy in DBS is to (i) establish strong relationships
with retailers, (ii) build its own direct sales and distribution channels and
(iii) develop local and regional marketing and promotion to supplement
DIRECTV's national advertising.
As of February 28, 1998, after giving effect to the Pending Pegasus DBS
Acquisitions and the Merger, the Company would have served approximately
318,000 DBS subscribers representing a penetration rate of approximately 7.4%.
There are approximately 38 million U.S. television households in rural areas,
of which approximately nine million are located in exclusive service
territories operated by members and affiliate members of the NRTC. Penetration
of DBS for the industry as a whole is currently estimated at 12% in rural
areas, and DIRECTV subscribers account for approximately 51% of all DBS
subscribers. The Company anticipates continued growth in subscribers and
operating profitability in DBS through increased penetration of DIRECTV
territories it currently owns and through additional acquisitions. As of
February 28, 1998, the Company's DIRECTV subscribers generated revenues of
approximately $41 per month at an average gross margin of 38%, after deducting
variable expenses. The Company's other expenses consist of regional sales
costs, advertising and promotion, and commissions and subsidies incurred to
build its growing base of subscribers and overhead costs which are
predominantly fixed.
The Company believes that there is an opportunity for additional growth
through the acquisition of DIRECTV territories held by the approximately 165
NRTC members and affiliate members, which are the only
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<PAGE>
independent providers of DIRECTV services. NRTC territories represent
approximately 23% of DIRECTV's 3.2 million current subscribers. As the largest
independent provider of DIRECTV services, the Company believes that it is well
positioned to achieve economies of scale through the acquisition of DIRECTV
territories held by NRTC members and other affiliate members. However, the
Company also believes that other well-financed organizations will seek to
acquire DIRECTV territories held by other NRTC members and affiliate members,
which the Company expects will increase acquisition prices. See "RISK FACTORS
- -- Risk Factors Relating to the Company's Business -- Risks Attendant to
Acquisition Strategy."
The Company's DBS Operations
After giving effect to the Pending Pegasus DBS Acquisitions and the
Merger, the Company will own, through agreements with the NRTC, the exclusive
right to provide DIRECTV services in certain rural areas of 35 states. The
Company is the largest independent provider of DIRECTV services not affiliated
with Hughes. Set forth below is certain information with respect to the
Company's DIRECTV territories and territories to be acquired upon completion of
the Pending Pegasus DBS Acquisitions and the Merger.
<TABLE>
<CAPTION>
DIRECTV Total Homes Not Homes
Homes in Passed by Passed by
Territory Territory(1) Cable Cable(2)
- ------------------------ -------------- ----------- -----------
<S> <C> <C> <C>
Owned:
Central ............... 347,556 121,216 226,340
Midwest ............... 566,847 143,180 423,667
Northeast ............. 732,882 143,210 589,672
Southeast ............. 418,368 126,472 291,896
West .................. 117,141 36,002 81,139
------- ------- -------
Total Owned .......... 2,182,794 570,080 1,612,714
========= ======= =========
To be Acquired:
Central ............... 456,267 109,312 346,955
Midwest ............... 135,774 27,096 108,678
Northeast ............. 310,820 105,860 204,960
Southeast ............. 855,291 278,863 576,428
West .................. 369,378 73,224 296,154
--------- ------- ---------
Total Pending
DBS Acquisitions ..... 2,127,530 594,355 1,533,175
========= ======= =========
Total ............... 4,310,324 1,164,435 3,145,889
========= ========= =========
Monthly
Average
DIRECTV Total Revenue
Subscribers Monthly Penetration Per
Territory (3) Total Cabled Uncabled Subscriber(4)
- ------------------------ ------------- --------- ---------- ---------- --------------
Owned:
Central ............... 25,793 7.4% 16.3% 2.7%
Midwest ............... 35,940 6.3 18.6 2.2
Northeast ............. 36,142 4.9 18.9 1.5
Southeast ............. 33,937 8.1 22.5 1.9
West .................. 8,988 7.7 16.9 3.6
------ ---- ----- ----
Total Owned .......... 140,800 6.5% 18.9% 2.0% $ 40.68
======= ==== ===== ==== =======
To be Acquired:
Central ............... 36,867 8.1% 28.2% 1.7%
Midwest ............... 13,645 10.0 30.9 4.8
Northeast ............. 35,275 11.3 30.1 1.7
Southeast ............. 60,162 7.0 17.3 2.1
West .................. 31,147 8.7 29.3 3.3
------- ---- ----- ----
Total Pending
DBS Acquisitions ..... 177,096 8.4 23.7% 2.4% $ 42.24
======= ==== ===== ==== =======
Total ............... 317,896 7.4% 21.4% 2.2% $ 41.55
======= ==== ===== ==== =======
</TABLE>
<PAGE>
- ------------
(1) Total homes in territory extracted from demographic data obtained from
Claritas, Inc. Does not include business locations. Includes approximately
277,000 seasonal residences.
(2) A home is deemed to be "passed" by cable if it can be connected to the
distribution system without any further extension of the cable
distribution plant. Does not include business locations. Includes
approximately 202,000 seasonal residences.
(3) As of February 28, 1998.
(4) Based upon December 1997 revenues and weighted average December 1997
subscribers.
Pending Pegasus DBS Acquisitions
As of March 12, 1998, without giving effect to the Merger, the Company has
entered into either letters of intent or definitive agreements to acquire
DIRECTV distribution rights and related assets from 14 independent providers of
DIRECTV services, which have exclusive DIRECTV service territories in certain
rural portions of six states and whose territories include, in the aggregate,
approximately 339,000 television households (including 29,000 seasonal
residences), 50,000 business locations and 37,000 subscribers. In the
aggregate, the consideration for the Pending Pegasus DBS Acquisitions amounts
to approximately $64.1 million and consists of $52.9 million of cash, $10.3
million in promissory notes and $854,000 in shares of Class A Common Stock. All
of the Pending Pegasus DBS Acquisitions are subject to the negotiation of
definitive agreements, if not already entered into, and all are subject, among
other conditions, to the prior approval of Hughes and the NRTC, if not already
obtained. In addition to these conditions, each of the Pending Pegasus DBS
Acquisitions is also expected to be
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<PAGE>
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 Pegasus DBS Acquisitions or, if entered
into, that all or any of the Pending Pegasus DBS Acquisitions will be
completed. See "RISK FACTORS -- Risk Factors Relating to the Company's Business
- -- Risks Attendant to Acquisitions Strategy."
DIRECTV Programming
DIRECTV programming includes (i) cable networks, broadcast networks and
audio services available for purchase in tiers for a monthly subscription, (ii)
premium services available a la carte or in tiers for a monthly subscription,
(iii) sports programming (including regional sports networks and seasonal
college and major professional league sports packages) available for a yearly,
seasonal or monthly subscription and (iv) movies and events available for
purchase on a pay-per-view basis. Satellite and premium services available a la
carte or for a monthly subscription are priced comparably to cable.
Pay-per-view movies are $2.99 per movie. Movies recently released for
pay-per-view are available for viewing on multiple channels at staggered
starting times so that a viewer generally would not have to wait more than 30
minutes to view a particular pay-per-view movie.
Distribution, Marketing and Promotion
In general, subscriptions to DIRECTV programming are offered through
commissioned sales representatives who are also authorized by the manufacturers
to sell DSS units. DIRECTV programming is offered (i) directly through national
retailers (e.g., Sears, Circuit City and Best Buy) selected by DIRECTV, (ii)
through consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming, (iii) through satellite dealers and consumer electronics dealers
authorized by regional sales management agents ("SMAs") selected by DIRECTV,
and (iv) through members and affiliate members of the NRTC who, like the
Company, have agreements with the NRTC to provide DIRECTV services. All
programming packages currently must be authorized by the Company in its service
areas.
The Company markets DIRECTV programming services and DSS units in its
distribution area in separate but overlapping ways. In residential market
segments where authorized DSS dealers offer the purchase, inventory and sale of
the DSS unit, the Company seeks to develop close, cooperative relationships
with these dealers and provides marketing, subscriber authorization,
installation and customer service support. In these circumstances, the dealer
earns a profit on the sale of the DSS unit and from a commission payable by the
Company for the sale of DIRECTV programming, while the Company may receive a
profit from a subscriber's initial installation and receives the programming
service revenues payable by the subscriber.
The Company has also developed a network of its own sales agents
("Programming Sales Agents") from among local satellite dealers, utilities,
cable installation companies, retailers and other contract sales people or
organizations. Programming Sales Agents earn commissions on the lease or sale
of DSS units, as well as on the sale of DIRECTV programming.
Late in 1996, the Company launched a "$299 Installed" promotion, which
provided an all-inclusive, low-cost entry to DIRECTV. The components of the
promotion are such that consumers may purchase a base model DSS unit for only
$199, and receive a professional installation for $100 without any prepaid
programming commitments. In the first quarter of 1997, the Company separated
the "$299 Installed" promotion and, through its dealer network, offered a $199
equipment retail price, allowing consumers to purchase the equipment exclusive
of a professional installation. The customer was, however, obligated to
maintain 12 consecutive months of any Total Choice package, paid monthly.
Effective October 1, 1997, the Company dropped this customer programming
commitment. Dealers that participate in this promotion are not paid
commissions, but are provided the equipment at no charge.
The Company also continues to introduce new promotions each quarter, such
as our "Silver Screen Sensation" promotion, in the fourth quarter of 1997 and
"Let Pegasus Take You to the Movies" promotion in the first quarter of 1998.
These promotions are designed to offer consumers incentives unmatched by
competing DBS services and to emphasize the value of DIRECTV's unique
complement of pay-per-view movies, sports and entertainment.
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<PAGE>
The Company seeks to identify and target market segments within its
service area in which it believes DIRECTV programming services will have strong
appeal. Depending upon their individual circumstances, potential subscribers
may subscribe to DIRECTV services as a source of multichannel television where
no other source currently exists, as a substitute for existing cable service
due to its high price or poor quality or as a source of programming which is
not available via cable but which is purchased as a supplement to existing
cable service. The Company seeks to develop promotional campaigns, marketing
methods and distribution channels designed specifically for each market
segment.
The Company's primary target market consists of residences which are not
passed by cable or which are passed by older cable systems with fewer than 40
channels. After giving effect to the Pending Pegasus DBS Acquisitions and the
Merger, the Company estimates that out of its total 4.3 million television
households in its exclusive DIRECTV territories that approximately 1.2 million
television households are not passed by cable and approximately 1.7 million
television households are passed by older cable systems with fewer than 40
channels. The Company actively markets DIRECTV services as a primary source of
television programming to potential subscribers in this market segment since
the Company believes that it will achieve its largest percentage penetration in
this segment.
The Company also targets potential subscribers who are likely to be
attracted by specific DIRECTV programming services. This market segment
includes (i) residences in which a high percentage of the viewing is devoted to
movie rentals or sports, (ii) residences in which high fidelity audio or video
systems have been installed and (iii) commercial locations (such as bars,
restaurants, hotels and private offices) which currently subscribe to pay
television or background music services. After giving effect to the Pending
Pegasus DBS Acquisitions and the Merger, the Company estimates that its
exclusive DIRECTV territories will contain approximately 479,000 commercial
locations.
The Company also targets seasonal residences in which it believes that the
capacity to start and discontinue DIRECTV programming seasonally or at the end
of a rental term has significant appeal. These subscribers are easily
accommodated on short notice without the requirement of a service call because
DIRECTV programming is a fully "addressable" digital service. After giving
effect to the Pending Pegasus DBS Acquisitions and the Merger, the Company
estimates that its exclusive DIRECTV territories will contain approximately
277,000 seasonal residences in this market segment.
Additional target markets include apartment buildings, multiple dwelling
units and private housing developments. RCA/Thomson has begun commercial sales
of DSS units designed specifically for use in such locations.
The Company benefits from national promotion expenditures incurred by
DIRECTV, USSB and licensed manufacturers of DSS, such as RCA/Thomson and Sony,
to increase consumer awareness and demand for DIRECTV programming and DSS
units. The Company benefits as well from national, regional and local
advertising placed by national retailers, satellite dealers and consumer
electronics dealers authorized to sell DIRECTV programming and DSS units. The
Company also undertakes advertising and promotion cooperatively with local
dealers designed for specific market segments in its distribution area, which
are placed through local newspapers, television, radio and yellow pages. The
Company supplements its advertising and promotion campaigns with direct mail,
telemarketing and door-to-door direct sales.
Cable
Business Strategy
The Company operates cable systems whose revenues and Location Cash Flow
it believes can be increased with limited increases in fixed costs. In general,
the Company's cable systems (i) have the capacity to offer in excess of 50
channels of programming, (ii) are "addressable" and (iii) serve communities
where off-air reception is poor. The Company's business strategy in cable is to
achieve revenue growth by (i) adding new subscribers through improved signal
quality, increases in the quality and the quantity of programming, housing
growth and line extensions and (ii) increasing revenues per subscriber through
new program offerings and rate increases. The Company emphasizes the
development of strong engineering management and the delivery of a reliable,
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<PAGE>
high-quality signal to subscribers. The Company adds new programming (including
new cable services, premium services and pay-per-view movies and events) and
invests in additional channel capacity, improved signal delivery and line
extensions to the extent it believes that it can add subscribers at a low
incremental fixed cost.
The Company believes that significant opportunities for growth in revenues
and Location Cash Flow exist in Puerto Rico from the delivery of traditional
cable services. Cable penetration in Puerto Rico averages 34% (versus a U.S.
average of 65% to 70%). The Company believes that this low penetration is due
principally to the limited amount of Spanish language programming offered on
Puerto Rico's cable systems. In contrast, Spanish language programming
represents virtually all of the programming offered by television stations in
Puerto Rico. The Company believes that cable penetration in its Puerto Rico
cable systems will increase over the next five years as it substitutes Spanish
language programming for much of the English language cable programming
currently offered. The Company may also selectively expand its presence in
Puerto Rico.
The Cable Systems
The following table sets forth general information for the Company's cable
systems.
<TABLE>
<CAPTION>
Channel Homes in Homes Passed
Cable Systems Capacity Franchise Area(1) by Cable(2)
- --------------------- ---------- ------------------- --------------
<S> <C> <C> <C>
Puerto Rico ......... 62 110,700 81,700
New England ......... (6) 22,900 22,500
---- ------- ------
Total ............... 133,600 104,200
======= =======
Basic Basic Service Average Monthly
Cable Systems Subscribers(3) Penetration(4) Revenue per Subscriber(5)
- --------------------- ---------------- ---------------- --------------------------
Puerto Rico ......... 28,100 34% $ 33.56
New England ......... 15,100 67% $ 35.38
------ -- -------
Total ............... 43,200 41% $ 34.20
====== == =======
</TABLE>
- ------------
(1) Based on information obtained from municipal offices.
(2) These data are the Company's estimates as of December 31, 1997.
(3) A home with one or more television sets connected to a cable system is
counted as one basic subscriber. Bulk accounts (such as motels or
apartments) are included on a "subscriber equivalent" basis whereby the
total monthly bill for the account is divided by the basic monthly charge
for a single outlet in the area. This information is as of February 28,
1998.
(4) Basic subscribers as a percentage of homes passed by cable.
(5) Based upon February 1998 revenues and average February 1998 subscribers.
(6) The channel capacities of the New England cable systems are 40, 50 and 64,
and represent approximately 24%, 8% and 68% of the Company's New England
cable subscribers, respectively.
Puerto Rico Cable System
The Company's Puerto Rico cable system serves franchised areas of
approximately 111,000 households consisting of the port city of Mayaguez and
ten contiguous communities, eight of which are currently served by the
Company's Puerto Rico cable system. At February 28, 1998, the system had
approximately 28,100 subscribers. The Company consolidated the headends,
offices, billing systems, channel lineup and rates of the two separate
franchised areas in May 1997. The consolidated system consists of one headend
passing approximately 82,000 homes with 740 miles of plant. The system
currently offers 62 channels of programming and has a 62 channel capacity. The
Company anticipates that the system consolidation will result in significant
expense savings and will also enable it to increase revenues in the upgraded
franchised area from the addition of pay-per-view movies, additional
programming (including Spanish language channels) and improvements in picture
quality. The Company is also in the process of expanding the system to pass an
additional 8,950 homes.
New England Cable Systems
The Company's New England cable systems consist of five headends serving
13 towns in Connecticut and Massachusetts. At February 28, 1998, these systems
had approximately 15,100 subscribers. New England cable systems historically
have had higher than national average basic penetration rates due to the
region's higher household income levels and poor off air reception. The
Company's systems offer addressable converters to all premium and pay-per-view
customers, which allow the Company to activate these services without the
requirement of a service call. The Massachusetts system was acquired in June
1991 (with the exception of the North Brookfield, Massachusetts cable system,
which was acquired in July 1992), and the Connecticut system was acquired in
August 1991.
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<PAGE>
On January 16, 1998, the Company entered into an agreement to sell its New
England cable systems to Avalon Cable of New England, L.L.C. for a purchase
price of at least $28 million and not more than $31 million, based on the
systems' cash flow for the trailing 12 months prior to closing, multiplied by
nine. The completion of the New England Cable Sale is subject to the prior
approval of the local franchising authorities and other conditions typical in
transactions of this nature, certain of which are beyond the Company's control.
It is anticipated that the New England Cable Sale will be consummated in 1998.
There can be no assurance that this sale will be consummated on the terms
described herein or at all.
TV
Business Strategy
The Company's operating strategy in television is focused on (i)
developing strong local sales forces and sales management to maximize the value
of its stations' inventory of advertising spots, (ii) improving the stations'
programming, promotion and technical facilities in order to maximize their
ratings in a cost-effective manner and (iii) maintaining strict control over
operating costs while motivating employees through the use of incentive plans,
which rewards Company employees in proportion to annual increases in Location
Cash Flow.
The Company seeks to maximize demand for each station's advertising
inventory and thereby increase its revenue per spot. Each station's local sales
force is provided incentive to attract first-time television advertisers as
well as provide a high level of service to existing advertisers. Sales
management seeks to "oversell" the Company's share of the local audience. A
television station oversells its audience share if its share of its market's
television revenues exceeds its share of the viewing devoted to all stations in
the market. The Company's stations have generally achieved oversell ratios
ranging from 110% to 200%. The Company recruits and develops sales managers and
salespeople who are aggressive, opportunistic and highly motivated.
In addition, the Company seeks to make cost-effective improvements in its
programming, promotion and transmitting and studio equipment in order to enable
its stations to increase audience ratings in its targeted demographic segments.
In purchasing programming, the Company seeks to avoid competitive program
purchases and to take advantage of group purchasing efficiencies resulting from
the Company's ownership of multiple stations. The Company also seeks to
counter-program its local competitors in order to target specific audience
segments which it believes are underserved.
The Company utilizes its own market research together with national
audience research from its national advertising sales representative and
program sources to select programming that is consistent with the demographic
appeal of its network affiliates, the tastes and lifestyles characteristic of
the Company's markets and the counter-programming opportunities it has
identified. Examples of programs purchased by the Company's stations include
"Home Improvement," "Drew Carey," "Friends," "Third Rock from the Sun,"
"Seinfeld," "The Simpsons," "Mad About You," and "Frasier" (off-network); "Star
Trek: The Next Generation" and "Baywatch" (syndication); and "Jenny Jones,"
"Rosie O'Donnell," and various game shows (first run). In addition, the
Company's stations purchase children's programs to complement the Fox
Children's Network's and WB Kids' Monday through Saturday programs. Each of the
Company's stations is its market leader in children's viewing audiences, with
popular syndicated programming such as Disney's "Aladdin" and "Gargoyles"
complementing childrens programs such as the "Mighty Morphin Power Rangers,"
"Tiny Tune Adventures," "Batman and Robin," and "R.L. Stine's Goosebumps."
The Company's acquisition strategy in television seeks to identify
stations in mid-size markets which have no more than four separately operated
competitive commercial television stations licensed to them and which have a
stable and diversified economic base. The Company has focused upon these
markets because it believes that they have exhibited consistent and stable
increases in local advertising and that television stations in them have fewer
and less aggressive direct competitors. In these markets, the Company seeks
television stations whose revenues and market revenue share can be
substantially improved with limited increases in their fixed costs.
The Company is actively seeking to acquire additional stations in new
markets and to enter into LMAs with owners of stations or construction permits
in markets where it currently owns and operates television
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<PAGE>
stations. The Company has purchased or launched TV stations affiliated with the
"emerging networks" of Fox, WB and UPN, because, while affiliates of these
networks generally have lower revenue shares than stations affiliated with ABC,
CBS and NBC, the Company believes that they will experience growing audience
ratings and therefore afford the Company greater opportunities for increasing
their revenue share. The Company is pursuing expansion in its existing markets
through LMAs because LMAs provide additional opportunities for increasing
revenue share with limited additional operating expenses. However, the FCC is
considering proposals which, if adopted by the FCC, could prohibit the Company
from expanding in its existing markets through LMAs and require the Company to
modify or terminate its existing LMAs. The Company has or plans to enter into
LMAs to program two stations as affiliates of WB and has entered into an LMA to
program an additional station as an affiliate of UPN.
The Stations
The following table sets forth general information for each of the
Company's stations.
<TABLE>
<CAPTION>
Acquisition Station Market
Station Date Affiliation Area DMA
- --------------------- ----------------- ------------- ----------------- -----
<S> <C> <C> <C> <C>
WWLF-56/
WILF-53 (6) ......... May 1993 Fox Northeastern PA 47
WOLF-38 (6) ......... (6) WB Northeastern PA 47
WPXT-51 ............. January 1996 Fox Portland, ME 79
WPME-35 (7) ......... (7) UPN Portland, ME 79
WDSI-61 ............. May 1993 Fox Chattanooga, 82
TN
WDBD-40 ............. May 1993 Fox Jackson, MS 91
WTLH-49/
WFXU (8) ............ March 1996 Fox Tallahassee, FL 116
WGFL-53 (9) ......... (9) WB Gainesville, FL 167
Number
of TV Oversell
Station Households(1) Competitors(2) Prime(3) Access(4) Ratio(5)
- --------------------- --------------- ---------------- -------------- -------------- ---------
WWLF-56/
WILF-53 (6) ......... 566,000 3 4 2(tie) 170%
WOLF-38 (6) ......... 566,000 3 N/A N/A N/A
WPXT-51 ............. 353,000 3 3(tie) 4 119%
WPME-35 (7) ......... 353,000 3 N/A N/A N/A
WDSI-61 ............. 332,000 4 4 3(tie) 164%
WDBD-40 ............. 298,000 3 2(tie) 2 124%
WTLH-49/
WFXU (8) ............ 221,000 3 2 2(tie) 118%
WGFL-53 (9) ......... 101,000 2 N/A N/A N/A
</TABLE>
- ------------
(1) Represents total homes in a DMA for each television station as estimated by
Broadcast Investment Analysts ("BIA").
(2) Commercial stations not separately operated by the Company which are
licensed to and operating in the DMA.
(3) "Prime" represents local station rank in the 18 to 49 age category during
"prime time" based on A.C. Nielsen Company ("Nielsen") estimates for May
1997.
(4) "Access" indicates local station rank in the 18 to 49 age category during
"prime time access" (6:00 p.m. to 8:00 p.m.) based on Nielsen estimates
for May 1997.
(5) The oversell ratio is the station's share of the television market net
revenue divided by its in-market commercial audience share. The oversell
ratio is calculated using 1996 BIA market data and 1996 Nielsen audience
share data.
(6) WOLF,WILF and WWLF are currently simulcast. Assuming receipt of certain FCC
approvals and no adverse change in current FCC regulatory rulings or
requirements, the Company intends to sell WOLF to another entity not owned
or controlled by the Company, and then separately to program WOLF pursuant
to an LMA as an affiliate of WB. See "CERTAIN TRANSACTIONS -- Relationship
with KB Prime Media and Affiliated Entities."
(7) The Company began programming WPME in August 1997 pursuant to an LMA as an
affiliate of UPN.
(8) The Company has an agreement to program WFXU pursuant to an LMA. It is
anticipated that WFXU will simulcast the programming of WTLH commencing in
April 1998.
(9) The Company began programming WGFL in October 1997 pursuant to an LMA as an
affiliate of WB.
<PAGE>
Northeastern Pennsylvania
Northeastern Pennsylvania is the 47th largest DMA in the U.S. comprising
17 counties in Pennsylvania with a total of 566,000 television households and a
population of 1,473,000. In the past, the economy was primarily based on steel
and coal mining, but in recent years has diversified to emphasize
manufacturing, health services and tourism. In 1996, annual retail sales in
this market totaled approximately $12.0 billion and total television
advertising revenues in the Northeastern Pennsylvania DMA increased 7.5% from
approximately $44.0 million to approximately $47.3 million. Northeastern
Pennsylvania is the only one among the top 50 DMAs in the country in which all
television stations licensed to it are UHF. In addition to WOLF, WWLF and WILF,
which are licensed to Scranton, Hazelton and Williamsport, respectively, there
are three commercial stations and one educational station operating in the
Northeastern Pennsylvania DMA. The Northeastern Pennsylvania DMA also has an
allocation for an additional channel, which is not operational.
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<PAGE>
Portland, Maine
Portland is the 79th largest DMA in the U.S., comprising 12 counties in
Maine, New Hampshire and Vermont with a total of 353,000 television households
and a population of 911,000. Portland's economy is based on financial services,
lumber, tourism, and its status as a transportation and distribution gateway
for central and northern Maine. In 1996, annual retail sales in the Portland
market totaled approximately $9.3 billion and the total television revenues in
this market increased 7.7% from approximately $41.6 million to approximately
$44.8 million. In addition to WPXT, there are four VHF and two UHF stations
authorized in the Portland DMA, including one VHF and two UHF educational
stations. The Portland DMA has allocations for five other UHF stations, four of
which are educational.
The Company entered into agreements with the holder of a construction
permit for a new TV station, WPME, licensed to Lewiston, Maine and operating in
the Portland, Maine DMA. As part of the agreements, the Company entered into an
LMA (the "Portland LMA") to provide the station with programming and retain the
advertising revenue in exchange for a fee paid to the owner. The Company also
provides certain equipment for the station which is leased to the licenseee
during the term of the LMA. The Company has certain rights to acquire the
station in the future. WPME commenced operations on August 1, 1997.
Chattanooga, Tennessee
Chattanooga is the 82nd largest DMA in the U.S., comprising 18 counties in
Tennessee, Georgia, North Carolina and Alabama with a total of 332,000
television households and a population of 865,000. Chattanooga's economy is
based on insurance and financial services in addition to manufacturing and
tourism. In 1996, annual retail sales in the Chattanooga market totaled
approximately $7.9 billion and total television revenues in this market
increased 8.3% from approximately $38.5 million to approximately $41.7 million.
In addition to WDSI, there are three VHF and four UHF stations operating in the
Chattanooga DMA, including one religious and two educational stations.
Jackson, Mississippi
Jackson is the 91st largest DMA in the U.S., comprising 24 counties in
central Mississippi with a total of 298,000 television households and a
population of 832,000. Jackson is the capital of Mississippi and its economy
reflects the state and local government presence as well as agriculture and
service industries. Because of its central location, it is also a major
transportation and distribution center. In 1996, annual retail sales in the
greater Jackson market totaled approximately $6.5 billion and total television
revenues in the market increased 6.9% from approximately $36.0 million to
approximately $38.5 million. In addition to WDBD, there are two VHF and two UHF
television stations operating in the Jackson DMA, including one educational
station. The Jackson DMA also has an allocation for an additional television
channel which is not operational.
Tallahassee, Florida
The Tallahassee DMA is the 116th largest in the U.S. comprising 18
counties in northern Florida and southern Georgia with a total of 221,000
television households and a population of 599,000. Tallahassee is the state
capitol of Florida and its major industries include state and local government
as well as firms providing commercial service to North Florida's cattle,
lumber, tobacco and farming industries. In 1996, annual retail sales in this
market totaled approximately $4.4 billion and total television advertising
revenues increased 7.0% from approximately $19.9 million in 1995 to
approximately $21.3 million. In addition to WTLH, which is licensed to
Bainbridge, Georgia, there are two VHF and two UHF television stations
operating in the Tallahassee DMA, including one educational VHF station. An
additional station licensed to Valdosta, Georgia broadcasts from a transmission
facility located in the Albany, Georgia DMA. The Tallahassee DMA has
allocations for four UHF stations that are not operational, one of which is
educational.
In March 1996, the Company acquired the principal tangible assets of WTLH
and in August 1996, the Company acquired WTLH's FCC licenses and its Fox
affiliation agreements. The Company has filed an application which will enable
the Company to move WTLH's tower and transmitter facilities to a site closer to
Tallahassee and to increase its tower height and power. The Company intends to
relocate WTLH's transmitter and tower in 1998 to increase its audience coverage
in the Tallahassee market subject to FCC approval. In August 1996, the Company
also acquired the license for translator station W53HI, Valdosta, Georgia. In
October 1996,
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the FCC consented to the assignment of the construction permit for translator
station W13BO, Valdosta, Georgia. Special temporary authorities have been
granted by the FCC for continued operation of both translators at relocated
facilities. Such authorities expire September 5, 1998.
In May 1997, the Company signed an agreement by which it received an
option to acquire the construction permit for unbuilt TV station WFXU, Live
Oak, Florida, and an LMA to program the station once it has been constructed.
The Company will construct the station and lease the facilities to the licensee
during the term of the LMA. The Company intends to assign its option to another
entity who will exercise that option and, if approved by the FCC, acquire the
station's license. The Company plans to operate the station pursuant to the
LMA. See CERTAIN TRANSACTIONS -- Relationship with KB Prime Media and
Affiliated Entities." Pursuant to the LMA, it is anticipated that WFXU will
rebroadcast WTLH. The WFXU construction permit was to expire on November 1,
1997, however the holder of the construction permit received extensions, from
the FCC, of this permit until July 15, 1998. If construction is not complete by
July 15, 1998, it will need to seek another extension. If that extension were
to be denied by the FCC, the station could not be constructed or programmed by
the Company.
Gainesville, Florida
The Gainesville DMA is the 167th largest in the U.S., comprising four
counties in northern Florida with a total of 101,000 television households and
a population of 257,000. Gainesville is the home of the Gainesville campus of
the University of Florida and its economy reflects the educational
institution's presence as well as that of healthcare and other service
industries. In 1996, annual retail sales in this market totaled approximately
$2.0 billion and total television advertising revenues increased 7.7% from
approximately $13.0 million to approximately $14.0 million. In addition to
WGFL, there is one VHF station and two UHF stations operating in the
Gainesville DMA, including one VHF educational station. The Gainesville DMA has
allocations for two additional UHF stations that are not operational, one of
which is religious.
The Company entered into agreements with the holder of a construction
permit for WGFL, a new TV station licensed to High Springs, Florida and
operating in the Gainesville market. As part of these agreements, the Company
has entered into an LMA (the "Gainesville LMA") to provide the station with
programming and retain the advertising revenue in exchange for a fee paid to
the owner of the station. The Company also provides certain equipment for the
station, which is leased to the licensee during the LMA term. The Company has
certain rights to acquire the license in the future. WGFL commenced operations
pursuant to the LMA on October 17, 1997.
Recent and Pending Transactions
Completed Sale
Effective January 31, 1997, the Company sold substantially all the assets
of its New Hampshire cable system to State Cable TV Corporation for
approximately $6.9 million in cash, net of certain selling costs. The Company
recognized a gain on the transaction of approximately $4.5 million.
Completed Acquisitions
On January 31, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Indiana and the related assets and liabilities in exchange for approximately
$8.8 million in cash and 466,667 shares of the Company's Class A Common Stock.
On February 14, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Mississippi and the related assets in exchange for approximately $14.8 million
in cash.
As of March 10, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Arkansas, Virginia and West Virginia and the related
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assets in exchange for approximately $10.4 million in cash, $200,000 in assumed
liabilities, $3.0 million in preferred stock of a subsidiary of Pegasus and
warrants to purchase a total of 283,969 shares of the Company's Class A Common
Stock. The $3.0 million in preferred stock of a subsidiary of Pegasus has been
accounted for as a minority interest.
As of April 9, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Georgia and the related assets in exchange for approximately $3.3 million in
cash, $143,000 in assumed liabilities, 42,187 shares of the Company's Class A
Common Stock, and a $600,000 obligation, payable over four years, for
consultancy and non-compete agreements.
As of May 9, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Colorado, Florida, Maryland, Minnesota, Nevada, New Hampshire, Oklahoma, Texas,
Virginia, Washington, Wisconsin and Wyoming and the related assets in exchange
for approximately $18.6 million in cash, $502,000 in assumed liabilities, a
$350,000 note due January 1998, $200,000 of the Company's Class A Common Stock,
and $600,000 in cash for consultancy and non-compete agreements.
As of July 9, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Ohio and Texas and the related assets in exchange for approximately $17.4
million in cash and $503,000 in assumed liabilities.
As of August 8, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Indiana, Minnesota and South Dakota and the related assets in exchange for
approximately $15.5 million in cash, $464,000 in assumed liabilities, a
$988,000 note due January 1998, and $750,000 in cash for endorsement and
non-compete agreements.
As of September 8, 1997, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Illinois, Minnesota and Utah and the related assets in exchange for
approximately $9.1 million in cash and $165,000 in assumed liabilities.
As of October 8, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Alabama and Texas and the related assets in exchange for approximately $24.2
million in cash, $219,000 in assumed liabilities, a $2.2 million note, payable
over four years, and $589,000 in cash and a $772,000 obligation, payable over
four years, for consultancy and non-compete agreements.
Effective October 31, 1997, the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Georgia and the related assets and liabilities in exchange for
approximately $6.4 million in cash and 397,035 shares of the Company's Class A
Common Stock.
As of November 7, 1997, the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Nebraska, Minnesota, Utah and Wyoming and the related assets in
exchange for approximately $3.1 million in cash, $147,000 in assumed
liabilities, a $1.7 million note, payable over two years, and a $446,000 note
due November 2000.
As of January 7, 1998, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Minnesota and the related assets in exchange for approximately $1.9 million in
cash and $32,000 in assumed liabilities.
LMAs
On August 1, 1997, Pegasus commenced operations of TV station WPME, which
is affiliated with UPN. WPME is in the Portland, Maine DMA and is being
operated under an LMA. WPME's offices, studio and transmission facilities are
co-located with WPXT, a TV station in the Portland market the Company has owned
and operated since January 1996.
On October 17, 1997, Pegasus commenced operations of TV station WGFL,
which is affiliated with WB. WGFL is in the Gainesville, Florida DMA and is
being operated under a LMA.
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Pending Sale
On January 16, 1998, the Company entered into an agreement to sell its
remaining New England cable systems for a purchase price of at least $28
million and not more than $31 million, based on the systems' cash flow for the
trailing 12 months prior to closing, multiplied by nine.
Pending Acquisitions
Pending DBS Acquisitions. As of March 12, 1998, the Company has entered
into 14 letters of intent or definitive agreements to acquire, from various
independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of Idaho, Nebraska, New Mexico, Oregon, South Dakota and
Texas and the related assets (the "Pending Pegasus DBS Acquisitions") in
exchange for approximately $52.9 million of cash, $10.3 million in promissory
notes and $854,000 in shares of Class A Common Stock. Each of the Pending
Pegasus DBS Acquisitions for which there is only a letter of intent is subject
to negotiation of a definitive agreement, and all of the Pending Pegasus DBS
Acquisitions are subject, if not already obtained, to the prior approval of
Hughes Electronics Corporation or one of its subsidiaries ("Hughes") and the
NRTC. In addition to these conditions, each of the Pending Pegasus 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 Pegasus DBS
Acquisitions or, if entered into, that all or any of the Pending Pegasus DBS
Acquisitions will be completed.
DTS Acquisition. On January 8, 1998, the Company entered into an agreement
and plan of merger (the "Agreement and Plan of Merger") to acquire Digital
Television Services, Inc. ("DTS"), for approximately 5.5 million shares of
Pegasus' Class A Common Stock. As of December 31, 1997, DTS' operations pro
forma for its then pending acquisition consisted of providing DIRECTV services
to approximately 131,000 subscribers in certain rural areas of 11 states in
which DTS holds the exclusive right to provide such services. Upon completion
of the acquisition of DTS (the "DTS Acquisition"), DTS will become a wholly
owned subsidiary of Pegasus.
Public Offerings
On January 27, 1997, the Company consummated an offering of 100,000 units
(the "Unit Offering") in which it sold 100,000 shares of 12.75% Series A
Cumulative Exchangeable Preferred Stock (the "Series A Preferred Stock") and
warrants to purchase 193,600 shares of Class A Common Stock at an exercise
price of $15 per share to the public at a price of $1,000 per unit, resulting
in net proceeds to the Company of $95.8 million. The Company applied the net
proceeds from the Unit Offering as follows: (i) $30.1 million to the repayment
of all outstanding indebtedness under the PM&C Credit Facility and expenses
related thereto, and (ii) $56.5 million for the payment of the cash portion of
the purchase price for the acquisition of DBS assets from nine independent
DIRECTV providers. The remaining net proceeds were used for working capital,
general corporate purposes and to finance other acquisitions.
On October 21, 1997, Pegasus completed the Senior Notes Offering in which
it sold $115.0 million of its Series A Senior Notes, resulting in net proceeds
to the Company of approximately $111.0 million. The Company applied the net
proceeds from the Senior Notes Offering as follows: (i) $94.2 million to the
repayment of all outstanding indebtedness under the PSH Credit Facility, and
(ii) $16.8 million for the payment of the cash portion of the purchase price
for the acquisition of DBS assets from various independent DIRECTV providers.
On February 26, 1998, pursuant to a registered exchange offer, Pegasus
exchanged all $115.0 million of its Series A Senior Notes for $115.0 million of
its Series B Senior Notes. The Series B Senior Notes have substantially the
same terms and provisions as the Series A Senior Notes. No gain or loss was
recorded in connection with the exchange of the notes.
New Credit Facility
In December 1997, PM&C entered into the Credit Facility, a $180.0 million
six-year senior revolving credit facility, which is collateralized by
substantially all of the assets of PM&C and its subsidiaries. Interest on the
Credit Facility is, at the Company's option, at either the bank's base rate
plus an applicable margin or LIBOR
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plus an applicable margin. The Credit Facility is subject to certain financial
covenants as defined in the loan agreement, including a debt to adjusted cash
flow covenant. The Credit Facility will be used to finance future acquisitions
and for working capital, capital expenditures and general corporate purposes.
There were no borrowings outstanding on December 31, 1997.
Competition
The Company's TV stations compete for audience share, programming and
advertising revenue with other television stations in their respective markets,
and compete for advertising revenue with other advertising media, such as
newspapers, radio, magazines, outdoor advertising, transit advertising, yellow
page directories, direct mail and local cable systems. Competition for audience
share is primarily based on program popularity, which has a direct effect on
advertising rates. Advertising rates are based upon the size of the market in
which the station operates, a program's popularity among the viewers that an
advertiser wishes to attract, the number of advertisers competing for the
available time, the demographic composition of the market served by the
station, the availability of alternative advertising media in the market area,
aggressive and knowledgeable sales forces and the development of projects,
features and programs that tie advertiser messages to programming. The Company
believes that its focus on a limited number of markets and the strength of its
programming allows it to compete effectively for advertising within its
markets.
DIRECTV faces competition from cable (including in New England, the
Company's cable systems), wireless cable and other microwave systems and other
DTH and DBS operators. Cable currently possesses certain advantages over
DIRECTV in that cable is an established provider of programming, offers local
programming and does not require that its subscribers purchase receiving
equipment in order to begin receiving cable services. DIRECTV, however, offers
significantly expanded service compared to most cable systems. Additionally,
upgrading cable companies' coaxial systems to offer expanded digital video and
audio programming similar to that offered by DIRECTV will be costly. While
local programming is not currently available through DIRECTV directly, DIRECTV
provides programming from affiliates of national broadcast networks to
subscribers who are unable to receive networks over-the-air and who have not
subscribed to cable. DIRECTV faces additional competition from wireless cable
systems such as multichannel multipoint distribution systems ("MMDS") which use
microwave frequencies to transmit video programming over the air from a tower
to specially equipped homes within the line of sight of the tower. The Company
is unable to predict whether wireless video services, such as MMDS, will
continue to develop in the future or whether such competition will have a
material impact on the operations of the Company.
DIRECTV also faces competition from other providers and potential
providers of DBS services. Of the eight orbital locations within the BSS band
allocated for U.S. licensees, three orbital positions enable full coverage of
the contiguous forty-eight U.S states ("CONUS"). The remaining orbital
positions are situated to provide coverage to either the eastern or western
U.S., but cannot provide full coverage of the contiguous U.S. This provides
companies licensed to the three orbital locations with full coverage a
significant advantage in providing DBS service to the entire U.S., as they must
place satellites in service at only one and not two orbital locations. The
orbital location licensed to DIRECTV and USSB is generally recognized as the
most centrally located for coverage of the contiguous U.S.
In March 1996, EchoStar Communications Corp. ("EchoStar") commenced
national broadcasting of programming and currently broadcasts over 120 video
channels and 30 audio channels. EchoStar has 21 licensed channel frequencies at
the 119- W.L. full-CONUS orbital position and has 69 frequencies in other
partial CONUS orbital locations. At December 31, 1997, EchoStar reported
approximately 1.0 million subscribers.
On June 11, 1997, PrimeStar Partners ("PrimeStar") announced that it had
entered into an agreement to combine its assets with American Sky Broadcasting
("ASkyB"). According to press releases, each of PrimeStar's cable company
partners will contribute its PrimeStar customers and partnership interests into
a newly formed entity. ASkyB has announced that it will contribute two
satellites under construction and 28 full-CONUS frequencies at the 110o W.L.
orbital location. This proposed transaction requires certain federal regulatory
approvals. In addition, Tempo Satellite, Inc. has a license for a satellite
using 11 full-CONUS frequencies at the 119o W.L. orbital location, and recently
launched a satellite to that location. PrimeStar reported having approximately
2.0 million subscribers at February 24, 1998.
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Cable operators face competition from television stations, private
satellite master antenna television ("SMATV") systems that serve condominiums,
apartment complexes and other private residential developments, wireless cable,
DTH and DBS systems. As a result of the passage of the Telecommunications Act
1996 (the "1996 Act"), electric utilities and telephone companies will be
allowed to compete directly with cable operators both inside and outside of
their telephone service areas. In September 1996, an affiliate of Southern New
England Telephone Company, which is the dominant provider of local telephone
service in Connecticut, was granted a non-exclusive franchise to provide cable
television service throughout Connecticut. Currently, there is only limited
competition from SMATV, wireless cable, DTH and DBS systems in the Company's
franchise areas. The only DTH and DBS systems with which the Company's cable
systems currently compete are DIRECTV, USSB, EchoStar and PrimeStar. However,
the Company cannot predict whether additional competition will develop in its
service areas in the future. Additionally, cable systems generally operate
pursuant to franchises granted on a non-exclusive basis and, thus, more than
one applicant could secure a cable franchise for an area at any time. It is
possible that a franchising authority might grant a second franchise to another
cable company containing terms and conditions more favorable than those
afforded the Company. Although the potential for "overbuilds" exists, there are
presently no overbuilds in any of the Company's franchise areas and, except as
noted above with respect to its Connecticut franchise, the Company is not aware
of any other company that is actively seeking franchises for areas currently
served by the Company.
Both the television and cable industries are continuously faced with
technological change and innovation, the possible rise in popularity of
competing entertainment and communications media, and governmental restrictions
or actions of federal regulatory bodies, including the FCC, any of which could
possibly have a material effect on the Company's operations and results.
Licenses, LMAs, DBS Agreements and Cable Franchises
TV
FCC Licensing. The broadcast television industry is subject to regulation
by the FCC pursuant to the Communications Act of 1934, as amended (the
"Communications Act"). Approval by the FCC is required for the issuance,
renewal, transfer and assignment of broadcast station operating licenses. The
FCC adopted a Report and Order on January 24, 1997 extending television license
terms to eight years as provided in the 1996 Act, reserving the right to renew
licenses for shorter terms. While in the vast majority of cases such licenses
are renewed by the FCC, there can be no assurance that the Company's licenses
will be renewed at their expiration dates or that such renewals will be for
full terms. The licenses with respect to TV stations WOLF/WWLF/WILF, WPXT,
WDSI, WTLH and WDBD are scheduled to expire on August 1, 1999, April 1, 1999,
August 1, 2005, April 1, 2005 and June 1, 1997, respectively. An application
has been filed with the FCC for renewal of the WDBD license and the station has
continuing authority to operate pending the FCC's action on the renewal
application. See "BUSINESS OF THE COMPANY -- TV."
Fox Affiliation Agreement. Each of the Company's TV stations which are
affiliated with Fox is a party to a substantially identical station affiliation
agreement with Fox (as amended, the "Fox Affiliation Agreements"). Each Fox
Affiliation Agreement provides the Company's Fox-affiliated stations with the
right to broadcast all programs transmitted by Fox, on behalf of itself and its
wholly-owned subsidiary, the Fox Children's Network, Inc. ("FCN"), which
include programming from Fox as well as from FCN. In exchange, Fox has the
right to sell a substantial portion of the advertising time associated with
such programs and to retain the revenue from the advertising it has sold. The
stations are entitled to sell the remainder of the advertising time and retain
the associated advertising revenue. The stations are also compensated by Fox
according to a ratings-based formula for Fox programming and a share of the
programming net profits of FCN programming, as specified in the Fox Affiliation
Agreements.
Each Fox Affiliation Agreement is for a term ending October 31, 1998 with
the exception of the WTLH Fox Affiliation Agreement, which expires on December
31, 2000. The Fox Affiliation Agreements are renewable for a two-year
extension, at the discretion of Fox and upon acceptance by the Company. The Fox
Affiliation Agreements may be terminated generally (a) by Fox upon (i) a
material change in the station's transmitter location, power, frequency,
programming format or hours of operation, with 30 days' written notice, (ii)
acquisition by Fox, directly or indirectly, of a significant ownership and/or
controlling interest in any television station in
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the same market, with 60 days' written notice, (iii) assignment or attempted
assignment by the Company of the Fox Affiliation Agreements, with 30 days
written notice, (iv) three or more unauthorized preemptions of Fox programming
within a 12-month period, with 30 days written notice, or (b) by either Fox or
the affiliate station upon occurrence of a force majeure event which
substantially interrupts Fox's ability to provide programming or the station's
ability to broadcast the programming. The Company's Fox Affiliation Agreements
have been renewed in the past. The Company believes that it enjoys good
relations with Fox.
Each Fox Affiliation Agreement provides the Company's Fox-affiliated
stations with all programming which Fox and FCN make available for broadcasting
in the community to which the station is licensed by the FCC. Fox has committed
to supply approximately six hours of programming per day during specified time
periods. Each of the Company's stations have agreed to broadcast all such Fox
programs in their entirety, including all commercial announcements. In return
for a station's full performance of its obligations under its respective
affiliation agreement, Fox will pay such station compensation determined in
accordance with Fox's current, standard, performance-based station compensation
formula.
As part of the agreement with Fox to extend the stations' Fox Affiliation
Agreements, each of the stations granted Fox the right to negotiate with the
cable operators in their respective markets for retransmission consent
agreements. Under the Fox "Win/Win Plan," the cable operators received the
right to retransmit the programming of the Company's TV stations in exchange
for the carriage by the cable operators of a new cable channel owned by Fox.
The Company's TV stations are to receive consideration from Fox based on the
number of subscribers carrying the new Fox channel within the stations' market.
Fox has reached agreements in principle with most of the largest cable
operators in the country.
UPN Affiliation Agreement. The Portland TV station programmed by the
Company pursuant to an LMA, WPME, is affiliated with UPN pursuant to a station
affiliation agreement (the "UPN Affiliation Agreement"). Under the UPN
Affiliation Agreement, UPN grants the Company an exclusive license to broadcast
all programming, including commercial announcements, network identifications,
promotions and credits, which UPN makes available to serve the community of
Lewiston, Maine. UPN has committed to supply approximately four hours of
programming during specified time periods. The UPN Affiliation Agreement allots
to each party a specified amount of advertising time during each hour of
programming, and each party is entitled to the revenue realized from its sale
of advertising time.
The term of the UPN Affiliation Agreement expires January 15, 2001, and
automatically renews for a three-year period unless either party has given
written notice to the other party of its election not to renew. The UPN
Affiliation Agreement may be terminated (a) by UPN, upon prior written notice,
in the event of (i) a material reduction or modification of WPME's transmitter
location, power, frequency, programming format or hours of operation, (ii) any
assignment or transfer of control of the Company's license, (iii) three or more
unauthorized preemptions of UPN programming by the Company during any 12-month
period, which have actually occurred or which UPN reasonably believes will
occur, or (b) by either UPN or the Company upon the occurrence of a force
majeure event that causes UPN substantially to fail to provide programming or
the Company substantially to fail to telecast UPN's programming, for either (i)
four consecutive weeks or (ii) an aggregate of six weeks in any 12-month
period.
WB Affiliation Agreement. The Company has entered into commitments to
program TV stations WOLF and WGFL as affiliates of WB. The Company is in the
process of negotiating affiliation agreements with respect to these stations.
TV station WGFL has only committed to be an affiliate of WB for one year.
LMAs. Current FCC rules preclude the ownership of more than one
television station in a market, unless such stations are operated as a
satellite of a primary station. WWLF and WILF are currently authorized as
satellites of WOLF. In recent years, in a number of markets across the country,
certain television owners have entered into agreements to provide the bulk of
the broadcast programming on stations owned by other licensees, and to retain
the advertising revenues generated from such programming. Such agreements are
commonly referred to as Local Marketing Agreements, or LMAs.
When operating pursuant to an LMA, while the bulk of the programming is
provided by someone other than the licensee of the station, the station
licensee must retain control of the station for FCC purposes. Thus, the
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licensee has the ultimate responsibility for the programming broadcast on the
station and for the station's compliance with all FCC rules, regulations, and
policies. The licensee must retain the right to preempt programming supplied
pursuant to the LMA where the licensee determines, in its sole discretion, that
the programming does not promote the public interest or where the licensee
believes that the substitution of other programming would better serve the
public interest. The licensee must also have the primary operational control
over the transmission facilities of the station.
The Company programs WPME, Portland and WGFL, Gainesville, and expects to
program other television stations, through the use of LMAs, but there can be no
assurance that the licensees of such stations will not unreasonably exercise
their right to preempt the programming of the Company, or that the licensees of
such stations will continue to maintain the transmission facilities of the
stations in a manner sufficient to broadcast a high quality signal over the
station. As the licensee must also maintain all of the qualifications necessary
to be a licensee of the FCC, and as the principals of the licensee are not
under the control of the Company, there can be no assurances that these
licenses will be maintained by the entities which currently hold them.
Pursuant to the 1996 Act, the continued performance of then existing LMAs
was generally grandfathered. The FCC suggested in a rulemaking proposal that
LMAs entered into after November 5, 1996 will not be grandfathered. The Company
cannot predict whether the Portland LMA, or its other LMAs, will be
grandfathered. Currently, television LMAs are not considered attributable
interests under the FCC's multiple ownership rules. However, the FCC is
considering proposals which would make LMAs attributable, as they generally are
in the radio broadcasting industry. If the FCC were to adopt an order that
makes such interests attributable, without modifying its current prohibitions
against the ownership of more than one television station in a market, the
Company could be prohibited from entering into such arrangements with other
stations in markets in which it owns television stations and could be required
to modify or terminate existing LMA arrangements. Such a change in the FCC
rules could affect the contemplated LMA with the new owner of WOLF, and could
affect the LMAs with the owners of WFXU and WPME.
DBS Agreements
Prior to the launch of the first DIRECTV satellite in 1993, Hughes entered
into various agreements intended to assist it in the introduction of DIRECTV
services, including agreements with RCA/Thomson for the development and
manufacture of DSS units and with USSB for the sale of five transponders on the
first satellite. At this time, Hughes also offered the NRTC and its members and
affiliate members the opportunity to become the exclusive providers of DIRECTV
services in rural areas of the U.S. in which an NRTC member purchased such a
right. The NRTC is a cooperative organization whose members and affiliate
members are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the U.S. Pursuant to the DBS
Agreements, participating NRTC members and affiliate members acquired the
exclusive right to provide DIRECTV programming services to residential and
commercial subscribers in certain service areas. Service areas purchased by
participating NRTC members and affiliate members comprise approximately 9
million television households and were acquired for aggregate purchase payments
exceeding $100 million.
The DBS Agreements provide the NRTC and participating NRTC members and
affiliate members in their service areas substantially all of the rights and
benefits otherwise retained by DIRECTV in other areas, including the right to
set pricing (subject to certain obligations to honor national pricing on
subscriptions sold by national retailers), to bill subscribers and retain all
subscription remittances and to appoint sales agents within their distribution
areas (subject to certain obligations to honor sales agents appointed by
DIRECTV and its regional SMAs). In exchange, the NRTC and participating NRTC
members and affiliate members paid to DIRECTV a one-time purchase price. In
addition to the purchase price, NRTC members and affiliate members are required
to reimburse DIRECTV for the allocable share of certain common expenses (such
as programming, satellite-specific costs and expenses associated with the
billing and authorization systems) and to remit to DIRECTV a 5% royalty on
subscription revenues.
The DBS Agreements authorize the NRTC and participating NRTC members and
affiliate members to provide all commercial services offered by DIRECTV that
are transmitted from the frequencies that the FCC has authorized for DIRECTV's
use at its present orbital location for a term running through the life of
DIRECTV's current satellites. The NRTC has advised the Company that the NRTC
Agreement also provides the NRTC a
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right of first refusal to acquire comparable rights in the event that DIRECTV
elects to launch successor satellites upon the removal of the present
satellites from active service. The financial terms of any such purchase are
likely to be the subject of negotiation and the Company is unable to predict
whether substantial additional expenditures of the NRTC will be required in
connection with the exercise of such right of first refusal. Finally, under a
separate agreement with Hughes (the "Dealer Agreement"), the Company is an
authorized agent for sale of DIRECTV programming services to subscribers
outside of its service area on terms comparable to those of DIRECTV's other
authorized sales agents.
The NRTC Member Agreement terminates when the DIRECTV satellites are
removed from their orbital location, although under the Dealer Agreement the
right of the Company to serve as a DIRECTV sales agent outside of its
designated territories may be terminated upon 60 days' notice by either party.
If the satellites are removed earlier than June 2004, the tenth anniversary of
the commencement of DIRECTV services, the Company will receive a prorated
refund of its original purchase price for the DIRECTV rights. The NRTC Member
Agreement may be terminated prior to the expiration of its term as follows: (a)
if the Hughes/NRTC Agreement is terminated because of a breach by DIRECTV, the
NRTC may terminate the NRTC Member Agreement, but the NRTC will be responsible
for paying to the Company its pro rata portion of any refunds that the NRTC
receives from DIRECTV, (b) if the Company fails to make any payment due to the
NRTC or otherwise breaches a material obligation of the NRTC Member Agreement,
the NRTC may terminate the NRTC Member Agreement in addition to exercising
other rights and remedies against the Company and (c) if the Hughes/NRTC
Agreement is terminated because of a breach by the NRTC, DIRECTV is obligated
to continue to provide DIRECTV services to the Company (i) by assuming the
NRTC's rights and obligations under the NRTC Member Agreement or (ii) under a
new agreement containing substantially the same terms and conditions as the
NRTC Member Agreement.
The Company is not permitted under the NRTC Member Agreement or the Dealer
Agreement to assign or transfer, directly or indirectly, its rights under these
agreements without the prior written consent of the NRTC and Hughes, which
consents cannot be unreasonably withheld.
The NRTC has adopted a policy requiring any party acquiring DIRECTV
distribution rights from an NRTC member or affiliate member to post a letter of
credit to secure payment of NRTC's billings if the acquiring person's monthly
payments to the NRTC (including payments on account of the acquired territory)
exceeds a specified amount. Pursuant to this policy, the Company has posted a
letter of credit of approximately $8.5 million in connection with certain of
the Completed Pegasus DBS Acquisitions and will be required to increase the
amount of the letter of credit to approximately $18.0 million after completing
the Pending Pegasus DBS Acquisitions and the Merger. Although this requirement
can be expected to reduce somewhat the Company's acquisition capacity inasmuch
as it ties up capital that could otherwise be used to make acquisitions, the
Company expects this reduction to be manageable. There can be no assurance,
however, that the NRTC will not in the future seek to institute other policies,
or to change this policy, in ways that would be material to the Company.
Cable Franchises
Cable systems are generally constructed and operated under non-exclusive
franchises granted by state or local governmental authorities. The franchise
agreements may contain many conditions, such as the payment of franchise fees;
time limitations on commencement and completion of construction; conditions of
service, including the number of channels, the carriage of public, educational
and governmental access channels, the carriage of broad categories of
programming agreed to by the cable operator, and the provision of free service
to schools and certain other public institutions; and the maintenance of
insurance and indemnity bonds. Certain provisions of local franchises are
subject to limitations under the 1992 Cable Act.
The Company holds eleven cable franchises, all of which are non-exclusive.
The Cable Communications Policy Act of 1984 (the "1984 Cable Act") prohibits
franchising authorities from imposing annual franchise fees in excess of 5% of
gross revenues and permits the cable system operator to seek renegotiation and
modification of franchise requirements if warranted by changed circumstances.
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The table below groups the Company's franchises by date of expiration and
presents the number of franchises per group and the approximate number and
percent of basic subscribers of the Company in each group as of December 31,
1997.
Year of Number of Percent of
Franchise Number of Basic Basic
Expiration Franchises Subscribers Subscribers
---------- ------------ ------------- ------------
1997-1998 ................... 1 2,900 7%
1999-2002 ................... 3 9,500 22%
2003 and thereafter ......... 7 30,800 71%
- ------ --
Total ........... ......... 11 43,200 100%
== ====== ===
The Company has never had a franchise revoked. All of the franchises of
the systems eligible for renewal have been renewed or extended at or prior to
their stated expirations. The 1992 Cable Act provides, among other
things, for an orderly franchise renewal process in which renewal will not be
unreasonably withheld. In addition, the 1992 Cable Act establishes
comprehensive renewal procedures which require that an incumbent franchisee's
renewal application be assessed on its own merit and not as part of a
comparative process with competing applications. The Company believes that it
has good relations with its franchising authorities.
Legislation and Regulation
On February 1, 1996, the Congress passed the 1996 Act. On February 8,
1996, President Clinton signed it into law. This new law has altered and will
alter federal, state and local laws and regulations regarding
telecommunications providers and services, including the Company and the cable
television and other telecommunications services provided by the Company. There
are numerous rulemakings undertaken and to be undertaken by the FCC which will
interpret and implement the provisions of the 1996 Act. It is not possible at
this time to predict the outcome of such rulemakings that remain pending.
TV
The ownership, operation and sale of television stations, including those
licensed to subsidiaries of the Company, are subject to the jurisdiction of the
FCC under authority granted it pursuant to the Communications Act. Matters
subject to FCC oversight include, but are not limited to, the assignment of
frequency bands for broadcast television; the approval of a television
station's frequency, location and operating power; the issuance, renewal,
revocation or modification of a television station's FCC license; the approval
of changes in the ownership or control of a television station's licensee; the
regulation of equipment used by television stations; and the adoption and
implementation of regulations and policies concerning the ownership, operation
and employment practices of television stations. The FCC has the power to
impose penalties, including fines or license revocations, upon a licensee of a
television station for violations of the FCC's rules and regulations.
The following is a brief summary of certain provisions of the
Communications Act and of specific FCC regulations and policies affecting
broadcast television. Reference should be made to the Communications Act, FCC
rules and the public notices and rulings of the FCC for further information
concerning the nature and extent of FCC regulation of broadcast television
stations.
License Renewal. Under law in effect prior to the 1996 Act, television
station licenses were granted for a maximum allowable period of five years and
were renewable thereafter for additional five year periods. The 1996 Act,
however, authorized the FCC to grant television broadcast licenses, and
renewals thereof, for terms of up to eight years. The FCC has extended
television license terms to the eight-year maximum provided in the 1996 Act,
reserving the right to renew licenses for shorter terms. The FCC may revoke or
deny licenses, after a hearing, for serious violations of its regulations, and
it may impose fines on licensees for less serious infractions. Petitions to
deny renewal of a license may be filed on or before the first day of the last
month of a license term. Generally, however, in the absence of serious
violations of FCC rules or policies, license renewal is expected in the
ordinary course. The 1996 Act prohibits the FCC from considering competing
applications for the frequency used by the renewal applicant if the FCC finds
that the station seeking renewal has served the public interest, convenience
and necessity, that there have been no serious violations by the licensee of
the Communications Act
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or the rules and regulations of the FCC, and that there have been no other
violations by the licensee of the Communications Act or the rules and
regulations of the FCC that, when taken together, would constitute a pattern of
abuse. The licenses with respect to TV stations WOLF/WWLF/WILF, WPXT, WDSI,
WTLH and WDBD are scheduled to expire on August 1, 1999, April 1, 1999, August
1, 2005, April 1, 2005 and June 1, 1997, respectively. An application for
renewal of the WDBD license is on file with the FCC and the station has
continuing authority to operate pending FCC action on such application. The
Company is not aware of any facts or circumstances that might reasonably be
expected to prevent any of its stations from having its current license renewed
at the end of its respective term.
Ownership Matters. The Communications Act contains a number of
restrictions on the ownership and control of broadcast licenses. The
Communications Act prohibits the assignment of a broadcast license or the
transfer of control of a broadcast licensee without the prior approval of the
FCC. The Communications Act and the FCC's rules also place limitations on alien
ownership; common ownership of broadcast, cable and newspaper properties;
ownership by those not having the requisite "character" qualifications and
those persons holding "attributable" interests in the licensee.
Attribution Rules. The FCC generally applies its ownership limits to
"attributable" interests held by an individual, corporation, partnership or
other association. In the case of corporations holding (or through subsidiaries
controlling) broadcast licenses, the interests of officers, directors and those
who, directly or indirectly, have the right to vote 5% or more of the
corporation's stock (or 10% or more of such stock in the case of insurance
companies, investment companies and bank trust departments that are passive
investors) are generally attributable, except that, in general, no minority
voting stock interest will be attributable if there is a single holder of more
than 50% of the outstanding voting power of the corporation. The FCC has
outstanding a notice of proposed rulemaking that, among other things, seeks
comment on whether the FCC should modify its attribution rules by (i)
restricting the availability of the single majority shareholder exemption and
(ii) attributing under certain circumstances certain interests such as
non-voting stock or debt. The Company cannot predict the outcome of this
proceeding or how it will affect the Company's business.
Alien Ownership Restrictions. The Communications Act restricts the ability
of foreign entities to own or hold interests in broadcast licenses. Foreign
governments, representatives of foreign governments, non-citizens and
representatives of non-citizens, corporations and partnerships organized under
the laws of a foreign nation are barred from holding broadcast licenses.
Non-citizens, foreign governments, foreign corporations and representatives of
any of the foregoing, collectively, may directly or indirectly own or vote up
to 20% of the capital stock of a broadcast licensee. In addition, a broadcast
license may not be granted to or held by any corporation that is controlled,
directly or indirectly, by any other corporation more than one-fourth of whose
capital stock is owned or voted by non-citizens or their representatives, by
foreign governments or their representatives, or by non-U.S. corporations, if
the FCC finds that the public interest will be served by the refusal or the
revocation of such license. The FCC has interpreted this provision of the
Communications Act to require an affirmative public interest finding before a
broadcast license may be granted to or held by any such corporation. To the
Company's knowledge, the Commission has made such a finding in only one case
involving a broadcast licensee. Because of these provisions, Pegasus may be
prohibited from having more than one-fourth of its stock owned or voted
directly or indirectly by non-citizens, foreign governments, foreign
corporations or representatives of any of the foregoing.
Multiple Ownership Rules. FCC rules limit the number of television
stations any one entity can acquire or own. The FCC's television national
multiple ownership rule limits the combined audience of television stations in
which an entity may hold an attributable interest to 35% of total U.S. audience
reach. The FCC's television multiple ownership local contour overlap rule
generally prohibits ownership of attributable interests by a single entity in
two or more television stations with certain overlapping contours; however,
changes in these rules are under consideration, but the Company cannot predict
the outcome of the proceeding in which such changes are being considered.
Cross-Ownership Rules. FCC rules have generally prohibited or restricted
the cross-ownership, operation or control of a radio station and a television
station serving the same geographic market, of a television station and a cable
system serving the same geographic market, and of a television station and a
daily newspaper serving the same geographic market. As required by the 1996
Act, the FCC has amended its rules to allow a person
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or entity to own or control a network of broadcast stations and a cable system.
In addition, the 1996 Act eliminates the statutory prohibition against the
ownership of television stations and cable systems in the same geographic
market, although FCC rules prohibiting such ownership are still in place. The
1996 Act also directs the FCC to presumptively waive, in the top 50 markets,
its prohibition on ownership of a television and one AM or one FM station in
the same geographic market. Under these rules, absent waivers, the Company
would not be permitted to acquire any daily newspaper, radio broadcast station
or cable system in a geographic market in which it now owns or controls any TV
properties. The FCC is currently considering a rulemaking to change the
radio/television cross-ownership restrictions. The Company cannot predict the
outcome of that rulemaking.
Programming and Operation. The Communications Act requires broadcasters
to serve the "public interest." Since the late 1970s, the FCC gradually has
relaxed or eliminated many of the formal procedures it had developed to promote
the broadcast of certain types of programming responsive to the needs of a
station's community of license. However, broadcast station licensees continue
to be required to present programming that is responsive to local community
problems, needs and interests and to maintain certain records demonstrating
such responsiveness. Complaints from viewers concerning a station's programming
often will be considered by the FCC when it evaluates license renewal
applications, although such complaints may be filed at any time and generally
may be considered by the FCC at any time. It has been reported that the FCC may
initiate a proceeding to clarify the public interest obligations of
broadcasters, although the Company cannot predict the outcome of any such
proceeding. Stations also must follow various rules promulgated under the
Communications Act that regulate, among other things, political advertising,
sponsorship identifications, the advertisements of contests and lotteries,
programming directed to children, obscene and indecent broadcasts and technical
operations, including limits on radio frequency radiation. In August 1996, the
FCC adopted new children's television rules mandating, among other things, that
stations must now identify and provide information concerning children's
programming to publishers of program guides and listings and must broadcast
three hours each week of educational and informational programming directed to
children. The 1996 Act contains a number of provisions relating to television
violence, which, among other things, direct the television industry or the FCC
to develop a television ratings system and require commercial television
stations to report on complaints concerning violent programming in their
license renewal applications. In addition, most broadcast licensees, including
the Company's licensees, must develop and implement affirmative action programs
designed to promote equal employment opportunities and must submit reports to
the FCC with respect to these matters on an annual basis and in connection with
a license renewal application. The 1996 Act also directs the FCC to adopt rules
requiring closed captioning of all broadcast television programming, except
where captioning would be "economically burdensome." The FCC has recently
adopted such rules. The rules require generally that (i) 95% of all new
programming first published or exhibited on or after January 1, 1998 must be
closed captioned within eight years, and (ii) 75% of "old" programming which
first aired prior to January 1, 1998 must be closed captioned within ten years,
subject to certain exemptions. In connection with the transition to digital
operations, a governmental commission has been appointed to consider whether
additional public service obligations should be imposed on television
broadcasters. The Company cannot predict the likely outcome of such
considerations.
Must Carry and Retransmission Consent. The 1992 Cable Act requires each
television broadcaster to make an election to exercise either certain "must
carry" or, alternatively, "retransmission consent" rights in connection with
its carriage by cable systems in the station's local market. If a broadcaster
chooses to exercise its must carry rights, it may demand carriage on a
specified channel on cable systems within its defined market. Must carry rights
are not absolute, and their exercise is dependent on variables such as the
number of activated channels on, and the location and size of, the cable system
and the amount of duplicative programming on a broadcast station. Under certain
circumstances, a cable system may decline carriage of a given station. If a
broadcaster chooses to exercise its retransmission consent rights, it may
prohibit cable systems from carrying its signal, or permit carriage under a
negotiated compensation arrangement. The FCC's must carry requirements took
effect on June 2, 1993; however, stations had until June 17, 1993 to make their
must carry/retransmission consent elections. Under the Company's Fox
Affiliation Agreements, the Company appointed Fox as its irrevocable agent to
negotiate such retransmission consents with the major cable operators in the
Company's respective markets. Fox exercised the Company's stations'
retransmission consent rights. Television stations must make a new election
between must carry and retransmission consent rights every three years. The
last required election date was October 1, 1996. Although the Company expects
the current retransmission consent agreements to be renewed upon their
expiration, there can be no assurance that such renewals will be obtained.
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In April 1993, the U.S. District Court for the District of Columbia upheld
the constitutionality of the legislative must carry provision. This decision
was vacated by the U.S. Supreme Court in June 1994, and remanded to the
District Court for further development of a factual record. The District Court
again upheld the must carry rules and in March 1997 the Supreme Court affirmed
the District Court's decision and thereby let stand the must-carry rules.
Digital Television. The FCC has taken a number of steps to implement
digital television ("DTV") broadcasting service in the U.S. In December 1996,
the FCC adopted a DTV broadcast standard and, in April 1997 and February 1998,
adopted decisions in several pending rulemaking proceedings that establish
service rules and a plan for implementing DTV. The FCC adopted a DTV Table of
Allotments that provides all television stations authorized as of April 1997
with a second channel on which to broadcast a DTV signal. The FCC has attempted
to provide DTV coverage areas that are comparable to stations' existing service
areas. The FCC has ruled that television broadcast licenses may use their
digital channels for a wide variety of services such as high-definition
television, multiple standard definition television programming, audio, data,
and other types of communications, subject to the requirement that each
broadcaster provide at least one free video channel equal in quality to the
current technical standard.
The FCC is requiring that affiliates of ABC, CBS, Fox and NBC in the top
ten television markets begin digital broadcasting by May 1, 1999, and that
affiliates of these networks in markets 11 through 30 begin digital
broadcasting by November 1999, and that all other stations begin digital
broadcasting by May 1, 2002. The FCC's plan calls for the DTV transition period
to end in the year 2006 at which time the FCC expects that television
broadcasters will have ceased broadcasting on their non-digital channels,
allowing that spectrum to be recovered by the government for other uses. Under
the Balanced Budget Act signed into law by President Clinton, however, the FCC
is authorized to extend the December 31, 2006 deadline for reclamation of a
television station's non-digital channel if, in any given case: (a) one or more
television stations affiliated with one of the four major networks in a market
are not broadcasting digitally, and the FCC determines that the station(s)
has(have) "exercised due diligence" in attempting to convert to digital
broadcasting; (b) less than 85% of the television households in the station's
market subscribe to a multichannel video service (cable, wireless cable or DBS)
that carries at least one digital channel from each of the local stations in
that market; or (c) less than 85% of the television households in the station's
market can receive digital signals off the air using either a set-top converter
box for an analog television set or a new digital television set. The Balanced
Budget Act also directs the FCC to auction the non-digital channels by
September 30, 2002 even though they are not to be reclaimed by the government
until at least December 31, 2006. The Balanced Budget Act also permits
broadcasters to bid on the non-digital channels in cities with populations
greater than 400,000 provided the channels are used for DTV. Thus it is
possible a broadcaster could own two channels in a market. The FCC has opened a
separate proceeding to consider the surrender of existing television channels
and how those frequencies will be used after they are eventually recovered from
television broadcasters. Additionally, the FCC will open a separate proceeding
to consider to what extent the cable must-carry requirements will apply to DTV
signals.
In addition, the digital order restricts current stations' abilities to
relocate transmitter sites and otherwise change technical facilities in any
manner which could impact proposed digital television stations. This may
preclude the improvement of the facilities of certain stations owned or
programmed by the Company. The order also allotted digital television stations
at the current analog transmitter sites. Changes in the location of digital
stations are dependant on the lack of interference to other digital and analog
stations. Thus, digital operation of Company stations at new transmitter sites
constructed between now and the date of digital conversion, such as those
planned for WWLF and WILF, may not be possible.
Implementation of digital television will improve the technical quality of
television signals receivable by viewers. Under certain circumstances, however,
conversion to digital operation may reduce a station's geographic coverage area
or result in some increased interference. The FCC's DTV allotment plan also
results in current UHF stations having considerably less signal power within
their service areas than present VHF stations that move to DTV channels. While
the February 1998 orders of the FCC present current UHF stations with some
options to overcome this power disparity, it is unknown at this time whether
the Company will be able to benefit from these options. Implementation of
digital television will also impose substantial additional costs on television
stations because of the need to replace equipment and because some stations
will need to operate at higher
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utility costs. The FCC is also considering imposing new public interest
requirements on television licensees in exchange for their receipt of DTV
channels. The Company cannot predict what future actions the FCC might take
with respect to DTV, nor can it predict the effect of the FCC's present DTV
implementation plan or such future actions on the Company's business.
Pending or Proposed Legislation and FCC Rulemakings. The FCC is now
conducting a rulemaking proceeding to consider changes to the multiple
ownership rules that could, under certain limited circumstances, permit common
ownership of television stations with overlapping service areas, while imposing
restrictions on television LMAs. Certain of these changes, if adopted, could
allow owners of television stations who currently cannot buy a television
station or an additional television station in the Company's markets to acquire
television properties in such markets. This may increase competition in such
markets, but may also work to the Company's advantage by permitting it to
acquire additional stations in its present markets and by enhancing the value
of the Company's stations by increasing the number of potential buyers.
Alternatively, if no changes are made in the multiple ownership rules relating
to local ownership, and LMAs are made attributable, certain plans of the
Company may be prohibited. Proposed changes in the FCC's "attribution" rules
may also limit the ability of certain investors to invest in the Company. The
FCC also has adopted more restrictive standards for the exposure of the public
and workers to potentially harmful radio frequency radiation emitted by
broadcast station transmitting facilities. Other matters which could affect the
Company's broadcast properties include technological innovations affecting the
mass communications industry and technical allocation matters, including
assignment by the FCC of channels for additional broadcast stations, low-power
television stations and wireless cable systems and their relationship to and
competition with full power television service, as well as possible spectrum
fees or other changes imposed on broadcasters for the use of their channels.
The ultimate outcome of these pending proceedings cannot be predicted at this
time.
The FCC has initiated a Notice of Inquiry proceeding seeking comment on
whether the public interest would be served by establishing limits on the
amount of commercial matter broadcast by television stations. No prediction can
be made at this time as to whether the FCC will impose any commercial limits at
the conclusion of its deliberations. The Company is unable to determine what
effect, if any, the imposition of limits on the commercial matter broadcast by
television stations would have upon the Company's operations. In connection
with the conversion to digital, a governmental commission has been appointed to
study whether additional public interest obligations should be imposed on
television broadcasters. The Company cannot predict the likely outcome of this
study.
The Congress and the FCC have considered in the past and may consider and
adopt in the future, (i) other changes to existing laws, regulations and
policies or (ii) new laws, regulations and policies regarding a wide variety of
matters that could affect, directly or indirectly, the operation, ownership,
and profitability of the Company's broadcast stations, result in the loss of
audience share and advertising revenues for these stations or affect the
ability of the Company to acquire additional broadcast stations or finance such
acquisitions.
Additionally, irrespective of the FCC rules, the Antitrust Agencies have
the authority to determine that a particular transaction presents antitrust
concerns. The Antitrust Agencies have recently increased their scrutiny of the
television and radio industries, and have indicated their intention to review
matters related to the concentration of ownership within markets (including
LMAs) even when the ownership or LMA in question is permitted under the
regulations of the FCC. There can be no assurance that future policy and
rulemaking activities of the Antitrust Agencies will not impact the Company's
operations (including existing stations or markets) or expansion strategy.
DBS
For a description of legislation and regulation affecting the DBS
industry, see "BUSINESS OF DTS --Legislation and Regulation."
Cable
1984 Cable Act and 1992 Cable Act. The Cable Communications Policy Act of
1984 (the "1984 Cable Act") created uniform national standards and guidelines
for the regulation of cable systems. Among other things,
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the 1984 Cable Act generally preempted local control over cable rates in most
areas. In addition, the 1984 Cable Act affirmed the right of franchising
authorities (state or local, depending on the practice in individual states) to
award one or more franchises within their jurisdictions. It also prohibited
non-grandfathered cable systems from operating without a franchise in such
jurisdictions.
The Cable Television Consumer Protection and Competition Act of 1992 (the
"1992 Cable Act") amended the 1984 Cable Act in many respects and significantly
changed the legislative and regulatory environment in which the cable industry
operates. The 1992 Cable Act allows for a greater degree of regulation with
respect to, among other things, cable system rates for both basic and certain
nonbasic services; programming access and exclusivity arrangements; access to
cable channels by unaffiliated programming services; leased access terms and
conditions; horizontal and vertical ownership of cable systems; customer
service requirements; franchise renewals; television broadcast signal carriage
and retransmission consent; technical standards; subscriber privacy; consumer
protection issues; cable equipment compatibility; obscene or indecent
programming; and cable system requirements that subscribers subscribe to tiers
of service other than basic service as a condition of purchasing premium
services. Additionally, the legislation encourages competition with existing
cable systems by allowing municipalities to own and operate their own cable
systems without having to obtain a franchise; preventing franchising
authorities from granting exclusive franchises or unreasonably refusing to
award additional franchises covering an existing cable system's service area;
and prohibiting the common ownership of cable systems and co-located wireless
systems known as MMDS and private SMATV. The 1992 Cable Act also precludes
video programmers affiliated with cable television companies from favoring
cable operators over competitors and requires such programmers to sell their
programming to other multichannel video distributors. This provision may limit
the ability of cable program suppliers to offer exclusive programming
arrangements to cable television companies. The FCC, the principal federal
regulatory agency with jurisdiction over cable television, has adopted many
regulations to implement the provisions of the 1992 Cable Act.
The FCC has the authority to enforce these regulations through the
imposition of substantial fines, the issuance of cease and desist orders and/or
the imposition of other administrative sanctions, such as the revocation of FCC
licenses needed to operate transmission facilities often used in connection
with cable operations.
Cable Rate Regulation. In June 1995, the FCC adopted rules which provide
significant rate relief for small cable operators, which include operators the
size of the Company. The Company's current rates are below the maximum presumed
reasonable under the FCC's rules for small operators, and the Company may use
this new rate relief to justify current rates, rates already subject to pending
rate proceedings and new rates. The 1996 Act eliminates cable programming
service tier ("CPST") rate regulation effective March 31, 1999, for all cable
operators. In the interim, CPST rate regulation can be triggered only by a
local unit of government (commonly referred to as local franchising authorities
or "LFA") complaint to the FCC. Since the Company is a small cable operator
within the meaning of the 1996 Act, CPST rate regulation for the Company ended
upon the enactment of the 1996 Act. The Company's status as a small cable
operator may be affected by future acquisitions. The 1996 Act does not disturb
existing rate determinations of the FCC. The Company's basic tier of cable
service ("BST") rates remain subject to LFA regulation under the 1996 Act.
Rate regulation is precluded wherever a cable operator faces "effective
competition." The 1996 Act expands the definition of effective competition to
include any franchise area where a local exchange carrier ("LEC") (or
affiliate) provides video programming services to subscribers by any means
other than through DBS. There is no penetration minimum for the local exchange
carrier to qualify as an effective competitor, but it must provide "comparable"
programming services in the franchise area. The Company filed a petition
requesting the FCC to find that its Puerto Rico system is subject to effective
competition, and on December 29, 1997, the FCC granted the Company's petition.
Under the 1996 Act, the Company is allowed to aggregate, on a franchise,
system, regional or company level, its equipment costs into broad categories,
such as converter boxes, regardless of the varying levels of functionality of
the equipment within each such broad category. The 1996 Act allows the Company
to average together costs of different types of converters (including
non-addressable, addressable, and digital). The statutory changes will also
facilitate the rationalizing of equipment rates across jurisdictional
boundaries. These favorable cost-aggregation rules do not apply to the limited
equipment used by "BST-only" subscribers.
Anti-Buy Through Provisions. In March 1993, the FCC adopted regulations
pursuant to the 1992 Cable Act which require cable systems to permit customers
to purchase video programming on a per channel or a per
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program basis without the necessity of subscribing to any tier of service,
other than the basic service tier, unless the cable system is technically
incapable of doing so. Generally, this exemption from compliance with the
statute for cable systems that do not have such technical capability is
available until a cable system obtains the capability, but not later than
December 2002. The Company's systems have the necessary technical capability
and have complied with this regulation.
Indecent Programming on Leased Access Channels. FCC regulations pursuant
to the 1992 Cable Act permit cable operators to restrict or refuse the carriage
of indecent programming on so-called "leased access" channels, i.e., channels
the operator must set aside for commercial use by persons unaffiliated with the
operator. Operators were also permitted to prohibit indecent programming on
public access channels. In June 1996, the Supreme Court ruled unconstitutional
the indecency prohibitions on public access programming as well as the
"segregate and block" restriction on indecent leased access programming.
Scrambling. The 1996 Act requires that upon the request of a cable
subscriber, the cable operator must, free of charge, fully scramble or
otherwise fully block the audio and video programming of each channel carrying
adult programming so that a non-subscriber does not receive it.
Cable operators must also fully scramble or otherwise fully block the
video and audio portion of sexually explicit or other programming that is
indecent on any programming channel that is primarily dedicated to sexually
oriented programming so that a non-subscriber to such channel may not receive
it. Until full scrambling or blocking occurs, cable operators must limit the
carriage of such programming to hours when a significant number of children are
not likely to view the programming ("safe-harbor period"). The Company's
systems do not presently have the necessary technical capability to comply with
the scrambling requirement; however, such programming is only carried during
the safe-harbor period.
Cable Entry Into Telecommunications. The 1996 Act declares that no state
or local laws or regulations may prohibit or have the effect of prohibiting the
ability of any entity to provide any interstate or intrastate
telecommunications service. States are authorized to impose "competitively
neutral" requirements regarding universal service, public safety and welfare,
service quality, and consumer protection. The 1996 Act further provides that
cable operators and affiliates providing telecommunications services are not
required to obtain a separate franchise from LFAs for such services. The FCC
has held that LFAs may not place telecommun- ications conditions in their
grants of cable construction permits. The 1996 Act prohibits LFAs from
requiring cable operators to provide telecommunications service or facilities
as a condition of a grant of a franchise, franchise renewal, or franchise
transfer, except that LFAs can seek "institutional networks" as part of
franchise negotiations.
The 1996 Act clarifies that traditional cable franchise fees may only be
based on revenues related to the provision of cable television services.
However, when cable operators provide telecommunications services, LFAs may
require reasonable, competitively neutral compensation for management of the
public rights-of-way.
Interconnection and Other Telecommunications Carrier Obligations. To
facilitate the entry of new telecommunications providers including cable
operators, the 1996 Act imposes interconnection obligations on all
telecommunications carriers. All carriers must interconnect their networks with
other carriers and may not deploy network features and functions that interfere
with interoperability. On August 8, 1996, the FCC released its First Report and
Order to implement the interconnection provisions of the 1996 Act. Several
parties have sought reconsideration of the order by the FCC, and a number of
parties petitioned for review of the order in several federal courts of appeal.
Those petitions were consolidated before the U.S. Court of Appeals for the
Eighth Circuit, which on July 18, 1997 overturned several parts of the
interconnection order, as it relates to the ability of the FCC to set
interconnection rates. The FCC has appealed the ruling to the Supreme Court.
Telephone Company Entry Into Cable Television. The 1996 Act allows
telephone companies to compete directly with cable operators by repealing the
telephone company-cable cross-ownership ban and the FCC's video dialtone
regulations. This will allow LECs, including the Bell Operating Companies, to
compete with cable both inside and outside their telephone service areas.
The 1996 Act replaces the FCC's video dialtone rules with an "open video
system" ("OVS") plan by which LECs can provide cable service in their telephone
service area. LECs complying with FCC OVS regulations will
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receive relaxed oversight. Only the program access, negative option billing
prohibition, subscriber privacy, Equal Employment Opportunity, PEG, must-carry
and retransmission consent provisions of the Communications Act will apply to
LECs providing OVS. Franchising, rate regulation, consumer service provisions,
leased access and equipment compatibility will not apply. Cable copyright
provisions will apply to programmers using OVS. LFAs may require OVS operators
to pay "franchise fees" only to the extent that the OVS provider or its
affiliates provide cable services over the OVS. OVS operators will be subject
to LFA general right-of-way management regulations. Such fees may not exceed
the franchise fees charged to cable operators in the area, and the OVS provider
may pass through the fees as a separate subscriber bill item.
As required by the 1996 Act, the FCC has adopted regulations prohibiting
an OVS operator from discriminating among programmers, and ensuring that OVS
rates, terms, and conditions for service are reasonable and nondiscriminatory.
Further, the FCC has adopted regulations prohibiting a LEC-OVS operator, or its
affiliates, from occupying more than one-third of a system's activated channels
when demand for channels exceeds supply, although there are no numeric limits.
The FCC also has adopted OVS regulations governing channel sharing; extending
the FCC's sports exclusivity, network nonduplication, and syndex regulations;
and controlling the positioning of programmers on menus and program guides. The
1996 Act does not require LECs to use separate subsidiaries to provide
incidental inter Local Access and Transport Area ("interLATA") video or audio
programming services to subscribers or for their own programming ventures.
Cable and Broadcast Television Cross-Ownership. As required by the 1996
Act, the FCC has amended its rules to allow a person or entity to own or
control a network of broadcast stations and a cable system. In addition, the
1996 Act eliminates the statutory prohibition against the ownership of cable
systems and television stations in the same geographic market, although FCC
rules prohibiting such ownership are still in place.
Signal Carriage. The 1992 Cable Act imposed obligations and restrictions
on cable operator carriage of non-satellite delivered television stations.
Under the must-carry provision of the 1992 Cable Act, a cable operator, subject
to certain restrictions, must carry, upon request by the station, all
commercial television stations with adequate signals which are licensed to the
same market as the cable system. Cable operators are also obligated to carry
all local non-commercial stations. If a non-satellite delivered commercial
broadcast station does not request carriage under the must-carry provisions of
the 1992 Cable Act, a cable operator may not carry that station without that
station's explicit written consent for the cable operator to retransmit its
programming. The Company is carrying all television stations that have made
legitimate requests for carriage. All other television stations are carried
pursuant to written retransmission consent agreements.
Closed Captioning. In August 1997, in accordance with the 1996 Act, the
FCC adopted rules requiring closed captioning of most programming for persons
with hearing disabilities. The FCC's rules establish a schedule of gradual
compliance. The Company, like all other video programming distributors, is
responsible for ensuring that these goals are met.
Emergency Alert System. In September 1997, the FCC released its rules
establishing the deadlines by which cable operators must comply with the new
Emergency Alert System ("EAS"). These deadlines vary depending on how many
subscribers are served by the particular cable system. The Company, like all
other cable operators, is responsible for compliance with the EAS rules.
Copyright Licensing. Cable systems are subject to federal copyright
licensing covering carriage of broadcast signals. In exchange for making
semi-annual payments to a federal copyright royalty pool and meeting certain
other obligations, cable operators obtain a blanket license to retransmit
broadcast signals. Bills have been introduced in Congress over the past several
years that would eliminate or modify the cable compulsory license. The 1992
Cable Act's retransmission consent provisions expressly provide that
retransmission consent agreements between television stations and cable
operators do not obviate the need for cable operators to obtain a copyright
license for the programming carried on each broadcaster's signal.
Electric Utility Entry Into Telecommunications. The 1996 Act provides that
registered utility holding companies and subsidiaries may provide
telecommunications services (including cable) notwithstanding the Public
Utility Holding Company Act. Electric utilities must establish separate
subsidiaries, known as "exempt telecommunications companies" and must apply to
the FCC for operating authority. It is anticipated that large utility holding
companies will become significant competitors to both cable television and
other telecommunications providers.
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State and Local Regulation. Because a cable system uses streets and
rights-of-way, cable systems are subject to state and local regulation,
typically imposed through the franchising process. State and/or local officials
are usually involved in franchisee selection, system design and construction,
safety, consumer relations, billing practices and community-related programming
and services among other matters. Cable systems generally are operated pursuant
to nonexclusive franchises, permits or licenses granted by a municipality or
other state or local government entity. Franchises generally are granted for
fixed terms and in many cases are terminable if the franchise operator fails to
comply with material provisions. The 1992 Cable Act prohibits the award of
exclusive franchises and allows franchising authorities to exercise greater
control over the operation of franchised cable systems, especially in the area
of customer service and rate regulation. The 1992 Cable Act also allows
franchising authorities to operate their own multichannel video distribution
system without having to obtain a franchise and permits states or LFAs to adopt
certain restrictions on the ownership of cable systems. Moreover, franchising
authorities are immunized from monetary damage awards arising from regulation
of cable systems or decisions made on franchise grants, renewals, transfers and
amendments. Under certain circumstances, LFAs may become certified to regulate
basic cable service rates.
The specific terms and conditions of a franchise and the laws and
regulations under which it was granted directly affect the profitability of the
cable system. Cable franchises generally contain provisions governing fees to
be paid to the franchising authority, length of the franchise term, renewal,
sale or transfer of the franchise, territory of the franchise, design and
technical performance of the system, use and occupancy of public streets and
number and types of cable services provided.
Although federal law has established certain procedural safeguards to
protect incumbent cable television franchisees against arbitrary denials of
renewal, the renewal of a franchise cannot be assured unless the franchisee has
met certain statutory standards. Moreover, even if a franchise is renewed, a
franchising authority may impose new and stricter requirements, such as the
upgrading of facilities and equipment or higher franchise fees (subject,
however, to limits set by federal law). To date, however, no request of the
Company for franchise renewals or extensions has been denied. Despite favorable
legislation and good relationships with its franchising authorities, there can
be no assurance that franchises will be renewed or extended.
Various proposals have been introduced at the state and local levels with
regard to the regulation of cable systems, and several states have adopted
legislation subjecting cable systems to the jurisdiction of centralized state
governmental agencies, some that impose regulation similar to that of a public
utility. Attempts in other states to regulate cable systems are continuing and
can be expected to increase. Such proposals and legislation may be preempted by
federal statute and/or FCC regulation. Massachusetts and Connecticut have
adopted state level regulation.
The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the cable
industry. Other existing federal regulations, copyright licensing and, in many
jurisdictions, state and local franchise requirements currently are the subject
of a variety of judicial proceedings, legislative hearings and administrative
and legislative proposals which could change, in varying degrees, the manner in
which cable systems operate. Neither the outcome of these proceedings nor the
impact upon the cable industry or the Company's cable systems can be predicted
at this time.
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Properties
<TABLE>
<CAPTION>
Owned or Lease or Expiration of
Location and Type of Property Leased Approximate Size Renewal Options
- ------------------------------------------------ ------------ ------------------------------------ ----------------
<S> <C> <C> <C>
Corporate Office
Radnor, PA Leased 6,686 sq. ft. 3/31/99
TV Stations
Jackson, MS (transmitting equipment) Leased 1,125 foot tower 2/28/04
Jackson, MS (1) Lease/ 5,600 sq. ft. bldg.; 900 N/A
(television station and transmitter building) Purchase sq. ft. bldg.
West Mountain, PA (tower & transmitter) Leased 9.6 acres 1/31/00
Scranton, PA (television station) Leased 9,032 sq. ft. 4/30/00
Bald Eagle Mtn, PA (transmitting equip.) Owned 179 foot tower N/A
Nescopec Mountain, PA (transmitting) Owned 400 foot tower N/A
Williamsport, PA (tower) Owned 175 foot tower N/A
Williamsport, PA (land) Owned 40,000 sq. ft. N/A
Chattanooga, TN (transmitting) Owned 577 foot tower N/A
Chattanooga, TN (television station) Owned 16,240 sq. ft. bldg. on 3.17 acres N/A
Portland, ME (television station) Leased 8,000 sq. ft. 12/31/00
Gray, ME (tower site) Owned 18.6 acres N/A
Midway, FL (television station) Owned 16,000 sq. ft. bldg. on 3.55 acres N/A
Jasper, FL Owned 118 acres N/A
Nickleville, GA (tower) Owned 22.5 acres N/A
Cairo, GA Owned 18 acres N/A
DBS Offices
Marlborough, MA (office) Leased 11,450 sq. ft. 6/30/02
Charlton, MA (warehouse) Leased 1,750 sq. ft. area Monthly
Cable Systems
Winchester, CT (headend) Owned 15.22 acres N/A
Winsted, CT (office) Owned 2,000 sq. ft. N/A
North Brookfield, MA (headend) Leased 60,000 sq. ft. / 100' tower 6/01/04
Charlton, MA (office, headend site) Leased 38,223 sq. ft. 5/9/99
Hinsdale, MA (headend site) Leased 30,590 sq. ft. 2/1/04
Lanesboro, MA (headend site) Leased 62,500 sq. ft. 4/13/03
West Stockbridge, MA (headend site) Leased 1.59 acres 4/4/05
Mayaguez, Puerto Rico (office) Leased 2,520 sq. ft. building 8/14/00
Mayaguez, Puerto Rico (headend) Leased 530 sq. ft. building 8/30/98
Mayaguez, Puerto Rico (warehouse) Leased 1,750 sq. ft. area monthly
San German, Puerto Rico (headend site) Owned 1,200 sq. ft. N/A
San German, Puerto Rico (tower &
transmitter) Owned 60' tower N/A
San German, Puerto Rico (land) Leased 192 sq. meters 30 yr. term
San German, Puerto Rico (office) Leased 2,928 sq. ft. 2/1/01
Anasco, Puerto Rico (office) Leased 500 sq. ft 2/28/99
Anasco, Puerto Rico (headend site) Leased 1,200 sq. meters monthly
Anasco, Puerto Rico (headend) Owned 59 foot tower N/A
Guanica, Puerto Rico (headend site) Leased 121 sq. meters 2/28/04
Cabo Rojo, Puerto Rico (headend site) Leased 121 sq. meters 11/10/04
Hormigueros, Puerto Rico (warehouse) Leased 2,000 sq. ft. monthly
</TABLE>
- ------------
(1) The Company entered into a Lease/Purchase agreement in July 1993 which
calls for 60 monthly payments of $4,500 at the end of which the property
is conveyed to the Company.
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Employees
As of February 28, 1998, the Company had 421 full-time and 69 part-time
employees. The Company is not a party to any collective bargaining agreement
and considers its relations with its employees to be good.
Legal and Other Proceedings
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, cash flows or financial position of the Company.
BUSINESS OF DTS
General
DTS is the second largest independent provider of DIRECTV services. DTS
has the exclusive right to provide DIRECTV services to approximately 1.8
million U.S. television households in rural areas of 11 states serving a
subscriber base, as of February 28, 1998, of approximately 139,600 DBS
customers.
DTS was formed in October 1997 under the laws of the State of Delaware. It
is a successor to Digital Television Services, LLC, a limited liability company
formed in November 1996 under the Delaware Limited Liability Company Act,
which, in turn, is a successor to DBS Holdings, L.P., a Delaware limited
partnership initially formed in January 1996 by Columbia Capital Corporation
and DTS' senior management.
DBS -- DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
U.S. television households in 1994. DIRECTV currently offers in excess of 175
channels of near laser disc quality video and CD quality audio programming and
transmits via three high-power Ku band satellites, each containing 16
transponders. As of March 2, 1998, there were over 3.4 million DIRECTV
subscribers.
The equipment required for reception of DIRECTV services (a DSS unit)
includes an 18-inch satellite antenna, a digital receiver approximately the
size of a standard VCR and a remote control, all of which are used with
standard television sets. Each DSS receiver includes a "smart card" which is
uniquely addressed to it. The smart card, which can be removed from the
receiver, prevents unauthorized reception of DIRECTV services and retains
billing information on pay-per-view usage, which information is sent at regular
intervals from the DSS receiver telephonically to DIRECTV's authorization and
billing system. DSS units also enable subscribers to receive United States
Satellite Broadcasting Company, Inc. ("USSB") programming. USSB is a DBS
service whose programming consists of 28 channels of video programming
transmitted via five transponders it owns on DIRECTV's first satellite. USSB
primarily offers Time Warner and Viacom satellite programming services, such as
multiple channels of HBO and Showtime, which are not available through DIRECTV
but which are generally complementary to DIRECTV programming.
DSS equipment is produced by major manufacturers under the brand names
RCA, GE, ProScan, Sony, Hughes, Panasonic, Hitachi, Toshiba, Uniden, Magnavox,
Sanyo, Samsung, Daewoo and Memorex. DSS equipment is currently sold through
over 30,000 retail outlets throughout the U.S. for prices typically ranging
from $149 to $299, depending upon the generation of the equipment, the level of
features and the retail outlet.
DIRECTV Programming
DIRECTV programming includes (i) cable networks, broadcast networks and
audio services available for purchase in tiers for a monthly subscription, (ii)
premium services available a la carte or in tiers for a monthly subscription,
(iii) sports programming (including regional sports networks and seasonal
college and major professional league sports packages) available for a yearly,
seasonal or monthly subscription and (iv) movies and events available for
purchase on a pay-per-view basis. Satellite and premium services available a la
carte or for a monthly subscription are priced comparably to cable.
Pay-per-view movies are $2.99 per movie. Movies
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recently released for pay-per-view are available for viewing on multiple
channels at staggered starting times so that a viewer generally would not have
to wait more than 30 minutes to view a particular pay-per-view movie.
Programming also includes, as of March 10, the Viacom basic networks (MTV, M2,
VH-1, Nickelodeon, Nick at Nite, TV Land, Comedy Central and Lifetime)
previously available on USSB. These services will be included in each of the
Total Choice package options. The following is a summary of some of the more
popular programming packages currently available from DTS' DIRECTV operations:
Plus DIRECTV: Package of 16 video channels, 31 CD audio channels and access
to up to 60 channels of pay-per-view movies and events, which retails for
$14.99 per month. Plus DIRECTV consists of channels not typically offered
on most cable systems and is intended to be sold to existing cable
subscribers to augment their cable or other satellite services.
Economy or Select Choice: Two packages of 19 to 33 video channels and
access to up to 60 channels of pay-per-view movies and events, which retail
for $19.99 month. The Economy service is available only in the rural
DIRECTV markets.
Economy and Select Choice are often offered in conjunction with DSS rental
or leasing options to create a total monthly payment comparable to the
price of cable.
Total ChoiceTM Package Options: Total ChoiceTM, the most popular DIRECTV
package featuring over 80 channels, including USA, TNT, two Disney
channels, an in-market regional sports network and 31 digital audio
channels, plus access to up to 60 channels of pay-per-view movies and
events, which retails for $29.99 per month. Total ChoiceTM Plus Encore,
which retails for $33.99, features all the services contained in Total
ChoiceTM, plus the eight movie channels in the Encore Multiplex; Total
ChoiceTM Silver, which also retails for $39.99, features over 90 channels
including multiple channels of STARZ! and Encore, and the Independent Film
Channel; Total ChoiceTM Gold, which retails for $39.99, featuring nearly
100 channels, including 29 sports networks from FOX Sports, Sportschannel
and The Golf Channel; and Total ChoiceTM Platinum, featuring over 115
channels at $47.99 per month.
DIRECTV Limited: Package comprising Bloomberg Information Television and
the DIRECTV Preview Channel which retails for $4.99 per month. This is
intended for subscribers who are principally interested in DIRECTV's
pay-per-view movies, sports and events.
Playboy: Adult service available monthly for $12.99 or 12 hours for $7.99.
Spice: Adult service featuring 90-minute programs at $5.99 each.
Prime Time 24 Network Package: ABC (East and West), NBC (East and West),
CBS (East and West), Fox and PBS available individually for $.99 per month
or together for $4.99 per month. (Available only to subscribers unable to
receive networks over-the-air and who have not subscribed to cable in the
last 90 days.)
Sports Choice: Package of 29 channels (including 19 regional networks) and
five general sports networks (such as the Golf Channel, Speedvision,
Classic Sports Network and Outdoor Life) included in Total ChoiceTM
Platinum and Gold at no extra cost.
NBA League Pass: Approximately 800 out-of-market NBA games for $159.00 per
season.
NHL Center Ice: Approximately 500 out-of-market NHL games for $129.00 per
season.
NFL Sunday Ticket: As many as 13 out-of-market NFL Sunday games every week
for $159.00 per season.
MLB Extra Innings: Up to 1,000 out-of-market major league baseball games
for $139.00 per season.
DIRECT Ticket: Nearly 60 channels of blockbuster, pay-per-view movies,
events and specials. Movies start as often as every 30 minutes for only
$2.99 each.
The Silver Movie Package: Featuring 14 movie channels, including multiple
channels of STARZ! and Encore, the Independent Film Channel and Romance
Classics for $10.00 per month, a la carte (available in the Total Choice
Silver package at no extra charge).
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The Gold Sports Package: Featuring 29 sports channels from FOX Sports,
Sportschannel, The Golf Channel, Speedvision and Outdoor Life for $10.00
per month, a la carte (available in the Total Choice Gold package at no
extra charge).
Acquisitions by DTS
DTS completed its first acquisition in March 1996 and has made a total of
18 acquisitions to date.
When DTS purchases the exclusive right to provide DIRECTV services from a
member or affiliate member of the NRTC, it acquires the NRTC Member Agreement
and related agreements providing for the exclusive right to provide DIRECTV
services within the DIRECTV service territory, all assets related to the
provision of DIRECTV services in such territory and any residual rights to
provide DBS services which the NRTC may grant the provider after the
termination or expiration of the NRTC Member Agreement.
DTS completed its first two acquisitions in the first half of 1996 and six
additional acquisitions for certain rural portions of New York, Colorado, New
Mexico and South Carolina in the second half of 1996. In the first quarter of
1997, DTS completed four acquisitions for certain rural portions of Kentucky,
Kansas, Vermont, and New Hampshire. In May 1997, DTS completed four
acquisitions in Georgia. In January 1998, DTS completed an acquisition in
Indiana, which was effective as of December 31, 1997, and an acquisition of
certain DIRECTV service territories in Georgia.
DTS owns, through agreements with the NRTC, the exclusive right to provide
DIRECTV services in certain rural areas of 11 states. DTS operates its service
territories in regional or market clusters. Set forth below is certain
information with respect to the service territories owned or to be acquired by
DTS.
<TABLE>
<CAPTION>
Percentage
of Homes
Cluster Not Passed
Location Households(1) by Cable Subscribers(2) Penetration(3)
- --------------------------- --------------- ----------- ---------------- ---------------
<S> <C> <C> <C> <C>
Kentucky(4) ............... 402,803 31.23% 26,349 6.54%
Kansas(5) ................. 301,952 19.17 15,988 5.29
Georgia(6) ................ 288,024 33.76 23,115 8.03
Vermont(7) ................ 257,621 34.80 29,647 11.51
South Carolina(8) ......... 164,464 31.66 10,698 6.50
New Mexico(9) ............. 96,122 16.06 7,071 7.36
California(10) ............ 89,062 3.84 7,481 8.40
New York(11) .............. 53,199 30.52 5,628 10.58
Indiana(12) ............... 135,774 20.00 13,645 10.05
------- ------ ------ -----
Total .................. 1,789,021 27.16% 139,622 7.80%
========= ====== ======= =====
</TABLE>
- ------------
(1) Total homes in territory extracted from demographic data obtained from
Claritas, Inc. Does not include business locations. Includes approximately
87,000 seasonal residences.
(2) Reflects actual subscribers at February 28, 1998.
(3) Represents the percentage of households which subscribe to DIRECTV
Services in DTS' rural DIRECTV service territories.
(4) Cluster consists of rural DIRECTV service territories acquired in January
1997 which includes households located in portions of Jefferson County,
Kentucky and in all or portions of 37 surrounding counties in Kentucky.
(5) Cluster consists of rural DIRECTV service territories acquired in January
1997 which include households located in the following counties in Kansas:
Clay, Cowley, Ellis, Greenwood, Harvey, Lyon and Sumner, and in portions
of 58 additional counties in Kansas.
(6) Cluster consists of rural DIRECTV service territories acquired in May 1997
which include households located in the following counties in Georgia:
Baker, Baldwin, Burke, Calhoun, Colquitt, Decatur, Early,
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Glascock, Grady, Greene, Hancock, Jasper, Jefferson, Jenkins, Johnson,
Lamar, Miller, Mitchell, Monroe, Morgan, Putnam, Seminole, Screven, Sumter,
Terrell, Thomas, Tift, Turner, Warren, Washington, Wilkinson and Worth, and
in portions of the following counties in Georgia: Dougherty, Jones, Lee and
Twiggs, and rural DIRECTV service territories which the Company acquired in
January 1998 and which includes households located in the following
counties in Georgia: Atkinson, Ben Hill, Bleckley, Brooks, Clinch, Coffee,
Cook, Crisp, Dodge, Dooly, Echols, Irwin, Jeff Davis, Lanier, Liberty,
Lowndes, Pulaksi, Telfair, Ware, Wheeler and Wilcox, in portions of the
following counties in Georgia: Clayton, Muscogee, Newton and Walker, in
Jefferson County, Florida, and a portion of Baker County, Florida.
(7) Cluster consists of rural DIRECTV service territories acquired in February
1997 which includes households in the following counties in Vermont:
Addison, Bennington, Caledonia, Essex, Franklin, Lamoille, Orange,
Orleans, Rutland, Washington, Windham and Windsor and in Cheshire County,
New Hampshire and Sullivan County, New Hampshire.
(8) Cluster consists of rural DIRECTV service territories acquired in November
1996 which include households located in the following counties in South
Carolina: Clarendon, Chesterfield, Darlington, Dillon, Georgetown, Lee,
Marion, Marlboro and Williamsburg, and in portions of Florence County,
South Carolina.
(9) Cluster consists of rural DIRECTV service territories acquired in March
1996 and August 1996 which include households located in the following
counties in New Mexico: Colfax, Los Alamos, Rio Arriba, Santa Fe and Taos,
and in Chaffee County, Colorado and Saguache County, Colorado.
(10) Cluster consists of rural DIRECTV service territories acquired in April
1996 which includes households located in San Luis Obispo County,
California.
(11) Cluster consists of rural DIRECTV service territories acquired in August
1996 which include households located in the following counties in New
York: Cortland, Schuyler and Yates, and in portions of Madison County, New
York and Oneida County, New York.
(12) Cluster consists of rural DIRECTV service territories acquired in January
1998, effective December 31, 1997, and which includes households located
in the following counties in Indiana: Clay, Hamilton, Hendricks, Morgan,
Owen, Parke, Putnam and Tipton.
Sales and Distribution
DTS offers DIRECTV services to consumer and business segments in its rural
DIRECTV service territories through two separate but complementary sales and
distribution channels.
DTS Controlled Channels. DTS employs both a direct sales force and an
extensive indirect dealer network, which includes major retailers, mass
merchandisers and consumer electronics stores, in its rural DIRECTV service
territories.
DTS has direct sales forces in all of its market clusters. The direct
sales force is supported by an active lead generation call center which sets
appointments during which outside sales agents provide in-home demonstrations
of DIRECTV services. DTS also has company-owned full service retail stores
located in six of its markets and has plans to open additional stores in its
other markets during 1998.
DTS has approximately 314 independent dealers in its rural DIRECTV service
territories. DTS seeks to develop close relationships with these dealers and
provides marketing, subscriber authorization, installation and customer service
support to enhance subscriber additions from such dealers. Whenever possible,
DTS attempts to achieve exclusivity with its dealers network by paying higher
commissions to dealers who do not sell competing DTH services. In connection
with the sale of a DSS unit, the 18-inch satellite dish used to receive DIRECTV
services, and a subscription to DIRECTV services offered by DTS, a dealer
retains the proceeds from the sale of the equipment and earns a one-time
commission paid by DTS while DTS retains the ongoing monthly subscription
revenue from the subscriber. For certain equipment sold through the indirect
dealer network, DTS provides a subsidy, thus lowering the price of the
equipment for the consumer.
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Non-DTS Controlled Channels. DIRECTV services are also offered to
potential subscribers in DTS' service territories by sources which DTS does not
control. Such sources include (i) national retailers selected by DIRECTV, (ii)
consumer electronics dealers authorized by DIRECTV to sell DIRECTV services and
(iii) satellite dealers and consumer electronics dealers authorized by five
regional sales management agents ("SMAs") selected by DIRECTV. Similar to DTS'
indirect dealer network, DTS pays a one-time commission to these distribution
channels for the sale of DIRECTV Services to a subscriber located in DTS' rural
DIRECTV service territories and DTS receives all monthly programming revenues
associated therewith.
Marketing
In its marketing efforts, DTS emphasizes the DIRECTV and DSS brand names,
promoting DIRECTV programming as the new standard in television. DTS reinforces
the marketing efforts of DIRECTV and its other national distribution partners
with local print and radio advertising to promote general market acceptance of
DIRECTV services. In addition, DTS implements support advertising programs for
its indirect distribution channels. DTS' marketing efforts emphasize the value
of premium subscription plan offerings in order to maximize revenues per
customer. Specific promotions, such as offering new subscribers an initial
month's service at no charge, have been implemented by DTS to motivate
customers to purchase such plans, and DTS has incentive-based sales
compensation for both the direct and dealer sales forces to promote and sell
premium subscription plans. DTS has established or plans to establish a direct
sales force and DTS-owned full service retail stores in each of its rural
DIRECTV service territories.
A key element of DTS' marketing strategy is to offer value-priced DSS
equipment and installation through the use of subsidies on direct sales of
equipment and installations. DTS offers various types of DSS equipment and
accessories through its direct sales force and retail locations. DTS is able to
take advantage of volume discounts in purchasing this equipment from the NRTC.
In addition, dealers are motivated to lower the prices at which they offer DSS
equipment and installation by DTS' volume-based commission structure.
Customer Service
DTS has established centralized customer care facilities and maintains
customer service technicians in each of its market clusters. The market
clusters are responsible for the processing of subscription authorizations, the
assisting of customers through the installation and initial service period and
the handling of customer inquiries and service complaints that require customer
contact. Centralized customer service handles customer inquiries and
complaints, billing issues and service questions, proactive customer service
programs and customer account treatment. DTS, through its customer care
department, currently provides customer service from 8:00 a.m. EST to 1:00 a.m.
EST every day. The staff has on-line access to DIRECTV's billing and
authorization system.
DBS Agreements
For a description of the DBS Agreements, see "BUSINESS OF THE COMPANY --
Licenses, LMAs, DBS Agreements and Cable Franchises -- DBS Agreements."
Under the NRTC's policy requiring any party acquiring DIRECTV distribution
rights from an NRTC member or affiliate to post a letter of credit to secure
payment of NRTC's billings if the acquiring person's monthly payments to the
NRTC (including payments on account of the acquired territory) exceeds a
specified amount, DTS has posted a letter of credit of approximately $6.3
million in connection with this requirement.
Competition
DTS faces competition from a broad range of companies offering
communications and entertainment services, including cable operators, other
satellite service providers, wireless cable operators, telephone companies,
television networks and home video product companies. Many of DTS' competitors
have greater financial and marketing resources than DTS, and the business of
providing subscription and pay television programming is highly competitive.
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Cable Television
Cable operators in the United States serve approximately 64 million
subscribers, representing over 65% penetration of television households passed
by cable systems. Cable operators typically offer 25 to 78 channels of
programming at an average monthly subscription price of approximately $35.
While cable companies currently serve a majority of the U.S. television market,
they may not be able to provide the quality and variety of programming offered
by DIRECTV until they significantly upgrade their coaxial systems. Many cable
television providers are in the process of upgrading their systems and other
cable operators have announced their intentions to make significant upgrades.
Many proposed upgrades, such as conversion to digital format, fiber optic
cabling, advanced compression technology and other technological improvements,
when fully completed, will permit cable companies to increase channel capacity,
thereby increasing programming alternatives, and to deliver a better quality
signal. However, although cable systems with adequate channel capacity may
offer digital service without major rebuilds, other cable systems with limited
channel capacity, like those in most of the DIRECTV service territories may
have to be upgraded to add bandwidth in order to provide digital service. Such
upgrades may require substantial investments of capital and time to complete
industry-wide.
DTS may encounter a number of challenges in competing with cable
television providers. First, cable operators have an entrenched position in the
marketplace. Second, the upfront costs to the consumer associated with
purchasing and installing DSS equipment are higher than the upfront costs for
installation of cable television. Third, current DBS systems, unlike cable, do
not provide local broadcast programming via satellite, although seamless
switching between satellite and broadcast programming from other sources is
possible with all DSS units. In addition, DIRECTV provides programming from
affiliates of the national broadcast networks to subscribers who are unable to
receive networks over the air and do not subscribe to cable.
Other DBS Providers
EchoStar Communications Corp. ("EchoStar") commenced national broadcasting
of programming in March 1996 and currently broadcasts over 120 video channels
and 30 audio channels. EchoStar has 21 licensed channel frequencies at the 119
degrees W.L. full CONUS orbital position and has 69 frequencies in other
partial CONUS orbital locations. At March 2, 1998, EchoStar reported
approximately 1.1 million subscribers.
USSB owns and operates five transponders on DIRECTV's first satellite and
offers a programming service separate from DIRECTV's service, with over 25
channels of premium video programming not available from DIRECTV, including
multiple channels of HBO(R), Showtime, Cinemax and The Movie Channel. USSB's
programming (and its use of transponders on the same satellite used by DIRECTV,
which enables subscribers to receive both DIRECTV and USSB signals with a
single dish) allows it to be marketed as complementary to DIRECTV.
Medium Power DTH Providers
PrimeStar Partners ("PrimeStar"), owned primarily by a consortium of cable
companies including TeleCommunications, Inc., launched the first digital DTH
satellite television service in 1994. As a result of the successful launch and
operation of a new satellite in early 1997, PrimeStar increased its
medium-power programming services to approximately 150 channels. This new
satellite will potentially enable PrimeStar to reduce its dish size to
approximately 29 inches for most subscribers within the continental United
States. In addition, PrimeStar is expected to have access to significant DBS
capacity via TSAT's DBS satellite, which is capable of providing full-CONUS
service. PrimeStar has announced plans to use such satellite to provide a mix
of sports, multichannel movie services, pay-per-view services and popular cable
networks to traditional broadcast television, basic cable and other analog
programming customers. As of February 24, 1998, PrimeStar reported having
approximately 2.0 million subscribers.
On June 11, 1997, PrimeStar announced that it had entered into an
agreement to combine its assets with American Sky Broadcasting ("ASkyB").
According to press releases, each of PrimeStar's cable company partners will
contribute its PrimeStar customers and partnership interests into the newly
formed entity. ASkyB has announced that it will contribute two satellites under
construction and 28 full-CONUS frequencies at the 110
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<PAGE>
degrees W.L. orbital location. This proposed transaction requires certain
federal regulatory approvals. In addition, Tempo Satellite, Inc. has a license
for a satellite using 11 full-CONUS frequencies at the 119 degrees W.L. orbital
location, and recently launched a satellite to that location.
Other Competitors
Low power C-band operators reported approximately 2.1 million subscribers
at January 31, 1998. The C-band/home satellite television receive only ("TVRO")
market has been built primarily on subscribers who live in markets not served
by cable television. C-band equipment, including the six to eight foot dish
necessary to receive the low power signal, currently costs approximately $2,000
and is distributed by local TVRO satellite dealers. DTS believes that high and
medium power DTH services have significant advantages over low power C-band
service in equipment cost, dish size and range of programming packages. The
number of C-band subscribers declined by approximately 200,000 during 1996 and
early 1997 to 2.1 million as of January 31, 1998.
There are approximately 175 wireless cable systems in the United States,
serving approximately 1.2 million subscribers. These systems (which are usually
analog) typically offer only 20 to 40 channels of programming, which may
include local programming. Wireless cable requires a direct line of sight from
the receiver to the transmitter, which creates the potential for substantial
interference from terrain, buildings and foliage in the line of sight. However,
while it is expected that most large wireless operators (especially certain of
those backed by local telephone companies) will upgrade to digital technology
over the next several years, such upgrades will require the installation of new
digital decoders in customers' homes and modifications to transmission
facilities, at a potentially significant cost.
Certain regional telephone companies and other long distance companies
could become significant competitors in the future, as they have expressed an
interest in becoming subscription television providers. Furthermore,
legislation recently passed by Congress removes barriers to entry which
previously inhibited telephone companies from competing, or made it more
difficult for telephone companies to compete, in the provision of video
programming and information services. Certain telephone companies have received
authorization to test market video and other services in certain geographic
areas using fiber optic cable and digital compression over existing telephone
lines. Estimates for the timing of wide-scale deployment of such multichannel
video service vary, as several telephone companies have pushed back originally
announced deployment schedules.
As more telephone companies begin to provide subscription programming and
other information and communications services to their customers, additional
significant competition for subscribers will develop. Among other things,
telephone companies have an existing relationship with substantially every
household in their service area, substantial financial resources, and an
existing infrastructure and may be able to subsidize the delivery of
programming through their position as the sole source of telephone service to
the home.
Most areas of the U.S. are covered by traditional territorial over-the-air
VHF/UHF broadcasters. Consumers can receive from three to ten channels of
over-the-air programming in most markets. These stations provide local, network
and syndicated programming free of charge, but each major market is generally
limited in the number of programming channels. Congress is expected to consider
the release of additional digital spectrum for use by VHF/UHF broadcasters
later this year.
DBS Industry Background
The widespread use of satellites for television developed in the 1970s, as
a means to distribute news and entertainment programming to and from broadcast
television stations and to the headends of cable systems. The use of satellites
by cable systems permitted low cost networking of cable systems, thereby
promoting the growth of satellite-delivered pay channel services (such as HBO
and Showtime) and enhanced basic services (such as CNN, ESPN and C-SPAN).
The DTH satellite market developed as consumers in rural markets without
access to cable or broadcast television programming purchased TVRO products to
receive programming directed towards broadcast television stations and cable
headends. The DTH business has grown as satellite-delivered services have been
developed and marketed specifically for TVRO system owners.
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Until recently, most satellite applications for television were within the
C band radio frequencies allocated by the FCC for fixed satellite service
("FSS"). Most TVRO systems are designed to receive the signals of C band
satellites and require antennas ranging from six to 12 feet in diameter. Newer
DTH services may be transmitted using Ku band satellites, the signals of which
can be received with antennas ranging from three to six feet in diameter.
In the 1980s, the FCC began licensing additional radio spectrum within a
portion of the Ku band for broadcast satellite service ("BSS") or DBS service.
Unlike traditional FSS satellites, BSS satellites are designed specifically for
transmitting television signals directly to consumers. These satellites have
significantly higher effective radiated power, operate at higher frequencies
and are deployed at wider orbital spacing than FSS satellites. As a result,
they allow for reception using antennas as small as 18 inches in diameter.
Pursuant to international agreements governing the use of the radio
spectrum, there are eight orbital positions allocated for use by the U.S.
within the BSS band with 32 frequencies licensed to each orbital position. The
FCC initially awarded frequencies at these eight orbital locations to nine
companies, including Hughes and USSB.
Of the eight orbital locations for U.S.-licensed DBS satellites, only
three enable full coverage of the contiguous U.S. The remaining orbital
positions are situated to provide coverage to either the eastern or western
U.S., but not to both. The orbital location used by DIRECTV is one of the three
locations with full coverage and is considered to be the most centrally
located. Companies awarded frequencies at the three locations with full
coverage have a significant competitive advantage in providing nationwide
service.
Legislation and Regulation
On February 1, 1996, the Congress passed the Telecommunication Act of 1996
(the "1996 Act"). On February 8, 1996, President Clinton signed it into law.
This new law has altered and will alter federal, state and local laws and
regulations regarding telecommunications providers and services, including DTS
and the telecommunications services provided by DTS. There are numerous
rulemakings undertaken and to be undertaken by the FCC which will interpret and
implement the provisions of the 1996 Act. It is not possible at this time to
predict the outcome of such rulemakings that remain pending.
Unlike a common carrier, such as a telephone company, or a cable operator,
DBS operators such as DIRECTV are free to set prices and serve customers
according to their business judgment, without rate of return or other
regulation or the obligation not to discriminate among customers. However,
there are laws and regulations that affect DIRECTV and, therefore, affect DTS.
As an operator of a privately owned United States satellite system, DIRECTV is
subject to the regulatory jurisdiction of the FCC, primarily with respect to
(i) the licensing of individual satellites (i.e., the requirement that DIRECTV
meet minimum financial, legal and technical standards), (ii) avoidance of
interference with radio stations and (iii) compliance with rules that the FCC
has established specifically for DBS satellite licenses. As a distributor of
television programming, DIRECTV is also affected by numerous other laws and
regulations. The 1996 Act clarifies that the FCC has exclusive jurisdiction
over DTH satellite services and that criminal penalties may be imposed for
piracy of DTH satellite services. The 1996 Act also offers DTH operators relief
from private and local government-imposed restrictions on the placement of
receiving antennae. In some instances, DTH operators have been unable to serve
areas due to laws, zoning ordinances, homeowner association rules, or
restrictive property covenants banning the installation of antennae on or near
homes. The FCC recently promulgated rules designed to implement Congress'
intent by prohibiting any restriction, including zoning, land use or building
regulation, or any private covenant, homeowners' association rule, or similar
restriction on property within the exclusive use or control of the antenna user
where the user has a direct or indirect ownership interest in the property, to
the extent it impairs the installation, maintenance or use of a DBS receiving
antenna that is one meter or less in diameter or diagonal measurement, except
where such restriction is necessary to accomplish a clearly defined safety
objective or to preserve a recognized historic district. Local governments and
associations may apply to the FCC for a waiver of this rule based on local
concerns of a highly specialized or unusual nature. The FCC also issued a
further notice of proposed rulemaking seeking comment on whether the 1996 Act
applies to restrictions on property not within the exclusive use or control of
the viewer and in which the viewer has no direct or indirect property interest.
The 1996 Act also preempted local (but not state) governments from imposing
taxes or fees on DTH services,
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including DBS. Finally, the 1996 Act required that multichannel video
programming distributors such as DTH operators fully scramble or block channels
providing indecent or sexually explicit adult programming. If a multi-channel
video programming distributor cannot fully scramble or block such programming,
it must restrict transmission to those hours of the day when children are
unlikely to view the programming (as determined by the FCC). On March 24, 1997,
the U.S. Supreme Court let stand a lower court ruling that allows enforcement
of this provision pending a constitutional challenge. In response to this
ruling, the FCC declared that its rules implementing the scrambling provision
would become effective on May 18, 1997.
In addition to regulating pricing practices and competition within the
franchise cable television industry, the Cable Act was intended to establish
and support existing and new multi-channel video services, such as wireless
cable and DTH, to provide subscription television services. DIRECTV and DTS
have benefited from the programming access provisions of the Cable Act and
implementing rules in that DIRECTV has been able to gain access to previously
unavailable programming services and, in some circumstances, has obtained
certain programming services at reduced cost. Any amendment to, or
interpretation of, the Cable Act or the FCC's rules that would permit cable
companies or entities affiliated with cable companies to discriminate against
competitors such as DIRECTV in making programming available (or to discriminate
in the terms and conditions of such programming) could adversely affect
DIRECTV's ability to acquire programming on a cost-effective basis, which would
have an adverse impact on DTS. Certain of the restrictions on cable-affiliated
programmers will expire in 2002 unless the FCC extends such restrictions.
The Cable Act also requires the FCC to conduct a rulemaking that will
impose public interest requirements for providing video programming on DTH
licensees, including, at a minimum, reasonable and non-discriminatory access by
qualified candidates for office and the obligation to set aside four to seven
percent of the licensee's channel capacity for non-commercial programming of an
educational or informational nature. Within this set-aside requirement, DTH
providers must make capacity available to "national educational programming
suppliers" at below-cost rates. The FCC is conducting a rulemaking to implement
this statutory provision.
While DTH operators like DIRECTV currently are not subject to the "must
carry" requirements of the Cable Act, the cable industry has argued that DTH
operators should be subject to these requirements. In the event the "must
carry" requirements of the Cable Act are revised to include DTH operators, or
to the extent that new legislation of a similar nature is enacted, DIRECTV's
future plans to provide local programming will be adversely affected, and such
must-carry requirements could cause the displacement of possibly more
attractive programming.
The Satellite Home Viewer Act (the "SHVA") establishes a "compulsory"
copyright license that allows a DTH operator, for a statutorily-established
fee, to retransmit network programming to subscribers for private home viewing
so long as that retransmission is limited to those persons in unserved
households. In general, an "unserved household" is one that cannot receive,
through the use of a conventional outdoor rooftop antenna, a sufficient
over-the-air network signal, and has not, within 90 days prior to subscribing
to the DTH service, subscribed to a cable service that provides that network
signal. Although DIRECTV and DTS have implemented guidelines to safeguard
against violations of the SHVA, certain subscribers within DTS's service
territories receive network programming despite their misrepresentation that
they are unserved households. Although not mandated by law, DIRECTV and DTS
presently disconnect such subscribers which any local network affiliate
maintains are not unserved households. Pending Congressional action or
administrative rulemaking, the inability of DIRECTV and DTS to provide network
programming to subscribers in DIRECTV service territories could adversely
affect DTS' average programming revenue per subscriber and subscriber growth.
Facilities
DTS is headquartered in approximately 6,400 square feet of leased space in
Roswell, Georgia and maintains offices in Louisville, Kentucky; Hays, Kansas;
Santa Fe, New Mexico; Burlington, Vermont; Cortland, New York; Florence, South
Carolina; San Luis Obispo, California; and Albany, Georgia. DTS also maintains
full-service retail stores in Florence, South Carolina; Santa Fe, New Mexico
and San Luis Obispo, California.
Employees
As of February 28, 1998, DTS had approximately 241 full-time and 32
part-time employees. DTS is not a party to any collective bargaining agreement.
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Legal Proceedings
DTS is not a party to, nor is any of its properties subject to, any
material legal proceedings, other than routine litigation incidental to its
business.
PEGASUS MANAGEMENT
Executive Officers, Directors, and Designees for Director
Set forth below is certain information concerning the executive officers
and directors of Pegasus and those persons who will be designated by Columbia,
Whitney and Chisholm to the Pegasus Board following the Merger pursuant to the
Voting Agreement.
<TABLE>
<CAPTION>
Name Age Position
---- --- ---------
<S> <C> <C>
Marshall W. Pagon .............. 42 Chairman of the Board, President and Chief Execu-
tive Officer
Robert N. Verdecchio ........... 41 Senior Vice President, Chief Financial Officer, Trea-
surer, Assistant Secretary and Director
Ted S. Lodge ................... 41 Senior Vice President, Chief Administrative Officer,
General Counsel and Secretary
Howard E. Verlin ............... 36 Vice President and Assistant Secretary
James J. McEntee, III .......... 40 Director
Mary C. Metzger ................ 52 Director
Donald W. Weber ................ 61 Director
Harry F. Hopper, III ........... 44 Designee for Director
Michael C. Brooks .............. 53 Designee for Director
Riordon B. Smith ............... 37 Designee for Director
</TABLE>
Marshall W. Pagon has served as President, Chief Executive Officer and
Chairman of the Board of Pegasus since its incorporation, and served as
Treasurer of Pegasus from its incorporation to June 1997. Mr. Pagon also serves
as Chief Executive Officer and Director of each of Pegasus' subsidiaries. From
1991 to October 1994, when the assets of various affiliates of PM&C,
principally limited partnerships that owned and operated the Company's TV and
cable operations, were transferred to PM&C's subsidiaries, entities controlled
by Mr. Pagon served as the general partner of these partnerships and conducted
the business of the Company. Mr. Pagon's background includes over 17 years of
experience in the media and communications industry.
Robert N. Verdecchio has served as Pegasus' Senior Vice President, Chief
Financial Officer and Assistant Secretary since its inception and as Pegasus'
Treasurer since June 1997. He has also served similar functions for PM&C's
affiliates and predecessors in interest since 1990. Mr. Verdecchio has been a
Director of Pegasus and PM&C since December 18, 1997. Mr. Verdecchio is a
certified public accountant and has over 12 year of experience in the media and
communications industry.
Ted S. Lodge has served as Senior Vice President, Chief Administrative
Officer, General Counsel and Assistant Secretary of Pegasus since July 1, 1996.
In June 1997, Mr. Lodge became Pegasus' Secretary. From June 1992 through June
1996, Mr. Lodge practiced law with the law firm of Lodge & Company. During such
period, Mr. Lodge was engaged by the Company as its outside legal counsel in
connection with various matters.
Howard E. Verlin is a Vice President and Assistant Secretary of Pegasus
(and was until June 1997 its Secretary) and is responsible for operating
activities of the Company's DBS and cable subsidiaries, including supervision
of their general managers. Mr. Verlin has served similar functions with respect
to the Company's predecessors in interest and affiliates since 1987 and has
over 14 years of experience in the media and communications industry.
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James J. McEntee, III has been a Director of Pegasus since October 8,
1996. Mr. McEntee has been a member of the law firm of Lamb, Windle & McErlane,
P.C. for the past five years and a principal of that law firm for the past four
years.
Mary C. Metzger has been a Director of Pegasus since November 14, 1996.
Ms. Metzger has been Chairman of Personalized Media Communications L.L.C. and
its predecessor company, Personalized Media Communications Corp. since February
1989. Ms. Metzger has also been Managing Director of Video Technologies
International, Inc. since June 1986.
Donald W. Weber has been a Director of Pegasus since its incorporation and
a director of PM&C since November 1995. Until its acquisition by Pegasus in
November 1997, Mr. Weber had been the President and Chief Executive Officer of
ViewStar Entertainment Services, Inc., an NRTC associate that distributes
DIRECTV services in North Georgia, since August 1993. From November 1991
through August 1993, Mr. Weber was a private investor and consultant to various
communication companies. Prior to that time, Mr. Weber was President and Chief
Executive Officer of Contel Corporation until its merger with GTE Corporation
in 1991. Mr. Weber is currently a member of the boards of directors of
Powertel, Inc. and Healthdyne Information Enterprises, Inc., which are
publicly-traded companies.
Harry F. Hopper, III is Columbia's designee under the Voting Agreement to
serve on the Pegasus Board following consummation of the Merger. Mr. Hopper has
been a director of DTS, or a manager of its predecessor, Digital Television
Services, LLC, since June 1996 and serves in such capacity as a designee of the
holders of the Common Stock of DTS (including Columbia) pursuant to the DTS
Stockholders Agreement. Mr. Hopper has been a Managing Director of Columbia
since January 1997. From January 1994 to January 1997, Mr. Hopper was a Senior
Vice President of Columbia. From May 1990 to January 1994, he was an Executive
Vice President of the corporate general partners of Bachtel Cellular Liquidity,
LP and Paul S. Bachow Co-Investment Fund, LP.
Michael C. Brooks is Whitney's designee under the Voting Agreement to
serve on the Pegasus Board following consummation of the Merger. Mr. Brooks has
been a director of DTS, or a manager of its predecessor, Digital Television
Services, LLC, since February 1997 and serves in such capacity as a designee of
Whitney pursuant to the DTS Stockholders Agreement. He has been a general
partner of J.H. Whitney & Co., a venture capital firm ("J.H. Whitney"), since
January 1985 and currently serves as Managing Partner. Mr. Brooks is also a
director of SunGard Data Systems, Inc., DecisionOne Holdings Corp., Nitinol
Medical Technologies, Inc. and several private companies.
Riordon B. Smith is Chisholm's designee under the Voting Agreement to
serve on the Pegasus Board following consummation of the Merger. Mr. Smith has
been a director of DTS, or a manager of its predecessor, Digital Television
Services, LLC, since February 1997 and serves in such capacity as the designee
of Chisholm pursuant to the DTS Stockholders Agreement. Mr. Smith is a Senior
Vice President of Fleet Venture Resources, Inc., which he joined in 1990. Fleet
Venture Resources, Inc. is a private equity fund with an investment focus in
media and information, telecommunications services, healthcare services,
industrial manufacturing, business services and consumer products and services.
In connection with the acquisition of DIRECTV rights and related assets
from Harron Communications Corp., Pegasus Communications Holdings, Inc.,
Pegasus' parent corporation, agreed to nominate a designee of Harron as a
member of Pegasus' Board of Directors. Effective October 8, 1996, James J.
McEntee, III, was appointed to Pegasus' Board of Directors as Harron's
designee.
Upon consummation of the Merger, Columbia, Whitney and Chisholm will have
the right to designate one director each to the Pegasus Board pursuant to the
Voting Agreement. For a description of this right, see "THE MERGER -- Voting
Agreement."
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Executive Compensation
The following table sets forth certain information for the Company's last
three fiscal years concerning the compensation paid to the Chief Executive
Officer and to each of the Company's most highly compensated officers, whose
total annual salary and bonus for the fiscal year ended December 31, 1997
exceeded $100,000.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation
Compensation(1) Awards
------------------- --------------------------
Restricted Securities All
Stock Underlying Other
Name Principal Position Year Salary Award(2) Options Compensation(3)
- ---------------------- ------------------------------- ------ ----------- ------------ ------------ ----------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon President and Chief Executive 1997 $200,000 $100,558 85,000 $ 63,228(4)
Officer 1996 $150,000 -- -- $ 62,253(4)
1995 $150,000 -- -- --
Robert N. Verdecchio Senior Vice President and 1997 $150,000 $ 50,279 40,000 $ 9,500
Chief Financial Officer 1996 $125,000 $555,940 -- $ 6,875
1995 $122,083 $133,450 -- --
Ted S. Lodge(5) Senior Vice President, Chief 1997 $150,000 $ 40,223 40,000 $ 1,800
Administrative Officer and 1996 $ 75,000 -- -- --
General Counsel
Howard E. Verlin Vice President, Satellite 1997 $135,000 $100,558 40,000 $ 1,685
and Cable Television 1996 $100,000 -- -- $ 1,100
1995 $100,000 $ 95,321 -- --
</TABLE>
- ------------
(1) Prior to the consummation of the Initial Public Offering, the Company's
executive officers never received any salary or bonus compensation from
the Company. The salary amounts presented above for 1995 and for January
1, 1996 through October 8, 1996 were paid by Management Company, an
affiliate of the Company. After October 8, 1996, the Company's executive
officers' salaries were paid by the Company. There are no employment
agreements between the Company and its executive officers.
(2) Awards presented for 1995 represent grants of the non-voting common stock
of Pegasus Communications Holdings, Inc., the parent of the Company (the
"Parent"). In 1995, 875 shares and 625 shares of the Parent's non-voting
common stock were granted to Mr. Verdecchio and Mr. Verlin, respectively.
The amounts shown in the table for 1995 are based on a valuation prepared
for the Parent at the time of the grants. Upon the completion of the
Initial Public Offering, all shares of the Parent's non-voting common
stock were exchanged for shares of Class A Common Stock pursuant to the
Management Share Exchange Agreement. As a result, Messrs. Verdecchio and
Verlin received an aggregate of 131,193 and 39,321 shares of Class A
Common Stock, respectively. In addition, upon the Initial Public Offering,
certain shares of Class B Common Stock were exchanged for shares of Class
A Common Stock and distributed to certain members of management, including
38,807 shares of Class A Common Stock that were distributed to Mr.
Verdecchio. One-fourth of the aggregate shares granted in 1995 and 1996
vested or will vest on December 31 of each of 1995, 1996, 1997 and 1998.
In 1996, Mr. Verdecchio also received a grant of 903 shares pursuant to
the Company's Restricted Stock Plan, which shares were immediately vested.
On December 31, 1997, Messrs. Verdecchio and Verlin had an aggregate of
42,500 and 9,830 shares of Class A Common Stock, respectively, which were
unvested and had a value as of December 31, 1997 of $881,875 and $203,973,
respectively, based on the closing price of the Class A Common Stock on
such date of $20.75.
(3) Unless otherwise indicated, the amounts listed represent the Company's
contributions under its 401(k) Plans. The amounts listed for 1997 do not
include discretionary contributions that may be made by the Company since
such contributions, if any, have not been determined to date.
(4) Of the amounts listed for Mr. Pagon for 1997 and 1996, $9,500 and $8,525,
respectively, represent the Company's contributions under its 401(k) Plans
and $53,727 and $53,728, respectively, represent the actuarial benefit to
Mr. Pagon of premiums paid by the Company in connection with the split
dollar agreement entered into by the Company with the trustees of an
insurance trust established by Mr. Pagon. See "CERTAIN TRANSACTIONS --
Split Dollar Agreement."
(5) Mr. Lodge became an employee of the Company on July 1, 1996.
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Option Grants in 1997
<TABLE>
<CAPTION>
Potential Realizable Value
at Assumed Annual Rates of
Stock Price Appreciation for
Individual Grants Option Term(2)
--------------------------------------------------------- ---------------------------
% of Total
Options Granted Exercise
Options to Employees in Price Expiration
Name Granted Fiscal Year(1) Per Share Date 5% 10%
---- --------- ----------------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ 85,000 38.6% $ 11.00 3-21-07 $588,016 $1,490,149
Robert N. Verdecchio ......... 40,000 18.2% $ 11.00 3-21-07 $276,714 $ 701,247
Howard E. Verlin ............. 40,000 18.2% $ 11.00 3-21-07 $276,714 $ 701,247
Ted S. Lodge ................. 40,000 18.2% $ 11.00 3-21-07 $276,714 $ 701,247
</TABLE>
- ------------
(1) The Company granted options to employees and directors to purchase a total
of 220,000 shares during 1997.
(2) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock appreciation of 5% and 10% compounded
annually from the date the respective options were granted to their
expiration date.
Aggregated Option Exercises in 1997 and 1997 Year-End Option Values
<TABLE>
<CAPTION>
Number of Unexercised Value of Unexercised
Options at Fiscal In-the-Money Options
Year-End at Fiscal Year-End(1)
------------------------- ------------------------
Shares
Acquired on Exercis- Unexercis- Exercis- Unexercis-
Name Exercise Value Realized able able able able
---- ------------- ---------------- ---------- ------------ ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Marshall W. Pagon ............ -- -- -- 85,000 -- $828,750
Robert N. Verdecchio ......... -- -- -- 40,000 -- $390,000
Howard E. Verlin ............. -- -- -- 40,000 -- $390,000
Ted S. Lodge ................. -- -- -- 40,000 -- $390,000
</TABLE>
- ------------
(1) In-the-money options are those where the fair market value of the
underlying securities exceeds the exercise price of the option. The
closing price of the Company's Class A Common Stock on December 31, 1997
was $20.75 per share.
Compensation of Directors
Under Pegasus' By-Laws, each director is entitled to receive such
compensation, if any, as may from time to time be fixed by the Board of
Directors, Pegasus currently pays its directors who are not employees or
officers of Pegasus an annual retainer of $5,000 plus $500 for each Board
meeting attended in person and $250 for each Board meeting held by telephone.
Pegasus also reimburses each director for all reasonable expenses incurred in
traveling to and from the place of each meeting of the Board or committee of
the Board.
On March 21, 1997 and February 17, 1998, James J. McEntee, III, Mary C.
Metzger, and Donald W. Weber, representing all of Pegasus' nonemployee
directors, each received options under the Stock Option Plan to purchase 5,000
shares of Class A Common Stock. Each option vests in annual installments of
2,500 shares, was issued at an exercise price of $11.00 per share and $______,
respectively, (the price equal to the closing price of the Class A Common Stock
at the time of the grant), and are exercisable until the tenth anniversary from
the date of grant.
Compensation Committee Interlocks and Insider Participation
During 1997, decisions concerning executive compensation of executive
officers were generally made by the Board of Directors, which included Marshall
W. Pagon, the President and Chief Executive Officer of Pegasus, and since
December 18, 1997, Robert N. Verdecchio, Pegasus' Senior Vice President and
Chief Financial Officer. The Compensation Committee, however, made decisions
regarding option grants under the Stock Option Plan and discretionary awards
and special recognition awards to officers under the Restricted Stock Plan (as
defined).
105
<PAGE>
Incentive Program
The Incentive Program, which includes the Restricted Stock Plan, the
401(k) Plans (as defined) and the Stock Option Plan, is designed to promote
growth in stockholder value by providing employees with restricted stock awards
in the form of Class A Common Stock and grants of options to purchase Class A
Common Stock. Awards under the Restricted Stock Plan (other than excess and
discretionary awards) and the 401(k) Plans (other than matching contributions)
are in proportion to annual increases in Location Cash Flow. For this purpose
Location Cash Flow is automatically adjusted for acquisitions such that, for
the purpose of calculating the annual increase in Location Cash Flow, the
Location Cash Flow of the acquired properties is included as if it had been a
part of the Company's financial results for the comparable period of the prior
year.
The Company believes that the Restricted Stock Plan and 401(k) Plans
result in greater increases in stockholder value than result from a
conventional stock option program, because these plans create a clear cause and
effect relationship between initiatives taken to increase Location Cash Flow
and the amount of incentive compensation that results therefrom.
Although the Restricted Stock Plan and 401(k) Plans like conventional
stock option programs provide compensation to employees as a function of growth
in stockholder value, the tax and accounting treatments of these programs are
different. For tax purposes, incentive compensation awarded under the
Restricted Stock Plan (upon vesting) and the 401(k) Plans is fully tax
deductible as compared to conventional stock option grants which generally are
only partially tax deductible upon exercise. For accounting purposes,
conventional stock option programs generally do not result in a charge to
earnings while compensation under the Restricted Stock Plan and the 401(k)
Plans do result in a charge to earnings. The Company believes that these
differences result in a lack of comparability between the EBITDA of companies
that utilize conventional stock option programs and the EBITDA of the Company.
The table below lists the specific maximum components of the Restricted Stock
Plan (other than excess and discretionary awards) and the 401(k) Plans (other
than matching contributions) in terms of a $1 increase in annual Location Cash
Flow.
<TABLE>
<CAPTION>
Component Amount
--------- ------
<S> <C>
Restricted Stock grants to general managers based on the increase in annual Location Cash
Flow of individual business units ....................................................... 6 Cents
Restricted Stock grants to department managers based on the increase in annual Location
Cash
Flow of individual business units ....................................................... 6 Cents
Restricted Stock grants to corporate managers (other than executive officers) based on the
Company-wide increase in annual Location Cash Flow ...................................... 3 Cents
Restricted Stock grants to employees selected for special recognition .................... 5 Cents
Restricted Stock grants under the 401(k) Plans for the benefit of all eligible employees
and
allocated pro rata based on wages ....................................................... 10 Cents
Total .................................................................................. 30 Cents
</TABLE>
As of February 28, 1998, the Company has seven general managers, 35
department managers and four corporate managers.
Executive officers and non-employee directors are not eligible to receive
profit sharing awards under the Restricted Stock Plan. Executive officers are
eligible to receive awards under the Restricted Stock Plan consisting of (i)
special recognition awards, (ii) excess awards made to the extent that an
employee does not receive a matching contribution under the 401(k) Plans
because of restrictions of the Internal Revenue Code of 1986, as amended (the
"Code") and (iii) discretionary restricted stock awards determined by a Board
committee, or the full Board. Executive officers and non-employee directors are
eligible to receive options under the Stock Option Plan.
Restricted Stock Plan
For information with respect to the Restricted Stock Plan, see "PROPOSAL
2: AMENDMENT TO RESTRICTED STOCK PLAN."
Stock Option Plan
For information with respect to the Stock Option Plan, see "PROPOSAL 3:
AMENDMENT TO STOCK OPTION PLAN."
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<PAGE>
401(k) Plans
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "U.S. 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus
Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and,
together with the U.S. 401(k) Plan, the "401(k) Plans") for eligible employees
of the Company's Puerto Rico subsidiaries. Substantially all Company employees
who, as of the enrollment date under the 401(k) Plans, have completed at least
one year of service with the Company are eligible to participate in one of the
401(k) Plans. Participants may make salary deferral contributions of 2% to 6%
of salary to the 401(k) Plans.
The Company may make three types of contributions to the 401(k) Plans,
each allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year: (i) the Company matches 100% of a
participant's salary deferral contributions to the extent the participant
invested his or her salary deferral contributions in Class A Common Stock at
the time of his or her initial contribution to the 401(k) Plans; (ii) the
Company, in its discretion, may contribute an amount that equals up to 10% of
the annual increase in Company-wide Location Cash Flow (these Company
discretionary contributions, if any, are allocated to eligible participants'
accounts based on each participant's salary for the plan year); and (iii) the
Company also matches a participant's rollover contribution, if any, to the
401(k) Plans, to the extent the participant invests his or her rollover
contribution in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the form of Class A Common Stock, or in cash used to
purchase Class A Common Stock. The Company has authorized and reserved for
issuance up to 205,000 shares of Class A Common Stock in connection with the
401(k) Plans. Company contributions to the 401(k) Plans are subject to
limitations under applicable laws and regulations.
All employee contributions to the 401(k) Plans are fully vested at all
times and all Company contributions, if any, vest 34% after two years of
service with the Company (including years before the 401(k) Plans were
established); 67% after three years of service and 100% after four years of
service. A participant also becomes fully vested in Company contributions to
the 401(k) Plans upon attaining age 65 or upon his or her death or disability.
CERTAIN TRANSACTIONS
Split Dollar Agreement
In December 1996, the Company entered into a split dollar agreement with
the trustees of an insurance trust established by Marshall W. Pagon. Under the
split dollar agreement, the Company agreed to pay a portion of the premiums for
certain life insurance policies covering Mr. Pagon owned by the insurance
trust. The agreement provides that the Company will be repaid for all amounts
it expends for such premiums, either from the cash surrender value or the
proceeds of the insurance policies. For 1996 and 1997, the actuarial benefit to
Mr. Pagon of premiums paid by the Company amounted to $53,728 and $53,727,
respectively.
Loan Program
In February 1997, the Company adopted a program to assist its employees in
obtaining loans for various purposes, including to enable employees to pay
income taxes as a result of grants of Class A Common Stock by the Company.
Assistance may take the form of direct loans by the Company, guarantees by the
Company of loans made by third parties, or other forms of credit support or
credit enhancement, including without limitation, agreements by the Company to
purchase such loans, purchase any collateral securing such loans (including
Class A Common Stock), lend money or otherwise provide funds for the repayment
of such loans. Any direct loan by the Company may not exceed 75 percent of the
market value of the Class A Common Stock at the time that the loan is made.
In April 1997, Robert N. Verdecchio, Howard E. Verlin and Guyon W. Turner,
a former executive officer of Pegasus, obtained loans of $432,000, $68,000 and
$414,000, respectively, from a bank and pledged their shares
107
<PAGE>
of Class A Common Stock as security. Proceeds from the loans were used to pay
tax liabilities arising from grants of the Company's Class A Common Stock.
Pursuant to the loan program, the Company agreed, upon any default by these
officers under the loans, to purchase from the bank the Class A Common Stock
securing the loans for prices (ranging from $3.71 to $5.66 per share)
sufficient to repay the loans.
Harron Designee
In connection with the acquisition of DBS rights and related assets from
Harron Communications Corp. ("Harron") in October 1996, the Parent agreed to
nominate a designee of Harron as a member of the Company's Board of Directors.
James J. McEntee, III was appointed to the Company's Board of Directors as
Harron's designee. Harron's right to name a designee terminates on October 8,
1998.
ViewStar DBS Acquisition
Effective October 31, 1997, the Company acquired DIRECTV distribution
rights for certain rural areas of Georgia and related assets (the "ViewStar DBS
Acquisition") from ViewStar Entertainment Services, Inc. ("ViewStar"). Prior to
the acquisition, Donald W. Weber, a director of Pegasus, was the President and
Chief Executive Officer of ViewStar and together with his son owned
approximately 73% of the outstanding stock of ViewStar. The ViewStar DBS
Acquisition was effected through a merger of ViewStar into a subsidiary of
Pegasus. The purchase price of the ViewStar DBS Acquisition consisted of
approximately $6.4 million in cash and 397,035 shares of Class A Common Stock.
The acquisition involved the execution of noncompetition agreements by Mr.
Weber and his son and the execution of a shareholders agreement (which included
the granting of certain registration rights on the shares of Class A Common
Stock issued in connection with the acquisition).
Relationship with KB Prime Media and Affiliated Entities
The Company intends to enter into an agreement to sell to KB Prime Media,
L.L.C. ("KB Prime Media") the license for TV station WOLF, one of the Company's
TV stations serving the Northeastern Pennsylvania DMA, and certain related
assets, including leases and subleases for studio, office, tower and
transmitter space and equipment, for a cash payment of $500,000 and ongoing
rental payments of approximately $25,000 per year. The closing of this
transaction will be subject to FCC consent. KB Prime Media is a corporation
owned 80% by W.W. Keen Butcher, the stepfather of Marshall W. Pagon. The
Company will have an option to repurchase WOLF's license, subject to applicable
FCC rules and regulations, and related assets for a cash payment of $500,000
plus interest accruing at the rate of 12% per annum until the option is
exercised. Concurrently with the closing under the agreement described above,
the Company and KB Prime Media will enter into an LMA, pursuant to which the
Company will provide programming to WOLF and retain all revenues generated from
advertising in exchange for certain payments to KB Prime Media. The financial
terms of the LMA have not been finalized; however, the term of the LMA will be
seven years, with two automatic renewals.
The Company also intends to enter into an agreement to sell to KB Prime
Media the option to acquire the construction permit for unbuilt television
station WFXU and certain related assets, including leases and subleases for
studio, office, tower and transmitter space and equipment. WFXU will
rebroadcast WTLH pursuant to the terms of an LMA between the Company and KB
Prime Media. The terms of this transaction have not been finalized, and the
closing of the transaction is subject to FCC consent.
In addition to these two transactions, the Company expects to enter into
other transactions with companies controlled by Mr. Butcher relating to FCC
licenses, LMAs and similar arrangements that the Company determines to be of
benefit to it. In connection with such transactions, the Company anticipates
that it will provide guarantees or other forms of credit support for bank loans
to Mr. Butcher or companies controlled by him. To date the Company has pledged
approximately $1.1 million of bank deposits to collateralize loans to Mr.
Butcher the proceeds of which were contributed into another entity controlled
by Mr. Butcher and used as deposits for auctions of television licenses and
other operating expenses. The Company's board of directors has authorized the
Company to provide similar credit support for up to $3.0 million of credit to
Mr. Butcher for transactions that the Company determines to be to its
advantage. The Company will enter into LMAs, purchase options and related
arrangements with respect to any licenses acquired by Mr. Butcher's controlled
companies where the Company has provided credit support.
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<PAGE>
The Company believes that all of these transactions, including those with
respect to WOLF and WFXU, will be done at fair value.
The proposed LMAs with WOLF and WFXU are currently subject to no adverse
regulatory rulings or requirements. Because of the pendency of certain
rulemaking proceedings at the FCC, this situation cannot be guaranteed to
continue.
OWNERSHIP AND CONTROL
The following table sets forth certain information, as of February 28,
1998, with respect to the beneficial holdings of each director, each person who
will be elected to the Pegasus Board upon consummation of the Merger, each
executive officer, and all executive officers and directors as a group. The
table also sets forth the holdings of each stockholder who was known to Pegasus
to be the beneficial owner, as defined in Rule 13d-3 under the Exchange Act, of
more than 5% of the Class A Common Stock or Class B Common Stock, based upon
Company records or records of the Commission, and of each DTS Stockholder who
is anticipated to be the beneficial owner of more than 5% of the Class A Common
Stock or Class B Common Stock upon consummation of the Merger. The information
set forth in the table and the footnotes thereto which give effect to the
consummation of the Merger assumes that 5,465,500 shares of Class A Common
Stock in the aggregate will be issued to the DTS Stockholders. The actual
number of shares to be issued to the DTS Stockholders upon consummation of the
Merger may differ, but not materially, from those presented below. For
information concerning the calculation of the number of shares to be issued in
the Merger, see "THE MERGER -- The Merger Agreement -- Conversion of DTS
Capital Stock," "THE MERGER -- The Merger Agreement -- Conversion Ratio" and
"THE MERGER -- The Merger Agreement -- Treatment of Certain Outstanding Options
and Warrants." The information set forth below does not give effect to any
options or warrants that may be issued by Pegasus to replace the outstanding
DTS options and warrants upon consummation of the Merger.
Holders of Class A Common Stock are entitled to one vote per share on all
matters submitted to a vote of stockholders generally, and holders of Class B
Common Stock are entitled to ten votes per share. Shares of Class B Common
Stock are convertible immediately into shares of Class A Common Stock on a
one-for-one basis, and accordingly, holders of Class B Common Stock are deemed
to own the same number of shares of Class A Common Stock. Pegasus
Communications Holdings, Inc. (the "Parent"), two subsidiaries of the Parent
and Pegasus Capital, L.P. (collectively, the "Pegasus Entities") hold in the
aggregate all shares of Class B Common Stock, representing on a fully diluted
basis 44.4% and 29.0% of the Common Stock before and after the consummation of
the Merger, respectively (and 88.9% and, without giving effect to the Voting
agreement, 80.3% of the combined voting power of all voting stock before and
after the consummation of the Merger, respectively). Without giving effect to
the Voting Agreement, Marshall W. Pagon is deemed to be the beneficial owner of
all of the Class B Common Stock; the table gives effect to the Voting
Agreement. The outstanding capital stock of the Parent consists of 64,119
shares of Class A Voting Common Stock and 5,000 shares of Non-Voting Stock, all
of which are beneficially owned by Marshall W. Pagon.
109
<PAGE>
<TABLE>
<CAPTION>
Before Merger
--------------------------------------------------------------------------
Pegasus Class A Pegasus Class B
Name and address of Common Stock Common Stock Voting
Beneficial Owner Beneficially Owned Beneficially Owned Power
------------------- ------------------------------------ ------------------------ ----------
Shares % Shares % %
------------------------ ---------- ----------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon(1)(2) ......... 4,611,599(3) 44.6% 4,581,900 100.0% 88.9%
Robert N. Verdecchio ............ 165,242(5) (6) 2.8% -- -- *
Howard E. Verlin ................ 52,153(5) (6) * -- -- *
Ted S. Lodge .................... 15,669(6) (7) * -- -- *
James J. McEntee, III ........... 3,000(8) * -- -- *
Mary C. Metzger ................. 3,000(8) * -- -- *
Donald W. Weber(9) .............. 390,920(10) 6.8% -- -- *
Harron Communications
Corp.(11) ...................... 852,110 14.8% -- -- 1.6%
T. Rowe Price Associates,
Inc. and related
entities(12) ................... 480,400 8.4% -- -- *
Wellington Management
Company, LLP(13) ............... 494,500 8.6% -- -- *
PAR Investment Partners,
L.P. and related
entities(14) ................... 355,200 6.2% -- -- *
Columbia Entities
(as defined)(15) ............... -- -- -- -- --
Whitney Equity Partners,
L.P.(16) ....................... -- -- -- -- --
Fleet Entities
(as defined)(17) ............... -- -- -- -- --
Riordon B. Smith(18) ............ -- -- -- -- --
Michael C. Brooks(19) ........... -- -- -- -- --
Harry F. Hopper(20) ............. -- -- -- -- --
Directors and Executive
Officers as a group(21)
(consists of 7 persons
before the Merger and 10
persons after the Merger) ...... 5,241,583 50.4% 4,581,900 100.0% 90.0%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
After Merger
-----------------------------------------------------------------------------------
Pegasus Class A Pegasus Class B
Name and address of Common Stock Common Stock Voting
Beneficial Owner Beneficially Owned Beneficially Owned Power
------------------- -------------------------------------- ------------------------------- ----------
Shares % Shares % %
-------------------------- ---------- ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Marshall W. Pagon(1)(2) ......... 9,786,779(3) (4) 61.9% 4,581,900 100.0% 89.5%
Robert N. Verdecchio ............ 165,242(5) (6) 1.5% -- -- *
Howard E. Verlin ................ 52,153(5) (6) * -- -- *
Ted S. Lodge .................... 15,669(6) (7) * -- -- *
James J. McEntee, III ........... 3,000(8) * -- -- *
Mary C. Metzger ................. 3,000(8) * -- -- *
Donald W. Weber(9) .............. 390,920(9) 3.5% -- -- *
Harron Communications
Corp.(11) ...................... 852,110 7.6% -- -- 1.5%
T. Rowe Price Associates,
Inc. and related
entities(12) ................... 480,400 4.3% -- -- *
Wellington Management
Company, LLP(13) ............... 494,500 4.4% -- -- *
PAR Investment Partners,
L.P. and related
entities(14) ................... 355,200 3.2% -- -- *
Columbia Entities
(as defined)(15) ............... 9,786,779(3) (4) 61.9% 4,581,900(4) 100.0% 89.5%
Whitney Equity Partners,
L.P.(16) ....................... 9,786,779(3) (4) 61.9% 4,581,900(4) 100.0% 89.5%
Fleet Entities
(as defined)(17) ............... 9,786,779(3) (4) 61.9% 4,581,900(4) 100.0% 89.5%
Riordon B. Smith(18) ............ 9,786,779(3) (4) 61.9% 4,581,900(4) 100.0% 89.5%
Michael C. Brooks(19) ........... 9,786,779(3) (4) 61.9% 4,581,900(4) 100.0% 89.5%
Harry F. Hopper(20) ............. -- -- -- -- --
Directors and Executive
Officers as a group(21)
(consists of 7 persons
before the Merger and 10
persons after the Merger) ...... 10,416,763 65.8% 4,581,900 100.0% 90.5%
</TABLE>
- ------------
* Represents less than 1% of the outstanding shares of Class A Common Stock or
less than 1% of the voting power, as applicable.
(1) The address of this person is c/o Pegasus Communications Management
Company, 5 Radnor Corporate Center, Suite 454, 100 Matsonford Road,
Radnor, Pennsylvania 19087.
(2) Pegasus Capital, L.P. holds 1,217,348 shares of Class B Common Stock. Mr.
Pagon is the sole shareholder of the general partner of Pegasus Capital,
L.P. and is deemed to be the beneficial owner of these shares. All of the
3,364,552 remaining shares of Class B Common Stock are owned by the Parent
and two subsidiaries of the Parent. All shares of Class A Voting Common
Stock of the Parent are held by Pegasus Communications Limited
Partnership. Mr. Pagon controls Pegasus Communications Limited Partnership
by reason of his ownership of all the outstanding voting stock of the sole
general partner of a limited partnership that is, in turn, the sole
general partner in Pegasus Communications Limited Partnership. As such,
without giving effect to the Voting Agreement, Mr. Pagon is the beneficial
owner of 100% of Class B Common Stock with sole voting and investment
power over all such shares.
110
<PAGE>
(3) Includes 4,581,900 shares of Class B Common Stock, which are convertible
into shares of Class A Common Stock on a one-for-one basis and 17,000
shares of Class A Common Stock which are issuable upon the exercise of the
vested portion of outstanding stock options.
(4) Upon consummation of the Merger, Mr. Pagon, the Pegasus Entities, the
Columbia Entities (as defined), Whitney (as defined) and the Fleet
Entities (as defined) will enter into the Voting Agreement, which provides
that these parties vote all shares held by them in the manner specified in
the Voting Agreement. In particular, the Voting Agreement establishes that
the Pegasus Board will consist initially of nine members with three
independent directors, three directors to be designated by Mr. Pagon, and
one director to be designated by each of Columbia, Whitney and Chisholm
and that committees of the Pegasus Board consist of certain directors
designated by the parties to the Voting Agreement. See "THE MERGER --
Voting Agreement" and a copy of the Form of Voting Agreement which is
attached as Annex II to this Proxy Statement/Prospectus for more
information about the Voting Agreement. As a consequence of being parties
to the Voting Agreement, each of Mr. Pagon, the Pegasus Entities, the
Columbia Entities, Whitney, and the Fleet Entities are deemed to have
shared voting power over all shares beneficially owned by them in the
aggregate for the purposes specified in the Voting Agreement. As such, the
parties to the Voting Agreement are each deemed to be the beneficial owner
with respect to 4,581,900 shares of Class B Common Stock and 9,786,779
shares of Class A Common Stock (including 4,581,900 shares of Class A
Common Stock upon conversion of the all of the outstanding shares of Class
B Common Stock).
(5) On March 26, 1997, the Commission declared effective a registration
statement filed by Pegasus which would permit Messrs. Verdecchio and
Verlin to sell shares of Class A Common Stock subject to certain vesting
and other restrictions. As of February 28, 1998, Messrs. Verdecchio and
Verlin are permitted to sell 150,000 and 29,321 shares of Class A Common
Stock, respectively, pursuant to the registration statement. Messrs.
Verdecchio and Verlin have sole voting and investment power over their
shares, subject to certain vesting restrictions.
(6) Includes 9,090 shares of Class A Common Stock which are issuable upon the
exercises of the vested portion of outstanding stock options.
(7) Includes 1,500 shares of Class A Common Stock owned by Mr. Lodge's wife,
for which Mr. Lodge disclaims beneficial ownership, and 5,079 shares of
Class A Common Stock issued to Mr. Lodge and his wife, subject to certain
vesting restrictions.
(8) Includes 2,500 shares of Class A Common Stock which are issuable upon the
exercise of the vested portion of outstanding stock options.
(9) The address of this person is 525 Old Cobblestone Drive, Dunwoody, Georgia
30350.
(10) Includes 5,885 shares of Class A Common Stock issuable upon the exercise
of the vested portion of outstanding stock options.
(11) Under the terms of a stockholder's agreement entered into by the Company
in connection with the acquisition of direct broadcast satellite
television rights in Michigan and Texas, the Company has until October 8,
1998 a right of first offer to purchase any shares sold by Harron
Communications Corp. in a private transaction exempt from registration
under the Securities Act. The address of Harron Communications Corp. is 70
East Lancaster Avenue, Frazer, Pennsylvania 19355.
(12) T. Rowe Price Associates, Inc. ("T. Rowe Price") is deemed to be the
beneficial owner of 480,400 shares, over which it has sole investment
power and with respect to 13,000 shares sole voting power. The address of
T. Rowe Price is 100 East Pratt St., Baltimore, Maryland 21202.
(13) Consists of 207,400 shares over which Wellington Management Company, LLP
("WMC") has shared voting power and 494,500 shares over which WMC has
shared investment power. The address of WMC is 75 State Street, Boston,
Massachusetts 02109.
(14) PAR Investment Partners, L.P. ("PIP") has sole voting and investment power
with respect to 355,200 shares. The sole general partner of PIP is PAR
Group, L.P. ("PAR Group"), whose sole general partner is PAR Capital
Management, Inc. ("PAR Capital"). As a consequence, each of PAR Group and
PAR Capital may be deemed to be the beneficial owner of the 355,200 shares
held by PIP with sole voting and investment power with respect to such
shares. The address of PIP is Suite 1600, One Financial Center, Boston,
Massachusetts 02111.
(15) The Columbia Entities consist of Columbia Capital Corporation, Columbia
DBS Investors, L.P., Columbia DBS Class A Investors, LLC, and Columbia
DBS, Inc. Upon consummation of the Merger, Columbia DBS
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<PAGE>
Investors, L.P., Columbia DBS Class A Investors, LLC, and Columbia DBS,
Inc. will directly hold 2,990,072, 505,559, and 18,583, shares of Class A
Common Stock, respectively. Columbia Capital Corporation is the sole
general partner of Columbia DBS Investors, L.P., has directors who have a
majority of the voting power of Columbia DBS Class A Investors, LLC, and
has directors who also serve as directors of Columbia DBS, Inc. As such,
without giving effect to the Voting Agreement, Columbia Capital Corporation
has sole investment and voting power over the shares of Class A Common
Stock held by Columbia DBS Investors. Columbia Capital Corporation
disclaims beneficial ownership of all shares of Class A Common Stock held
by the Columbia Entities other than the shares held by Columbia DBS
Investors, L.P. Columbia DBS Investors, L.P., Columbia DBS Class A
Investors, LLC, and Columbia DBS, Inc. each disclaim beneficial ownership
of all shares of Class A Common Stock held by the Columbia Entities other
than shares held directly by each of them. The address of each of the
Columbia Entities is 201 N. Union Street, Suite 300, Alexandria, Virginia
22314-2642. Set forth below is a table setting forth information about the
shares of Class A Common Stock and the voting power associated with those
shares for each of the Columbia Entities without giving effect to the
Voting Agreement:
<TABLE>
<CAPTION>
Shares % of Class Voting Power
----------- ------------ -------------
<S> <C> <C> <C>
Columbia Capital Corporation ................. 3,514,214 31.4% 6.2 %
Columbia DBS Investors, L.P. ................. 2,990,072 26.7% 5.2 %
Columbia DBS Class A Investors, LLC .......... 505,559 4.5% 0.9 %
Columbia DBS, Inc. ........................... 18,583 0.2% 0.03%
</TABLE>
(16) Includes 938,973 shares of Class A Common Stock held directly by Whitney
Equity Partners, L.P. ("Whitney") over which it has, with the exception of
matters covered by the Voting Agreement, sole voting and investment power.
The shares of Class A Common Stock held directly by Whitney represent 8.4%
of the shares of Class A Common Stock to be outstanding upon consummation
of the Merger and voting power with respect to 1.6% of the Common Stock.
The address of Whitney is 177 Broad Street, Stamford, Connecticut 06901.
(17) The Fleet Entities consist of Fleet Venture Resources, Inc. ("Fleet
Venture"), Fleet Equity Partners VI, L.P. ("Fleet Equity"), Chisholm
Partners III, L.P. ("Chisholm"), and Kennedy Plaza Partners ("Kennedy").
Includes 397,342, 170,524, 144,289, and 9,838 shares of Class A Common
Stock held by Fleet Venture, Fleet Equity, Chisholm and Kennedy,
respectively. The address of each of the Fleet Entities is 50 Kennedy
Plaza, RI MO F12C, Providence, Rhode Island 02903.
(18) Upon consummation of the Merger, Mr. Smith will be elected to the Pegasus
Board. The information for Mr. Smith includes 397,342, 170,524, 144,289,
and 9,838 shares of Class A Common Stock held by Fleet Venture, Fleet
Equity, Chisholm and Kennedy, respectively. Mr. Smith is a Senior Vice
President of each of the managing general partners of Fleet Equity, is a
Senior Vice President of Fleet Venture, is a Senior Vice President of the
corporation that is the general partner of the partnership that is the
general partner of Chisholm, and a partner of Kennedy. As Senior Vice
President of Fleet Growth Resources II, Inc. and Silverado IV Corp. (the
two general partners of Fleet Equity) and as a Senior Vice President of
Fleet Venture and Silverado III Corp. (the general partner of the
partnership (Silverado III, L.P.) which is the general partner of
Chisholm), Mr. Smith may be considered to share investment and voting
power with Robert M. Van Degna and Habib Y. Gorgi, the Chairman and CEO,
and President, respectively, of the aforementioned entities. As a partner
of Kennedy, Mr. Smith may be considered to share investment and voting
power with Mr. Van Degna and Mr. Gorgi, the managing general partners of
Kennedy. Mr. Smith disclaims beneficial ownership of all shares held
directly by Fleet Venture and all shares held directly by Fleet Equity,
Chisholm, and Kennedy, except for his pecuniary interest therein. The
address of this person is 50 Kennedy Plaza, RI MO F12C, Providence, Rhode
Island 02903.
(19) Upon consummation of the Merger, Mr. Brooks will be elected to the Pegasus
Board. The information for Mr. Brooks includes 938,973 shares of Class A
Common Stock held by Whitney. Mr. Brooks has shared voting and investment
power over such shares of Class A Common Stock with the managing members
of the general partner of Whitney and disclaims beneficial ownership of
such shares of Class A Common Stock. The address of this person is 177
Broad Street, Stamford, Connecticut 06901.
(20) Upon consummation of the Merger, Mr. Hopper will be elected to the Pegasus
Board. The information for Mr. Hopper excludes 2,990,072 and 18,583 shares
of Class A Common Stock held by Columbia DBS
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Investors, L.P. and Columbia DBS, Inc., respectively. Mr. Hopper is a
shareholder of Columbia Capital Corporation and Columbia DBS, Inc. and a
limited partner of Columbia DBS Investors, L.P. Mr. Hopper disclaims
beneficial ownership of the shares of Common Stock held by Columbia DBS
Investors, L.P. and Columbia DBS, Inc.
(21) For information relating to the period before the Merger, see footnotes
(2) and (3) with respect to Mr. Pagon, (5), (6) and (7) with respect to
Messrs. Verdecchio, Verlin and Lodge, (8) with respect to Mr. McEntee and
Ms. Metzger, and (10) with respect to Mr. Weber. For information relating
to after the Merger, also see footnote (4).
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company (which, in this section,
refers only to Pegasus) consists of (i) 30,000,000 shares of Class A Common
Stock, par value $.01 per share (the "Class A Common Stock"), (ii) 15,000,000
shares of Class B Common Stock, par value $.01 per share (the "Class B Common
Stock" and, together with the Class A Common Stock, the "Common Stock"), and
(iii) 5,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). Of the 5,000,000 shares of Preferred Stock that the Company
is authorized to issue, approximately 112,215 shares have been designated as
Series A Preferred Stock. Without giving effect to the issuance of the 193,600
shares of Class A Common Stock issuable upon exercise of the Warrants, as of
February 28, 1998, 5,751,850 shares of Class A Common Stock, 4,581,900 shares
of Class B Common Stock and approximately 112,215 shares of Series A Preferred
Stock are outstanding.
For a more detailed description of Pegasus' capital stock, see "COMPARISON
OF STOCKHOLDERS RIGHTS" and "-- Description of Series A Preferred Stock."
Description of Series A Preferred Stock
General. The following is a summary of certain terms of the Series A
Preferred Stock. The terms of the Series A Preferred Stock are set forth in the
Certificate of Designation. This summary is not intended to be complete and is
subject to, and qualified in its entirety by reference to, the Company's
Amended and Restated Certificate of Incorporation and the Certificate of
Designation, which are filed as exhibits with the Commission. All terms defined
in the Certificate of Designation and not otherwise defined in this subsection
are used below with the meanings set forth in the Certificate of Designation.
Pursuant to the Certificate of Designation, approximately 112,215 shares
of Series A Preferred Stock with a liquidation preference of $1,000 per share
(the "Liquidation Preference") have been issued. On January 1, 2007, the
Company will be required to redeem (subject to the legal availability of funds
therefor) all outstanding shares of Series A Preferred Stock at a price in cash
equal to the liquidation preference thereof, plus accrued and unpaid dividends,
if any, to the date of redemption.
Dividends. The holders of shares of the Series A Preferred Stock are
entitled to receive, when, as and if dividends are declared by the Board of
Directors out of funds of the Company legally available therefor, cumulative
preferential dividends from the issue date of the Series A Preferred Stock
accruing at the rate per share of 12 3/4% per annum, payable semi-annually in
arrears on January 1 and July 1 of each year. Accumulated unpaid dividends bear
interest at a per annum rate 200 basis points in excess of the annual dividend
rate on the Series A Preferred Stock. Dividends are payable in cash, except
that on or prior to January 1, 2002, dividends may be paid, at the Company's
option, by the issuance of additional shares of Series A Preferred Stock
(including fractional shares) having an aggregate Liquidation Preference equal
to the amount of such dividends. The issuance of such additional shares of
Series A Preferred Stock will constitute "payment" of the related dividend for
all purposes of the Certificate of Designation.
Optional Redemption. The Series A Preferred Stock may not be redeemed at
the option of the Company on or prior to January 1, 2002. The Series A
Preferred Stock may be redeemed, in whole or in part, at the option of the
Company on or after January 1, 2002, at the redemption prices (expressed as
percentages of the liquidation preference thereof), starting at 106.375% during
the 12-month period beginning January 1, 2002 and declining annually to 100% on
January 1, 2005 and thereafter.
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In addition, prior to January 1, 2000, the Company may, on any one or more
occasions, use the net proceeds of one or more offerings of its Class A Common
Stock to redeem up to 25% of the shares of Series A Preferred Stock then
outstanding (whether initially issued or issued in lieu of cash dividends) at a
redemption price of 112.750% of the Liquidation Preference thereof plus,
without duplication, accumulated and unpaid dividends to the date of
redemption; provided that, after any such redemption, at least $75.0 million in
aggregate Liquidation Preference of Series A Preferred Stock remains
outstanding; and provided further, that any such redemption shall occur within
90 days of the date of closing of such offering of Class A Common Stock of the
Company.
Change of Control. Upon the occurrence of a Change of Control, each holder
of shares of Series A Preferred Stock will have the right to require the
Company to repurchase all or any part of such holder's Series A Preferred Stock
at an offer price in cash equal to 101% of the aggregate Liquidation Preference
thereof plus accrued and unpaid dividends, if any, thereon to the date of
purchase. Generally, a Change of Control means the occurrence of any of the
following: (i) the disposition of all or substantially all of the Company's
assets to any person other than Marshall W. Pagon or his Related Parties, (ii)
the adoption of a plan relating to the liquidation or dissolution of the
Company, (iii) the consummation of any transaction in which a person becomes a
beneficial owner of more of the voting stock of the Company than is
beneficially owned at such time by Mr. Pagon and his Related Parties, or (iv)
the first day on which a majority of the members of the Board of Directors of
the Company are not Continuing Directors.
Certain Covenants. The Certificate of Designation contains a number of
covenants restricting the operations of the Company and its subsidiaries,
which, among other things, limit the ability of the Company to issue capital
stock ranking on parity with or senior to the Series A Preferred Stock and the
ability of the Company and/or its subsidiaries to incur additional
Indebtedness, pay dividends or make distributions, issue subsidiary stock,
create certain liens, enter into certain consolidations or mergers and enter
into certain transactions with affiliates.
COMPARISON OF STOCKHOLDERS' RIGHTS
If the Merger is consummated, holders of DTS capital stock will become
holders of the Class A Common Stock, and the rights of such holders will be
governed by Pegasus' Amended and Restated Certificate of Incorporation (the
"Pegasus Certificate of Incorporation"), including the Certificate of
Designation. and Bylaws (the "Pegasus Bylaws"). The rights of Pegasus'
stockholders (the "Pegasus Stockholders") differ in certain respects from the
rights of DTS' stockholders (the "DTS Stockholders"). Without accounting for
the Merger, certain of the material differences are summarized below. This
summary is qualified in its entirety by reference to the full text of the
Pegasus Certificate of Incorporation, the Pegasus ByLaws, the Amended and
Restated Certificate of Incorporation of DTS (the "DTS Certificate of
Incorporation"), the Bylaws of DTS (the "DTS Bylaws"), the Stockholder
Agreement dated as of October 10, 1997, by and among, DTS, the holders of DTS'
common stock, and the holders of DTS' preferred stock (the "DTS Stockholder
Agreement"), and the Registration Rights Agreement dated as of February 10,
1997 (the "DTS Registration Rights Agreement"), by and among DTS, Whitney, the
Fleet Entities, Columbia DBS Class A Investors, LLC, Columbia DBS Investors,
L.P., Columbia DBS, Inc., Douglas S. Holladay, Jr., Donald A. Doering and
William J. Dorran (the "Investors").
Authorized Capital
The authorized capital stock of Pegasus consists of (i) 30.0 million
shares of Class A Common Stock, (ii) 15.0 million shares of Class B Common
Stock, and (iii) 5.0 million shares of Preferred Stock, par value $.01 per
share (the "Pegasus Preferred Stock"). Of the 5.0 million shares of Preferred
Stock that Pegasus is authorized to issue, 112,215 shares have been designated
as Series A Preferred Stock (the "Series A Preferred Stock").
DTS is authorized to issue up to 10.0 million shares of Common Stock, par
value $.01 per share (the "DTS Common Stock") and 10.0 million shares of
preferred stock, par value $.01 per share (the "DTS Preferred Stock"). A total
of 5.0 million of shares of the DTS Preferred Stock have been designated
"Series A Payment-in-Kind Convertible Preferred Stock" (the "DTS Series A
Preferred Stock").
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Voting, Liquidation, and Other Rights
With regard to Pegasus, the voting powers, preferences and relative rights
of the Class A Common Stock and the Class B Common Stock are identical in all
respects, except that (i) the holders of Class A Common Stock are entitled to
one vote per share and holders of Class B Common Stock are entitled to ten
votes per share, (ii) stock dividends on each class of Common Stock may be paid
only in shares of that class as described below under "Dividend Rights," and
(iii) shares of Class B Common Stock have certain conversion rights and are
subject to certain restrictions on ownership and transfer described below under
"Conversion Rights and Transfer Restrictions." Except as described below under
"Class Voting" or as required by law, holders of Class A Common Stock and Class
B Common Stock vote together on all matters presented to the stockholders for
their vote or approval, including the election of directors.
In the event of a merger or consolidation to which Pegasus is a party,
each share of Class A Common Stock and Class B Common Stock will be entitled to
receive the same consideration, except that holders of Class B Common Stock may
receive stock with greater voting power in lieu of stock with lesser voting
power received by holders of the Class A Common Stock in a merger in which
Pegasus is not the surviving corporation.
Subject to any rights of holders of the Pegasus Preferred Stock, all
holders of Common Stock, regardless of class, are entitled to share equally on
a share for share basis in any assets available for distribution to
stockholders on liquidation, dissolution or winding up of Pegasus. No shares of
Common Stock are subject to redemption or a sinking fund. In the event of any
increase or decrease in the number of outstanding shares of either Class A
Common Stock or Class B Common Stock from a stock split, combination or
consolidation of shares or other capital reclassification, Pegasus is required
to take parallel action with respect to the other class so that the number of
shares of each class outstanding immediately following the stock split,
combination, consolidation or capital reclassification bears the same
relationship to each other as the number of shares of each class outstanding
before such event.
With regard to DTS, in the event of any voluntary or involuntary
dissolution, winding up or liquidation, after payment or provision for payment
of all of DTS' debts and other liabilities, the holders of the DTS Series A
Preferred Stock will be entitled to receive, out of the remaining net assets of
DTS and in preference to the holders of the DTS Common Stock and any other
capital stock ranking junior to the DTS Series A Preferred Stock, the amount of
$22.50 (the "DTS Liquidation Preference") for each share of the DTS Series A
Preferred Stock, plus any accrued and unpaid dividends up to the date for such
distribution, whether or not declared. If, upon any liquidation of DTS, the
assets distributable among the holders of the DTS Series A Preferred Stock are
insufficient to permit the payment in full to the holders of the DTS Series A
Preferred stock and all other classes of preferred stock ranking (as to any
such distribution) senior to or on a parity with the DTS Series A Preferred
Stock, of all preferential amounts payable to all such holders, then the entire
assets of DTS thus distributable will be distributed ratably among the holders
of DTS Series A Preferred Stock and all classes and series of capital stock
ranking (as to any such distribution) senior to or on a parity with the DTS
Series A Preferred Stock in order of relative priority and, as to classes and
series ranking on a parity with one another, in proportion to the full
preferential amount that would be payable per share if such assets were
sufficient to permit payment in full. If, after payment of the DTS Liquidation
Preference to the holders of the DTS Series A Preferred Stock and the payment
of the liquidation preference with respect to any capital stock ranking (as to
any such distribution) senior to or on a parity with the DTS Series A Preferred
Stock, assets remain in DTS, all such remaining funds shall be distributed
first to the holders of the DTS Common Stock, until such holders have received
an amount per share equal to the DTS Liquidation Preference, subject to certain
adjustments, and then on an equal per share basis to holders of all capital
stock of DTS on a pro rata, as-if-converted to common stock basis.
Except as provided by law, the holders of the DTS Series A Preferred Stock
are entitled to only those voting rights set forth in the DTS Stockholders
Agreement.
Dividend Rights
Stock dividends on Class A Common Stock may be paid only in shares of
Class A Common Stock and stock dividends on Class B Common Stock may be paid
only in shares of Class B Common Stock. Each share of Class
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A Common Stock and Class B Common Stock is entitled to receive dividends if, as
and when declared by the Pegasus Board out of funds legally available therefor.
The Class A Common Stock and Class B Common Stock share equally, on a
share-for-share basis, in any cash dividends declared by the Pegasus Board.
The holders of shares of the Series A Preferred Stock are entitled to
receive, when, as and if dividends are declared by the Board of Directors out
of funds of Pegasus legally available therefor, cumulative preferential
dividends from the issue date of the Series A Preferred Stock accruing at the
rate per share of 12 3/4% per annum, payable semi-annually in arrears on
January 1 and July 1 of each year. Dividends are payable in cash, except that
on or prior to January 1, 2002, dividends may be paid, at Pegasus' option, by
the issuance of additional shares of Series A Preferred Stock (including
fractional shares) having an aggregate liquidation preference equal to the
amount of such dividends. Under the terms of the Senior Notes Indenture,
Pegasus is restricted from paying dividends in cash prior to July 1, 2002.
The holders of the DTS Series A Preferred Stock are entitled to receive
when, as and if declared by the DTS Board cumulative dividends payable on the
shares of the DTS Series A Preferred Stock for each quarterly dividend period,
at a rate of 8% per annum. DTS may, at its option, subject to certain
restrictions, pay a portion of dividends through the issuance of additional
shares of DTS Series A Preferred Stock.
Size and Make-up of the Board of Directors
The DTS Stockholders Agreement provides that the DTS Board shall consist
of seven members and requires the election of certain directors to be
designated by certain constituent groups. The DTS Stockholders Agreement also
contains provisions with respect to the size of the DTS Board and the number of
votes that certain directors may vote. Upon consummation of the Merger, the
Pegasus Board will be increased to nine members with directors to be designated
by certain entities or individuals. See "THE MERGER -- Voting Agreement."
Preemptive Rights
Pegasus' stockholders have no preemptive or other rights to subscribe for
additional shares. The DTS Stockholders Agreement provides, with certain
exceptions, that prior to the issuance of any additional shares of capital
stock of DTS each stockholder (other than any DTS stockholders who own shares
of DTS Common Stock solely through participation in DTS' employee stock plan)
shall be offered the right to purchase their proportionate share of such
additional shares of capital stock on the same terms and conditions as the
proposed issuance to others.
Change of Control
Upon the occurrence of a Change of Control (as defined in the Pegasus
Certificate of Designation), each holder of Series A Preferred Stock will have
the right to require Pegasus to repurchase all or any part of such holder's
Series A Preferred Stock at an offer price in cash equal to 101% of the
aggregate liquidation preference thereof plus accrued and unpaid dividends, if
any, thereon to the date of purchase.
With regard to DTS, under the DTS Stockholders Agreement, upon the
occurrence of a "change of control" of certain of the Columbia Entities, and
for a period of one year thereafter, either Whitney or the Fleet Entities may
implement a Vote Shift. A "Vote Shift" means (i) in the event there is a seven
member DTS Board, a change in the voting rights of the directors such that the
Chisholm designee and the Whitney designees shall have, in the aggregate, five
of the nine votes on the seven-member DTS Board and (ii) in the event there is
a nine member DTS Board, a change in the voting rights of the directors such
that the Chisholm designee and the Whitney designees shall have, in the
aggregate, seven of 13 votes on the nine-member DTS Board.
Conversion Rights and Transfer Restrictions
The Class A Common Stock has no conversion rights. Each share of Class B
Common Stock is convertible at the option of the holder at any time and from
time to time into one share of Class A Common Stock. The Pegasus Certificate of
Incorporation provides that any holder of shares of Class B Common Stock
desiring to
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transfer such shares to a person other than a Permitted Transferee (as the term
is defined in the Pegasus Certificate of Incorporation) must present such
shares to Pegasus for conversion into an equal number of shares of Class A
Common Stock upon such transfer. Thereafter, such shares of Class A Common
Stock may be freely transferred to persons other than Permitted Transferees,
subject to applicable securities laws.
Each holder of shares of the DTS Series A Preferred Stock will have the
right, exercisable at any time and from time to time, to convert all or any
such shares of DTS Series A Preferred Stock into shares of DTS Common Stock,
initially on a share-for-share basis. The conversion ratio of the DTS Series A
Preferred Stock is subject to certain adjustments. In addition, if DTS
consolidates or merges with, or transfers all or substantially all of its
assets to, another corporation, and such transaction requires the approval of
the DTS Stockholders, then a holder of the DTS Series A Preferred Stock may
convert some or all of such shares into shares of DTS Common Stock
simultaneously with the record date for, or the effective date of, such
transaction so as to receive the rights, warrants, securities or assets that a
holder of shares of the DTS Common Stock on that date may receive. If DTS
consummates an underwritten public offering of equity securities meeting
certain criteria, then the DTS Series A Preferred Stock is converted
automatically into shares of DTS Common Stock at an initial conversion rate of
one-for-one, subject to adjustment as described above.
A holder of DTS Common Stock or DTS Series A Preferred Stock may transfer
stock only if the transfer complies with the provisions of the DTS Stockholders
Agreement, which vary depending on whether the transferee falls within certain
transferee categories.
Rights of First Refusal
Under the terms of the DTS Stockholders Agreement, DTS and some of its
stockholders have rights of first refusal with respect to the transfer of DTS'
capital stock. Pegasus' stockholders do not have any such rights in connection
with its capital stock.
Rights of Co-Sale
If DTS' capital stock is transferred other than to certain permitted
transferees and such stock is not purchased by DTS pursuant to its right of
first refusal described above, each other DTS Stockholder has the option to
participate in the proposed transfer by selling, at the same price and on the
same terms as the proposed transfer, a proportionate number of shares based on
the relative holdings of those DTS Stockholders exercising their co-sale
rights. No rights of co-sale exist with respect to the Common Stock.
Class Voting
Any amendment to the Pegasus Certificate of Incorporation that has any of
the following effects will require the approval of the holders of a majority of
the outstanding shares of each of the Class A Common Stock and Class B Common
Stock, voting as separate classes: (i) any decrease in the voting rights per
share of Class A Common Stock or any increase in the voting rights of Class B
Common Stock, (ii) any increase in the number of shares of Class A Common Stock
into which shares of Class B Common Stock are convertible, (iii) any relaxation
on the restrictions on transfer of the Class B Common Stock, or (iv) any change
in the powers, preferences or special rights of the Class A Common Stock or
Class B Common Stock adversely affecting the holders of the Class A Common
Stock. The approval of the holders of a majority of the outstanding shares of
each of the Class A Common Stock and Class B Common Stock, voting as separate
classes, is also required to authorize or issue additional shares of Class B
Common Stock (except for parallel action with respect to Class A Common Stock
in connection with stock dividends, stock splits, recapitalizations and similar
changes in the capitalization of Pegasus).
With regard to DTS, for so long as any shares of DTS Series A Preferred
Stock are outstanding, with certain exceptions, a vote of the holders of at
least 70% of the DTS Series A Preferred Stock is required to effect certain
transactions, including, among other things, alterations in the rights of the
DTS Series A Preferred Stock, business combination transactions, transactions
with affiliates, or the redemption or repurchase of capital stock.
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LEGAL MATTERS
The validity of the shares of Class A Common Stock to be issued in
connection with the Merger will be passed upon by Drinker Biddle & Reath LLP,
counsel for the Company. Michael B. Jordan, a partner of Drinker Biddle & Reath
LLP, is an Assistant Secretary of the Company.
Drinker Biddle & Reath LLP has delivered an opinion to the effect that the
description of the Federal income tax consequences of the Merger under the
heading "THE MERGER -- Certain Federal Income Tax Consequences" correctly sets
forth the material federal income tax consequences of the Merger to Pegasus,
DTS and their respective stockholders. DTS' obligation to complete the Merger
is conditioned upon the DTS stockholders' receipt of an opinion to similar
effect from Nelson Mullins Riley & Scarborough, LLP, counsel to DTS.
EXPERTS
The Company's consolidated balance sheets as of December 31, 1996 and 1997
and the related consolidated statements of operations, statements of changes in
total equity and statements of cash flows for each of the three years in the
period ended December 31, 1997 included in this Proxy Statement/Prospectus,
have been included herein in reliance on the report of Coopers & Lybrand
L.L.P., independent accountants, given on the authority of that firm as experts
in accounting and auditing.
The (i) consolidated financial statements of DTS and its subsidiaries for
the period from inception (January 30, 1996) through December 31, 1996 and for
the year ended December 31, 1997, (ii) financial statements of WEP for the
period from inception (January 28, 1997) through September 30, 1997, (iii)
financial statements of Direct Programming Services Limited Partnership for the
years ended December 31, 1994, December 31, 1995 and December 31, 1996, (iv)
financial statements of Kansas DBS, L.L.C. for the years ended December 31,
1995 and December 31, 1996, (v) financial statements of the DBS Operations of
NRTC System No. 0422 for the years ended December 31, 1995 and December 31,
1996, (vi) financial statements of the DBS Operations of NRTC System No. 0073
for the year ended December 31, 1996, (vii) financial statements of Northeast
DBS Enterprises, L.P. for the year ended December 31, 1996, (viii) financial
statements of the DBS Operations of NRTC System No. 0001 for the years ended
December 31, 1995 and for the period from January 1, 1996 through November 26,
1996, (ix) financial statements of the DBS Operations of NRTC System No. 1025
for the period from March 10, 1995 (inception) through December 31, 1995 and
the period from January 1, 1996 through August 28, 1996, and (x) financial
statements of Ocmulgee Communications, Inc. for the years ended December 31,
1996 and 1997 appearing in this Proxy Statement/Prospectus have been audited by
Arthur Andersen LLP, independent accountants and are included herein in
reliance upon the authority of said firm as experts in giving said reports.
The financial statements of Northeast DBS Enterprises, L.P. for the years
ended December 31, 1994 and December 31, 1995 appearing in this Proxy
Statement/Prospectus have been audited by Fishbein & Company, P.C., independent
auditors and are included herein in reliance upon the authority of said firm as
experts in giving said reports.
The financial statements of Satellite Television Services, Inc. as of
September 30, 1997 and 1996 and for each of the three years in the period ended
September 30, 1997 included in this Proxy Statement/Prospectus have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
report appearing herein, and have been so included in reliance upon the report
of such firm given upon their authority as experts in accounting and auditing.
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GLOSSARY OF DEFINED TERMS
<TABLE>
<S> <C>
Certificate of Designation Pegasus' Certificate of Designation, Preferences and Relative, Partici-
pating, Optional and Other Special Rights thereof relating to the Series
A Preferred Stock.
Class A Common Stock Pegasus' Class A Common Stock, par value $.01 per share.
Class B Common Stock Pegasus' Class B Common Stock, par value $.01 per share.
Common Stock The Class A Common Stock and the Class B Common Stock.
Company Pegasus and its direct and indirect subsidiaries.
Completed Pegasus DBS
Acquisitions The acquisition of DBS territories and related assets from 26 indepen-
dent providers of DIRECTV services, which were all acquired from
January 1, 1997 to an effective date as of January 7, 1998.
Completed Pegasus Transactions The Completed Pegasus DBS Acquisitions, the New Hampshire Cable
Sale, the Unit Offering and the Senior Notes Offering.
Credit Facility PM&C's $180.0 million credit facility.
DBS Direct broadcast satellite television.
DBS Acquisitions The Completed Pegasus DBS Acquisitions and the Pending Pegasus
DBS Acquisitions.
DIRECTV The video, audio and data services provided via satellite by DIRECTV
Enterprises, Inc., or the entity, as applicable.
DSS Digital satellite system or DSS(R) DSS(R) is a registered trademark of
DIRECTV, Inc.
DTS Digital Television Services, Inc. and its subsidiaries, as applicable.
DTS Credit Facility DTS' $90.0 million credit facility, which consists of a $70 million
revolving credit facility (with a $50.0 million sublimit for letters of
credit) and a $20.0 million term loan facility.
DTS Indenture The indenture dated as of July 30, 1997 (as supplemented), among
DTS, certain of its subsidiaries and The Bank of New York, as trustee,
relating to the DTS Notes.
DTS Notes DTS' and DTS Capital, Inc.'s 12 1/2% Senior Subordinated Notes due
2007, Series A and Series B.
DTS Transactions (i) The 1996 Acquisitions, (ii) the 1997 Acquisitions, (ii) the sale in
January 1997 of 205,902 Class B Units to Columbia and senior man-
agement raising approximately $2.1 million of equity capital and the
sale by the Company in February 1997 of 1,333,333 Class A Units to
Columbia, J.H. Whitney & Co. and Fleet Partners raising an additional
$30.0 million of equity capital, (iv) the repayment of approximately
$14.8 million of outstanding indebtedness under certain seller notes
incurred in connection with the 1996 Acquisitions, the amendment and
restatement of DTS' former credit facility in May 1997 to provide for a
$50.0 million term loan facility and a revolving credit facility in the
amount of $85.0 million, with a $50.0 million limit for letters of credit,
(v) the Corporate Conversion, (vi) the acquisition of a DIRECTV ser-
vice territory in Georgia, which occurred on January 30, 1998, (vii) the
placement of approximately $37.0 million in an interest escrow account
(the "Interest Escrow Account") to fund the first four semi-annual inter-
est payments on the Series A 12 1/2% Senior Subordinated Notes due
2007 (the "DTS Notes"), (viii) the repayment of the $50.0 million term
loans which were outstanding under DTS' former credit facility and
</TABLE>
G-1
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<TABLE>
<S> <C>
approximately $32.2 million of the revolving credit loans which were
outstanding under the former DTS credit facility, and (ix) the amend-
ment and restatement of DTS' former credit facility. Certain terms used
in this definition are defined in "DTS MANAGEMENT'S DISCUS-
SION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION."
Exchange Note Indenture The indenture between Pegasus and First Union National Bank, as
trustee, governing the Exchange Notes.
Exchange Notes Pegasus' 12 3/4% Senior Subordinated Exchange Notes due 2007, which
are issuable at Pegasus' option in exchange for the Series A Preferred
Stock.
FCC Federal Communications Commission.
Fox Fox Broadcasting Company.
Hughes Hughes Electronics Corporation or one of its subsidiaries, including
DIRECTV, Inc., as applicable.
LMAs Local marketing agreements, program service agreements or time bro-
kerage agreements between broadcasters and television station licensees
pursuant to which broadcasters provide programming to and retain the
advertising revenues of such stations in exchange for fees paid to tele-
vision station licensees.
New England Cable Sale The proposed sale of the Company's New England cable systems.
New Hampshire Cable Sale The sale of the Company's New Hampshire cable system which took
place effective January 31, 1997.
NRTC The National Rural Telecommunications Cooperative, the only entity
authorized to provide DIRECTV services that is independent of
DIRECTV, Inc. Approximately 165 NRTC members and affiliate mem-
bers are authorized to provide DIRECTV services in exclusive territo-
ries granted to members and affiliate members of the NRTC by
DIRECTV, Inc.
Pegasus Pegasus Communications Corporation.
Pending Pegasus DBS
Acquisitions The acquisition of DBS territories and related assets from 14 indepen-
dent providers of DIRECTV services.
PM&C Pegasus Media & Communications, Inc., a wholly-owned subsidiary of
Pegasus.
PM&C Indenture The indenture dated July 7, 1995 by and among PM&C, certain of its
subsidiaries and First Union National Bank, as trustee, relating to the
PM&C Notes.
PM&C Notes PM&C's 12 1/2% Series B Senior Subordinated Notes due 2005 issued
in an aggregate principal amount of $85.0 million.
PSH Pegasus Satellite Holdings, Inc., a wholly-owned subsidiary of Pegasus,
which concurrently with the consummation of the Senior Notes Offer-
ing sold all of its assets to PM&C in connection with the Subsidiaries
Combination.
Senior Notes Pegasus' 9 5/8% Series A Senior Notes due 2005 issued in an aggregate
principal amount of $115.0 million or Pegasus' 95/8% Series B Senior
Notes due 2005, which were issued upon exchange of the Series A
Notes and which have terms substantially similar to the Series A Notes,
as applicable.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
Senior Notes Indenture The indenture between Pegasus and First Union National Bank, as
trustee, governing the Senior Notes.
Senior Notes Offering Pegasus' offering of the 9 5/8% Series A Senior Notes due 2005 issued
in an aggregate principal amount of $115.0 million.
Series A Preferred Stock Pegasus' 12 3/4% Series A Cumulative Exchangeable Preferred Stock,
which was offered in connection with the Unit Offering.
Subsidiaries Combination The acquisitions of the assets of PSH by PM&C, which occurred con-
currently with the consummation of the Senior Notes Offering.
Transactions The Completed Pegasus Transactions, the Pending Pegasus DBS
Acquisitions, the Senior Notes Offering, the Credit Facility, the Subsid-
iaries Combination, and the New England Cable Sale.
Unit Offering Pegasus' public offering of 100,000 Units consisting of 100,000 shares
of Series A Preferred Stock and 100,000 Warrants, which was com-
pleted on January 27, 1997.
Units The units consisting of Series A Preferred Stock and Warrants offered
in the Unit Offering.
UPN United Paramount Network.
WB The WB Television Network.
</TABLE>
G-3
<PAGE>
FINANCIAL STATEMENT INDEX
<TABLE>
<S> <C>
Page
----
Pegasus Communications Corporation
Report of Coopers & Lybrand L.L.P. ....................................................... F-4
Consolidated Balance Sheets as of December 31, 1996 and 1997 ............................. F-5
Consolidated Statements of Operations for the years ended December 31, 1995, 1996 and F-6
1997
Consolidated Statements of Changes in Total Equity for the years ended December 31, 1995,
1996 and
1997 .................................................................................... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and F-8
1997
Notes to Consolidated Financial Statements ............................................... F-9
Digital Television Services, Inc., formerly Digital Television Services, LLC (DTS)
(a proposed acquisition)
Report of Arthur Andersen LLP ............................................................ F-28
Consolidated Balance Sheets as of December 31, 1996 and 1997 ............................. F-29
Consolidated Statements of Operations for the Period from Inception (January 30, 1996)
Through
December 31, 1996 and for the Year Ended December 31, 1997 .............................. F-30
Consolidated Statements of Members'/Stockholders' Equity for the Period from Inception
(January 30,
1996) Through December 31, 1996 and for the Year Ended December 31, 1997 ................ F-31
Consolidated Statements of Cash Flows for the Period from Inception (January 30, 1996)
Through
December 31, 1996 and for the Year Ended December 31, 1997 .............................. F-32
Notes to Consolidated Financial Statements ............................................... F-33
WEP Intermediate Corp. (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-52
Balance Sheet as of September 30, 1997 ................................................... F-53
Statement of Cash Flows for the Period from Inception (January 28, 1997) through F-54
September 30, 1997
Notes to Financial Statements ............................................................ F-55
Direct Programming Services Limited Partnership (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-57
Balance Sheets as of December 31, 1995 and 1996 .......................................... F-58
Statements of Operations for the Years Ended December 31, 1994, 1995 and 1996 ............ F-59
Statements of Changes in Partners' Capital for the Years Ended December 31, 1994, 1995 F-60
and 1996
Statements of Cash Flows for the Years Ended December 31, 1994, 1995 and 1996 ............ F-61
Notes to Financial Statements ............................................................ F-62
Kansas DBS, L.L.C. (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-68
Balance Sheets as of December 31, 1995 and 1996 .......................................... F-69
Statements of Operations and Changes in Accumulated Deficit for the Years Ended December
31, 1995
and 1996 ................................................................................ F-70
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 .................. F-71
Notes to Financial Statements ............................................................ F-72
DBS Operations of NRTC System No. 0422 (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-77
Statements of Assets and Liabilities and Accumulated Deficit as of December 31, 1995 and
1996 and as
of March 31, 1997 (unaudited) ........................................................... F-78
Statements of Expenses over Revenues and Changes in Accumulated Deficit for the Years
Ended
December 31, 1995 and 1996 and for the Three Months Ended March 31, 1997 (unaudited) .... F-79
</TABLE>
F-1
<PAGE>
<TABLE>
<S> <C>
Page
-----
Statements of Cash Flows for the Years Ended December 31, 1995 and 1996 and for the Three
Months
Ended March 31, 1997 (unaudited) ........................................................ F-80
Notes to Financial Statements ............................................................ F-81
DBS Operations of NRTC System No. 0073 (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-86
Statement of Assets and Liabilities and Accumulated Earnings as of December 31, 1996 and
as of
March 31, 1997 (unaudited) .............................................................. F-87
Statements of Revenues over Expenses and Change in Accumulated Earnings for the Year Ended
December 31, 1996 and for the Three Months Ended March 31, 1997 (unaudited) ............. F-88
Statements of Cash Flows for the Year Ended December 31, 1996 and for the Three Months
Ended
March 31, 1997 (unaudited) .............................................................. F-89
Notes to Financial Statements ............................................................ F-90
Northeast DBS Enterprises, L.P. (a business acquired by DTS)
Report of Fishbein & Company, P.C ........................................................ F-95
Balance Sheets as of December 31, 1994 and 1995 .......................................... F-96
Statements of Operations and Partners' Equity for the Years Ended December 31, 1994 and F-97
1995
Statements of Cash Flows for the Years Ended December 31, 1994 and 1995 .................. F-98
Notes to Financial Statements ............................................................ F-100
Northeast DBS Enterprises, L.P. (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-104
Balance Sheet as of December 31, 1996 .................................................... F-105
Statement of Operations for the Year Ended December 31, 1996 ............................. F-106
Statement of Changes in Partners' Capital for the Year Ended December 31, 1996 ........... F-107
Statement of Cash Flows for the Year Ended December 31, 1996 ............................. F-108
Notes to Financial Statements ............................................................ F-109
DBS Operations of NRTC System No. 0001 (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-115
Statements of Assets and Liabilities and Accumulated Deficit as of December 31, 1995 and
November
26, 1996 ................................................................................ F-116
Statements of Expenses over Revenues and Changes in Accumulated Deficit for the Year
Ended Decem-
ber 31, 1995 and the Period From January 1, 1996 Through November 26, 1996 .............. F-117
Statements of Cash Flows for the Year Ended December 31, 1995 and the Period From January
1, 1996
Through November 26, 1996 ............................................................... F-118
Notes to Financial Statements ............................................................ F-119
DBS Operations of NRTC System No. 1025 (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-124
Statements of Assets and Liabilities and Accumulated Deficit as of December 31, 1995 and
August 28,
1996 .................................................................................... F-125
Statements of Expenses over Revenues and Changes in Accumulated Deficit for the Period
From March
10, 1995 (Inception) Through December 31, 1995 and the Period From January 1, 1996
Through
August 28, 1996 ......................................................................... F-126
Statements of Cash Flows for the Period From March 10, 1995 (Inception) Through December
31, 1995
and the Period From January 1, 1996 Through August 28, 1996 ............................. F-127
Notes to Financial Statements ............................................................ F-128
Satellite Television Services, Inc. (a business acquired by DTS)
Report of Deloitte & Touche LLP .......................................................... F-133
</TABLE>
F-2
<PAGE>
<TABLE>
<S> <C>
Page
-----
Balance Sheets as of September 30, 1996 and 1997 and December 31, 1997 (unaudited) ....... F-134
Statements of Cash Flows for the Years Ended September 30, 1995, 1996 and 1997 and the
three
months ended December 31, 1996 (unaudited) and 1997 (unaudited) ......................... F-135
Statements of Operations for the Years Ended September 30, 1995, 1996 and 1997 and the
three months
ended December 31, 1996 (unaudited) and 1997 (unaudited) ................................ F-136
Statements of Shareholder's Equity for the Years Ended September 30, 1995, 1996 and 1997
and the
three months ended December 31, 1997 (unaudited) ........................................ F-137
Notes to Financial Statements ............................................................ F-138
Ocmulgee Communications, Inc. (a business acquired by DTS)
Report of Arthur Andersen LLP ............................................................ F-142
Balance Sheets as of December 31, 1996 and 1997 .......................................... F-143
Statements of Operations for the Years Ended December 31, 1996 and 1997 .................. F-144
Statements of Changes in Stockholder's Deficit for the Years Ended December 31, 1996 and F-145
1997
Statements of Cash Flows for the Years Ended December 31, 1996 and 1997 .................. F-146
Notes to Financial Statements ............................................................ F-147
Pegasus Communications Corporation
Pro Forma Consolidated Financial Information (unaudited)
Basis of Presentation ................................................................. F-154
Pro Forma Consolidated Balance Sheet as of December 31, 1997 .......................... F-154
Notes to Pro Forma Consolidated Balance Sheet ......................................... F-156
Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1997 ... F-157
Notes to Pro Forma Consolidated Statements of Operations .............................. F-158
</TABLE>
F-3
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Pegasus Communications Corporation
We have audited the accompanying consolidated balance sheets of Pegasus
Communications Corporation as of December 31, 1996 and 1997, and the related
consolidated statements of operations, changes in total equity, and cash flows
for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pegasus
Communications Corporation as of December 31, 1996 and 1997, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1997 in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 26, 1998
F-4
<PAGE>
Pegasus Communications Corporation
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
----------------------------------
1996 1997
--------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................. $ 8,582,369 $ 44,049,097
Restricted cash ............................................ -- 1,220,056
Accounts receivable, less allowance for doubtful accounts of
$243,000 and $319,000, respectively ...................... 9,155,545 13,819,571
Program rights ............................................. 1,289,437 2,059,346
Inventory .................................................. 697,957 974,920
Deferred taxes ............................................. 1,290,397 2,602,453
Prepaid expenses and other ................................. 851,592 788,669
------------- -------------
Total current assets ..................................... 21,867,297 65,514,112
Property and equipment, net ................................. 24,115,138 27,686,646
Intangible assets, net ...................................... 126,236,128 284,774,027
Program rights .............................................. 1,294,985 2,262,299
Deposits and other .......................................... 166,498 624,629
------------- -------------
Total assets ............................................... $ 173,680,046 $ 380,861,713
============= =============
LIABILITIES AND TOTAL EQUITY
Current liabilities:
Current portion of long-term debt .......................... $ 363,833 $ 6,357,320
Accounts payable ........................................... 5,075,981 10,240,615
Accrued interest ........................................... 5,592,083 8,177,261
Accrued expenses ........................................... 3,803,993 6,973,297
Current portion of program rights payable .................. 601,205 1,418,581
------------- -------------
Total current liabilities ................................ 15,437,095 33,167,074
Long-term debt, net ......................................... 115,211,610 201,997,811
Program rights payable ...................................... 1,365,284 1,416,446
Deferred taxes .............................................. 1,339,859 2,652,454
------------- -------------
Total liabilities .......................................... 133,353,848 239,233,785
Commitments and contingent liabilities ...................... -- --
Minority interest ........................................... -- 3,000,000
Series A preferred stock .................................... -- 111,264,424
Common stockholders' equity:
Class A common stock ....................................... 46,632 57,399
Class B common stock ....................................... 45,819 45,819
Additional paid-in capital ................................. 57,736,011 64,034,687
Deficit .................................................... (17,502,264) (36,774,401)
------------- -------------
Total common stockholders' equity ........................ 40,326,198 27,363,504
------------- -------------
Total liabilities and stockholders' equity ................. $ 173,680,046 $ 380,861,713
============= =============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------
1995 1996 1997
--------------- ---------------- ----------------
<S> <C> <C> <C>
Revenues:
Basic and satellite service .................................. $10,002,579 $ 16,645,428 $ 49,305,330
Premium services ............................................. 1,652,419 2,197,188 4,665,823
Broadcasting revenue, net of agency commissions .............. 14,862,734 21,813,409 23,927,876
Barter programming revenue ................................... 5,110,662 6,337,220 7,520,000
Other ........................................................ 519,682 935,387 1,399,397
----------- ------------ ------------
Total revenues ............................................. 32,148,076 47,928,632 86,818,426
----------- ------------ ------------
Operating expenses:
Programming .................................................. 5,475,623 9,889,895 24,340,556
Barter programming expense ................................... 5,110,662 6,337,220 7,520,000
Technical and operations ..................................... 2,740,670 3,271,564 3,741,708
Marketing and selling ........................................ 3,928,073 5,481,315 14,352,775
General and administrative ................................... 3,885,473 5,923,247 12,129,765
Incentive compensation ....................................... 527,663 985,365 1,273,872
Corporate expenses ........................................... 1,364,323 1,429,252 2,256,233
Depreciation and amortization ................................ 8,751,489 12,060,498 27,791,903
----------- ------------ ------------
Income (loss) from operations .............................. 364,100 2,550,276 (6,588,386)
Interest expense .............................................. (8,793,823) (12,454,891) (16,094,037)
Interest expense -- related party ............................. (22,759) -- --
Interest income ............................................... 370,300 232,361 1,538,569
Other expenses, net ........................................... (44,488) (171,289) (723,439)
Gain on sale of cable system .................................. -- -- 4,451,320
----------- ------------ ------------
Loss before income taxes and extraordinary items ............. (8,126,670) (9,843,543) (17,415,973)
Provision (benefit) for income taxes .......................... 30,000 (120,000) 200,000
----------- ------------ ------------
Loss before extraordinary items .............................. (8,156,670) (9,723,543) (17,615,973)
Extraordinary gain (loss) from extinguishment of debt ......... 10,210,580 (250,603) (1,656,164)
----------- ------------ ------------
Net income (loss) ............................................ 2,053,910 (9,974,146) (19,272,137)
Preferred stock dividends .................................... -- -- 12,215,000
----------- ------------ ------------
Net income (loss) applicable to common shares ................ $ 2,053,910 ($ 9,974,146) ($ 31,487,137)
=========== ============ ============
Basic and diluted earnings per common share:
Loss before extraordinary items .............................. ($ 1.59) ($ 1.56) ($ 3.02)
Extraordinary gain (loss) .................................... 1.99 ( 0.04) ( 0.17)
----------- ------------ ------------
Net income (loss) ............................................ $ 0.40 ($ 1.60) ($ 3.19)
=========== ============ ============
Weighted average shares outstanding .......................... 5,139,929 6,239,646 9,858,244
=========== ============ ============
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Changes in Total Equity
<TABLE>
<CAPTION>
Common Stock
Series A --------------------------
Preferred Number Par
Stock of Shares Value
--------------- ------------- -----------
<S> <C> <C> <C>
Balances at January 1, 1995 ................... 494 $ 494
Net income (loss) .............................
Distributions to Partners .....................
Distributions to Parent .......................
Exchange of common stock ...................... 161,006 1,121
Issuance of Class B common stock .............. 8,500 85
------- --------
Balances at December 31, 1995 ................. 170,000 1,700
Net loss ......................................
Contributions by Parent .......................
Distributions to Parent .......................
Issuance of Class A common stock due to:
Initial Public Offering ...................... 3,000,000 30,000
WPXT Acquisition ............................. 82,143 821
MI/TX DBS Acquisition ........................ 852,110 8,521
Awards ....................................... 3,614 36
Issuance of Class B common stock due to:
WPXT Acquisition ............................. 71,429 714
Conversions of partnerships ...................
Exchange of PM&C Class B ...................... 183,275 1,833
Exchange of PM&C Class A ...................... 4,882,541 48,826
--------- --------
Balances at December 31, 1996 ................. 9,245,112 92,451
Net loss ......................................
Issuance of Class A common stock due to:
Acquisitions of DBS properties ............... 923,860 9,239
Liveoak Transaction .......................... 34,000 340
Incentive compensation and awards ............ 118,770 1,188
Issuance of Class A preferred stock due to:
Unit Offering ................................ $100,000,000
Paid and accrued dividends ................... 12,215,000
Issuance of warrants due to:
Acquisition of DBS properties ................
Unit Offering ................................ (950,576)
------------
Balances at December 31, 1997 ................. $111,264,424 10,321,742 $103,218
============ ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Additional Retained Partners' Common
Paid-In Earnings Capital Stockholders'
Capital (Deficit) (Deficit) Equity
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Balances at January 1, 1995 ................... $ 16,382,054 ($ 3,905,909) ($ 5,535,017) $ 6,941,622
Net income (loss) ............................. 5,731,192 (3,677,282) 2,053,910
Distributions to Partners ..................... (246,515) (246,515)
Distributions to Parent ....................... (12,500,000) (12,500,000)
Exchange of common stock ...................... (1,121)
Issuance of Class B common stock .............. 3,999,915 4,000,000
-------------- --------------
Balances at December 31, 1995 ................. 7,880,848 1,825,283 (9,458,814) 249,017
Net loss ...................................... (5,934,261) (4,039,885) (9,974,146)
Contributions by Parent ....................... 579,152 105,413 684,565
Distributions to Parent ....................... (2,946,379) (2,946,379)
Issuance of Class A common stock due to:
Initial Public Offering ...................... 38,153,000 38,183,000
WPXT Acquisition ............................. 1,149,179 1,150,000
MI/TX DBS Acquisition ........................ 11,921,025 11,929,546
Awards ....................................... 50,559 50,595
Issuance of Class B common stock due to:
WPXT Acquisition ............................. 999,286 1,000,000
Conversions of partnerships ................... (13,393,286) 13,393,286
Exchange of PM&C Class B ...................... (1,833)
Exchange of PM&C Class A ...................... (48,826)
--------------
Balances at December 31, 1996 ................. 57,736,011 (17,502,264) -- 40,326,198
Net loss ...................................... (19,272,137) (19,272,137)
Issuance of Class A common stock due to:
Acquisitions of DBS properties ............... 14,827,014 14,836,253
Liveoak Transaction .......................... 360,910 361,250
Incentive compensation and awards ............ 1,307,453 1,308,641
Issuance of Class A preferred stock due to:
Unit Offering ................................
Paid and accrued dividends ................... (12,215,000) (12,215,000)
Issuance of warrants due to:
Acquisition of DBS properties ................ 1,067,723 1,067,723
Unit Offering ................................ 950,576 950,576
-------------- --------------
Balances at December 31, 1997 ................. $ 64,034,687 ($ 36,774,401) -- $ 27,363,504
============== ============ =========== ==============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
Pegasus Communications Corporation
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------------------
1995 1996 1997
---------------- ---------------- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ................................................ $ 2,053,910 ($ 9,974,146) ($ 19,272,137)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary (gain) loss on extinguishment of debt, net ......... (10,210,580) 250,603 1,656,164
Depreciation and amortization .................................... 8,751,489 12,060,498 27,791,903
Program rights amortization ...................................... 1,263,190 1,514,122 1,715,556
Accretion on discount of bonds ................................... 195,454 392,324 394,219
Stock incentive compensation ..................................... -- 50,595 --
Gain on sale of cable system ..................................... -- -- (4,451,320)
Bad debt expense ................................................. 146,147 335,856 1,141,913
Change in assets and liabilities:
Accounts receivable ............................................ (815,241) (4,607,356) (5,608,113)
Inventory ...................................................... (389,318) 402,942 (115,800)
Prepaid expenses and other ..................................... 490,636 (521,697) 305,066
Accounts payable and accrued expenses .......................... (796,453) 4,552,633 7,308,021
Advances payable -- related party .............................. 326,279 (468,327) --
Accrued interest ............................................... 5,173,745 418,338 2,585,178
Deposits and other ............................................. 5,843 (74,173) (458,131)
------------- ------------ -------------
Net cash provided by operating activities ......................... 6,195,101 4,332,212 12,992,519
------------- ------------ -------------
Cash flows from investing activities:
Acquisitions ................................................... -- (72,567,216) (133,886,247)
Cash acquired from acquisitions ................................ -- -- 379,044
Capital expenditures ........................................... (2,640,475) (6,294,352) (9,929,181)
Purchase of intangible assets .................................. (2,334,656) (1,758,727) (7,548,345)
Payments of programming rights ................................. (1,233,777) (1,830,903) (2,584,241)
Proceeds from sale of cable system ............................. -- 6,945,270
Other .......................................................... (250,000) -- --
------------- ------------ -------------
Net cash used for investing activities ........................... (6,458,908) (82,451,198) (146,623,700)
------------- ------------ -------------
Cash flows from financing activities:
Proceeds from long-term debt ................................... 81,455,919 -- 115,000,000
Repayments of long-term debt ................................... (48,095,692) (103,639) (320,612)
Borrowings on revolving credit facilities ...................... 2,591,335 41,400,000 94,726,250
Repayments of revolving credit facilities ...................... (2,591,335) (11,800,000) (124,326,250)
Proceeds from borrowings from related parties .................. 20,000 -- --
Restricted cash ................................................ (9,881,198) 9,881,198 (1,220,056)
Debt issuance costs ............................................ (3,974,454) (304,237) (10,236,823)
Capital lease repayments ....................................... (166,050) (267,900) (336,680)
Contributions by Parent ........................................ -- 684,565 --
Distributions to Parent ........................................ (12,500,000) (2,946,379) --
Proceeds from issuance of common stock ......................... 4,000,000 42,000,000 --
Underwriting and IPO costs ..................................... (3,817,000) --
Proceeds from issuance of Series A preferred stock ............. -- -- 100,000,000
Underwriting and preferred offering costs ...................... -- -- (4,187,920)
------------- ------------ -------------
Net cash provided by financing activities ........................ 10,858,525 74,726,608 169,097,909
------------- ------------ -------------
Net increase (decrease) in cash and cash equivalents .............. 10,594,718 (3,392,378) 35,466,728
Cash and cash equivalents, beginning of year ...................... 1,380,029 11,974,747 8,582,369
------------- ------------ -------------
Cash and cash equivalents, end of year ............................ $ 11,974,747 $ 8,582,369 $ 44,049,097
============= ============ =============
</TABLE>
See accompanying notes to consolidated financial statements
F-8
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Pegasus Communications Corporation ("Pegasus" or together with its
subsidiaries stated below, the "Company"), is a diversified media and
communications company, incorporated under the laws of the State of Delaware in
May 1996, and is a direct subsidiary of Pegasus Communications Holdings, Inc.
("PCH" or the "Parent"). Pegasus' subsidiaries are Pegasus Media &
Communications, Inc. ("PM&C"), Pegasus Development Corporation ("PDC"), Pegasus
Towers, Inc. ("Towers") and Pegasus Communications Management Company ("PCMC").
PM&C is a diversified media and communications company whose subsidiaries
provide direct broadcast satellite television ("DBS") services to customers in
certain rural areas which encompass portions of twenty-seven states, operate
cable television ("Cable") systems that provide service to individual and
commercial subscribers in New England and Puerto Rico, owns and operates
broadcast television ("TV") stations affiliated with the Fox Broadcasting
Company ("Fox") and operates, pursuant to local marketing agreements, stations
affiliated with United Paramount Network ("UPN") and The WB Television Network
("WB").
PDC provides capital for various Satellite initiatives such as subscriber
acquisitions costs. Towers owns and operates transmitting towers located in
Pennsylvania and Tennessee. PCMC provides certain management and accounting
services for the Company.
In October 1996, Pegasus completed an initial public offering (the
"Initial Public Offering") in which it sold 3,000,000 shares of its Class A
Common Stock to the public at a price of $14 per share, resulting in net
proceeds to the Company of $38.1 million.
In January 1997, Pegasus completed a unit offering (the "Unit Offering")
in which it sold 100,000 shares of 12.75% Series A Cumulative Exchangeable
Preferred Stock (the "Series A Preferred Stock") and warrants to purchase
193,600 shares of Class A Common Stock at an exercise price of $15 per share,
to the public at a price of $1,000 per unit, resulting in net proceeds to the
Company of $95.8 million. The Company applied the net proceeds from the Unit
Offering as follows: (i) $30.1 million to the repayment of all outstanding
indebtedness under the PM&C Credit Facility (as defined) and expenses related
thereto, and (ii) $56.5 million for the payment of the cash portion of the
purchase price for the acquisition of DBS assets from nine independent DIRECTV
providers. The remaining net proceeds were used for working capital, general
corporate purposes and to finance other acquisitions.
In October 1997, the Company completed a senior notes offering (the
"Senior Notes Offering") in which it sold $115.0 million of 9.625% Series A
Senior Notes (the "Senior Notes"), resulting in net proceeds to the Company of
approximately $111.0 million. The Company applied the net proceeds from the
Senior Notes Offering as follows: (i) $94.2 million to the repayment of all
outstanding indebtedness under the PSH Credit Facility (as defined), and (ii)
$16.8 million for the payment of the cash portion of the purchase price for the
acquisition of DBS assets from various independent DIRECTV providers.
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying consolidated financial statements include the accounts of
Pegasus and all of its subsidiaries or affiliates. All intercompany
transactions and balances have been eliminated.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to barter transactions and
the useful lives and recoverability of intangible assets.
F-9
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
Long-Lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence that suggest that the carrying amounts may not
be recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows.
Property and Equipment:
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets sold, retired or otherwise disposed of are
removed from the respective accounts, and any resulting gains or losses are
included in the statement of operations. For cable television systems, initial
subscriber installation costs, including material, labor and overhead costs of
the hookup are capitalized as part of the distribution facilities. The costs of
disconnection and reconnection are charged to expense. Satellite equipment that
is leased to customers is stated at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Reception and distribution facilities ......... 7 to 11 years
Transmitter equipment ......................... 5 to 10 years
Equipment, furniture and fixtures ............. 5 to 10 years
Building and improvements ..................... 12 to 39 years
Vehicles. ..................................... 3 to 5 years
Intangible Assets:
Intangible assets are stated at cost and amortized by the straight-line
method. Costs of successful franchise applications are capitalized and
amortized over the lives of the related franchise agreements, while
unsuccessful franchise applications and abandoned franchises are charged to
expense. Financing costs incurred in obtaining long-term financing are
amortized over the term of the applicable loan.
Amortization of Intangible Assets is computed using the straight-line
method based upon the following lives:
Broadcast licenses. ..................... 40 years
Network affiliation agreements. ......... 40 years
Goodwill. ............................... 40 years
DBS rights. ............................. 10 to 12 years
Other intangibles ....................... 2 to 14 years
Subscriber acquisition costs ............ 1 year
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased with
an initial maturity of three months or less. The Company has cash balances in
excess of the federally insured limits at various banks.
F-10
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
Restricted Cash:
The Company has restricted cash held in escrow of approximately $1.2
million at December 31, 1997 to collateralize loans made by banks to employees
enabling them to pay income taxes as a result of grants of Class A Common Stock
by the Company.
Financial Instruments:
The Company uses interest rate cap contracts for the purpose of hedging
interest rate exposures, which involve the exchange of fixed and floating rate
interest payments without the exchange of the underlying principal amounts. The
amounts to be paid or received are accrued as interest rates change and are
recognized over the life of the contracts as an adjustment to interest expense.
Gains and losses realized from the termination of interest rate hedges are
recognized over the remaining life of the hedge contract. As a policy, the
Company does not engage in speculative or leveraged transactions, nor does the
Company hold or issue financial instruments for trading purposes.
Revenue:
The Company operates in growing segments of the media and communications
industries: multichannel television (DBS and Cable) and broadcast television
(TV). The Company recognizes revenue in its multichannel operations when video
and audio services are provided. The Company recognizes revenue in its
broadcast operations when advertising spots are broadcast.
Barter Programming:
The Company obtains a portion of its TV programming, including pre-sold
advertisements, through its network affiliation agreements with Fox, UPN and
WB, and also through independent producers. The Company does not make any
direct payments for this programming. For running network programming, the
Company received payments from Fox, which totaled approximately $215,000, and
$73,000 in 1995 and 1996, respectively. The Company received no such payments
in 1997.
For running independent producers' programming, the Company received no
direct payments. Instead, the Company retains a portion of the available
advertisement spots to sell on its own account. Barter programming revenue and
the related expense are recognized when the pre-sold advertisements are
broadcast. These amounts are presented gross as barter programming revenue and
expense in the accompanying consolidated statements of operations.
Subscriber Acquisition Costs:
The Company's policy is to capitalize subscriber acquisition costs
directly related to new subscribers who sign a programming contract. These
costs are amortized over the life of the contract. The Company expenses its
subscriber acquisition when a new contract is obtained.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
totaled approximately $613,000, $1.1 million and $3.6 million for the years
ended December 31, 1995, 1996 and 1997, respectively.
Program Rights:
The Company enters into agreements to show motion pictures and syndicated
programs on television. The Company records the right and associated
liabilities for those films and programs when they are currently available for
showing. These rights are recorded at the lower of unamortized cost or
estimated net realizable value and are amortized on the straight-line method
over the license period which approximates amortization based on the estimated
number of showings during the contract period. Amortization of $1.3 million,
$1.5 million and
F-11
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies: -- (Continued)
$1.7 million is included in programming expense for the years ended December
31, 1995, 1996 and 1997, respectively. The obligations arising from the
acquisition of film rights are recorded at the gross amount. Payments for the
contracts are made pursuant to the contractual terms over periods which are
generally shorter than the license periods.
The Company has entered into agreements totaling $6.6 million as of
December 31, 1997, for film rights and programs that are not yet available for
showing at December 31, 1997, and accordingly, are not recorded by the Company.
At December 31, 1997, the Company has commitments for future program rights of
approximately $1.7 million, $1.0 million, $417,000, $123,000 and $15,000 in
1998, 1999, 2000, 2001 and 2002, respectively.
Income Taxes:
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS
109 is an asset and liability approach, whereby deferred tax assets and
liabilities are recorded to the extent of the tax effect of differences between
the financial statement carrying values and tax bases of assets and
liabilities. A valuation allowance is recorded for deferred taxes where it
appears more likely than not that the Company will not be able to recover the
deferred tax asset. MCT Cablevision, L.P. is treated as a partnership for
federal and state income tax purposes, but taxed as a corporation for Puerto
Rico income tax purposes.
Stock Based Compensation:
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees ("APB 25") in accounting for its
stock plans. The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock-Based Compensation ("SFAS 123").
Earnings Per Share:
The Company has adopted SFAS No. 128 "Earnings Per Share" issued in
February 1997. This statement requires the disclosure of basic and diluted
earnings per share and revises the method required to calculate these amounts.
The adoption of this standard did not significantly impact previously reported
earnings per share amounts.
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash
and cash equivalents.
Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, and their dispersion across different businesses and geographic regions.
As of December 31, 1995, 1996 and 1997 the Company had no significant
concentrations of credit risk.
New Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued SFAS No.
130, "Reporting Comprehensive Income" ("SFAS 130") and SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information," ("SFAS
131"). SFAS 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be reported in
a financial statement table that is displayed with the same prominence as other
financial statements. SFAS 131 requires that all public business enterprises
report information about operating segments, as well as specific revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. These new standards, which are
effective for the fiscal year ending December 31, 1998, will not have a
significant impact on the Company.
F-12
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. Property and Equipment:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---------------- ----------------
<S> <C> <C>
Land .......................................... $ 862,298 $ 947,712
Reception and distribution facilities ......... 29,140,040 27,012,297
Transmitter equipment ......................... 11,643,812 15,306,589
Building and improvements ..................... 1,553,548 2,293,755
Equipment, furniture and fixtures ............. 1,509,588 3,091,363
Vehicles ...................................... 766,192 983,256
Other equipment ............................... 2,295,446 2,612,332
------------- -------------
47,770,924 52,247,304
Accumulated depreciation ...................... (23,655,786) (24,560,658)
------------- -------------
Net property and equipment .................... $ 24,115,138 $ 27,686,646
============= =============
</TABLE>
Depreciation expense amounted to $4.1 million, $5.2 million and $5.7
million for the years ended December 31, 1995, 1996 and 1997, respectively.
4. Intangibles:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
---------------- ----------------
<S> <C> <C>
Goodwill ............................................ $ 28,490,035 $ 28,490,035
Franchise costs ..................................... 35,972,374 35,332,755
Broadcast licenses & affiliation agreements ......... 18,930,324 19,094,212
Deferred financing costs ............................ 4,020,665 16,654,186
Subscriber acquistion costs ......................... 1,272,282 5,787,156
DBS rights .......................................... 45,829,174 203,379,952
Consultancy & non-compete agreements................. 2,700,000 6,010,838
Organization & other deferred costs ................. 6,368,426 8,571,281
------------- -------------
143,583,280 323,320,415
Accumulated amortization ............................ (17,347,152) (38,546,388)
------------- -------------
Net intangible assets ............................... $ 126,236,128 $ 284,774,027
============= =============
</TABLE>
Amortization expense amounted to $4.6 million, $6.9 million and $22.1
million for the years ended December 31, 1995, 1996 and 1997, respectively.
The Company's intangible assets increased primarily due to the $166
million increase in DBS rights and other intangibles relating to the 25
acquisitions completed by the Company during 1997 (see footnote 12 --
Acquisitions and Disposition), as well as the net $12.6 million increase in
deferred financing costs related to the three completed financings (see
footnote 6 -- Redeemable Preferred Stock and footnote 7 -- Long-Term Debt).
F-13
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. Common Stock:
At December 31, common stock consists of the following:
<TABLE>
<CAPTION>
1996 1997
---------- ----------
<S> <C> <C>
Pegasus Class A common stock, $0.01 par value; 30.0 million shares
authorized; 4,663,229 and 5,739,842 issued and outstanding, respec-
tively ............................................................ $46,632 $ 57,399
Pegasus Class B common stock, $0.01 par value; 15.0 million shares
authorized; 4,581,900 and 4,581,900 issued and outstanding, respec-
tively ............................................................ 45,819 45,819
------- --------
Total common stock ................................................ $92,451 $103,218
======= ========
</TABLE>
The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions (see footnote 6 -- Redeemable Preferred Stock and footnote
7 -- Long-Term Debt ).
6. Redeemable Preferred Stock:
As a result of the Unit Offering and dividends subsequently declared on
the Series A Preferred Stock, the Company has outstanding approximately 112,215
shares of Series A Preferred Stock with a liquidation preference of $1,000 per
share (the "Liquidation Preference"). Cumulative dividends, at a rate of 12.75%
are payable semi-annually on January 1 and July 1. Dividends may be paid,
occurring on or prior to January 1, 2002, at the option of the Company, either
in cash or by the issuance of additional shares of Series A Preferred Stock.
Subject to certain conditions, the Series A Preferred Stock is exchangeable in
whole, but not in part, at the option of the Company, for Pegasus' 12.75%
Senior Subordinated Exchange Notes due 2007 (the "Exchange Notes"). The
Exchange Notes would contain substantially the same redemption provisions,
restrictions and other terms as the Series A Preferred Stock. Pegasus is
required to redeem all of the Series A Preferred Stock outstanding on January
1, 2007 at a redemption price equal to the Liquidation Preference thereof, plus
accrued dividends.
The carrying amount of the Series A Preferred Stock is periodically
increased by amounts representing dividends not currently declared or paid but
which will be payable under the mandatory redemption features. The increase in
carrying amount is effected by charges against retained earnings, or in the
absence of retained earnings, by charges against paid-in capital.
Under the terms of the Series A Preferred Stock, Pegasus' ability to pay
dividends on its Common Stock is subject to certain restrictions. At December
31, 1997, 5,000,000 shares of Series A Preferred Stock are authorized and
112,215 shares are issued and outstanding.
Basic earnings per share amounts are based on net income after deducting
preferred stock dividend requirements divided by the weighted average number of
Class A and Class B Common shares outstanding during the year.
For the year ended December 31, 1997, net loss per common share was
determined by dividing net loss, as adjusted by the aggregate amount of
dividends on the Company's Series A Preferred Stock, approximately $12,215,000,
by applicable shares outstanding.
F-14
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Long-Term Debt:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
-------------- ---------------
<S> <C> <C>
Series B Notes payable by PM&C, due 2005, interest at 12.5%,
payable semi-annually in arrears on January 1 and July 1, net
of unamortized discount of $3,412,222 and $3,018,003 as of
December 31, 1996 and December 31, 1997, respectively ........... $ 81,587,778 $ 81,981,997
Series A Senior Notes payable by Pegasus, due 2005, interest at
9.625%, payable semi-annually in arrears on April 15 and
October 15, commencing on April 15, 1998 ........................ -- 115,000,000
Senior seven-year $50.0 million revolving credit facility, payable
by PM&C, interest at the Company's option at either the
bank's prime rate plus an applicable margin or LIBOR plus an
applicable margin ............................................... 29,600,000 --
Senior six-year $180.0 million revolving credit facility, payable
by PM&C, interest at the Company's option at either the
bank's base rate plus an applicable margin or LIBOR plus an
applicable margin ............................................... -- --
Mortgage payable, due 2000, interest at 8.75% .................... 498,468 477,664
Note payable, due 1998, interest at 10% .......................... 3,050,000 3,050,000
Sellers' notes, various maturities and interest rates ............ 277,130 7,171,621
Capital leases and other ......................................... 562,067 673,849
------------ ------------
115,575,443 208,355,131
Less current maturities .......................................... 363,833 6,357,320
------------ ------------
Long-term debt ................................................... $115,211,610 $201,997,811
============ ============
</TABLE>
In July 1995, PM&C sold 85,000 units consisting of $85.0 million in
aggregate of 12.5% Series A Senior Subordinated Notes due 2005 (the "PM&C
Series A Notes" and, together with the PM&C Series B Notes, the "PM&C Notes")
and 8,500 shares of Class B Common Stock of PM&C (the "PM&C Note Offering").
The PM&C Class B Shares were subsequently exchanged for an aggregate of 191,775
shares of Pegasus' Class A Common Stock.
In November 1995, PM&C exchanged its PM&C Series B Notes for the PM&C
Series A Notes. The PM&C Series B Notes have substantially the same terms and
provisions as the PM&C Series A Notes. The PM&C Series B Notes are guaranteed
on a full, unconditional, senior subordinated basis, jointly and severally by a
majority of the wholly owned direct and indirect subsidiaries of PM&C. PM&C's
indebtedness contain certain financial and operating covenants, including
restrictions on PM&C to incur additional indebtedness, create liens and to pay
dividends.
In August 1996, in conjunction with the acquisition of the WTLH
Tallahassee, Florida FCC license and Fox affiliation agreement, the Company
incurred indebtedness of $3.1 million.
In August 1996, PM&C entered into a $50.0 million seven-year senior
revolving credit facility (the "PM&C Credit Facility"), which was
collateralized by substantially all of the assets of PM&C and its subsidiaries.
Deferred financing fees relating to the $10.0 million revolving credit facility
were written off, resulting in an extraordinary loss of $251,000 on the
refinancing transaction. Outstanding balances under the PM&C Credit Facility
were repaid from the proceeds of the Unit Offering. Concurrently with the
closing of the New Credit Facility, the PM&C Credit Facility was repaid in full
and commitments thereunder were terminated. Deferred financing fees relating to
the $50.0 million revolving credit facility were written off, resulting in an
extraordinary loss of $460,000 on the refinancing transaction.
F-15
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. Long-Term Debt: -- (Continued)
In October 1997, Pegasus completed the Senior Notes Offering in which it
sold $115.0 million of its 9.625% Series A Senior Notes due 2005 (the "9.625%
Series A Senior Notes"), resulting in net proceeds to the Company of
approximately $111.0 million. A portion of the proceeds from the Senior Notes
Offering were used to retire an existing $130.0 million credit facility (the
"PSH Credit Facility"). The PSH Credit Facility was financed with the New
Credit Facility. Deferred financing fees relating to the PSH Credit Facility
were written off, resulting in an extraordinary loss of approximately $1.2
million on the refinancing transaction.
In December 1997, PM&C entered into a $180.0 million six-year senior
revolving credit facility (the "New Credit Facility"), which is
collateralized by substantially all of the assets of PM&C and its
subsidiaries. Interest on the New Credit Facility is, at the Company's
option, at either the bank's base rate plus an applicable margin or LIBOR
plus an applicable margin. The New Credit Facility is subject to certain
financial covenants as defined in the loan agreement, including a debt to
adjusted cash flow covenant. The New Credit Facility also contains
restrictions over the Company's ability to pay dividends. The New Credit
Facility will be used to finance future acquisitions and for working
capital, capital expenditures and general corporate purposes. There were no
borrowings outstanding at December 31, 1997.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
At December 31, 1997, maturities of long-term debt and capital leases are
as follows:
1998 ........................ $ 6,357,320
1999 ........................ 1,905,265
2000 ........................ 1,930,290
2001 ........................ 1,125,561
2002 ........................ 54,698
Thereafter .................. 196,981,997
------------
$208,355,131
============
<PAGE>
8. Net Income Per Common Share:
Calculation of Basic and Diluted net income per common share:
The following table sets forth the computation of the number of shares
used in the computation of basic and diluted net income per common share:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ---------------- -----------------
<S> <C> <C> <C>
Net income (loss) applicable to common shares ............. $2,053,910 ($ 9,974,146) ($ 31,487,137)
========== =========== ============
Weighted average common shares outstanding ................ 5,139,929 6,239,646 9,858,244
Total shares used for calculation of basic net income per
common share ............................................. 5,139,929 6,239,646 9,858,244
----------- ------------
Stock options ............................................. -- -- --
---------- ----------- ------------
Total shares used for calculation of diluted net income per
common share ............................................. 5,139,929 6,239,646 9,858,244
========== =========== ============
</TABLE>
For the year ended December 31, 1997, net loss per common share was
determined by dividing net loss, as adjusted by the aggregate amount of
dividends on the Company's Series A Preferred Stock, approximately $12,215,000,
by applicable shares outstanding.
F-16
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. Net Income Per Common Share: -- (Continued)
Securities that have not been issued and are antidilutive amounted to
2,539 shares in 1996 and 582,493 shares in 1997.
9. Leases:
The Company leases certain studios, towers, utility pole attachments, and
occupancy of underground conduits and headend sites under operating leases. The
Company also leases office space, vehicles and various types of equipment
through separate operating lease agreements. The operating leases expire at
various dates through 2005. Rent expense for the years ended December 31, 1995,
1996 and 1997 was $503,000, $712,000 and $1.1 million, respectively. The
Company leases equipment under long-term leases and has the option to purchase
the equipment for a nominal cost at the termination of the leases. The related
obligations are included in long-term debt. Property and equipment at December
31 include the following amounts for leases that have been capitalized:
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
Equipment, furniture and fixtures .......... $ 215,112 $ 700,807
Vehicles ................................... 446,372 516,642
---------- ----------
661,484 1,217,449
Accumulated depreciation ................... (250,288) (512,307)
---------- ----------
Total ..................................... $ 411,196 $ 705,142
========== ==========
</TABLE>
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
------------- -----------
<S> <C> <C>
1998 ................................................ $ 649,802 $259,574
1999 ................................................ 427,794 184,631
2000 ................................................ 331,283 164,726
2001 ................................................ 248,206 140,681
2002 ................................................ 143,958 53,612
Thereafter .......................................... 59,154 --
---------- --------
Total minimum payments .............................. $1,860,197 803,224
==========
Less: amount representing interest .................. 153,375
--------
Present value of net minimum lease payments including
current maturities of $199,273 ..................... $649,849
========
</TABLE>
<PAGE>
10. Income Taxes:
The following is a summary of the components of income taxes from
operations:
<TABLE>
<CAPTION>
1995 1996 1997
---------- -------------- -----------
<S> <C> <C> <C>
Federal -- deferred ............................ $23,000 ($ 169,000)
State and local -- current ..................... 7,000 49,000 $200,000
------- --------- --------
Provision (benefit) for income taxes .......... $30,000 ($ 120,000) $200,000
======= ========= ========
</TABLE>
The deferred income tax assets and liabilities recorded in the
consolidated balance sheets at December 31, 1996 and 1997 are as follows:
F-17
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
10. Income Taxes: -- (Continued)
<TABLE>
<CAPTION>
1996 1997
---------------- ---------------
<S> <C> <C>
Assets:
Receivables ............................................ $ 47,887 $ 73,547
Excess of tax basis over book basis from tax gain
recognized upon incorporation of subsidiaries ......... 1,890,025 1,890,025
Loss carryforwards ..................................... 14,197,578 21,990,684
Other .................................................. 870,305 870,305
------------ ------------
Total deferred tax assets ............................. 17,005,795 24,824,561
Liabilities:
Excess of book basis over tax basis of property, plant
and equipment ......................................... (1,754,621) (1,938,899)
Excess of book basis over tax basis of amortizable
intangible assets ..................................... (4,616,997) (5,695,313)
------------ ------------
Total deferred tax liabilities ........................ (6,371,618) (7,634,212)
------------ ------------
Net deferred tax assets ................................ 10,634,177 17,190,349
Valuation allowance ................................... (10,683,639) (17,240,349)
------------ ------------
Net deferred tax liabilities ........................... ($ 49,462) ($ 50,000)
============ ============
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration
of the Company's net operating loss carryforwards and portions of other
deferred tax assets related to prior acquisitions. The valuation allowance
increased primarily as the result of net operating loss carryforwards generated
during 1997, which may not be utilized.
At December 31, 1997, the Company has net operating loss carryforwards of
approximately $53.1 million which are available to offset future taxable income
and expire through 2017.
A reconciliation of the Federal statutory rate to the effective tax rate
is as follows:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ----------- -----------
<S> <C> <C> <C>
U.S. statutory federal income tax rate .......... 34.00% 34.00% 34.00%
Foreign net operating loss ...................... 27.09 1.73 --
Valuation allowance ............................. (61.46) (36.92) (34.38)
Other ........................................... -- -- 1.43
------- ------ -------
Effective tax rate .............................. ( 0.37%) 1.19% 1.05%
======= ====== =======
</TABLE>
F-18
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
11. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------
1995 1996 1997
------------- ------------- -------------
<S> <C> <C> <C>
Barter revenue and related expense ............................. $5,110,662 $6,337,220 $7,520,000
Acquisition of program rights and assumption of related
program payables .............................................. 1,335,275 1,140,072 3,452,779
Acquisition of plant under capital leases ...................... 121,373 312,578 529,072
Redemption of minority interests and related receivable ........ 246,515 -- --
Capital contribution and related acquisition of intangibles..... -- 14,079,546 15,197,503
Execution of license agreement option .......................... -- 3,050,000 --
Stock incentive compensation and related expense/ accrued
expense ....................................................... -- -- 1,273,872
Minority interest and related acquisition of intangibles ....... -- -- 3,000,000
Notes payable and related acquisition of intangibles ........... -- -- 7,113,689
Series A Preferred Stock dividend and reduction of paid-in
capital ....................................................... -- -- 12,215,000
</TABLE>
For the years ended December 31, 1995, 1996 and 1997 the Company paid cash
for interest in the amount of $3.6 million, $12.0 million and $13.5 million,
respectively. The Company paid no federal income taxes for the years ended
December 31, 1995, 1996 and 1997.
12. Acquisitions and Disposition:
In January 1996, PCH, the parent of the Company, acquired all of the
outstanding stock of Portland Broadcasting, Inc. ("PBI"), which owns the
tangible assets of WPXT, Portland, Maine. PCH immediately transferred ownership
of PBI to the Company. The aggregate purchase price of PBI was approximately
$11.7 million of which $1.5 million was allocated to fixed and tangible assets
and $10.2 million to intangible assets. In June 1996, PCH acquired the FCC
license of WPXT for aggregate consideration of $3.0 million. PCH immediately
transferred the ownership of the license to the Company.
Effective March 1, 1996, the Company acquired the principal tangible
assets of WTLH, Inc., Tallahassee, Florida and certain of its affiliates for
approximately $5.0 million, except for the FCC license and Fox affiliation
agreement. Additionally, the Company entered into a put/call agreement
regarding the FCC license and Fox affiliation agreement with the licensee of
WTLH. In August 1996, the Company exercised its rights and recorded $3.1
million in intangible assets and long term debt. The aggregate purchase price
of WTLH, Inc. and the related FCC licenses and Fox affiliation agreement is
approximately $8.1 million of which $2.2 million was allocated to fixed and
tangible assets and $5.9 million to various intangible assets. In addition, PCH
granted the sellers of WTLH a warrant to purchase $1.0 million of stock of one
of its subsidiaries at $14.00 per share. The warrant expired in February 1997.
Effective August 29, 1996, the Company acquired all of the assets of Dom's
for approximately $25.0 million in cash and $1.0 million in assumed
liabilities. Dom's operates cable systems serving ten communities contiguous to
the Company's Mayaguez, Puerto Rico cable system. The aggregate purchase price
of the principal assets of Dom's amounted to $26.0 million of which $4.7
million was allocated to fixed and tangible assets and $21.3 million to various
intangible assets.
On October 8, 1996, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Texas and Michigan and the related assets in exchange for approximately $17.9
million in cash and $11.9 million of the Company's Class A Common Stock.
F-19
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. Acquisitions and Disposition: -- (Continued)
On November 8, 1996, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Ohio and the related assets, including receivables, in exchange for
approximately $12.0 million in cash.
Effective January 31, 1997, the Company sold substantially all the assets
of its New Hampshire cable system to State Cable TV Corporation for
approximately $6.9 million in cash, net of certain selling costs. The Company
recognized a gain on the transaction of approximately $4.5 million.
On January 31, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Indiana and the related assets and liabilities in exchange for approximately
$8.8 million in cash and 466,667 shares of the Company's Class A Common Stock.
On February 14, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Mississippi and the related assets in exchange for approximately $14.8 million
in cash.
As of March 10, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Arkansas, Virginia and West Virginia and the related assets in exchange for
approximately $10.4 million in cash, $200,000 in assumed liabilities, $3.0
million in preferred stock of a subsidiary of Pegasus and warrants to purchase
a total of 283,969 shares of the Company's Class A Common Stock. The $3.0
million in preferred stock of a subsidiary of Pegasus has been accounted for as
a minority interest.
As of April 9, 1997, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Georgia and the related assets in exchange for approximately $3.3 million in
cash, $143,000 in assumed liabilities, 42,187 shares of the Company's Class A
Common Stock, and a $600,000 obligation, payable over four years, for
consultancy and non-compete agreements.
As of May 9, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Colorado, Florida, Maryland, Minnesota, Nevada, New Hampshire, Oklahoma, Texas,
Virginia, Washington, Wisconsin and Wyoming and the related assets in exchange
for approximately $18.6 million in cash, $502,000 in assumed liabilities, a
$350,000 note due January 1998, 17,971 shares of the Company's Class A Common
Stock, and $600,000 in cash for consultancy and non-compete agreements.
As of July 9, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Ohio and Texas and the related assets in exchange for approximately $17.4
million in cash and $503,000 in assumed liabilities.
As of August 8, 1997, the Company acquired, from four independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Indiana, Minnesota and South Dakota and the related assets in exchange for
approximately $15.5 million in cash, $464,000 in assumed liabilities and a
$988,000 note due January 1998; and $750,000 in cash for endorsement and
non-compete agreements.
As of September 8, 1997, the Company acquired, from four independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Illinois, Minnesota and Utah and the related assets in exchange for
approximately $9.1 million in cash and $165,000 in assumed liabilities.
As of October 8, 1997, the Company acquired, from two independent DIRECTV
providers, the rights to provide DIRECTV programming in certain rural areas of
Alabama and Texas and the related assets in exchange for approximately $24.2
million in cash, $219,000 in assumed liabilities, a $2.2 million note, payable
over four years, and $589,000 in cash and a $772,000 obligation, payable over
four years, for consultancy and non-compete agreements.
F-20
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
12. Acquisitions and Disposition: -- (Continued)
Effective October 31, 1997 the Company acquired, from an independent
DIRECTV provider, the rights to provide DIRECTV programming in certain rural
areas of Georgia and the related assets and liabilities in exchange for
approximately $6.4 million in cash and 397,035 shares of the Company's Class A
Common Stock.
As of November 7, 1997 the Company acquired, from three independent
DIRECTV providers, the rights to provide DIRECTV programming in certain rural
areas of Nebraska, Minnesota, Utah and Wyoming and the related assets in
exchange for approximately $3.1 million in cash, $147,000 in assumed
liabilities, a $1.7 million note, payable over two years, and a $446,000 note
due November 2000.
The following unaudited summary, prepared on a pro forma basis, combines
the results of operations as if the above DBS territories and cable system had
been acquired or sold as of the beginning of the periods presented, after
including the impact of certain adjustments, such as the Company's payments to
related parties, amortization of intangibles, interest expense, preferred stock
dividends and related income tax effects. The pro forma information does not
purport to be indicative of what would have occurred had the
acquisitions/disposition been made on those dates or of results which may occur
in the future. This pro forma information does not include any acquisitions
that occurred subsequent to December 31, 1997.
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
(in thousands, except earnings per share) (unaudited)
1996 1997
------------- -------------
<S> <C> <C>
Net revenues ...................................... $ 83,916 $ 104,357
========= =========
Operating loss .................................... $ (12,783) $ (16,250)
========= =========
Net loss .......................................... $ (34,972) $ (39,002)
Less: Preferred stock dividends ................... (13,156) (13,156)
--------- ---------
Net loss available to common stockholders ......... $ (48,128) $ (52,158)
========= =========
Net loss per common share ......................... $ (6.72) $ (5.09)
========== ==========
</TABLE>
13. Financial Instruments:
The carrying values and fair values of the Company's financial instruments
at December 31 consisted of:
<PAGE>
<TABLE>
<CAPTION>
1996 1997
(in thousands) ------------------------ ------------------------
Carrying Fair Carrying Fair
Value Value Value Value
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Long-term debt, including current portion ......... $115,575 $125,788 $208,355 $240,086
Series A Preferred Stock .......................... -- -- 111,264 114,750
</TABLE>
Long-term debt: The fair value of long-term debt is estimated based on the
quoted market price for the same or similar instruments.
Series A Preferred Stock: The fair value of Series A Preferred Stock is
estimated based on the quoted market price for the same or similar instruments.
14. Warrants:
In January 1997, in connection with the Unit Offering, the Company issued
warrants to purchase 193,600 shares of Class A Common Stock at an exercise
price of $15 per share. These warrants are exercisable through January 1, 2007.
At December 31, 1997, none of these warrants have been exercised.
F-21
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
14. Warrants: -- (Continued)
In March 1997, in connection with the acquisition of DBS properties, the
Company issued warrants to purchase 283,969 shares of Class A Common Stock at
an exercise price of $11.81 per share. These warrants are exercisable through
March 10, 2006. At December 31, 1997, none of these warrants have been
exercised.
15. Employee Benefit Plans:
The Company has two active stock plans available to grant stock options
(the "Stock Option Plan") and restricted stock awards (the "Restricted Stock
Plan") to eligible employees, executive officers and non-employee directors of
the Company.
Stock Option Plan
The Stock Option Plan provides for the granting of nonqualified and
qualified options to purchase a maximum of 450,000 shares (subject to
adjustment to reflect stock dividends, stock splits, recapitalizations and
similar changes in the capitalization of Pegasus) of Class A Common Stock of
the Company. Executive officers, who are not eligible to receive profit sharing
awards under the Restricted Stock Plan, are eligible to receive stock options
under the Stock Option Plan, but no executive officer may be granted options to
purchase more than 275,000 shares of Class A Common Stock under the Stock
Option Plan. Directors of Pegasus who are not employees of the Company are
eligible to receive nonqualified options. The Stock Option Plan terminates in
September 2006. As of December 31, 1997, options to purchase an aggregate of
223,385 shares of Class A Common Stock were outstanding, including 220,000
options outstanding under the Stock Option Plan.
The Financial Accounting Standards Board issued SFAS No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123"), in October 1995. Under SFAS 123,
companies can either continue to account for stock compensation plans pursuant
to existing accounting standards or elect to expense the value derived from
using an option pricing model. The Company is continuing to apply existing
accounting standards. However, SFAS 123 requires disclosures of pro forma net
income and earnings per share as if the Company had adopted the expensing
provisions of SFAS 123.
The fair value of options was estimated using the Black-Scholes option
pricing model with the following weighted average assumptions for 1996 and
1997:
1996 1997
---------- -----------
Risk-free interest rate ................. 5.56% 6.35%
Dividend yield .......................... 0.00% 0.00%
Volatility factor ....................... 0.00 0.403
Weighted average expected life .......... 5 years 5 years
Pro forma net losses for 1996 and 1997 would have been $9,976,114 and
$19,480,852, respectively; pro forma net losses per common share for 1996 and
1997 would have been $1.60 and $3.22, respectively. The weighted average fair
value of options granted were $3.40 and $4.99 for 1996 and 1997, respectively.
F-22
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Employee Benefit Plans: -- (Continued)
The following table summarizes stock option activity over the past two
years under the Company's plan:
<TABLE>
<CAPTION>
Weighted
Number of Average
Shares Exercise Price
----------- ---------------
<S> <C> <C>
Outstanding at January 1, 1996 ................... -- --
Granted .......................................... 3,385 $ 14.00
Exercised ........................................ -- --
Canceled or expired .............................. -- --
----- --------
Outstanding at December 31, 1996 ................. 3,385 14.00
Granted .......................................... 220,000 11.00
Exercised ........................................ -- --
Canceled or expired .............................. -- --
------- --------
Outstanding at December 31, 1997 ................. 223,385 $ 11.05
======= ========
Options exercisable at December 31, 1996 ......... 3,385 $ 14.00
Options exercisable at December 31, 1997 ......... 3,385 $ 14.00
</TABLE>
Restricted Stock Plan
The Restricted Stock Plan provides for the granting of restricted stock
awards representing a maximum of 270,000 shares (subject to adjustment to
reflect stock dividends, stock splits, recapitalizations and similar changes in
the capitalization of Pegasus) of Class A Common Stock of the Company to
eligible employees who have completed at least one year of service. Restricted
stock received under the Restricted Stock Plan vests over four years. The Plan
terminates in September 2006. As of December 31, 1997, 94,159 shares of Class A
Common Stock had been granted under the Restricted Stock Plan. The expense for
this plan amounted to $501,139 and $800,768 in 1996 and 1997, respectively.
401(k) Plans
Effective January 1, 1996, PM&C adopted the Pegasus Communications Savings
Plan (the "US 401(k) Plan") for eligible employees of PM&C and its domestic
subsidiaries. In 1996, the Company's Puerto Rico subsidiary adopted the Pegasus
Communications Puerto Rico Savings Plan (the "Puerto Rico 401(k) Plan" and,
together with the US 401(k) Plan, the "401(k) Plans") for eligible employees of
the Company's Puerto Rico subsidiaries. Substantially all Company employees
who, as of the enrollment date under the 401(k) Plans, have completed at least
one year of service with the Company are eligible to participate in one of the
401(k) Plans. Participants may make salary deferral contributions of 2% to 6%
of their salary to the 401(k) Plans. The expense for this plan amounted to
$484,226 and $473,104 in 1996 and 1997, respectively.
The Company may make three types of contributions to the 401(k) Plans,
each allocable to a participant's account if the participant completes at least
1,000 hours of service in the applicable plan year, and is employed on the last
day of the applicable plan year: (i) the Company matches 100% of a
participant's salary deferral contributions to the extent the participant
invested his or her salary deferral contributions in Class A Common Stock at
the time of his or her initial contribution to the 401(k) Plans, (ii) the
Company, in its discretion, may contribute an amount that equals up to 10% of
the annual increase in Company-wide Location Cash Flow (these Company
discretionary contributions, if any, are allocated to eligible participants'
accounts based on each participant's salary for the plan year), and (iii) the
Company also matches a participant's rollover contribution, if any, to the
401(k) Plans, to the extent the participant invested his or her rollover
contribution in Class A Common Stock at the time of his or her initial
contribution to the 401(k) Plans. Discretionary Company contributions and
Company matches of employee salary deferral contributions and rollover
contributions are made in the
F-23
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
15. Employee Benefit Plans: -- (Continued)
form of Class A Common Stock, or in cash used to purchase Class A Common Stock.
The Company has authorized and reserved for issuance up to 205,000 shares of
Class A Common Stock in connection with the 401(k) Plans. Company contributions
to the 401(k) Plans are subject to limitations under applicable laws and
regulations.
All employee contributions to the 401(k) Plans are fully vested at all
times and all Company contributions, if any, vest 34% after two years of
service with the Company (including years before the 401(k) Plans were
established), 67% after three years of service and 100% after four years of
service. A participant also becomes fully vested in Company contributions to
the 401(k) Plans upon attaining age 65 or upon his or her death or disability.
16. Commitments and Contingent Liabilities:
Legal Matters:
From time to time the Company is involved with claims that arise in the
normal course of business. In the opinion of management, the ultimate liability
with respect to these claims will not have a material adverse effect on the
consolidated operations, liquidity, cash flows or financial position of the
Company.
17 Other Events:
In August 1997, Pegasus commenced operations of TV station WPME, which is
affiliated with UPN. WPME is in the Portland, Maine Designated Market Area
("DMA") and is being operated under a local marketing agreement ("LMA"). WPME's
offices, studio and transmission facilities are co-located with WPXT, a TV
station in the Portland market the Company has owned and operated since January
1996.
In October 1997, Pegasus commenced operations of TV station WGFL, which is
affiliated with WB. WGFL is in the Gainesville, Florida DMA and is being
operated under a LMA.
18. Related Party Transaction:
Effective October 31, 1997, the Company acquired DIRECTV distribution
rights for certain rural areas of Georgia and related assets (the "ViewStar DBS
Acquisition") from ViewStar Entertainment Services, Inc. ("ViewStar"). Prior to
the acquisition, Donald W. Weber, a director of Pegasus, was the President and
Chief Executive Officer of ViewStar and together with his son owned
approximately 73% of the outstanding stock of ViewStar. The ViewStar DBS
Acquisition was effected through a merger of ViewStar into a subsidiary of
Pegasus. The purchase price of the ViewStar DBS Acquisition consisted of
approximately $6.4 million in cash and 397,035 shares of Class A Common Stock.
The acquisition involved the execution of noncompetition agreements by Mr.
Weber and his son and the execution of a shareholders agreement (which included
the granting of certain registration rights on the shares of Class A Common
Stock issued in connection with the acquisition).
The Company has advanced to KB Prime Media, L.L.C. ("KB Prime Media")
approximately $212,000 to be used as deposits for auctions of television
licenses and other operating expenses. KB Prime Media is a corporation owned
80% by W.W. Keen Butcher, the stepfather of Marshall W. Pagon, the Company's
President and Chief Executive Officer.
F-24
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
19. Industry Segments:
The Company operates in growing segments of the media and communications
industries: multichannel television (DBS and Cable) and broadcast television
(TV). TV consists of five Fox-affiliated television stations, one of which also
simulcasts its signal in Hazelton and Williamsport, Pennsylvania, one
UPN-affiliated television station and two WB-affiliated television stations,
one of which one is pending launch. Cable and DBS consist of providing cable
television services and direct broadcast satellite services, respectively, in
twenty-seven states and Puerto Rico, as of December 31, 1997. Information
regarding the Company's business segments in 1995, 1996, and 1997 is as follows
(in thousands):
<TABLE>
<CAPTION>
TV DBS Cable Other Consolidated
---------- ----------- ---------- ---------- -------------
<S> <C> <C> <C> <C> <C>
1995
Revenues ............................ $19,973 $ 1,469 $ 10,606 $ 100 $ 32,148
Operating income (loss) ............. 2,252 (752) (1,103) (33) 364
Identifiable assets ................. 36,906 5,577 34,395 18,892 95,770
Incentive compensation .............. 415 9 104 -- 528
Corporate expenses .................. 782 114 450 18 1,364
Depreciation & amortization ......... 2,591 719 5,364 77 8,751
Capital expenditures ................ 1,403 216 953 69 2,641
1996
Revenues ............................ $28,488 $ 5,829 $ 13,496 $ 116 $ 47,929
Operating income (loss) ............. 3,925 (1,239) 190 (326) 2,550
Identifiable assets ................. 61,817 53,090 54,346 9,277 178,530
Incentive compensation .............. 691 95 148 51 985
Corporate expenses .................. 756 158 497 18 1,429
Depreciation & amortization ......... 4,000 1,786 5,245 1,029 12,060
Capital expenditures ................ 2,289 855 3,070 80 6,294
1997
Revenues ............................ $31,726 $ 38,254 $ 16,688 $ 150 $ 86,818
Operating income (loss) ............. 5,357 (11,990) 1,622 (1,577) (6,588)
Identifiable assets ................. 63,016 209,507 51,714 56,625 380,862
Incentive compensation .............. 298 525 181 270 1,274
Corporate expenses .................. 840 744 617 55 2,256
Depreciation & amortization ......... 3,927 17,042 5,643 1,180 27,792
Capital expenditures ................ 6,425 506 2,914 84 9,929
</TABLE>
F-25
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
20. Subsequent Events:
As of January 7, 1998 the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Minnesota and the related assets in exchange for approximately $1.9 million in
cash and $32,000 in assumed liabilities.
In January 1998, the Company entered into an agreement and plan of merger
(the "Agreement and Plan of Merger") to acquire Digital Television Services,
Inc. ("DTS"), for approximately 5.5 million shares of Pegasus' Class A Common
Stock. As of December 31, 1997, DTS' operations consisted of providing DIRECTV
services to approximately 126,000 subscribers in certain rural areas of eleven
states in which DTS holds the exclusive right to provide such services. Upon
completion of the acquisition of DTS (the "DTS Acquisition"), DTS will become a
wholly owned subsidiary of Pegasus.
In January 1998, the Company entered into an agreement to sell its
remaining New England cable systems for a purchase price of at least $28
million and not more than $31 million, based on the systems' location cash flow
for the trailing 12 months prior to closing, multiplied by nine. The Company
anticipates this transaction to close in the third quarter of 1998. The Company
expects to report a one-time nonrecurring gain relating to this transaction.
The Company has entered into 14 letters of intent to acquire, from various
independent DIRECTV providers, the rights to provide DIRECTV programming in
certain rural areas of Idaho, Nebraska, New Mexico, Oregon, South Dakota and
Texas and the related assets in exchange for approximately $52.9 million in
cash, $10.3 million in promissory notes and $854,000 of the Company's Class A
Common Stock.
In February 1998, pursuant to a registered exchange offer, Pegasus
exchanged all $115.0 million of its 9.625% Series A Senior Notes for $115.0
million of its 9.625% Series B Senior Notes due 2005 (the "9.625% Series B
Senior Notes"). The 9.625% Series B Notes have substantially the same terms and
provisions as the 9.625% Series A Senior Notes. No gain or loss was recorded in
connection with the exchange of the notes.
21. Quarterly Information (unaudited):
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
(in thousands) ----------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Net revenues ....................... $ 15,897 $ 19,778 $ 21,927 $ 29,216
Operating income before depreciation
and amortization .................. 4,532 5,843 5,998 4,831
Income (loss) before extraordinary
items ............................. 1,433 (3,083) (9,015) (19,166)
Net income (loss) .................. $ 1,433 $ (3,083) $ (9,015) $ (20,822)
Basic earnings per share: .............
Operating income before depreciation
and amortization .................. $ 0.47 $ 0.60 $ 0.61 $ 0.48
Income (loss) before extraordinary
items ............................. 0.07 (0.64) ( 0.91) (1.88)
Net income (loss) .................. $ 0.07 $ (0.64) $ (0.91) $ (2.05)
Diluted earnings per share:
Operating income before depreciation
and amortization .................. $ 0.47 $ 0.60 $ 0.61 $ 0.48
Income (loss) before extraordinary
items ............................. 0.07 (0.64) ( 0.91) (1.88)
Net income (loss) .................. $ 0.07 $ (0.64) $ (0.91) $ (2.05)
</TABLE>
F-26
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
22. Other Information (unaudited):
As defined in the Certificate of Designation governing the Series A
Preferred Stock, and the indenture governing the Senior Notes, the Company is
required to provide Adjusted Operating Cash Flow data for Pegasus and its
Restricted Subsidiaries, on a consolidated basis, where Adjusted Operating Cash
Flow is defined as, "for the four most recent fiscal quarters for which
internal financial statements are available, Operating Cash Flow of such Person
and its Restricted Subsidiaries less DBS Cash Flow (Satellite Segment Operating
Cash Flow) for the most recent four-quarter period plus DBS Cash Flow for the
most recent quarterly period, multiplied by four." Operating Cash Flow is
income from operations before income taxes, depreciation and amortization,
interest expense, extraordinary items and non-cash corporate expenses and
incentive compensation. Restricted Subsidiaries carries the same meaning as in
the Certificate of Designation. Pro forma for the twenty-five completed DBS
acquisitions occurring in 1997 and the disposition of the New Hampshire cable
system, as if such acquisitions/disposition occurred on January 1, 1997,
Adjusted Operating Cash Flow would have been approximately $35.2 million, as
follows:
<TABLE>
<CAPTION>
Four Quarters
Ended
December 31,
1997
(in thousands) --------------
<S> <C>
Revenues .................................................................... $108,676
Direct operating expenses, excluding depreciation, amortization and other
non-cash charges ........................................................... 71,264
--------
Income from operations before incentive compensation, corporate
expenses and depreciation and amortization ................................. 28,507
Corporate expenses .......................................................... 2,256
--------
Adjusted operating cash flow ................................................ $ 35,156
========
</TABLE>
F-27
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
of Digital Television Services, Inc.:
We have audited the accompanying consolidated balance sheets of DIGITAL
TELEVISION SERVICES, INC. (a Delaware corporation and formerly Digital
Television Services, LLC) AND SUBSIDIARIES as of December 31, 1996 and 1997 and
the related consolidated statements of operations, members'/stockholders'
equity, and cash flows for the period from inception (January 30, 1996) through
December 31, 1996 and for the year ended December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Television Services, Inc. and subsidiaries as of December 31, 1996 and 1997 and
the results of their operations and their cash flows for the period from
inception (January 30, 1996) through December 31, 1996 and for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 18, 1998
F-28
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 1,595,955 $ 39,113,152
Restricted cash ........................................................ -- 19,006,386
Accounts receivable:
Trade, net of allowance for doubtful accounts of $6,750 and $190,647
at December 31, 1996 and 1997, respectively ......................... 893,950 4,629,539
Other ................................................................ 154,840 544,480
Inventory .............................................................. 244,544 2,229,918
Other (Note 2) ......................................................... 234,153 92,605
------------ ------------
Total current assets .............................................. 3,123,442 65,616,080
------------ ------------
RESTRICTED CASH ......................................................... -- 18,020,702
------------ ------------
PROPERTY AND EQUIPMENT, at cost (Note 2) ................................ 478,445 3,474,754
Less accumulated depreciation .......................................... (44,339) (554,537)
------------ ------------
434,106 2,920,217
------------ ------------
CONTRACT RIGHTS AND OTHER ASSETS, NET (Note 2) .......................... 38,604,625 171,105,067
------------ ------------
$ 42,162,173 $257,662,066
============ ============
LIABILITIES AND MEMBERS'/STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ....................................................... $ 1,041,019 $ 4,495,937
Accrued liabilities .................................................... 1,380,321 40,275,901
Unearned revenue ....................................................... 1,082,601 3,314,397
Current maturities of long-term debt ................................... 6,033,732 14,950,430
Other .................................................................. 92,279 299,766
------------ ------------
Total current liabilities ......................................... 9,629,952 63,336,431
------------ ------------
LONG-TERM DEBT, less current maturities ................................. 17,542,883 177,641,876
------------ ------------
OTHER LIABILITIES ....................................................... 83,615 46,646
------------ ------------
COMMITMENTS AND CONTINGENCIES (Notes 5, 6, 8, and 10)
MEMBERS'/STOCKHOLDERS' EQUITY
Class A units .......................................................... -- --
Class B units .......................................................... 18,440,982 --
Class C units .......................................................... -- --
Class D units .......................................................... -- --
Preferred stock, $.01 par value; 10,000,000 shares authorized; 1,404,056
issued and outstanding at December 31, 1997 .......................... -- 14,041
Common stock, $.01 par value; 10,000,000 shares authorized; 2,137,049
issued and outstanding at December 31, 1997 .......................... -- 21,370
Additional paid-in capital ............................................. -- 25,826,080
Retained deficit ....................................................... (3,535,259) (9,224,378)
------------ ------------
Total members'/stockholders' equity ............................... 14,905,723 16,637,113
------------ ------------
$ 42,162,173 $257,662,066
============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-29
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception
(January 30) to Year Ended
December 31, December 31,
1996 1997
----------------- ----------------
<S> <C> <C>
REVENUE:
Programming revenue ........................ $ 3,085,146 $ 41,752,873
Equipment and installation revenue ......... 323,663 5,690,253
------------ -------------
Total revenue ......................... 3,408,809 47,443,126
------------ -------------
COST OF REVENUE:
Programming expense ........................ 1,595,963 20,694,127
Cost of equipment and installation ......... 398,144 6,443,374
Service fees ............................... 275,704 4,009,353
------------ -------------
Total cost of revenue ................. 2,269,811 31,146,854
------------ -------------
GROSS PROFIT ................................ 1,138,998 16,296,272
------------ -------------
OPERATING EXPENSES:
Sales and marketing ........................ 778,036 8,659,446
General and administrative ................. 1,953,635 8,706,851
Depreciation and amortization .............. 1,147,963 14,509,152
------------ -------------
Total operating expenses .............. 3,879,634 31,875,449
------------ -------------
OPERATING LOSS .............................. (2,740,636) (15,579,177)
------------ -------------
OTHER INCOME (EXPENSE):
Interest expense, net ...................... (817,603) (14,457,088)
Other income (expense) ..................... 22,980 (111,350)
------------ -------------
(794,623) (14,568,438)
------------ -------------
NET LOSS .................................... $ (3,535,259) $ (30,147,615)
============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-30
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS'/STOCKHOLDERS' EQUITY
for the Period From Inception (January 30, 1996) Through December 31, 1996
and for the Year Ended December 31, 1997
<TABLE>
<CAPTION>
Class A Class B
--------------------------------- ---------------------------------
Units Amount Units Amount
--------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
BALANCE,
January 30, 1996 ......... -- $ -- -- $ --
Sale of Class B Units..... -- -- 1,844,098 18,440,982
Issuance of Class C
Units .................... -- -- -- --
Net loss ................. -- -- -- (3,535,259)
-- -------------- --------- --------------
BALANCE,
December 31, 1996 ........ -- -- 1,844,098 14,905,723
Sale of Class A Units..... 1,333,333 29,820,008 -- --
Sale of Class B Units..... -- -- 205,902 2,058,997
Issuance of Class D
Units .................... -- -- -- --
Net Loss (January 1,
1997 through Octo-
ber 10, 1997) ............ -- (3,958,517) -- (16,964,720)
--------- -------------- --------- --------------
BALANCE,
October 10, 1997 ......... 1,333,333 25,861,491 2,050,000 --
Conversion of Capital
(Note 7) ................. (1,333,333) (25,861,491) (2,050,000) --
Net Loss (October 11,
1997 through
December 31, 1997) -- -- -- --
---------- -------------- ---------- --------------
BALANCE,
December 31, 1997 ........ -- $ -- -- $ --
========== ============== ========== ==============
<CAPTION>
Class C Class D Preferred Stock Common Stock
---------------------- ----------------------- ------------------------- ------------
Units Amount Units Amount Shares Par Value Shares
------------ -------- ------------- -------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
January 30, 1996 ......... -- $ -- -- $ -- -- $ -- --
Sale of Class B Units..... -- -- -- -- -- -- --
Issuance of Class C
Units .................... 87,049 -- -- -- -- -- --
Net loss ................. -- -- -- -- -- -- --
------ ---- -- ---- -- ------- --
BALANCE,
December 31, 1996 ........ 87,049 -- -- -- -- -- --
Sale of Class A Units..... -- -- -- -- -- -- --
Sale of Class B Units..... -- -- -- -- -- -- --
Issuance of Class D
Units .................... -- -- 124,000 -- -- -- --
Net Loss (January 1,
1997 through Octo-
ber 10, 1997) ............ -- -- -- -- -- -- --
------ ---- ------- ---- -- ------- --
BALANCE,
October 10, 1997 ......... 87,049 -- 124,000 -- -- -- --
Conversion of Capital
(Note 7) ................. (87,049) -- (124,000) -- 1,404,056 14,041 2,137,049
Net Loss (October 11,
1997 through
December 31, 1997) -- -- -- -- -- -- --
------- ---- -------- ---- --------- ------- ---------
BALANCE,
December 31, 1997 ........ -- $ -- -- $ -- 1,404,056 $14,041 2,137,049
======= ==== ======== ==== ========= ======= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
Common Stock Additional Members'/
------------ Paid-In Retained Stockholders'
Par Value Capital Deficit Equity
----------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
BALANCE,
January 30, 1996 ......... $ -- $ -- $ -- $ --
Sale of Class B Units..... -- -- -- 18,440,982
Issuance of Class C
Units .................... -- -- -- --
Net loss ................. -- -- -- (3,535,259)
------- ----------- ------------ --------------
BALANCE,
December 31, 1996 ........ -- -- -- 14,905,723
Sale of Class A Units..... -- -- -- 29,820,008
Sale of Class B Units..... -- -- -- 2,058,997
Issuance of Class D
Units .................... -- -- -- --
Net Loss (January 1,
1997 through Octo-
ber 10, 1997) ............ -- -- -- (20,923,237)
------- ----------- ------------ --------------
BALANCE,
October 10, 1997 ......... -- -- -- 25,861,491
Conversion of Capital
(Note 7) ................. 21,370 25,826,080 -- --
Net Loss (October 11,
1997 through
December 31, 1997) -- -- (9,224,378) (9,224,378)
------- ----------- ------------ --------------
BALANCE,
December 31, 1997 ........ $21,370 $25,826,080 $ (9,224,378) $ 16,637,113
======= =========== ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-31
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception
(January 30) to Year Ended
December 31, December 31,
1996 1997
----------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ........................................................................ $ (3,535,259) $ (30,147,615)
------------- --------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ................................................. 1,106,264 13,412,025
Amortization of capitalized debt costs and debt discount ...................... 313,329 2,423,535
Amortization of deferred promotional costs .................................... 41,699 1,097,127
Changes in operating assets and liabilities, net of acquisitions:
Accounts receivable, net ..................................................... (428,281) (1,678,650)
Inventory .................................................................... (218,140) (1,566,129)
Other current assets ......................................................... (269,721) (771,194)
Accounts payable ............................................................. 877,630 19,297
Accrued liabilities and other liabilities .................................... 1,099,003 11,721,655
Unearned revenue ............................................................. 379,533 (1,817,178)
------------- --------------
Total adjustments .......................................................... 2,901,316 22,840,488
------------- --------------
Net cash used in operating activities ...................................... (633,943) (7,307,127)
------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of acquisitions ........................ (382,175) (2,611,405)
Disposals of property and equipment ............................................. (3,930) --
Increase in restricted cash for payment of subordinated notes ................... -- (37,027,088)
Purchase of contract rights and related net assets, net of amounts financed ..... (12,695,488) (89,590,710)
Increase in other assets ........................................................ (693,690) (1,222,307)
------------- --------------
Net cash used in investing activities ...................................... (13,775,283) (130,451,510)
------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank credit facility .............................................. 9,400,000 88,269,409
Repayment of bank credit facility ............................................... -- (82,169,409)
Proceeds from subordinated notes offering, net of discounts ..................... -- 152,840,850
Issuance of notes payable ....................................................... 32,399 344,417
Repayment of seller notes and other notes payable ............................... (9,047,023) (6,201,532)
Capitalized financing fees ...................................................... (2,821,177) (9,649,936)
Sale of Member Units ............................................................ 18,440,982 31,879,005
Other, net ...................................................................... -- (36,970)
------------- --------------
Net cash provided by financing activities .................................. 16,005,181 175,275,834
------------- --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ........................................ 1,595,955 37,517,197
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................................. -- 1,595,955
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ....................................... $ 1,595,955 $ 39,113,152
============= ==============
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared ................................................. $ 83,615 $ --
============= ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .......................................................... $ 301,035 $ 5,425,156
============= ==============
Issuance of seller notes in connection with acquisitions ........................ $ 24,156,000 $ 17,552,000
============= ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-32
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Digital Television Services, Inc. ("DTS"), a Delaware corporation, is
successor to Digital Television Services, LLC, a limited liability company
organized under the Delaware Limited Liability Act, and DBS Holdings, L.P., a
Delaware limited partnership originally formed on January 30, 1996 by Columbia
Capital Corporation ("Columbia") and senior management of DTS. DTS and its
wholly owned subsidiaries (collectively, "the Company") were formed to acquire
and operate the exclusive rights to distribute direct broadcast satellite
("DBS") services ("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv") in
certain rural markets. The Company completed its first acquisition of rights to
provide DIRECTV Services in March 1996 and has made a total of 17 acquisitions
through December 31, 1997. On November 19, 1996, the limited partnership was
converted into a limited liability company. On October 10, 1997, DTS effected a
conversion from a limited liability company to a corporation through a merger
with and into WEP Intermediate Corp.
In connection with the Company's expansion, Columbia and certain of its
affiliates increased their investment in the Company in February 1997. Also, in
February 1997, the Company raised additional equity from J.H. Whitney & Co. and
Fleet Equity Partners (together with Columbia, the "Equity Investors") and from
senior executives of the Company. The Equity Investors and senior executives,
in aggregate, have contributed $50,500,000 of equity capital to the Company.
DTS is a holding company which operates primarily through its wholly-owned
subsidiaries. The principal wholly-owned subsidiaries of DTS as of December 31,
1997 consist of 11 entities (the "Operating Subsidiaries") which, except for
one subsidiary which is a Delaware limited liability company and one subsidiary
which is a New Mexico corporation, are limited liability companies organized
under the laws of the state of Georgia. The Operating Subsidiaries have the
right to provide DIRECTV Services. The sole member and manager of the Operating
Subsidiaries is DTS Management, LLC ("DTS Management"), a Georgia limited
liability company, which is a wholly-owned subsidiary of DTS. The Company's
other wholly-owned subsidiary, DTS Capital, Inc. ("DTS Capital"), was formed in
1997 and currently has nominal assets and does not conduct any operations. DTS
Capital was formed to facilitate the issuance of $155.0 million in senior
subordinated notes (the "Notes") in July 1997 (Note 5). In connection with the
reorganization (the "Reorganization") of the Company in February 1997, the
Company contributed to the capital of DTS Management the Company's ownership
interest in each of its direct subsidiaries, other than DTS Management and DTS
Capital. As a result thereof, each direct subsidiary became a wholly-owned
direct subsidiary of DTS Management and a wholly-owned indirect subsidiary of
the Company. Since each subsidiary was a wholly-owned direct or indirect
subsidiary of the Company prior to the Reorganization, the Reorganization had
no impact on the consolidated financial statements of the Company.
The Company obtained the rights to distribute DIRECTV Services in its
territories pursuant to agreements (the "NRTC Member Agreements") with the
National Rural Telecommunications Cooperative (the "NRTC"). Under the
provisions of the NRTC Member Agreements, the Company has the exclusive right
to provide DIRECTV Services within certain rural territories in the United
States (Note 3).
The Company has had a limited operating history during which time it has
generated negative cash flows and net losses. The negative cash flows can be
attributed to the costs incurred to purchase NRTC contract rights and related
assets (Notes 3 and 10) and general corporate overhead expenses. The Company
expects negative cash flows and net losses to continue through at least 1998,
as the Company plans to purchase additional contract rights and to incur
substantial selling and marketing expenses in order to build its subscriber
base. The ability to generate positive cash flow in the future is dependent
upon many factors, including general economic conditions, the level of market
acceptance for the Company's services, and the degree of competition
encountered by the Company. As discussed in Note 5, financing totaling $90
million has been committed by a syndicate of lenders, of which approximately
$41.0 million was available at December 31, 1997. The Company also issued the
Notes in July 1997 (Note 5) to refinance certain indebtedness and to provide
additional funds for possible future acquisitions and general operating needs.
F-33
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
1. ORGANIZATION AND NATURE OF BUSINESS -- (Continued)
The success of the Company is dependent on the future ability of DTS and
its subsidiaries to generate projected revenues through successful operations.
In the opinion of management, capital on hand, as well as funds provided from
financings (Note 5), will be sufficient to meet the capital and operating needs
of the Company through at least 1998. Additional funding may be required for
any future acquisitions. However, there can be no assurance when or if future
operations of the Company will be successful or that further financing, if
needed, will be available with terms acceptable to the Company, or at all.
On November 6, 1997, the Company entered into an agreement in principle
with Pegasus Communications Corporation ("Pegasus") providing for the
acquisition of the Company by Pegasus (Note 10).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of DTS and its
subsidiaries. All significant intercompany transactions and balances have been
eliminated.
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.
Revenue Recognition
The Company earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, quarterly, annual, or seasonal basis, including premium programming,
is billed in advance and is recorded as unearned revenue. All programming
revenue is recognized when earned. As programming revenue is earned uniformly
over the period of the purchase agreement with the customer, approximately
$447,000 and $2,315,000 of net accounts receivable in the accompanying
consolidated balance sheets represent unearned revenue at December 31, 1996 and
1997, respectively.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Company and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the Company for such services.
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 (Note
9)); monthly subscriber maintenance fees charged by DirecTV, such as security
fees, ground service fees, system authorization fees, and fees for subscriber
billings; costs of equipment and installation; and certain subscriber operating
costs. Cost of equipment and installation represents the actual cost of the
equipment to the Company plus the costs to install the equipment.
F-34
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Inventories
The Company maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following:
December 31, December 31,
1996 1997
-------------- -------------
Deferred promotional costs ......... $214,939 $16,006
Other .............................. 19,214 76,599
-------- -------
$234,153 $92,605
======== =======
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who sign a
non-cancellable and non-refundable contract pursuant to which they agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Company for the credit. The Company defers both the
programming revenue and the cost of this credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the Company
receives $1 per month for up to five years from the NRTC for each subscriber
activated under this program. This program was discontinued in July 1997.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated useful lives of five years for leasehold improvements
and three to seven years for furniture and equipment. Depreciation expense was
$48,269 and $509,842 for the period from inception (January 30, 1996) through
December 31, 1996 and for the year ended December 31, 1997, respectively. 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
earnings.
Property and equipment, at cost, consist of the following:
December 31, December 31,
1996 1997
-------------- -------------
Leasehold improvements .......... $ 81,244 $ 327,804
Furniture and equipment ......... 397,201 3,146,950
-------- ----------
$478,445 $3,474,754
======== ==========
F-35
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Contract Rights and Other Assets
Contract rights and other assets consist of the following:
<TABLE>
<CAPTION>
December 31, December 31,
1996 1997
-------------- ---------------
<S> <C> <C>
Contract rights ........................... $ 32,727,697 $ 170,715,335
Organization costs ........................ 599,528 1,166,475
------------ -------------
33,327,225 171,881,810
Accumulated amortization .................. (1,057,995) (13,943,682)
------------ -------------
32,269,230 157,938,128
Deposits on Pending Acquisitions .......... 3,380,961 250,000
Debt issuance costs, net .................. 2,776,658 4,002,209
Bond issuance costs, net .................. -- 7,276,609
NRTC patronage capital .................... 83,615 46,646
Subscriber acquisition receivable ......... -- 717,632
Capitalized merger costs .................. -- 555,239
Other ..................................... 94,161 318,604
------------ -------------
$ 38,604,625 $ 171,105,067
============ =============
</TABLE>
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services (Note 3), less net tangible assets acquired.
Contract rights are being amortized over ten years, the estimated remaining
useful life of the satellites operated by DirecTv which provide service under
the related contracts. Amortization expense, included in depreciation and
amortization in the accompanying consolidated statements of operations, was
$1,021,606 and $12,646,558 for the period from inception (January 30, 1996)
through December 31, 1996 and for the year ended December 31, 1997,
respectively. Accumulated amortization, included in the accompanying
consolidated balance sheets, was $1,021,606 and $13,668,165 for the period from
inception (January 30, 1996) through December 31, 1996 and for the year ended
December 31, 1997, respectively.
Organization Costs: Organization costs are costs associated with the
formation of the Company and its subsidiaries and are being amortized over five
years. Amortization expense included in depreciation and amortization in the
accompanying consolidated statements of operations was $33,891 and $241,626,
for the period from inception (January 30, 1996) through December 31, 1996 and
for the year ended December 31, 1997, respectively. Accumulated amortization,
included in the accompanying consolidated balance sheets, was $33,891 and
$275,517 for the period from inception (January 30) through December 31, 1996
and for the year ended December 31, 1997, respectively.
Deposits on Acquisitions: In accordance with the provisions of asset
purchase agreements entered into by the Company, deposits were made into escrow
accounts for acquisitions of contract rights in Kentucky, Vermont and Kansas,
which were pending at December 31, 1996 and for a pending acquisition of
contract rights in Georgia at December 31, 1997.
Debt Issuance Costs: Debt issuance costs are amortized over the term of
the related long-term debt facility. Amortization expense, included in interest
expense in the accompanying consolidated statements of operations, was $44,520
and $843,410 for the period from inception (January 30, 1996) through December
31, 1996 and for the year ended December 31, 1997, respectively. Accumulated
amortization, included in the accompanying consolidated balance sheets, was
$44,520 and $887,930 for the period from inception (January 30) through
December 31, 1996 and for the year ended December 31, 1997, respectively.
F-36
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
Bond Issuance Costs: Bond issuance costs represent deferred costs incurred
in connection with the issuance of the Notes (Note 5) and are capitalized over
the life of the Notes. Amortization expense, included in interest expense in
the accompanying consolidated statements of operations, was $304,364 for the
year ended December 31, 1997. Accumulated amortization, included in the
accompanying consolidated balance sheets, was $304,364 for the same period.
NRTC Patronage Capital: The Company, through its subsidiaries, is an
affiliate of the NRTC. While affiliates have no vote, they do have an 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 recognized as
income when received and is netted against programming expense in the
accompanying statement of operations. 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. The Company includes noncash patronage capital as other
assets, with an offsetting deferred patronage income amount included in other
liabilities in the accompanying consolidated balance sheets. The patronage
capital will be recognized as income when cash distributions are declared by
the NRTC. The NRTC does not permit the transfer of patronage capital.
Accordingly, noncash patronage capital due to the Operating Subsidiaries
relating to the period of time prior to the date of acquisition by the Company
has not been recorded in the accompanying consolidated balance sheets.
Subscriber Acquisition Receivable: During the second half of 1996, the
Company entered into an agreement with the NRTC pursuant to which the NRTC
provided a rebate to offset costs relating to the acquisition of new
subscribers under the Company's subscriber rebate program. The Company receives
the rebate over the period of 60 months commencing with the acquisition date of
each subscriber covered under this agreement. The receivable represents amounts
due to the Company under this agreement at December 31, 1997.
Capitalized Merger Costs: Capitalized merger costs are costs incurred
during 1997 associated with the agreement with Pegasus that provides that the
Company will become a wholly owned subsidiary of Pegasus (Note 10). As the
transaction is not expected to be completed until the first half of 1998, no
amortization expense has been recorded in the accompanying consolidated
statement of operations.
Income Taxes
The Company was considered a partnership for federal and state income tax
purposes for the period from inception (January 30, 1996) to October 10, 1997.
All taxable income or loss was allocated to the members in accordance with the
terms of the limited liability company agreement of the Company (the "LLC
Agreement"). Additionally, the Company incurred an operating loss for the
period from October 11, 1997 to December 31, 1997. Accordingly, no provision
for income taxes is included in the accompanying consolidated financial
statements.
The Company became a taxable entity for federal and state income tax
purposes, effective with its conversion to a corporation (Note 7) on October
10, 1997. The Company accounts for income taxes using Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires the use of the asset and liability approach for financial accounting
and reporting for income taxes. Deferred tax assets and liabilities arise from
differences between the tax basis of an asset or liability and its reported
amount in the financial statements. Deferred tax balances are calculated by
applying the provisions of enacted tax law to determine the amount of taxes
payable or refundable currently or in future years.
F-37
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
The sources of the differences between the financial accounting and tax
bases of the Company's assets and liabilities which give rise to the deferred
tax assets and liabilities and the tax effects of each are as follows as of
December 31, 1997 (in thousands):
Deferred tax assets:
Net operating loss carryforwards ("NOLs") ......... $ 3,072
Amortization ...................................... 1,989
Professional fees ................................. 172
Other ............................................. 97
Less: valuation allowance ......................... (5,330)
--------
$ --
========
As of December 31, 1997, the Company had NOLs of approximately $7,877,000,
which will expire in year 2017. The Company has established a valuation
allowance equal to the net operating loss carryforwards not utilized because of
the uncertainty of the realizability of the net operating loss carryforwards.
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures About
Fair Value of Financial Instruments," requires disclosure of the fair value of
certain financial instruments for which it is practicable to estimate that
value. For purposes of the following disclosure, the fair value of a financial
instrument is the amount at which the instrument could be exchanged in a
current transaction between willing parties other than in a forced sale or
liquidation.
The methods and assumptions used to estimate fair value are as follows:
Cash and cash equivalents: The Company considers all highly liquid
investments purchased with a maturity of three months or less to be cash
equivalents. The carrying amount approximates fair value due to the
relatively short period to maturity of these instruments.
Long-term debt: Fair value is estimated based on borrowing rates
currently available to the Company for bank loans with similar terms and
average maturities.
The asset and liability amounts recorded in the accompanying balance
sheets at December 31, 1996 and 1997 for cash and cash equivalents and
long-term debt approximate fair value based on the above assumptions.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of geographically dispersed subscribers. As a
result, at December 31, 1996 and 1997, management does not believe any
significant concentration of credit risk exists.
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. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying consolidated balance sheets are appropriately
valued.
F-38
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. CONTRACT RIGHTS
During 1996, the Company acquired the rights to distribute DIRECTV
Services in eight rural DirecTv markets in certain rural areas in the United
States (the "1996 Acquisitions"). The aggregate consideration was approximately
$32.3 million, including closing date working capital and other adjustments as
defined in the purchase agreements and fair value adjustments related to the
seller notes (Note 5), subject to increase based on the number of subscribers
in one of the markets on October 1, 1998 (Note 5). Of the total purchase price,
approximately $9.3 million was paid in cash and approximately $24.2 million
(before fair value adjustments related to the seller notes of $1.2 million
(Note 5)) was financed through the issuance of promissory notes to the sellers
of the contract rights (Note 5). Under the 1996 Acquisitions, rights were
acquired in the following markets:
o In March 1996, the Company acquired the outstanding common stock of
Spacenet, Inc. and the rights to provide DIRECTV Services in certain
counties in New Mexico.
o In April 1996, the Company acquired the rights to provide DIRECTV
Services in certain counties in California from Pacific Coast DBS, Inc.
o In August 1996, the Company acquired the rights to provide DIRECTV
Services in certain counties in New Mexico from Teg DBS Services, Inc., in
certain counties in New York from Northeast Cable Services, Inc. and Falls
Earth Station, Inc., and in certain counties in Colorado from Omega Cable.
o In November 1996, the Company acquired the rights to provide DIRECTV
Services in certain counties in South Carolina from Pee Dee Electric
Cooperative, Inc. and Santee Electric Cooperative, Inc.
When the Company purchases the exclusive rights to provide DIRECTV
Services in a rural DirecTv market, it acquires the NRTC Member Agreement and
related agreements providing for the exclusive rights to provide DIRECTV
Services within that market, all net assets related to the provision of DIRECTV
Services in such market, and any residual rights to provide DBS services which
the NRTC may grant the owner of such market after the termination or expiration
of the NRTC Member Agreement. The purchase price of the above acquisitions was
allocated to the fair values of the net assets acquired as follows (in
thousands):
<TABLE>
<S> <C>
Current assets ........................................................ $ 751
Property and equipment ................................................ 96
Contract rights, net of fair value adjustments of $1.2 million......... 32,728
Current liabilities ................................................... (1,240)
--------
Total consideration ............................................. $ 32,335
========
</TABLE>
Any additional contingent consideration will be recorded as an increase in
contract rights.
During 1997, the Company acquired the rights to distribute DIRECTV
Services in nine additional rural DirecTv markets in certain rural areas in the
United States (the "1997 Acquisitions"). The aggregate consideration was
approximately $134.3 million including closing date working capital and other
adjustments as defined in the purchase agreements and fair value adjustments
related to the seller notes (Note 5). Of the total price, approximately $44.4
million was paid in cash, approximately $75.3 million was financed through
borrowings under the Credit Facility and approximately $17.6 million (before
fair value adjustments related to the seller notes of $3.0 million (Note 5))
was financed through the issuance of promissory notes to the sellers of the
contract rights (Note 5). Under the 1997 Acquisitions, rights were acquired in
the following markets:
o In January 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Kentucky from Direct Programming Services
Limited Partnership.
F-39
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
3. CONTRACT RIGHTS -- (Continued)
o In January 1997, the Company also acquired the rights to provide DIRECTV
Services in certain counties in Kansas from Kansas DBS, L.L.C. and Skywave
Communications, Inc.
o In February 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Vermont from Northeast DBS Enterprises,
L.P.
o In May 1997, the Company acquired the rights to provide DIRECTV Services
in certain counties in Georgia from Mitchell Electric Membership
Corporation, Washington Electric Membership Corporation, Planters Electric
Membership Corporation and DigiCom Services, Inc.
o In December 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Indiana from Satellite Television
Services, Inc. ("STS"). The purchase price has been allocated to the
assets acquired and liabilities assumed based on the estimated fair values
as of the acquisition date. The purchase price allocation of STS is
preliminary and subject to adjustment.
The purchase price of the above acquisitions was allocated to the fair
values of the net assets acquired as follows (in thousands):
<TABLE>
<S> <C>
Current assets ........................................................ $ 3,908
Property and equipment ................................................ 385
Contract rights, net of fair value adjustments of $3.0 million......... 137,987
Current liabilities ................................................... (7,965)
--------
Total consideration ............................................. $134,315
========
</TABLE>
The following pro forma information has been prepared assuming that the
1996 Acquisitions and the 1997 Acquisitions (collectively the "Acquisitions")
occurred at the beginning of the respective periods. This information includes
pro forma adjustments related to the amortization of contract rights resulting
from the excess of the purchase price over the fair value of the net assets
acquired and interest expense related to the Notes, the seller notes and a
portion of the credit facility which were used to acquire the Acquisitions. The
pro forma information is presented for informational purposes only and may not
be indicative of the results of operations as they would have been had the
Acquisitions occurred at the beginning of the respective periods, nor is the
information necessarily indicative of the results of the operations which may
occur in the future.
<PAGE>
<TABLE>
<CAPTION>
December 31
-----------------------------
1996 1997
------------- -------------
(in thousands)
(Unaudited)
<S> <C> <C>
Consolidated operating revenues ......... $ 40,024 $ 57,498
Consolidated net loss ................... $ (43,718) $ (44,904)
</TABLE>
4. RELATED-PARTY TRANSACTIONS
Columbia, which is owned by certain members of the Company holding Class A
and Class B units prior to October 10, 1997 and preferred stock and common
stock subsequent to October 10, 1997 (Note 7), provides financial, managerial,
and other services to the Company. Total fees and expenses paid to Columbia
were approximately $322,000 and $47,000 for the period from inception (January
30, 1996) through December 31, 1996 and for the year ended December 31, 1997,
respectively. Such fees are included in general and administrative expenses and
other expenses in the accompanying consolidated statements of operations.
F-40
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LONG-TERM DEBT
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1997
----------------------------- ------------------------------
Unamortized Unamortized
Principal Discount Principal Discount
------------- ------------- --------------- ------------
<S> <C> <C> <C> <C>
Senior subordinated notes ............ $ -- $ -- $155,000,000 $2,069,185
Credit facility ...................... 9,400,000 -- 15,500,000 --
Seller notes and commitments ......... 15,113,250 965,011 26,544,998 2,675,149
Installment notes .................... 28,376 -- 291,642 --
----------- -------- ------------ ----------
24,541,626 965,011 197,336,640 4,744,334
Less current maturities .............. 6,130,183 96,451 16,315,333 1,364,903
----------- -------- ------------ ----------
$18,411,443 $868,560 $181,021,307 $3,379,431
=========== ======== ============ ==========
</TABLE>
Senior Subordinated Notes
On July 30, 1997, the Company sold the Notes in a transaction exempt from
registration under the Securities Act of 1933, as amended (the "Securities
Act"). The Notes are the joint and several obligations of the Company and DTS
Capital. DTS Capital has nominal assets, does not conduct any operations and
will not provide any additional security for the Notes. DTS Capital was formed
solely to provide a corporate co-issuer in addition to a limited liability
company issuer (the Company). Accordingly, financial information for DTS
Capital is not provided. The Notes mature in 2007 and bear interest at 12 1/2%,
payable semi-annually on February 1 and August 1. The Company raised
approximately $146.0 million, net of underwriting discount and estimated
expenses, through the issuance of the Notes. The Company used the net proceeds
to fund an interest escrow account for the first four semi-annual interest
payments and to repay outstanding indebtedness under the Credit Facility (as
defined below).
The Company filed to exchange the Notes with new senior subordinated notes
(the "Exchange Notes") registered under the Securities Act. The terms of the
Exchange Notes are identical in all material respects (including principal
amount, interest rate, maturity, security and ranking) to the terms of the
Private Notes (which they replace), except that the Exchange Notes: (i) bear a
Series B designation, (ii) have been registered under the Securities Act and,
therefore, do not bear legends restricting their transfer, and (iii) are not
entitled to certain registration rights and certain liquidated damages which
were applicable to the Notes in certain circumstances under a registration
rights agreement entered into by the Company in connection with the sale of the
Notes.
The Exchange Notes are unconditionally guaranteed, on a senior
subordinated basis, as to payment of principal, premium, if any, and interest,
jointly and severally, by all direct and indirect subsidiaries of DTS (the
"Guarantors"). The Guarantors consist of all of the subsidiaries of DTS, except
DTS Capital, which is a co-issuer of the Exchange Notes and has no separate
assets or operations. DTS does not have assets or operations apart from the
assets and operations of the subsidiaries. Accordingly, separate financial
information for the Guarantors is not provided because management of the
Company has determined that such information would not be material to
investors. On January 26 1998, the Company completed the exchange of the Notes
with the Exchange Notes.
Credit Facility
The Company is a party to a credit agreement dated November 27, 1996, as
amended and restated on July 30, 1997 (the "Credit Facility") by and among the
Company, the banks and other lenders party from time to time thereto (the
"Lenders"), CIBC, as Administrative Agent, CIBC Wood Gundy Securities Corp.
("CIBCWG"), as Arranger, J.P. Morgan, as Syndication Agent, and Fleet Bank, as
Documentation Agent, which provides for a
F-41
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LONG-TERM DEBT -- (Continued)
revolving credit facility in the amount of $70.0 million, with a $50.0 million
sublimit for letters of credit, and a $20.0 million term loan facility. The
proceeds of the Credit Facility may be used (i) to refinance certain existing
indebtedness, (ii) prior to December 31, 1998, to finance the acquisition of
certain Rural DirecTv Markets and related costs and expenses, (iii) to finance
capital expenditures of the Company and its subsidiaries and (iv) for the
general corporate purposes and working capital needs of the Company and its
subsidiaries.
The $20.0 million term loan facility must be drawn no later than July 30,
1998 and any amounts not so drawn by that date will be cancelled. The term loan
shall be repaid in 20 consecutive quarterly installments of $200,000 each
commencing September 30, 1998 with the remaining balance due July 31, 2003.
Borrowings under the revolving credit facility established pursuant to the
Credit Facility are available to the Company until July 31, 2003; however, if
the then unused portion of the commitments exceeds $10.0 million on December
31, 1998, the commitments will be reduced on such date by an amount equal to
the unused portion of such commitments minus $10.0 million. Thereafter, the
commitments thereunder will reduce quarterly commencing on September 30, 1999
at a rate of 3.50% through 1999, 5.75% in 2000, 7.0% in 2001, 9.0% in 2002 and
3.0% until June 30, 2003. All of the loans outstanding will be repayable on
July 31, 2003. The making of each loan under the Credit Facility is subject to
the satisfaction of certain conditions, including not exceeding a certain
"borrowing base" based on the number of paying subscribers and households
within the Rural DirecTv Markets served by the Company; maintaining minimum
subscriber penetration throughout the term of the Credit Facility; maintaining
annualized contribution per paying subscriber throughout the term of the Credit
Facility based on net income plus certain sales, administrative and payroll
expenses; maintaining a maximum ratio of total debt to equity beginning in the
first quarter of 2000 and continuing throughout the term of the Credit
Facility; maintaining a maximum ratio of total senior debt to annualized
operating cash flow and a ratio of total debt to annualized operating cash flow
beginning in the first quarter of 2000 and continuing throughout the term of
the Credit Facility; maintaining a maximum ratio of total debt to adjusted
annualized operating cash beginning in the first quarter of 1999 and continuing
until the last quarter of 2000; and maintaining a maximum percentage of general
and administrative expenses to revenues beginning in the first quarter of 1998
and continuing for the duration of the Credit Facility. The Credit Facility
also contains a number of significant covenants that, among other things, limit
the ability of the Company and its subsidiaries to incur additional
indebtedness and guaranty obligations, create liens and other encumbrances,
make certain payments, investments, loans and advances, pay dividends or make
other distributions in respect of its equity interests, sell or otherwise
dispose of assets, make capital expenditures, merge or consolidate with another
entity, make amendments to its organizational documents or transact with
affiliates. The Company is in compliance with those covenants with which it is
required to comply as of the date hereof. In addition, the Credit Facility
provides that the Company will be required to make mandatory prepayments of the
Credit Facility from, subject to certain exceptions, the net proceeds of
certain sales or other dispositions by the Company or any of its subsidiaries
of material assets and with 50% of any excess operating cash flow with respect
to any fiscal year after the fiscal year ending December 31, 1998.
Borrowings by the Company under the Credit Facility are unconditionally
guaranteed by each of the Company's direct and indirect subsidiaries, and such
borrowings are secured by (i) an equal and ratable pledge of all of the equity
interests in the Company's subsidiaries, (ii) a first priority security
interest in all of their assets, and (iii) a collateral pledge of the Company's
NRTC Member Agreements.
The Credit Facility provides that the Company may elect that all or a
portion of the borrowings under the Credit Facility bear interest at a rate per
annum equal to either (i) the CIBC Alternate Base Rate plus the Applicable
Margin or (ii) the Eurodollar Rate plus the Applicable Margin. When applying
the CIBC Alternate Base Rate with respect to borrowings pursuant to the
revolving credit facility, the Applicable Margin will be (w) 2.25% per annum
(when the ratio of total indebtedness of the Company to annualized operating
cash flow (the "Leverage Ratio")) is greater than or equal to 6.75 to 1.00),
(x) 2.00% (when the Leverage Ratio is less than 6.75 to 1.00 but greater than
or equal to 6.25 to 1.00), (y) 1.50% (when the Leverage Ratio is less than 6.25
to
F-42
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LONG-TERM DEBT -- (Continued)
1.00 but greater than or equal to 5.75 to 1.00) or (z) 1.25% (when the Leverage
Ratio is less than 5.75 to 1.00). When applying the Eurodollar Rate with
respect to borrowings pursuant to the revolving credit facility, Applicable
Margin will be (w) 3.50% per annum (when the Leverage Ratio is greater than or
equal to 6.75 to 1.00), (x) 3.25% (when the Leverage Ratio is less than 6.75 to
1.00 but greater than or equal to 6.25 to 1.00), (y) 2.75% (when the Leverage
Ratio is less than 6.25 to 1.00 but greater than or equal to 5.75 to 1.00) or
(z) 2.50% (when the Leverage Ratio is less than 5.75 to 1.00). The Applicable
Margin for borrowings pursuant to the term loan facility will be the Applicable
Margin for borrowings pursuant to the revolving credit facility, plus 0.25%. As
used herein, "CIBC Alternate Base Rate" means the higher of (i) CIBC's prime
rate and (ii) the federal funds effective rate from time to time plus 1/2% per
annum. As used herein, "Eurodollar Rate" means the rate at which eurodollar
deposits for one, two, three and six months (as selected by the Company) are
offered to CIBC in the interbank eurodollar market. The Credit Facility will
also provide that at any time when the Company is in default in the payment of
any amount due thereunder, the principal of all loans made under the Credit
Facility will bear interest at 2% per annum above the rate otherwise applicable
thereto and overdue interest and fees will bear interest at a rate of 2% per
annum over the CIBC Alternative Base Rate.
At December 31, 1996 and 1997, borrowings under the Credit Facility
accrued interest at the rate of 9% and 9.66%, respectively.
The Company has and will pay a commitment fee on the unused amounts under
the Credit Facility calculated at 0.5% per annum, payable quarterly in arrears.
The Company also paid the arrangers of the Credit Facility a customary
structuring and syndication fee and paid certain agency fees to the agents.
Pursuant to a recent amendment to the NRTC Member Agreements, the Company
and all other NRTC Members whose monthly obligations to the NRTC have exceeded
$500,000 in the past six months are required to keep and maintain in full force
and effect a standby letter of credit in favor of the NRTC to secure their
respective payment obligations to the NRTC under the NRTC Member Agreements.
The amount of the letter of credit issued at the request of the Company
pursuant to the Credit Facility, is equal to three times the Company's single
largest monthly invoice from the NRTC, exclusive of amounts payable for DSS(R)
equipment purchased by the Company from the NRTC, or $6.3 million, and must be
increased as the Company makes additional acquisitions of Rural DirecTv Markets
and when the Company's obligations to the NRTC exceed the amount of the
original letter of credit by 167%.
Seller Notes and Commitments
In connection with the acquisition of the Company's California rural
DirecTv market, one of the Operating Subsidiaries, Digital Television Services
of California, LLC ("DTS California"), entered into a promissory note dated
April 1, 1996, as modified as of December 31, 1996 (as so modified, the "DTS
California Note"), in favor of Pacific Coast DBS, Inc. ("Pacific"). Pursuant to
the DTS California Note, DTS California is obligated to pay to Pacific the sum
of (i) $480,000, payable in 24 equal monthly installments commencing May 1,
1996, and (ii) an amount payable on October 1, 1998 equal to the greater of
$4.0 million or the Contingent Payment Amount. The Contingent Payment Amount is
determined by multiplying the number of subscribers to DIRECTV Services in DTS
California's rural DirecTv market as of October 1, 1998 by certain dollar
amounts. As of December 31, 1996 and December 31, 1997, the Contingent Payment
Amount is recorded as $4,223,250 and $6,250,800, which is based on subscriber
levels at December 31, 1996 and December 31, 1997, respectively. The DTS
California Note is classified as current maturities in the accompanying
consolidated balance sheet at December 31, 1997. The obligations of DTS
California pursuant to the DTS California Note are secured by a $7,000,000
irrevocable letter of credit (the "DTS California Letter of Credit") issued in
favor of Pacific pursuant to the Credit Facility, as subsequently defined. The
stated amount of the DTS California Letter of Credit will increase so that it
will at all times be at least equal to 110% of the Contingent Payment Amount.
The DTS California Note contains
F-43
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LONG-TERM DEBT -- (Continued)
certain covenants which, among other things, prohibit the payment of dividends
or other distributions by DTS California and payments by DTS California to
Columbia. A failure to make any payment due under the DTS California Note will
allow Pacific to draw under the DTS California Letter of Credit.
In connection with the acquisition of one of the Company's rural DirecTv
markets in South Carolina (the "South Carolina Rural DirecTv Markets"), one of
the Operating Subsidiaries, Digital Television Services of South Carolina I,
LLC ("DTS South Carolina I"), entered into a promissory note dated November 26,
1996 (the "South Carolina I Note") payable to Pee Dee Electricom, Inc. ("Pee
Dee") in the amount of $7,955,000, of which $3,265,000 was paid in January
1997. The balance was paid on January 2, 1998 and is classified as current
maturities in the accompanying consolidated balance sheet at December 31, 1997.
The note bears interest at a rate of 4% per annum, payable quarterly. The
obligations of DTS South Carolina I with respect to the South Carolina I Note
are secured by an irrevocable letter of credit (the "South Carolina I Letter of
Credit") issued in favor of Pee Dee pursuant to the Credit Facility. The South
Carolina I Note does not contain any covenants; however, a failure to make any
payment due under the South Carolina I Note will allow Pee Dee to draw under
the South Carolina I Letter of Credit.
In connection with the acquisition of the Company's other South Carolina
rural DirecTv market, one of the Operating Subsidiaries, Digital Television
Services of South Carolina II, LLC, entered into a promissory note dated
November 26, 1996 (the "South Carolina II Note") payable to Santee Satellite
Systems, Inc. ("Santee") in the amount of $2,200,000, of which $1,100,000 was
due on November 26, 1997, with the balance due on November 26, 1998. The entire
balance was paid in January 1997 and thus is classified as current maturities
in the accompanying consolidated balance sheet at December 31, 1996. The note
bears interest at 6% per annum, payable quarterly. The note is secured by an
irrevocable letter of credit issued pursuant to the Credit Facility (the "South
Carolina II Letter of Credit") issued in favor of Santee. The South Carolina II
Note does not contain any covenants; however, a failure to make any payment due
under the South Carolina II Note will allow Santee to draw under the South
Carolina II Letter of Credit.
In connection with the acquisition of one of the Company's New Mexico
rural DirecTv markets, the Company entered into a promissory note dated March
1, 1996, as modified as of November 27, 1996 (as so modified, the "New Mexico
Note"), in favor of Edward Botefuhr and Janet Blakeley Botefuhr in the amount
of $415,000, payable in equal installments on April 1, 1998 and April 1, 1999.
The note bears interest at 15% per annum, payable monthly. The note is secured
by an irrevocable letter of credit issued pursuant to the Credit Facility (the
"New Mexico Letter of Credit") issued in favor of the Botefuhrs. The New Mexico
Note does not contain any covenants; however, a failure to make any payment due
under the New Mexico Note will allow the Botefuhrs to draw under the New Mexico
Letter of Credit. The entire balance was paid in January 1997 and thus is
classified as current maturities in the accompanying consolidated balance sheet
at December 31, 1996.
In connection with the acquisition of the Company's Rural DirecTv Markets
in Georgia (the "Georgia Rural DirecTv Markets"), one of the Subsidiaries,
Digital Television Services of Georgia, LLC ("DTS Georgia"), issued three
promissory notes, each of which represents a portion of the purchase price for
one of the Georgia Rural DirecTv Markets. DTS Georgia issued (i) a promissory
note dated May 9, 1997 (the "Planters Notes") payable to Planters Electric
Membership Corporation ("Planters") in the amount of approximately $850,000,
(ii) a promissory note dated May 9, 1997 (the "Mitchell Note") payable to
Mitchell Electric Membership Corporation ("Mitchell") in the amount of
approximately $9.4 million and (iii) a promissory note dated May 9, 1997 (the
"Washington Note") payable to Washington Electric Membership Corporation
("Washington") in the amount of approximately $5.2 million. The principal
amount of the Planters Note was paid on January 2, 1998 and bears interest at a
rate of 3% per annum; provided that if DTS Georgia acquires a certain Rural
DirecTv Market, the interest rate will increase as of the date of such
acquisition to 3 1/2% per annum. The principal amount of each of the Mitchell
Note and the Washington Note is payable in annual installments beginning
January 2, 1998
F-44
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
5. LONG-TERM DEBT -- (Continued)
through January 2, 2001. The Mitchell Note and the Washington Note bear
interest at a rate of 3% per annum until May 9, 2000 and at a rate of 3 1/2%
per annum thereafter; provided that if DTS Georgia acquires a certain Rural
DirectTv Market, the interest rate will increase as of the date of such
acquisition to 3 1/2% per annum, until May 9, 2000, and to 4% thereafter. The
obligations of DTS Georgia with respect to the Georgia Notes are secured by
three irrevocable letters of credit issued pursuant to the Credit Facility (the
"Georgia Letters of Credit"), each of which has been issued for the benefit of
one of Planters, Mitchell and Washington. The Georgia Notes do not contain any
affirmative or negative covenants regarding the Company, DTS Georgia or the
operation of the Georgia Rural DirecTv Markets; however, a failure to make any
payment due under a Georgia Note will allow the payee of such Georgia Note to
draw under the applicable Georgia Letter of Credit.
Installment Notes
The installment notes represent notes payable to certain financial
institutions for certain property and equipment. The notes are payable in equal
monthly installments through May 2000 and bear interest at rates ranging from
8.5% to 10.3% at December 31, 1996 and 1997.
Unamortized Discount
The Company has discounted the Notes, the DTS California Note, the South
Carolina I Note, the South Carolina II Note and the seller notes issued in
conjunction with the acquisitions of certain Rural DirecTv markets in Georgia
to reflect the fair market value based on average interest rates available to
the Company. The estimated fair value interest rate used to record the discount
was 12.75% for the Notes and 9% for the seller notes. The unamortized discount
is being amortized over the life of the notes using the effective interest
method. Amortization expense, included in interest expense in the accompanying
consolidated statements of operations, is $268,544 and $1,275,761 for the
period from inception (January 30, 1996) through December 31, 1996 and for the
year ended December 31, 1997, respectively.
Future maturities of long-term debt are as follows at December 31, 1997:
1998 .............. $16,315,333
1999 .............. 4,945,001
2000 .............. 4,990,854
2001 .............. 3,385,452
2002 .............. 12,700,000
-----------
$42,336,640
===========
6. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases office and retail space and certain equipment under
noncancelable operating leases which expire in various years through 2002.
Future minimum lease payments for noncancelable operating leases in effect at
December 31, 1997 are as follows:
1998 ..................................... $ 641,000
1999 ..................................... 529,000
2000 ..................................... 369,000
2001 ..................................... 318,000
2002 ..................................... 186,000
----------
Total future minimum lease payments ......... $2,043,000
==========
F-45
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
6. COMMITMENTS AND CONTINGENCIES -- (Continued)
Rental expense charged to operations totaled approximately $83,000 and
$672,632 during the period from inception (January 30, 1996) through December
31, 1996 and during the year ended December 31, 1997, respectively, and is
included in general and administrative expense in the accompanying consolidated
statements of operations.
Minimum Subscribers
As part of the NRTC Member Agreements, the Company is required to pay
certain programming fees based on a minimum number of subscribers in each of
its rural DirecTv markets (such minimum number of subscribers being equal to up
to 5% of the households in each such rural DirecTv market) and the requirements
of certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement, with
respect to such rural DirecTv market. Each of the Operating Subsidiaries had
achieved the minimum subscriber requirement at December 31, 1997.
7. MEMBERS'/STOCKHOLDERS' EQUITY
Prior to October 10, 1997, DTS was a limited liability company (the "LLC")
organized under the laws of the State of Delaware. The LLC had four classes of
equity interests, denominated as "Class A Units," "Class B Units," "Class C
Units," and "Class D Units," with the classes having different voting and
distribution rights per the LLC Agreement. During 1996, the Company sold
1,844,098 Class B Units to Columbia DBS, Inc. and Columbia DBS Investors, L.P.,
which are affiliates of Columbia, and certain senior executives of the Company,
raising $18.4 million of initial equity capital. On January 2, 1997, the
Company sold an additional 205,902 Class B Units to this same group for
approximately $2.1 million. On February 10, 1997, the Company sold 1,333,333
Class A Units to the Equity Investors, raising an additional $30 million of
equity capital.
Class C Units were issued to certain senior executives of the Company,
subject to certain vesting requirements related to employment. Each Class C
Unit represented a restricted interest in the Company received in exchange for
the performance of services. The Company issued a total of 87,049 Class C
Units, of which 34,876 and 68,302 were vested at December 31, 1996 and October
10, 1997, respectively.
In March 1997, DTS Management adopted an Employee Unit Plan (the "Employee
Unit Plan") pursuant to which up to 180,000 Class D Units could be issued to
employees or independent contractors of DTS Management or the Subsidiaries at
prices equal to the market value thereof as of the date of issuance and
pursuant to such terms and conditions (including vesting) as determined by the
Company. As of October 10, 1997, 124,000 Class D Units were issued pursuant to
the Employee Unit Plan.
On October 10, 1997, the Company converted to corporate form in a
transaction (the "Corporate Conversion") contemplated on the LLC Agreement
pursuant to which the LLC merged with and into WEP Intermediate Corp., a
Delaware corporation ("WEP"). As a result of the Corporate Conversion, (i) the
member interests in the LLC held by WEP were canceled, (ii) all of the
outstanding capital stock of WEP was converted into Series A Preferred Stock of
the Company, (iii) the member interests in the LLC evidenced by the Class A
Units (other than those held by WEP) were converted into Series A Preferred
Stock of the Company, (iv) the member interests in the LLC evidenced by the
Class B Units were converted into Common Stock of the Company, (v) the member
interests in the LLC evidenced by the Class C Units together with such Class C
Unit holders' promissory notes in the principal amount of $10.00 per share were
exchanged for shares of Common Stock of the Company, (vi) the member interests
in the LLC evidenced by the Class D Units were converted into warrants to
purchase Common Stock of the Company, (vii) the surviving entity changed its
name to "Digital Television Services, Inc." and (viii) Digital Television
Services, Inc. assumed by operation of law and supplemental indenture all of
the obligations of the LLC under the terms of the Notes.
F-46
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. MEMBERS'/STOCKHOLDERS' EQUITY -- (Continued)
Subsequent to the Corporate Conversion, substantially all of the
outstanding shares of the Company are owned by the holders of the equity
interests in the LLC. Therefore, the Corporate Conversion has been treated for
accounting purposes as the acquisition of WEP by the LLC. The LLC's assets and
liabilities have been recorded at historical cost and WEP's assets and
liabilities have been recorded at fair value. However, given that WEP's only
asset consisted of its investment in the LLC, no goodwill has been recognized.
Effective with the Corporate Conversion, the historical financial statements of
the LLC have become the historical financial statements of WEP and include the
businesses of both companies.
As a result of the Corporate Conversion, the stockholders' equity of the
Company is as follows:
Common Stock. The Company is authorized to issue up to 10,000,000 shares
of Common Stock, par value $.01 per share. As of December 31, 1997, there were
issued and outstanding 2,137,049 shares of Common Stock, held of record by five
stockholders.
Preferred Stock. The authorized capital stock of the Company includes
10,000,000 shares of preferred stock, par value $.01 per share. A total of
5,000,000 of such shares have been designated "Series A Payment-in-Kind
Convertible Preferred Stock" (the "Series A Preferred Stock"). As of December
31, 1997, there were issued and outstanding 1,404,056 shares of Series A
Preferred Stock, held of record by six stockholders.
The Board is authorized by the Amended and Restated Certificate of
Incorporation to issue one or more additional series of preferred stock from
time to time, without further stockholder action, in one or more series and,
with respect to such series, to fix the designation and number of shares to be
issued, the voting rights of the shares, the dividend rights, if any, the
redemption rights, if any, sinking fund requirements, if any, rights upon the
liquidation, dissolution or winding up of the Company or upon the distribution
of the assets of the Company, the terms of the conversion or exchange into any
other class or series of shares, if provided for, and other powers,
preferences, rights, qualifications, limitations or restrictions thereof. Under
the Stockholders Agreement dated as of October 10, 1997 among the Company, the
holders of the Common Stock and the holders of the Series A Preferred Stock
(the "Stockholders Agreement"), stockholder approval may be required in order
to take certain of these actions.
Each holder of shares of the Series A Preferred Stock will have the right,
exercisable at any time and from time to time, to convert all or any such
shares of Series A Preferred Stock into shares of Common Stock, initially on a
share-for-share basis. The conversion ratio of the Series A Preferred Stock is
subject to adjustment in the event of (i) any subdivision or combination of the
Common Stock, (ii) any payment by the Company of a stock dividend to the
holders of the Common Stock, (iii) the issuance of rights to acquire equity to
holders of the Common Stock without issuing similar rights to the holders of
the Series A Preferred Stock, or (iv) the issuance of equity or rights to
acquire equity at a price per share less than $22.50 (as adjusted). In
addition, if the Company consolidates or merges with, or transfers all or
substantially all of its assets to, another corporation, and such transaction
requires the approval of the stockholders of the Company, then a holder of the
Series A Preferred Stock may convert some or all of such shares into shares of
Common Stock simultaneously with the record date for, or the effective date of,
such transaction so as to receive the rights, warrants, securities or assets
that a holder of shares of the Common Stock on that date may receive.
If the Company consummates an underwritten public offering of equity
securities resulting in gross proceeds to the Company of at least $25 million
and at a price per share equal to (i) at least $33.75, if such public offering
is consummated on or before July 31, 1998, (ii) at least $39.37, if such public
offering is consummated after July 31, 1998 but on or before July 31, 1999, and
(iii) at least $45.00, if such public offering is consummated at any time after
July 31, 1999 (a public offering meeting such requirements is referred to
herein as a "Qualified IPO"), then the Series A Preferred Stock shall be
converted automatically upon such consummation into shares of Common Stock at
an initial conversion rate of one-for-one, subject to adjustment as described
above.
F-47
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
7. MEMBERS'/STOCKHOLDERS' EQUITY -- (Continued)
In the event of any voluntary or involuntary dissolution, winding up or
liquidation of the Company, after payment or provision for payment of all of
the Company's debts and other liabilities, the holders of the Series A
Preferred Stock will be entitled to receive, out of the remaining net assets of
the Company and in preference to the holders of the Common Stock and any other
capital stock ranking junior to the Series A Preferred Stock, the amount of
$22.50 (the "Liquidation Preference") for each share of the Series A Preferred
Stock, plus any accrued and unpaid dividends up to the date for such
distribution, whether or not declared. If, upon any liquidation of the Company,
the assets distributable among the holders of the Series A Preferred Stock are
insufficient to permit the payment in full to the holders of the Series A
Preferred Stock and all other classes of preferred stock ranking (as to any
such distribution) senior to or on a parity with the Series A Preferred Stock,
of all preferential amounts payable to all such holders, then the entire assets
of the Company thus distributable will be distributed ratably among the holders
of the Series A Preferred Stock and all classes and series of capital stock
ranking (as to any such distribution) senior to or on a parity with the Series
A Preferred Stock in order of relative priority and, as to classes and series
ranking on a parity with one another, in proportion to the full preferential
amount that would be payable per share if such assets were sufficient to permit
payment in full. If, after payment of the Liquidation Preference to the holders
of the Series A Preferred Stock and the payment of the liquidation preference
with respect to any capital stock ranking (as to any such distribution) senior
to or on a parity with the Series A Preferred Stock, assets remain in the
Company, all such remaining funds shall be distributed first to the holders of
the Common Stock, until such holders have received an amount per share equal to
the Liquidation Preference, subject to certain adjustments, and then on an
equal per share basis to holders of all capital stock of the Company on a pro
rata, as-if-converted to Common Stock basis.
The holders of the Series A Preferred Stock shall be entitled to receive
when, as and if declared by the Board cumulative dividends payable on the
shares of the Series A Preferred Stock for each quarterly dividend period,
commencing March 15, June 15, September 15 and December 15 of each year and
ending on the day next preceding the first day of the next quarterly dividend
period, at a rate of 8% per annum, compounded annually, in respect of the
Liquidation Preference. All such dividends shall be payable on March 15, June
15, September 15 and December 15 of each year. The Company may, at its option,
pay a certain portion of such dividends through the issuance of that number of
additional shares of Series A Preferred Stock having an aggregate Liquidation
Preference equal to the aggregate dollar amount of dividends to be paid on such
dividend payment date.
Except as provided by law, the holders of the Series A Preferred Stock are
entitled to only those voting rights set forth in the Stockholders Agreement.
8. EMPLOYEE BENEFITS
Employment Agreements
DTS Management has entered into employment agreements, as amended, with
certain executive officers of DTS Management (the "Employment Agreements"). The
initial term of the Employment Agreements are one year, with automatic
extensions of one year unless terminated by DTS Management or the executive.
The Employment Agreements provide for base salaries and bonuses at the
discretion of the Board of Directors of DTS.
Pursuant to the Employment Agreements, the Company issued the executives
an aggregate of 87,049 Class C Units, which vest based on the Company's
reaching defined numbers of subscribers and/or on defined vesting dates. Any
units not vested at the earlier of (i) the date on which the Company completes
an initial public offering; (ii) the date upon which Columbia and its officers,
directors, stockholders and employees cease to own, directly or indirectly, in
the aggregate at least 50% of the equity interests of the Company held by them
on November 19, 1996; or (iii) March 31, 1998 shall become fully vested and
cease to be restricted so long as the executive has remained employed by DTS
Management through such date.
F-48
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. EMPLOYEE BENEFITS -- (Continued)
The Employment Agreements also permitted the executives to purchase a
certain number of Class B Units at a price of $10 per unit. Pursuant to rights
under the Employment Agreements and the Company's LLC Agreement, the executives
have purchased an aggregate of 100,500 Class B Units.
The Employment Agreements provide that the Company has the option to
repurchase all of the Class C Units held by an executive which have vested and
all of the Class B Units held by an executive if the executive's employment is
terminated voluntarily or with cause (as defined) prior to April 1, 1998. At
such time, all unvested Class C Units of the executive shall be forfeited. If
the executive is terminated for any reason other than cause, the executive's
Class C Units will become fully vested and unrestricted.
Simultaneous with the execution of the Employment Agreements, the subject
executive officers also entered into loan agreements with Columbia for an
aggregate of $430,000 to fund a portion of the equity purchases by the
executives. The loans bear interest at 10% per annum and mature on the earlier
of April 1, 2001 or receipt by the executive of proceeds from the sale of the
purchased units. The loans are secured by a portion of the executive's
purchased Class B Units.
The Employment Agreements were amended as of October 10, 1997 to provide
for certain changes with respect to the severance provisions and the vesting of
applicable executive officers' shares of Common Stock received in exchange for
their Class C Units and warrants received in exchange for their Class D Units.
Digital Television Services 401(k) Plan
In January 1997, the Company established the Digital Television Services
401(k) Plan (the "Plan") covering all of its employees. As part of the Plan,
the Company provides matching contributions of 20% of the participant's
contributions up to a maximum of 5% of the participant's pay. The Plan also
provides for additional contributions at the discretion of the Company. The
Company incurs the cost of administering this plan.
Employee Stock Plan
In October 1997, the Company adopted the Digital Television Services, Inc.
1997 Stock Option Plan (the "Employee Stock Plan") pursuant to which up to
100,000 shares of Common Stock (or such larger number of shares as may be
approved by the Compensation Committee of the Board of Directors of the Company
(the "Board")) may be issued to employees or independent contractors of the
Company or the Subsidiaries at prices equal to the market value thereof as of
the date of issuance and pursuant to such terms and conditions (including
vesting) as the Board shall determine. As of December 31, 1997, stock options
have been granted with respect to 43,633 shares of Common Stock. The exercise
price at the date of grant of $22.50 per share approximates the market value of
the options and, therefore, the plan is generally non-compensatory. The stock
options expire from two to ten years after each respective grant date. A
portion of the options are exercisable as of the grant date. The remaining
options become exercisable beginning one year from the grant date with vesting
periods of four years. Upon consummation of the Pegasus transaction (Note 10),
generally all options that remain unvested will become fully vested.
The Company accounts for stock options under Accounting Principles Board
("APB") Opinion No. 25, which requires compensation costs to be recognized only
when the option price differs from the market price at the grant date.
Statement of Financial Accounting Standards No. 123: Accounting for Stock Based
Compensation ("SFAS No. 123") allows a company to follow APB Opinion No. 25
with an additional disclosure that shows what the Company's pro forma net loss
would have been using the compensation model under SFAS No. 123. Under SFAS No.
123, the fair values for these options were estimated at the date of grant
using an option pricing model with the following assumptions: weighted average
risk-free interest rate of 5.65%, no dividend yield, and a life of the options
approximating one year to reflect accelerated vesting provisions of the Pegasus
transaction (Note 10). The estimated fair value of these options was calculated
using a minimum value method and may not be indicative of the future impact,
since the model for this method does not take volatility into consideration.
F-49
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
8. EMPLOYEE BENEFITS -- (Continued)
The pro forma net loss under SFAS No. 123 approach was $3,535,259 for the
period from January 30, 1996 (inception) to December 31, 1996 and $30,286,667
for the year ended December 31, 1997.
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 Communication 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.
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, is 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.
F-50
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS -- (Continued)
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 EVENTS
Acquisition of Contract Rights
On January 30, 1998, the Company acquired the rights to provide DIRECTV
Services in certain counties in Georgia for $9.5 million from Ocmulgee
Communications, Inc. The purchase price was financed through borrowings under
the Credit Facility.
The Acquisition of the Company
On January 8, 1998, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") among Pegasus Communications Corporation
("Pegasus"), the Company, Pegasus DTS Merger Sub, Inc., a wholly-owned
subsidiary of Pegasus (the "Merger Sub"), certain stockholders of Pegasus and
certain stockholders of the Company. Pursuant to the Merger Agreement, the
Merger Sub will be merged (the "Pegasus Transaction") with and into the
Company, and the Company will become a wholly-owned subsidiary of Pegasus. The
Merger Agreement provides for the acquisition of all of the outstanding capital
stock of the Company in exchange for approximately 5.5 million shares of
Pegasus' Class A Common Stock. Pegasus will not assume, guarantee or otherwise
have any liability for the Notes or any other liability of the Company or its
subsidiaries. At the closing of the Pegasus Transaction, and thereafter except
to the extent permitted under the terms of the Notes, the Company will not
assume, guarantee or otherwise have any liability for any indebtedness or other
liability of Pegasus or any of its subsidiaries.
The Pegasus Transaction is expected to be completed in the first half of
1998 and is subject, among other things, to approval of the stockholders of
Pegasus and the Company, consents from the NRTC, DirecTv and the Company's
lenders, and other conditions customary in transactions of this nature.
Upon the consummation of the Pegasus Transaction, a change of control will
occur and the Company will be required to make an offer to purchase the Notes
at 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the date of the purchase. Pegasus has covenanted in the
Agreement that upon the closing of the Pegasus Transaction and the resulting
change of control, Pegasus shall cause the Company to make the offer to
purchase. If tendered, approximately $38 million will be available under the
Credit Facility to purchase the Notes (in addition to remaining funds in the
interest escrow account relating to the Notes tendered). The Company has
entered into a commitment letter with CIBC Oppenheimer Corp. ("CIBC") under
which CIBC will agree to purchase any Notes tendered in response to the offer
to purchase. CIBC's commitment is subject to the execution of definitive
documentation and customary closing conditions. In addition, the consummation
of the Pegasus Transaction may also constitute an event of default under the
Credit Facility due to a change in control of the Company, permitting the
lenders thereunder to accelerate the repayment of indebtedness thereunder, in
which case the subordination provisions of the Notes would require the payment
in full of the outstanding amounts under the Credit Facility and any other
senior indebtedness before the Company could distribute cash to purchase the
Notes. A condition to the closing of the Pegasus Transaction is that the Credit
Facility be amended to permit such closing.
The Company has been informed by the management of Pegasus that, upon
consummation of the Pegasus Transaction, Pegasus would use the purchase method
of accounting to record the acquisition of the Company and would "push down"
the effects of the purchase price which would increase the Company's intangible
assets by approximately $92.0 million. Accordingly, the Company's amortization
expense would be increased with respect to periods subsequent to the
consummation of the Pegasus Transaction.
F-51
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
WEP Intermediate Corp.:
We have audited the accompanying balance sheet of WEP INTERMEDIATE CORP.
(a Delaware corporation) as of September 30, 1997 and the statement of cash
flows for the period from inception (January 28, 1997) to September 30, 1997.
These financial statements are the responsibility of the Corporation'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 WEP Intermediate Corp. as
of September 30, 1997 and its cash flows for the period from inception (January
28, 1997) to September 30, 1997 in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
October 10, 1997
F-52
<PAGE>
WEP INTERMEDIATE CORP.
BALANCE SHEET
SEPTEMBER 30, 1997
ASSETS
INVESTMENT IN DIGITAL TELEVISION SERVICES, LLC ......... $13,000,000
===========
<TABLE>
<S> <C>
STOCKHOLDER'S EQUITY
STOCKHOLDER'S EQUITY:
Common stock, no par value, 200 shares authorized, 10 shares issued and outstanding .. $13,000,000
===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-53
<PAGE>
WEP INTERMEDIATE CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 28, 1997)
THROUGH SEPTEMBER 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Digital Television Services, LLC ......... $ (13,000,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock ............................ 13,000,000
--------------
NET CHANGES IN CASH ..................................... 0
CASH AT BEGINNING OF PERIOD ............................. 0
--------------
CASH AT END OF PERIOD ................................... $ 0
==============
</TABLE>
The accompanying notes are an integral part of these statement.
F-54
<PAGE>
WEP INTERMEDIATE CORP.
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. Organization and Nature of Business
WEP Intermediate Corp. (the "Corporation") is a Delaware corporation
formed on January 28, 1997 under the General Corporation Law of Delaware. The
purpose of the Corporation is to hold the investment in Digital Television
Services, LLC ("DTS"), a limited liability company organized under the Delaware
Limited Liability Act and formerly known as DBS Holdings, L.P. DTS was formed
to acquire and operate the exclusive rights to distribute direct broadcast
satellite services offered by DirecTv, Inc. in certain rural markets and was
formed on January 30, 1996.
On February 10, 1997, the Corporation issued 10 shares of the
Corporation's common stock to Whitney Equity Partners, L.P., a Delaware limited
partnership, for $13,000,000. Whitney Equity Partners, L.P. is the sole
stockholder of the Corporation as of September 30, 1997.
Also on February 10, 1997, the Corporation purchased 577,778 Class A
Membership Units of DTS for $13,000,000 or $22.50 per unit. These units
represent approximately 16% of the outstanding units of DTS at September 30,
1997. The Class A Units of DTS are entitled to special voting rights, as
defined in the DTS Limited Liability Company Agreement, certain preemptive
rights, a cumulative compounded annual rate of return equal to 8% applied to
their Class A Capital, and protection against dilution. The Class A Units rank
senior to the Class B, C, and D Units of DTS with respect to interim and
liquidating distributions.
The Corporation had no employees and no substantive operations for the
period from inception (January 28, 1997) through September 30, 1997. Therefore,
there is no income statement included in the accompanying financial statements.
2. Summary of Significant Accounting Policies
Investments
The Corporation records its investment in DTS at cost. For an investment
of less than 20 percent, an investor is presumed not to have the ability to
exercise significant influence and therefore the cost method would be used.
Under this view, an investor is not entitled to recognize earnings on its
investment until a right to claim the earnings arises, and that claim arises
only to the extent dividends are declared. For the period from inception
(January 28, 1997) through September 30, 1997, DTS has not declared any
dividends. An investor is considered to have no earnings on its investment
unless it is in a position to control the distribution of earnings. Likewise,
an investment or an investor's operations are not affected by losses of an
investee unless those losses indicate a loss in value of the investment is
other than temporary and accordingly should be recognized. See discussion of
longlived assets below.
As required by SFAS No. 115, "Accounting for Certain Investments in Debt
and Equity Securities," investments in equity securities are classified into
one of three categories as follows: held to maturity securities (debt and
equity securities that the Corporation has the positive intent and ability to
hold to maturity that are reported at amortized cost), trading securities (debt
and equity securities that are bought and held principally for the purpose of
selling them in the near term that are reported at fair value, with unrealized
gains and losses included in earnings), or available-for-sale securities (debt
and equity securities not classified in either category as described above and
reported at fair value, with unrealized gains and losses excluded from earnings
and reported in a separate component of retained earnings). The Corporation has
no trading or available-for-sale investment securities as of September 30,
1997.
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 held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an assets may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and
F-55
<PAGE>
WEP INTERMEDIATE CORP.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
SEPTEMBER 30, 1997
2. Summary of Significant Accounting Policies -- (Continued)
its eventual disposition. Having found no instances whereby the sum of expected
future cash flows (undiscounted and without interest charges) was less than the
carrying amount of the asset and thus requiring the recognition of an
impairment loss, management believes that the long-lived asset in the
accompanying balance sheet is appropriately valued.
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 any reported amounts of revenues and expenses. Actual results
could differ from those estimates.
3. Subsequent Event
On October 10, 1997, the Corporation merged with DTS to form Digital
Television Services, Inc. The 577,778 Class A Units of DTS held by the
Corporation were canceled and the ten shares of the Corporation's common stock
issued and outstanding were converted into 608,424 shares of Preferred Stock of
Digital Television Services, Inc. The total investment by Whitney Equity
Partners, L.P. remained at $13,000,000 and the price per share changed to
$21.37.
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Direct Programming
Services Limited Partnership:
We have audited the accompanying balance sheets of DIRECT PROGRAMMING
SERVICES LIMITED PARTNERSHIP (a Kentucky limited partnership) as of December
31, 1995 and 1996 and the related statements of operations, changes in
partners' capital, and cash flows for the years ended December 31, 1994, 1995
and 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Programming Services
Limited Partnership as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for the years ended December 31, 1994, 1995 and
1996 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-57
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................................ $ 242,260 $ 176,280
Trade accounts receivable, net of allowances for doubtful accounts
of $50,000 and $123,574 at December 31, 1995 and 1996, respec-
tively ......................................................... 483,559 1,166,657
Inventory ........................................................ 33,715 89,007
Other, net (Note 2) .............................................. 5,506 487,604
---------- ----------
Total current assets .......................................... 765,040 1,919,548
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements ............................................ -- 68,474
Furniture and equipment ........................................... 138,959 197,070
---------- ----------
138,959 265,544
Less accumulated depreciation ..................................... (34,385) (59,939)
---------- ----------
104,574 205,605
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ......................... 4,586,544 4,168,753
---------- ----------
$5,456,158 $6,293,906
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES: ..............................................
Accounts payable ................................................. $ 582,133 $ 676,132
Accrued liabilities .............................................. 228,099 625,049
Unearned revenue ................................................. 337,742 1,219,798
Current maturities of long-term debt and obligations under capital
leases ......................................................... 95,393 19,498
---------- ----------
Total current liabilities ..................................... 1,243,367 2,540,477
---------- ----------
OTHER LIABILITIES ................................................. 51,850 191,207
---------- ----------
LONG-TERM DEBT and obligations under capital leases, less current
maturities ....................................................... 19,498 --
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 5)
PARTNERS' CAPITAL:
General Partner ................................................... 690,620 519,071
Limited Partners .................................................. 3,450,823 3,043,151
---------- ----------
Total partners' capital ........................................... 4,141,443 3,562,222
---------- ----------
$5,456,158 $6,293,906
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-58
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995, AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------------- -------------- --------------
<S> <C> <C> <C>
REVENUE:
Programming revenue ........................ $ 342,843 $ 3,645,040 $ 7,216,027
Equipment and installation revenue ......... 79,821 764,338 56,536
------------ ----------- -----------
Total revenue ........................... 422,664 4,409,378 7,272,563
------------ ----------- -----------
COST OF REVENUE:
Programming expense ........................ 187,725 1,528,547 3,454,540
Cost of equipment and installation ......... 111,064 714,753 20,891
Service fees ............................... 43,637 363,499 769,426
------------ ----------- -----------
Total cost of revenue ................... 342,426 2,606,799 4,244,857
------------ ----------- -----------
GROSS PROFIT ................................ 80,238 1,802,579 3,027,706
------------ ----------- -----------
OPERATING EXPENSES:
Sales and marketing ........................ 24,183 663,578 622,129
General and administrative ................. 633,566 1,437,885 1,973,947
Depreciation and amortization .............. 426,847 583,034 591,738
------------ ----------- -----------
Total operating expenses ................ 1,084,596 2,684,497 3,187,814
------------ ----------- -----------
OPERATING LOSS .............................. (1,004,358) (881,918) (160,108)
------------ ----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ........................... (4,286) (19,003) (8,865)
Other income ............................... 16,888 30,815 39,752
------------ ----------- -----------
12,602 11,812 30,887
------------ ----------- -----------
NET LOSS .................................... $ (991,756) $ (870,106) $ (129,221)
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-59
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
General Limited
Partner Partners Total
------------- ----------------- --------------
<S> <C> <C> <C>
BALANCE, December 31, 1993 ......... $1,001,102 $ 4,902,203 $ 5,903,305
Partner contributions ............. -- 100,000 100,000
Net loss .......................... (165,384) (826,372) (991,756)
---------- ------------- -----------
BALANCE, December 31, 1994 ......... 835,718 4,175,831 5,011,549
Net loss .......................... (145,098) (725,008) (870,106)
---------- ------------- -----------
BALANCE, December 31, 1995 ......... 690,620 3,450,823 4,141,443
Partnership distribution .......... (150,000) (300,000) (450,000)
Net loss .......................... (21,549) (107,672) (129,221)
---------- ------------- -----------
BALANCE, December 31, 1996 ......... $ 519,071 $ (3,043,151) $ 3,562,222
========== ============= ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-60
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>
1994 1995 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................. $ (991,756) $ (870,106) $ (129,221)
----------- ----------- -----------
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities:
Depreciation and amortization .......................... 426,847 583,034 591,738
Changes in operating assets and liabilities:
Trade accounts receivable, net ........................ (130,660) (161,061) (683,098)
Inventory ............................................. (129,395) 95,680 (55,292)
Other, net ............................................ (794) (4,712) (482,098)
Accounts payable ...................................... 252,570 324,628 93,999
Accrued liabilities ................................... 354,494 (126,395) 396,950
Unearned revenue ...................................... 49,000 288,742 882,056
----------- ----------- -----------
Total adjustments ................................... 822,062 999,916 744,255
----------- ----------- -----------
Net cash (used in) provided by operating
activities .......................................... (169,694) 129,810 615,034
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net ................. (40,094) (58,375) (135,621)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) under line of credit ......... -- 70,000 (70,000)
Proceeds from long-term debt ............................. -- 22,000 --
Repayments on long-term debt and obligations under
capital leases ......................................... (3,776) (10,783) (25,393)
Partnership contributions ................................ 100,000 -- --
Partnership distributions ................................ -- -- (450,000)
----------- ----------- -----------
Net cash provided by (used in) financing
activities ......................................... 96,224 81,217 (545,393)
----------- ----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS .............................................. (113,564) 152,652 (65,980)
CASH AND CASH EQUIVALENTS at beginning of year 203,172 89,608 242,260
----------- ----------- -----------
CASH AND CASH EQUIVALENTS at end of year .................. $ 89,608 $ 242,260 $ 176,280
=========== =========== ===========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .......................... $ -- $ 51,850 $ 139,357
=========== =========== ===========
Capital lease obligations incurred ....................... $ 30,665 $ 6,785 $ --
=========== =========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ................................... $ 4,286 $ 19,003 $ 8,866
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-61
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
1. Organization and Nature of Business
Direct Programming Services Limited Partnership (the "Partnership") is a
limited partnership organized in Kentucky. The Partnership was formed on
January 6, 1993 to acquire and operate rights to distribute direct broadcast
satellite ("DBS") services ("DIRECTV Services") offered by DirecTv, Inc.
("DirecTv").
The term of the Partnership is through December 31, 2042, unless terminated
sooner. The Partnership has a General Partner in addition to its Limited
Partners. The Limited Partners may not take part in the management of the
Partnership and are not liable for any debts, obligations or losses of the
Partnership in excess of their capital contributions and their shares of the
undistributed profits. The interest of the Limited Partners was divided into 60
units, each of which required a capital contribution of $100,000. Contributed
capital of the General Partner was $1,000,000. The ownership interests of the
Partnership at December 31, 1996 is as follows: General Partner, 14.71%; Limited
Partner, 85.29%.
The partnership agreement provides that net losses are allocated to the
General and Limited Partners in accordance with their respective percentage
interests; however, no net losses will be allocated to a Limited Partner in
excess of the balance of the Limited Partner's capital account. Such net losses
would be allocated to the General Partner. Net income is allocated first to the
General Partner until such time as net income specifically allocated to the
General Partner equals the net losses allocated to the General Partner, then 20%
to the General Partner and 80% to the General and Limited Partners in accordance
with their respective percentage interests.
The Partnership obtained the rights to distribute DIRECTV Services in
certain rural markets in Kentucky pursuant to agreements (the "NRTC Member
Agreements") with the National Rural Telecommunications Cooperative ("NRTC") in
exchange for approximately $5.4 million.
In October 1996, the Partnership entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Kentucky, LLC ("DTS
Kentucky"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The Agreement provides that DTS Kentucky will
purchase the Partnership's NRTC Member Agreement and other assets used in
connection with the Partnership's business, as defined in the Agreement, and
will assume certain liabilities of the Partnership, as defined in the
Agreement. The purchase price is subject to an adjustment for working capital
at the date of closing of the Agreement.
2. Summary of Significant Accounting Policies
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.
Revenue Recognition
The Partnership earns programming revenue by providing DIRECTV Services to
its subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, quarterly, annual or seasonal basis, including premium programming, is
billed in advance and recorded as unearned revenue. All programming revenue is
recognized when earned.
F-62
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1994, 1995 AND 1996
2. Summary of Significant Accounting Policies -- (Continued)
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Partnership and
is recognized upon delivery of the equipment. Installation revenue is
recognized when the equipment is installed and represent the amounts paid by
the customers to the Partnership for such services.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the Partnership's subscribers. These costs include the direct
wholesale cost of purchasing related programming from DirecTv (through the NRTC
[Note 5]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the Partnership plus the costs to install the
equipment.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Partnership maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following at December 31, 1995 and
1996:
1995 1996
-------- -----------
Deferred promotional costs, net .......... $ -- $484,957
Other .................................... 5,506 2,647
------ --------
$5,506 $487,604
====== ========
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Partnership for the credit. The Partnership defers
both the programming revenue and the cost of this credit and amortizes them
over the one-year contract period. In addition, as a part of this program, the
Partnership receives $1 per month for up to five years from the NRTC for each
subscriber whose account remains active. Such amounts are recorded as a
reduction in selling expenses in the accompanying statements of operations.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated
F-63
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1994, 1995 AND 1996
2. Summary of Significant Accounting Policies -- (Continued)
useful lives of the respective assets, ranging from three to seven years.
Depreciation expense for the years ended December 31, 1994, 1995 and 1996 was
$8,642, $25,428 and $34,590, respectively. 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 earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and 1996:
1995 1996
------------- ---------------
Contract rights ................... $5,434,948 $ 5,434,948
Organization costs ................ 70,557 70,557
---------- ------------
5,505,505 5,505,505
Accumulated amortization .......... (975,811) (1,532,959)
---------- ------------
4,529,694 3,972,546
NRTC patronage capital ............ 51,850 191,207
Other ............................. 5,000 5,000
---------- ------------
$4,586,544 $ 4,168,753
========== ============
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization on the accompanying
statements of operations, for the years ended December 31, 1994, 1995 and 1996
was $407,621, $543,495 and $543,495, respectively. Accumulated amortization at
December 31, 1995 and 1996 was $951,116 and $1,494,611, respectively.
Organization Costs: Organization costs are costs associated with the
formation of the Partnership and are being amortized over five years.
Amortization expense, included in depreciation and amortization on the
accompanying statements of operations, for the years ended December 31, 1994,
1995 and 1996 was $10,584, $14,111, and $13,653. Accumulated amortization at
December 31, 1995 and 1996, was $24,695 and $38,348.
NRTC Patronage Capital: The Partnership is an affiliate of the NRTC. While
affiliates have no vote, they do have an interest in the NRTC in proportion to
their prior patronage. NRTC patronage capital represents the non-cash 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 recognized as income when received
and is netted against programming expense in the accompanying statements of
operations. The remaining 80% is distributed in the form of non-cash patronage
capital, which will be redeemed in cash only at the discretion of the NRTC. The
Partnership includes non-cash patronage capital as other assets, with an
offsetting deferred patronage income amount included in other liabilities on
the accompanying balance sheets. The patronage capital will be recognized as
income when cash distributions are declared by the NRTC.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1995 and
1996:
1995 1996
----------- -----------
Accrued commissions ........... $148,460 $153,907
Accrued service fees .......... 59,224 108,788
Other ......................... 20,415 362,354
-------- --------
$228,099 $625,049
======== ========
F-64
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1994, 1995 AND 1996
2. Summary of Significant Accounting Policies -- (Continued)
Income Taxes
The Partnership is not considered a taxable entity for federal and state
income tax purposes. All taxable income or loss is allocated to the partners in
accordance with the terms of the partnership agreement. Accordingly, no
provision for income taxes is included in the accompanying financial
statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
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. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
3. Commitments and Contingencies
Leases
The Partnership leases office and warehouse space under cancelable leases
and certain equipment under noncancelable operating leases which expire through
1998. Future minimum lease payments for noncancelable operating leases in
effect at December 31, 1996 are as follows:
1997 ......................................... $5,520
1998 ......................................... 2,300
------
Total future minimum lease payments ......... $7,820
======
Rental expense charged to general and administrative expenses in the
accompanying statements of operations for the years ended December 31, 1994,
1995 and 1996 totaled $11,218, $46,739 and $68,705, respectively.
Minimum Subscribers
As part of the NRTC Member Agreements, the Partnership is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the
Partnership's Rural DirecTv Market, or up to 16,914 subscribers) and the
requirements of certain programming agreements between DirecTv and providers of
programming, beginning in the fourth year of operation of the NRTC Member
Agreement if the Partnership fails to obtain such minimum number of subscribers
prior to such time. The Partnership had achieved the minimum subscriber
requirement at December 31, 1996 and is therefore not required to pay such
fees.
F-65
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1994, 1995 AND 1996
3. Commitments and Contingencies -- (Continued)
Litigation
The Partnership is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Partnership's
financial position and results of operations.
4. Long-Term Debt
In September 1994, the Partnership obtained a line of credit from a bank
in the amount of $400,000. Borrowings under this line of credit were $70,000 at
December 31, 1995. Amounts due under the line of credit were repaid during 1996
and the line of credit is no longer outstanding. The Partnership also had notes
payable and obligations under capital leases of $18,029 and $26,873,
respectively, outstanding at December 31, 1995. The notes payable were repaid
during 1996 and $19,498 remained outstanding under the capital leases. The
capital leases accrued interest at 11.07% at December 31, 1996 and were repaid
subsequent to year-end. The carrying amount of long-term debt approximates fair
value based on borrowing rates available to the Partnership.
5. 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 on the accompanying statements
of operations. The NRTC also sells DSS(R) equipment to its members.
Because the Partnership is, through the NRTC, a distributor of DIRECTV
Services, the Partnership 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 Communication Commission (the "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 Partnership
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 Partnership would be required to acquire the services from other sources.
There can be no assurance that the cost to the Partnership to obtain these
services elsewhere would not exceed the amounts currently payable to the NRTC.
The Partnership 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
Partnership would no longer have the right to provide DIRECTV Services. There
can be no assurance that the Partnership 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 Partnership will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
F-66
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1994, 1995 AND 1996
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
While the Partnership believes that 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 Partnership's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Partnership from Hughes
or the NRTC; and, if available, there can be no assurance with regard to the
financial and other terms under which the Partnership could acquire the
services.
The Partnership'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 Partnership's DBS business.
DirecTv, and therefore the Partnership, is 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 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.
F-67
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of Kansas DBS, L.L.C.:
We have audited the accompanying balance sheets of KANSAS DBS, L.L.C. (a
Kansas limited liability company) as of December 31, 1995 and 1996 and the
related statements of operations and changes in accumulated deficit, and cash
flows for the years ended December 31, 1995, and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Kansas DBS, L.L.C. as of
December 31, 1995 and 1996 and the results of its operations and its cash flows
for the years ended December 31, 1995, and 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-68
<PAGE>
KANSAS DBS, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
ASSETS
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents ......................................... $ 89,436 $ 462,263
Trade accounts receivable, net of allowances of $24,873 and $29,426
at December 31, 1995 and 1996, respectively ..................... 246,166 417,973
Current portion of lease receivables, net of allowances of $16,635
and $54,732, at December 31, 1995 and 1996, respectively......... 129,609 63,316
Inventory ......................................................... 332,114 191,891
Other ............................................................. 25,373 254,773
------------ ------------
Total current assets ............................................ 822,698 1,390,216
------------ ------------
LEASE RECEIVABLES, net of current portion .......................... 383,392 320,428
------------ ------------
PROPERTY AND EQUIPMENT, at cost:
Vehicles .......................................................... 42,238 32,537
Showroom and demonstration equipment .............................. 108,792 54,953
Furniture, fixtures, and equipment ................................ 78,141 80,090
------------ ------------
229,171 167,580
Less accumulated depreciation ..................................... (73,424) (67,918)
------------ ------------
155,747 99,662
------------ ------------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) .......................... 2,224,834 2,017,828
------------ ------------
$ 3,586,671 $ 3,828,134
============ ============
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES
Accounts payable .................................................. $ 200,241 $ 347,522
Accrued liabilities ............................................... 175,172 170,489
Book overdraft .................................................... 243,614 --
Unearned revenue .................................................. 128,644 467,890
Current portion of long-term debt ................................. 176,732 4,285,046
------------ ------------
Total current liabilities ....................................... 924,403 5,270,947
OTHER LIABILITIES .................................................. 48,659 102,980
LONG-TERM DEBT ..................................................... 3,723,012 --
COMMITMENTS AND CONTINGENCIES (Notes 2, 5, and 6)
ACCUMULATED DEFICIT ................................................ (1,109,403) (1,545,793)
------------ ------------
$ 3,586,671 $ 3,828,134
============ ============
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-69
<PAGE>
KANSAS DBS, L.L.C.
STATEMENTS OF OPERATIONS AND CHANGES IN ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
---------------- ---------------
<S> <C> <C>
REVENUE:
Programming revenue ........................... $ 1,502,154 $ 3,156,791
Equipment and installation revenue ............ 1,580,245 1,036,929
------------ ------------
Total revenue ............................... 3,082,399 4,193,720
------------ ------------
COST OF REVENUE:
Programming expense ........................... 775,323 1,662,627
Cost of equipment and installation ............ 1,277,652 973,470
Service fees .................................. 139,407 292,828
------------ ------------
Total cost of revenue ....................... 2,192,382 2,928,925
------------ ------------
GROSS PROFIT ................................... 890,017 1,264,795
------------ ------------
OPERATING EXPENSES:
Sales and marketing ........................... 451,473 416,731
General and administrative .................... 770,296 798,060
Depreciation and amortization ................. 308,220 303,090
------------ ------------
Total operating expenses .................... 1,529,989 1,517,881
------------ ------------
OPERATING LOSS ................................. (639,972) (253,086)
OTHER INCOME (EXPENSE):
Interest expense .............................. (240,403) (278,768)
Other income .................................. 36,793 95,464
------------ ------------
(203,610) (183,304)
------------ ------------
NET LOSS ....................................... (843,582) (436,390)
ACCUMULATED DEFICIT, beginning of year ......... (402,218) (1,109,403)
CAPITAL CONTRIBUTION ........................... 136,397 --
------------ ------------
ACCUMULATED DEFICIT, end of year ............... $ (1,109,403) $ (1,545,793)
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-70
<PAGE>
KANSAS DBS, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $ (843,582) $ (436,390)
------------ -----------
Adjustments to reconcile net loss to net cash (used in) provided by
operating activities:
Depreciation and amortization ................................... 308,220 303,090
Amortization of deferred promotional costs ...................... -- 33,800
Changes in operating assets and liabilities:
Trade accounts receivable, net ................................. (109,457) (171,807)
Inventory ...................................................... 387,218 140,223
Other .......................................................... 24,467 (225,103)
Accounts payable ............................................... (266,202) 147,281
Accrued liabilities ............................................ 84,636 (4,683)
Unearned revenue ............................................... 27,711 339,246
------------ -----------
Total adjustments ............................................ 456,593 562,047
------------ -----------
Net cash (used in) provided by operating activities .......... (386,989) 125,657
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ............................... (46,009) (44,471)
Disposals of property and equipment ............................... 52,808 58,793
Additions to lease receivables .................................... (565,437) (186,973)
Collections of lease receivables .................................. 35,801 278,133
------------ -----------
Net cash (used in) provided by investing activities .......... (522,837) 105,482
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceed from long term debt ....................................... 4,349,920 550,000
Repayments of long term debt ...................................... (3,813,085) (164,698)
Book overdraft .................................................... 243,614 (243,614)
Capital contribution .............................................. 136,397 --
------------ -----------
Net cash provided by financing activities .................... 916,846 141,688
------------ -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 7,020 372,827
CASH AND CASH EQUIVALENTS at beginning of year ..................... 82,416 89,436
------------ -----------
CASH AND CASH EQUIVALENTS at end of year ........................... $ 89,436 $ 462,263
============ ===========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared ................................... $ 48,659 $ 54,321
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ............................................ $ 190,590 $ 339,252
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-71
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND 1996
1. Organization and Nature of Business
Kansas DBS, L.L.C. (the "Company") is a limited liability company
organized in Kansas. The Company was formed in September 1993 by five members
of the NRTC to acquire and operate rights to distribute direct broadcast
satellite ("DBS") services ("DIRECTV Services") offered by DirecTv, Inc.
("DirecTv").
The term of the Company is through October 2018, unless terminated sooner.
The operating agreement of the Company provides that distributions, profits,
and losses shall be allocated among the members in proportion to their
respective ownership percentages.
In October and November 1993, the Company obtained the rights to
distribute DIRECTV Services in certain markets in Kansas pursuant to agreements
(the "NRTC Member Agreements") with the National Rural Telecommunications
Cooperative ("NRTC") in exchange for approximately $2.6 million.
In November 1996, the Company entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Kansas, LLC ("DTS
Kansas"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The Agreement provides that DTS Kansas will
purchase the Company's NRTC Member Agreements and other assets used in
connection with the Company's business, as defined in the Agreement, and will
assume certain liabilities of the Company, as defined in the Agreement. The
purchase price is subject to an adjustment for working capital at the date of
closing of the Agreement.
2. Summary of Significant Accounting Policies
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.
Revenue Recognition
The Company earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, quarterly, 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 revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Company and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the Company.
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 [Note
6]); monthly subscriber maintenance fees charged by DirecTv, such as security
fees, ground service fees, system authorization fees, and fees for subscriber
billings; costs of equipment and installation; and certain subscriber operating
costs. Cost of equipment and installation represents the actual cost of the
equipment to the Company plus the costs to install the equipment.
F-72
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Company maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following at December 31, 1995 and
1996:
1995 1996
--------- -----------
Deferred promotional costs, net .......... $ -- $236,800
Other .................................... 25,373 17,973
------- --------
$25,373 $254,773
======= ========
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Company for the credit. The Company defers both the
programming revenue and the cost of credit and amortizes them over the one-year
contract period. In addition, as a part of this program, the Company receives
$1 per month for up to five years from the NRTC for each subscriber whose
account remains active. Such amounts are recorded as received as a reduction in
selling expenses in the accompanying statement of operations and changes in
accumulated deficit.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
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 seven years. Depreciation expense for the years ended December 31,
1995 and 1996 was $46,893 and $41,763, respectively. 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 earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and 1996:
1995 1996
------------- -------------
Contract rights ................... $2,574,949 $2,574,949
Organization costs ................ 16,659 16,659
---------- ----------
2,591,608 2,591,608
Accumulated amortization .......... (415,433) (676,760)
---------- ----------
2,176,175 1,914,848
NRTC patronage capital ............ 48,659 102,980
---------- ----------
$2,224,834 $2,017,828
========== ==========
F-73
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services less net tangible assets acquired. Contract rights
are being amortized over ten years, the estimated remaining useful life of the
satellites operated by DirecTv which provide service under the related
contracts. Amortization expense, included in depreciation and amortization on
the accompanying statements of operations and changes in accumulated deficit,
for the years ended December 31, 1995 and 1996 was $257,995, and $257,995,
respectively. Accumulated amortization at December 31, 1995 and 1996 was
$408,492 and $666,487, respectively.
Organization Costs: Organization costs are costs associated with the
formation of the Company and are being amortized over five years. Amortization
expense, included in depreciation and amortization on the accompanying
statements of operations and changes in accumulated deficit, for the years
ended December 31, 1995 and 1996 was $3,332 and $3,332, respectively.
Accumulated amortization at December 31, 1995 and 1996 was $6,941 and $10,273,
respectively.
NRTC Patronage Capital: The Company is a voting member of the NRTC with an
ownership interest in the NRTC in proportion to its 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 recognized as income when received and is netted against
programming expense in the accompanying statements of operations and changes in
accumulated deficit. 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. The Company includes noncash patronage capital as other assets, with an
offsetting deferred patronage income amount included in other liabilities in
the accompanying balance sheets. The patronage capital will be recognized as
income when cash distributions are declared by the NRTC.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1995 and
1996:
<TABLE>
<CAPTION>
1995 1996
----------- -----------
<S> <C> <C>
Accrued interest .................................... $ 60,484 $ --
Accrued NRTC programming costs and service fees ..... 72,430 41,107
Other ............................................... 42,258 129,382
-------- --------
$175,172 $170,489
======== ========
</TABLE>
Income Taxes
The Company is not considered a taxable entity for federal and state
income tax purposes. All taxable income or loss is allocated to the members in
accordance with the terms of the Company's operating agreement. Accordingly, no
provision for income taxes is included in the accompanying financial
statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
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
F-74
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
that the carrying amount of an asset may not be recoverable. When events or
changes in circumstances occur related to long-lived assets, management
estimates the future cash flows expected to result from the use of the asset
and its eventual disposition. Having found no instances whereby the sum of
expected future cash flows (undiscounted and without interest charges) was less
than the carrying amount of the asset and thus requiring the recognition of an
impairment loss, management believes that the long-lived assets in the
accompanying balance sheets are appropriately valued.
401(K) Profit-Sharing Plan
Effective January 1, 1994, the Company offered its employees a
contributory 401(k) profit-sharing plan. Under the plan, the Company matches a
portion of participant contributions. Company contributions to the plan were
$340 and $3,467 for the years ended December 31, 1995, and 1996, respectively.
3. Receivables under Sales-Type Leases
The Company leases DSS(R) equipment to customers through long-term
sales-type leases, collateralized by the equipment. The leases range from three
to five years and are discounted at 9.75%. Receivables under sales-type leases
consist of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Minimum lease payments receivables ............ $ 665,376 $ 548,943
Less unearned interest income ................. (135,740) (110,467)
Less allowance for doubtful accounts .......... (16,635) (54,732)
---------- ----------
513,001 383,744
Less current portion .......................... 129,609 63,316
---------- ----------
$ 383,392 $ 320,428
========== ==========
</TABLE>
4. Long-Term Debt
Long-term debt at December 31, 1995 and 1996 consisted of notes payable to
National Cooperative Services Corporation which provided for borrowings of up
to $4,875,000 with interest at the lender's variable rate (6.25% at December
31, 1996). These notes were repaid subsequent to year-end in connection with
the Agreement (Note 1) and, therefore, are classified as current in the
accompanying balance sheets. The carrying amount of long-term debt approximates
fair value based on borrowing rates available to the Company.
5. Commitments and Contingencies
As part of the NRTC Member Agreements, the Company is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the
Company's Rural DirecTv Market, or up to 11,442 subscribers) and the
requirements of certain programming agreements between DirecTv and providers of
programming, beginning in the fourth year of operation of the NRTC Member
Agreement if the Company fails to obtain such minimum number of subscribers
prior to such time. The Company had achieved approximately 75% of the minimum
subscriber requirement at December 31, 1996. Based on the subscriber growth
rate of the Company to date, management anticipates that the Company will meet
the minimum subscriber requirement prior to the fourth year of operations of
the NRTC Member Agreement and therefore does not expect to be required to pay
such fees.
6. 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 on the accompanying statements
of operations and changes in accumulated deficit. The NRTC also sells DSS(R)
equipment to its members.
F-75
<PAGE>
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
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 Communication 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 that 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.
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, is 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 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.
F-76
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Mitchell Electric
Membership Corporation:
We have audited the accompanying statements of assets and liabilities and
accumulated deficit of the DBS OPERATIONS OF NRTC SYSTEM NO. 0422 (an
unincorporated division of Mitchell Electric Membership Corporation, a Georgia
corporation) as of December 31, 1995 and 1996 and the related statements of
expenses over revenues and changes in accumulated deficit and cash flows for
the years then ended. These financial statements are the responsibility of the
System's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of NRTC
System No. 0422 as of December 31, 1995 and 1996 and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 1997
F-77
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED DEFICIT
DECEMBER 31, 1995, 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- --------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ................................. $ 35,689 $ 253,269 $ 209,005
Trade accounts receivable, net of allowance for doubtful
accounts of $9,368, $24,375 and $42,819 at December
31, 1995, 1996 and March 31, 1997, respectively ......... 178,738 310,436 254,058
Inventory ................................................. 246,653 62,815 42,642
Deferred promotional costs, net (Note 2) .................. -- 38,433 26,283
---------- ---------- ----------
Total current assets .................................... 461,080 664,953 531,988
---------- ---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ................................... 5,075 5,075 5,075
Less accumulated depreciation ............................. (2,030) (3,045) (3,300)
---------- ---------- ----------
3,045 2,030 1,775
---------- ---------- ----------
LEASED EQUIPMENT, at cost:
Leased equipment .......................................... 1,047,081 2,312,534 2,312,534
Less accumulated depreciation ............................. (87,257) (367,225) (483,188)
---------- ---------- ----------
959,824 1,945,309 1,829,346
---------- ---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) 1,532,245 1,396,530 1,344,288
---------- ---------- ----------
$2,956,194 $4,008,822 $3,707,397
========== ========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable .......................................... $ 38,153 $ 45,724 $ --
Accrued liabilities ....................................... 56,236 145,381 155,291
Related-party payable ..................................... 3,471,320 4,470,539 4,177,369
Unearned revenue .......................................... 65,546 233,554 240,745
---------- ---------- ----------
Total current liabilities ............................... 3,631,255 4,895,198 4,573,405
---------- ---------- ----------
OTHER LIABILITIES .......................................... 31,547 89,102 89,102
---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 2, 4 and 5) ACCUMULATED DEFICIT .................... (706,608) (975,478) (955,110)
---------- ---------- ----------
$2,956,194 $4,008,822 $3,707,397
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-78
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
STATEMENTS OF EXPENSES OVER REVENUES
AND CHANGES IN ACCUMULATED DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- ---------------
(Unaudited)
<S> <C> <C> <C>
REVENUE:
Programming revenue .............................. $ 867,894 $ 2,375,636 $ 865,850
Equipment and installation revenue ............... 958,400 995,674 232,690
----------- ----------- -----------
Total revenue .................................. 1,826,294 3,371,310 1,098,540
----------- ----------- -----------
COST OF REVENUE:
Programming expense .............................. 408,654 1,106,938 323,877
Cost of equipment and installation. .............. 925,496 435,337 124,304
Service fees ..................................... 103,817 299,515 128,404
----------- ----------- -----------
Total cost of revenue. ......................... 1,437,967 1,841,790 576,585
----------- ----------- -----------
GROSS PROFIT. ..................................... 388,327 1,529,520 521,955
----------- ----------- -----------
OPERATING EXPENSES:
Sales and marketing .............................. 204,024 290,275 46,801
General and administrative. ...................... 314,108 1,033,862 286,326
Depreciation and amortization .................... 281,542 474,253 168,460
----------- ----------- -----------
Total operating expenses ....................... 799,674 1,798,390 501,587
----------- ----------- -----------
EXPENSES OVER REVENUES ............................ (411,347) (268,870) 20,368
ACCUMULATED DEFICIT at beginning of year. ......... (295,261) (706,608) (975,478)
----------- ----------- -----------
ACCUMULATED DEFICIT at end of year. ............... $ (706,608) $ (975,478) $ (955,110)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-79
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996 AND
THREE MONTHS ENDED MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Year Ended Ended
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- -------------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Expenses over revenues. ................................. $ (411,347) $ (268,870) $ 20,368
------------ ------------ ----------
Adjustments to reconcile expenses over revenues to net
cash provided by operating activities:
Depreciation and amortization. ........................ 281,542 474,253 168,460
Amortization of deferred promotional costs. ........... -- 10,167 --
Changes in operating assets and liabilities:
Trade accounts receivable, net ....................... (80,301) (131,698) 56,378
Inventory. ........................................... 481,081 183,838 20,173
Deferred promotional costs ........................... -- (48,600) 12,150
Accounts payable ..................................... (45,615) 7,571 (45,724)
Related-party payable. ............................... 822,511 999,219 (293,170)
Accrued liabilities. ................................. (52,349) 89,145 9,910
Unearned revenue ..................................... 49,217 168,008 7,191
------------ ------------ ----------
Total adjustments .................................. 1,456,086 1,751,903 (64,632)
------------ ------------ ----------
Net cash provided by operating activities. ......... 1,044,739 1,483,033 (44,264)
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ..................... (1,047,081) (1,265,453) --
------------ ------------ ----------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS ............................................. (2,342) 217,580 (44,264)
CASH AND CASH EQUIVALENTS at beginning of year.. 38,031 35,689 253,269
CASH AND CASH EQUIVALENTS at end of year. ................ $ 35,689 $ 253,269 $ 209,005
============ ============ ==========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared ......................... $ 31,547 $ 57,555 $ --
============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-80
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996
(INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 0422 (the "System") is an
unincorporated division of Mitchell Electric Membership Corporation ("Mitchell
EMC"), a Georgia corporation. The System operates the exclusive rights to
distribute direct broadcast satellite ("DBS") services ("DIRECTV Services")
offered by DirecTv, Inc. ("DirecTv") in certain rural markets in Georgia. The
accompanying financial statements present the financial position and excess of
expenses over revenues of the System.
Mitchell EMC obtained the rights to distribute DIRECTV Services in the
System's territory pursuant to an agreement (the "NRTC Member Agreement") with
the National Rural Telecommunications Cooperative ("NRTC"). Under the provision
of the NRTC Member Agreement, Mitchell EMC has the exclusive right to provide
DIRECTV Services within certain rural territories in Georgia.
In January 1997, Mitchell EMC entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Georgia, LLC ("DTS
Georgia"), a subsidiary of DTS Management, LLC ("DTS"), and DTS is a subsidiary
of Digital Television Services, LLC (a Delaware limited liability company). The
agreement provides that DTS Georgia will purchase Mitchell EMC's NRTC Member
Agreement and other assets used in connection with the System's business, as
defined in the Agreement, and will assume certain liabilities of the System, as
defined in the Agreement. The purchase price is subject to an adjustment for
working capital at the date of closing of the Agreement. The closing of the
Agreement occurred in May 1997.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Mitchell EMC nor has it been
operated as a separate division of Mitchell EMC. The financial statements of
the System have been derived from the records of Mitchell EMC and have been
prepared to present its financial position, excess of expenses over revenues,
and cash flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Mitchell EMC. The costs and expenses have been allocated to the
system based on actual amounts relative to DBS services or percentages as
determined by management through an analysis of DBS activity in the applicable
accounts. The System's management believes that the methodology used is
reasonable. Such allocated expenses may not be indicative of what such expenses
would have been had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, quarterly, 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 revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the
F-81
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
(INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
NRTC [Note 5]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the System plus the costs to install the
equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Deferred Promotional Costs
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the System for the credit. The System defers both the
programming revenue and the cost of this credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the System
receives $1 per month for up to five years from the NRTC for each subscriber
whose account remains active. Such amounts are recorded as a reduction in sales
and marketing expense in the accompanying statements of expenses over revenues
and changes in accumulated deficit.
Property and Equipment and Leased Equipment
Property and equipment and leased equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these assets
are expensed currently. The System leases DSS(R) equipment to subscribers under
cancellable operating leases. Depreciation for property and equipment and
leased equipment is provided using the straight-line method over the estimated
useful lives of the respective assets, ranging from five to six years.
Depreciation expense for the year ended December 31, 1995, 1996 and for the
three months ended March 31, 1997 was $88,272, $280,983 and $116,218,
respectively. Upon retirement or disposal of assets, the cost and related
accumulated depreciation are removed from the statements of assets and
liabilities and accumulated deficit and any gain or loss is reflected in
earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following:
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- -------------
Contract rights ............... $1,841,352 $1,841,352 $1,841,352
Organization costs ............ 45,674 45,674 45,674
---------- ---------- ----------
1,887,026 1,887,026 1,887,026
Accumulated amortization ...... (386,328) (579,598) (631,840)
---------- ---------- ----------
1,500,698 1,307,428 1,255,186
NRTC patronage capital ........ 31,547 89,102 89,102
---------- ---------- ----------
$1,532,245 $1,396,530 $1,344,288
========== ========== ==========
F-82
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
(INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, was
$184,135, $184,135 and $52,242 for the year ended December 31, 1995, 1996 and
three months ended March 31, 1997, respectively. Accumulated amortization at
December 31, 1995, 1996 and three months ended March 31, 1997 was $368,270,
$552,405 and $598,439, respectively.
Organization Costs: Organization costs are costs associated with the
formation of the System and are being amortized over five years. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, was
$9,135, $9,135 and $1,264 for the year ended December 31, 1995, 1996 and the
three months ended March 31, 1997, respectively. Accumulated amortization at
December 31, 1995, 1996 and for the three months ended March 31, 1997 was
$18,058, $27,193 and $28,335, respectively.
NRTC Patronage Capital: Mitchell EMC is a voting member of the NRTC with
an ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage certificates represent 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 is recognized as income when received and is netted against
programming expense in the accompanying statements of expenses over revenues
and changes in accumulated deficit. 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. The System includes noncash patronage capital as other
assets, with an offsetting deferred patronage income amount included in other
liabilities in the accompanying statements of assets and liabilities and
accumulated deficit. The patronage capital will be recognized as income when
cash distributions are declared by the NRTC.
Income Taxes
Mitchell EMC, and thus the System, is not considered a taxable entity for
federal and state income tax purposes, as it is a not-for-profit corporation.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at March 31, 1997,
management does not believe any significant concentration of credit risk
exists.
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. When
events or changes in circumstances occur
F-83
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
(INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
related to long-lived assets, management estimates the future cash flows
expected to result from the use of the asset and its eventual disposition.
Having found no instances whereby the sum of expected future cash flows
(undiscounted and without interest charges) was less than the carrying amount
of the asset and thus requiring the recognition of an impairment loss,
management believes that the long-lived assets in the accompanying statements
of assets and liabilities and accumulated deficit are appropriately valued.
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.
3. Related-Party Transactions
Certain administrative services are performed by Mitchell EMC on behalf of
the System. Costs attributable to these support functions are included in
general and administrative expenses in the accompanying statements of expenses
over revenues and changes in accumulated deficit. The costs allocated to the
System were approximately $279,000, $810,000 and $211,000 for the year ended
December 31, 1995, 1996 and for the three months ended March 31, 1997,
respectively. Such allocations do not necessarily represent actual and/or
ongoing expenses of the System.
Mitchell EMC either advances funds to or borrows funds from the System.
Included in the accompanying statements of assets and liabilities and
accumulated deficit is a net payable to Mitchell EMC representing amounts due
for the initial purchase of contract rights and net operating activities as
funded by Mitchell EMC.
4. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 6,958 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
System fails to obtain such minimum number of subscribers prior to such time.
The System had achieved the minimum subscriber requirement at March 31, 1997
and is therefore not required to pay such fees.
5. 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 System for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of expenses over revenues and changes in accumulated deficit. The NRTC also
sells DSS(R) equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System 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 Communication 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
F-84
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
(INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
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 System 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 System would be required to acquire the services from other sources. There
can be no assurance that the cost to the System to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The System 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 System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System 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 System will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While management believes that 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 System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
The System'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 System's DBS business.
DirecTv, and therefore the System, is 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 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.
F-85
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Washington Electric
Membership Corporation:
We have audited the accompanying statement of assets and liabilities and
accumulated earnings of the DBS OPERATIONS OF NRTC SYSTEM NO. 0073 (an
unincorporated division of Washington Electric Membership Corporation) as of
December 31, 1996 and the related statements of revenues over expenses and
changes in accumulated earnings and cash flows for the year then ended. These
financial statements are the responsibility of the System'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 the DBS Operations of NRTC
System No. 0073 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
February 21, 1997
F-86
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED EARNINGS
DECEMBER 31, 1996 AND MARCH 31, 1997
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 18,811 $ 29,742
Trade accounts receivable, net of allowance for doubtful accounts of
$14,820 and $0 at December 31, 1996 and March 31, 1997,
respectively ..................................................... 183,444 166,493
Inventory .......................................................... 44,282 55,025
Deferred promotional costs, net (Note 2) ........................... 57,533 50,250
---------- ----------
Total current assets ............................................ 304,070 301,510
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ............................................ 16,197 16,197
Less accumulated depreciation .................................... (10,798) (12,148)
---------- ----------
5,399 4,049
---------- ----------
LEASED EQUIPMENT, at cost:
Leased equipment ................................................... 206,066 209,212
Less accumulated depreciation ...................................... (35,060) (44,136)
---------- ----------
171,006 165,076
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ........................... 842,951 816,341
---------- ----------
$1,323,426 $1,286,976
========== ==========
LIABILITIES AND ACCUMULATED EARNINGS
CURRENT LIABILITIES:
Accounts payable ................................................... $ 98,644 $ 1,448
Accrued liabilities ................................................ 119,036 70,919
Related-party payable .............................................. 656,004 704,956
Unearned revenue ................................................... 209,288 202,837
---------- ----------
Total current liabilities ....................................... 1,082,972 980,160
---------- ----------
OTHER LIABILITIES ................................................... 44,637 44,637
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, and 5)
ACCUMULATED EARNINGS ............................................... 195,817 262,179
---------- ----------
$1,323,426 $1,286,976
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-87
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
STATEMENTS OF REVENUES OVER EXPENSES AND CHANGE
IN ACCUMULATED EARNINGS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1996 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
REVENUE:
Programming revenue. .......................... $1,605,660 $479,917
Equipment and installation revenue ............ 370,888 74,545
---------- --------
Total revenue. ................................ 1,976,548 554,462
---------- --------
COST OF REVENUE:
Programming expense. .......................... 826,714 271,395
Cost of equipment and installation ............ 200,066 51,897
Service fees .................................. 157,469 51,693
---------- --------
Total cost of revenue. ..................... 1,184,249 374,985
---------- --------
GROSS PROFIT ..................................... 792,299 179,477
---------- --------
OPERATING EXPENSES:
Sales and marketing. .......................... 57,752 3,500
General and administrative .................... 310,931 72,579
Depreciation and amortization. ................ 143,675 37,036
---------- --------
Total operating expenses ................... 512,358 113,115
---------- --------
REVENUES OVER EXPENSES ........................... 279,941 66,362
ACCUMULATED DEFICIT at beginning of year ......... (84,124) 195,817
---------- --------
ACCUMULATED EARNINGS at end of year. ............. $ 195,817 $262,179
========== ========
</TABLE>
The accompanying notes are an integral part of these statements.
F-88
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1997
<TABLE>
<CAPTION>
Three Months
Year Ended Ended
December 31, March 31,
1996 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Revenues over expenses ................................................ $ 279,941 $ 66,362
---------- ---------
Adjustments to reconcile revenues over expenses to net cash provided by
operating activities:
Depreciation and amortization ....................................... 143,675 10,436
Amortization of deferred promotional costs. ......................... 9,467 26,610
Changes in operating assets and liabilities:
Trade accounts receivable, net. .................................... (82,517) 16,951
Related-party payable .............................................. (439,143) 48,952
Inventory .......................................................... 70,343 (10,743)
Deferred promotional costs. ........................................ (67,000) 7,283
Accounts payable. .................................................. 34,392 (97,196)
Accrued liabilities ................................................ 74,401 (48,117)
Unearned revenue. .................................................. 123,134 (6,451)
---------- ---------
Total adjustments. ............................................... (133,248) (52,275)
---------- ---------
Net cash provided by operating activities. ....................... 146,693 14,087
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. .................................. (141,022) (3,156)
---------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS. ............................. 5,671 10,931
CASH AND CASH EQUIVALENTS at beginning of year ......................... 13,140 18,811
---------- ---------
CASH AND CASH EQUIVALENTS at end of year ............................... $ 18,811 $ 29,742
========== =========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared. ...................................... $ 31,110 $ --
========== =========
</TABLE>
The accompanying notes are an integral part of these statements.
F-89
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 (INFORMATION AS OF MARCH 31, 1997 IS UNAUDITED)
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 0073 (the "System") is an
unincorporated division of Washington Electric Membership Corporation
("Washington EMC"), a Georgia corporation. The System operates the exclusive
rights to distribute direct broadcast satellite ("DBS") services ("DIRECTV
Services") offered by DirecTv, Inc. ("DirecTv") in certain rural markets in
Georgia. The accompanying financial statements present the financial position
and excess of revenues over expenses of the System.
Washington EMC obtained the rights to distribute DIRECTV Services in the
System's territory pursuant to an agreement (the "NRTC Member Agreement") with
the National Rural Telecommunications Cooperative ("NRTC"). Under the
provisions of the NRTC Member Agreement, Washington EMC has the exclusive right
to provide DIRECTV Services within certain rural territories in Georgia.
In March 1997, Washington EMC entered into an asset purchase agreement
(the "Agreement") with Digital Television Services of Georgia, LLC ("DTS
Georgia"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The agreement provides that DTS Georgia will
purchase Washington EMC's NRTC Member Agreement and other assets used in
connection with the System's business, as defined in the Agreement, and will
assume certain liabilities of the System, as defined in the Agreement. The
purchase price is subject to an adjustment for working capital at the date of
closing of the Agreement. The closing of the Agreement occurred in May 1997.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Washington EMC nor has it been
operated as a separate division of Washington EMC. The financial statements of
the System have been derived from the records of Washington EMC and have been
prepared to present its financial position, results of operations, and cash
flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Washington EMC. The costs and expenses have been allocated to the
system based on actual amounts relative to DBS services or percentages as
determined by management through an analysis of DBS activity in the applicable
accounts. The System's management believes that the methodology used is
reasonable. Such allocated expenses may not be indicative of what such expenses
would have been had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, quarterly, 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 revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the
F-90
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
NRTC [Note 5]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the System plus the costs to install the
equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Deferred Promotional Costs
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the System for the credit. The System defers both the
programming revenue and the cost of this credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the System
receives $1 per month for up to five years from the NRTC for each subscriber
whose account remains active. Such amounts are recorded as a reduction in sales
and marketing expense in the accompanying statement of revenues over expenses
and change in accumulated earnings.
Property and Equipment and Leased Equipment
Property and equipment and leased equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these assets
are expensed currently. The System leases DSS(R) equipment to subscribers under
cancellable operating leases. Depreciation for property and equipment and
leased equipment is provided using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to six years.
Depreciation expense for the year ended December 31, 1996 and for the three
months ended March 31, 1997 was $37,235 and $10,426, respectively. Upon
retirement or disposal of assets, the cost and related accumulated depreciation
are removed from the statement of assets and liabilities and accumulated
earnings and any gain or loss is reflected in earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following:
December 31, March 31,
1996 1997
-------------- -------------
Contract rights .................. $1,064,414 $1,064,414
Accumulated amortization ......... (266,100) (292,710)
---------- ----------
798,314 771,704
NRTC patronage capital ........... 44,637 44,637
---------- ----------
$ 842,951 $ 816,341
========== ==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated
F-91
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
by DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statement of revenues over expenses and change in accumulated earnings, for the
year ended December 31, 1996 and for the three months ended March 31, 1997 is
$106,440 and $26,610, respectively.
NRTC Patronage Capital: Washington EMC is a voting member of the NRTC with
an ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage certificates represent 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 is netted against programming expense in the accompanying statement
of revenues over expenses and change in accumulated earnings when received. 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. The System
includes noncash patronage capital as other assets, with an offsetting deferred
patronage income amount included in other liabilities in the accompanying
statement of assets and liabilities and accumulated earnings. The patronage
capital will be recognized as income when cash distributions are declared by
the NRTC.
Income Taxes
The System is not considered a taxable entity for federal and state income
tax purposes, as it is a not-for profit-corporation. Accordingly, no provision
for income taxes is included in the accompanying financial statements.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
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. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying statement of assets and liabilities and accumulated
earnings are appropriately valued.
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.
F-92
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Related-Party Transactions
Certain administrative services are performed by Washington EMC on behalf
of the System. Costs attributable to these support functions are included in
general and administrative expenses in the accompanying statement of revenues
over expenses and change in accumulated earnings. The costs allocated to the
System were approximately $235,000 and $55,000 for the year ended December 31,
1996 and for the three months ended March 31, 1997, respectively. Such
allocations do not necessarily represent actual and/or ongoing expenses of the
System.
Washington EMC either advances funds to or borrows funds from the System.
Included in the accompanying statement of assets and liabilities and
accumulated earnings is a net payable to Washington EMC representing amounts
due for the initial purchase of contract rights and net operating activities as
funded by Washington EMC.
4. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 3,100 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
System fails to obtain such minimum number of subscribers prior to such time.
The System had achieved the minimum subscriber requirement at December 31, 1996
and is therefore not required to pay such fees.
5. 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 System for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of revenues over expenses and change in accumulated earnings. The NRTC also
sells DSS(R) equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System 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 Communication 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 System 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 System would be required to acquire the services from other sources. There
can be no assurance that the cost to the System to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The System 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 System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System 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
F-93
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
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 System
will be able to continue to acquire DBS services pursuant to the NRTC Member
Agreements.
While management believes that 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 System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
The System'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 System's DBS business.
DirecTv, and therefore the System, is 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 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.
F-94
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Partners
Northeast DBS Enterprises, L.P.
T/A Digital One Television
Williston, Vermont
We have audited the accompanying balance sheets of NORTHEAST DBS
ENTERPRISES, L.P., T/A Digital One Television as of December 31, 1995 and 1994,
and the related statements of operations and partners' equity and cash flows
for the years then ended. These financial statements are the responsibility of
the Partnership's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Northeast DBS Enterprises,
L.P., T/A Digital One Television as of December 31, 1995 and 1994, and the
results of its operations and its cash flows for the years then ended, in
conformity with generally accepted accounting principles.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
February 23, 1996
F-95
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash ........................................................... $ 245,639 $ 1,286,240
Accounts receivable -- Net of allowance for doubtful accounts of
$12,157 -- 1995 and $3,000 -- 1994 ........................... 361,890 138,116
Inventory ...................................................... 371,795 451,434
Due from partners .............................................. 28,315
Prepaid expenses and other current assets ...................... 43,866 2,963
------------ ------------
Total current assets ........................................ 1,023,190 1,907,068
------------ ------------
EQUIPMENT HELD FOR RENTAL ....................................... 487,866 --
Less accumulated depreciation .................................. 97,573 --
------------ ------------
390,293 --
------------ ------------
OTHER PROPERTY AND EQUIPMENT .................................... 395,301 256,441
Less accumulated depreciation and amortization ................. 164,395 57,387
------------ ------------
230,906 199,054
------------ ------------
FRANCHISE COSTS ................................................. 3,624,514 3,624,514
Less accumulated amortization .................................. 543,676 181,225
------------ ------------
3,080,838 3,443,289
------------ ------------
OTHER ASSETS ....................................................
NRTC patronage capital ......................................... 30,649
Note receivable -- Partner ..................................... 35,035 31,850
Deposits ....................................................... 4,040 3,590
Unamortized organization costs ................................. 29,672 19,600
------------ ------------
99,396 55,040
------------ ------------
$ 4,824,623 $ 5,604,451
============ ============
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current portion of long-term notes payable ..................... $ 10,390 $ 5,316
Accounts payable ............................................... 774,650 417,912
Accrued expenses and other current liabilities ................. 474,257 72,661
Unearned income and customer deposits .......................... 248,104 62,968
------------ ------------
Total current liabilities ................................... 1,507,401 558,857
------------ ------------
OTHER LIABILITIES ............................................... 30,649 --
------------ ------------
LONG-TERM NOTES PAYABLE -- Net of current portion ............... 16,356 8,980
------------ ------------
COMMITMENTS (Notes 7 and 8)
PARTNERS' EQUITY -- 565.72834 Units -- 1995 and 546.89676
Units -- 1994
Capital contributions .......................................... 6,968,080 6,710,087
Private placement costs ........................................ (263,704) (244,346)
Accumulated deficit ............................................ (3,434,159) (1,429,127)
------------ ------------
3,270,217 5,036,614
------------ ------------
$ 4,824,623 $ 5,604,451
============ ============
</TABLE>
See notes to financial statements.
F-96
<PAGE>
NORTHEAST DBS ENTERPISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1995 1994
-------------- --------------
<S> <C> <C>
OPERATING INCOME
Programming .............................. $ 2,670,015 $ 110,422
Equipment sales and installation ......... 2,025,501 671,122
Rental ................................... 106,663 144,343
------------ ----------
4,802,179 925,887
------------ ----------
DIRECT COSTS
Programming .............................. 1,611,657 66,405
Equipment sales and installation ......... 1,720,634 566,610
Rental ................................... 97,573 118,627
------------ ----------
3,429,864 751,642
------------ ----------
GROSS PROFIT
Programming .............................. 1,058,358 44,017
Equipment sales and installation ......... 304,867 104,512
Rental ................................... 9,090 25,716
------------ ----------
1,372,315 174,245
------------ ----------
OPERATING EXPENSES
Marketing and selling .................... 1,697,782 232,565
Administrative ........................... 1,223,003 641,015
Amortization of franchise costs .......... 362,451 181,225
Depreciation and amortization. ........... 118,151 102,395
------------ ----------
3,401,387 1,157,200
------------ ----------
LOSS FROM OPERATIONS ........................ (2,029,072) (982,955)
------------ ----------
OTHER INCOME (EXPENSES)
Interest income .......................... 41,018 97,212
Interest expense ......................... (9,478) (97,545)
Loan commitment fees ..................... (7,500) --
------------ ----------
24,040 (333)
------------ ----------
NET LOSS .................................... (2,005,032) (983,288)
PARTNERS' EQUITY -- BEGINNING ............... 5,036,614 1,108,561
PARTNERS' CAPITAL CONTRIBUTIONS ............. 257,993 5,155,687
PRIVATE PLACEMENT COSTS INCURRED ............ (19,358) (244,346)
------------ ----------
PARTNERS' EQUITY -- ENDING .................. $ 3,270,217 $5,036,614
============ ==========
</TABLE>
See notes to financial statements.
F-97
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1995 1994
----------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss .................................................................. $ (2,005,032) $ (983,288)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization of property and equipment ................ 204,581 54,028
Amortization of other assets ........................................... 373,594 229,592
Amortized discount on notes payable .................................... -- 15,069
Accrued interest on note receivable -- Partner ......................... (3,185) --
Increase in accounts receivable ........................................ (223,774) (138,116)
(Increase) decrease in inventory ....................................... 79,639 (451,434)
(Increase) decrease in prepaid expenses and other current assets ....... (41,528) 7,258
Increase in deposits ................................................... (450) (3,590)
Organization costs incurred ............................................ (20,590) (2,000)
Increase in accounts payable, accrued expenses and other current
liabilities ........................................................... 758,334 319,183
Increase in unearned income and customer deposits ...................... 185,136 --
------------- ------------
Net cash used in operating activities ............................... (693,275) (953,298)
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in due from partners .................................. 28,315 (8,528)
Purchase of equipment held for rental ..................................... (487,866)
Purchase of other property and equipment .................................. (118,658) (219,537)
Proceeds from disposition of equipment .................................... -- 2,484
Franchise costs incurred .................................................. -- (518,016)
Decrease in franchise costs payable ....................................... -- (1,082,523)
------------- ------------
Net cash used in investing activities ............................... (578,209) (1,826,120)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on long-term notes payable ............................. (7,752) (2,476)
Principal payments on notes payable -- Other .............................. -- (513,705)
Partners' capital contributions ........................................... 257,993 4,454,622
Private placement costs incurred .......................................... (19,358) (178,869)
------------- ------------
Net cash provided by financing activities ........................... 230,883 3,759,572
------------- ------------
NET INCREASE (DECREASE) IN CASH .............................................. (1,040,601) 980,154
CASH -- BEGINNING ............................................................ 1,286,240 306,086
------------- ------------
CASH -- ENDING ............................................................... $ 245,639 $ 1,286,240
============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest ...................................... $ 1,983 $ 147,220
============= ============
</TABLE>
See notes to financial statements.
F-98
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF CASH FLOWS -- (Continued)
YEAR ENDED DECEMBER 31, 1995
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Long-term notes payable of $20,202 and $16,772 were incurred for the
purchase of property and equipment during the years ended December 31, 1995 and
1994, respectively.
During the year ended December 31, 1995, NRTC patronage capital of $30,649
was recorded, representing deferred patronage dividends.
During the year ended December 31, 1994, the amount due from partners was
increased by $20,000 and a note receivable -- partner of $31,850 was issued in
connection with the issuance of Partnership Units (recorded as partners'
capital contributions).
During the year ended December 31, 1994, franchise costs of $350,614 were
incurred, recorded as a reduction of the note receivable of $140,496 and
partners' capital contributions of $210,118.
During the year ended December 31, 1994, notes payable of $422,063 were
converted to Partnership Units (recorded as partners' capital contributions).
During the year ended December 31, 1994, private placement costs of
$17,034 were incurred in connection with the issuance of Partnership Units
(recorded as partners' capital contributions).
See notes to financial statements.
F-99
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995
1. Summary of Significant Accounting Policies
A. Organization and Nature of Business
Northeast DBS Enterprises, L.P. is a limited partnership under the laws of
the State of Vermont. The Partnership provides direct broadcast satellite
("DBS") television distribution services and sells related equipment in rural
territories franchised in conjunction with the National Rural
Telecommunications Cooperative ("NRTC") and DIRECTV, a subsidiary of G.M.
Hughes Electronics, Inc. In the normal course of business, the Partnership
grants credit to its customers, in the form of accounts receivable, who are
located in Vermont and New Hampshire.
Unearned income on programming contracts is recognized as earned over the
term of the contracts.
The Company also leases certain equipment to customers under four-year
cancelable operating leases with rental income reported as earned over the
lease term.
The financial statements include only those assets, liabilities and
results of operations which relate to the business of the Partnership. The
statements do not include any assets, liabilities, income or expenses
attributable to the partners' individual activities.
B. Use of Estimates
The presentation 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.
C. Cash
The Partnership maintains cash balances at several financial institutions.
Accounts at certain institutions are insured by the Federal Deposit Insurance
Corporation up to $100,000. Temporary cash balances are invested on a daily
basis in a money market fund backed by U.S. Government obligations.
D. Inventory
Inventory, consisting of DBS systems and related parts and supplies, is
stated at the lower of cost (first-in, first-out method) or market.
E. Property and Equipment and Depreciation and Amortization
Property and equipment are stated at cost. Expenditures for additions,
renewals and betterments are capitalized; expenditures for maintenance and
repairs are charged to expense as incurred. Upon retirement or disposal of
assets, the cost and accumulated depreciation or amortization are eliminated
from the accounts and the resulting gain or loss is credited or charged to
operations. Depreciation and amortization are provided using the straight-line
and declining balance methods over the estimated useful lives of the assets.
F. NRTC Patronage Capital
The Partnership is an affiliate of the NRTC. While affiliates have no
vote, they do have an interest in the NRTC in proportion to their prior
patronage. NRTC patronage capital represents the noncash portion of NRTC
patronage dividends. Under its bylaws, the NRTC declares a patronage dividend
equal to the excess of its revenues over its expenses each year. Of the total
patronage dividend, 20% is paid in cash and recognized as income when received
and is netted against programming expense in the accompanying statement of
operations. The remaining 80% is distributed on the form of noncash patronage
capital which will be redeemed in cash only at the discretion of the NRTC, and
is recorded as deferred patronage dividends which will be recognized as income
only when cash distributions are declared by the NRTC.
F-100
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 -- (Continued)
1. Summary of Significant Accounting Policies -- (Continued)
G. Franchise Costs and Amortization
The Partnership purchased the rights to distribute DBS services in twelve
counties in Vermont and two counties in New Hampshire. These rights have been
granted by the NRTC under its agreement with DIRECTV. The DBS services which
the Partnership distributes are video and audio entertainment and information
programming transmitted by a satellite operated by DIRECTV. The franchise costs
paid to NRTC are being amortized over the minimum term of the contract with
NRTC of ten years.
H. Private Placement Costs
Costs incurred in connection with the private placement offering are
reflected as a reduction of partners' equity.
I. Advertising
Advertising costs are charged to operations when the advertising first
takes place.
J. Income Taxes
Income taxes are not payable by, or provided for, the Partnership. All tax
effects of the Partnership's income or losses are passed through to the
partners.
K. Allocation of Patnership Profits and Losses
Partnership profits and losses are allocated as follows:
All losses are allocated 99% to the Limited Partners and 1% to the General
Partner.
All profits are allocated as follows:
First, 100% to Partners who have previously been allocated losses in
proportion to previously allocated losses until each Partner has been allocated
profits equal to previously allocated losses.
Second, 100% to all Partners, pro rata based on the number of Partnership
Units ("Units") owned, until each Partner has been allocated $1,000 per year
per Unit, cumulatively (the "Preferred Return").
<PAGE>
Third, 80% to all Partners, pro rata based on the number of Units owned,
and 20% to the General Partner until each of the Partners has been allocated
aggregate profits equal to a 35% per year compounded return on their initial
capital contribution (the "Fixed Return").
After the aggregate allocated profits to each of the Partners exceeds the
Fixed Return, net profits will be allocated 65% to all Partners, pro rata based
on the number of Units owned, and 35% to the General Partner.
2. Other Property and Equipment
1995 1994
----------- ----------
Demonstration equipment ............................ $ 23,290 $ 8,966
Office furniture and equipment ..................... 339,151 220,386
Leasehold improvements ............................. 32,860 27,089
-------- --------
395,301 256,441
Less accumulated depreciation and amortization ..... 164,395 57,387
-------- --------
$230,906 $199,054
======== ========
F-101
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 -- (Continued)
3. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consists of the following:
1995 1994
----------- -----------
Sales taxes payable ........................... $ 24,062 $ 34,847
Accrued programming fees ...................... 144,189 17,000
Accrued payroll and related expenses .......... 115,552 --
Accrued commissions ........................... 131,105 8,500
Other ......................................... 59,349 12,314
-------- --------
$474,257 $ 72,661
======== ========
4. Long-Term Notes Payable
<TABLE>
<CAPTION>
1995 1994
---------- ----------
<S> <C> <C>
Payable in monthly installments of $537 including interest at 9.5%;
final payment due in June, 1997; collateralized by related equipment $ 8,980 $14,296
Payable in monthly installments of $520 including interest at 10.75%;
final payment due in May, 1999; collateralized by related equipment 17,766 --
------- -------
26,746 14,296
Less current portion ................................................ 10,390 5,316
------- -------
$16,356 $ 8,980
======= =======
</TABLE>
Principal payments on long-term notes payable are due as follows: Year
ending December 31, 1996 -- $10,390, 1997 -- $8,195, 1998 -- $5,631 and 1999 --
$2,530.
5. Partners' Equity
At December 31, 1995 and 1994, warrants are outstanding to purchase 33.81
Units and 31.31 Units, respectively, of the Partnership at prices ranging from
$10,000 to $25,000 per Unit. The warrants are exercisable (except as described
in Note 7), and expire at various dates from November, 1998, through October,
2000.
6. Major Supplier
The Partnership purchases substantially all of its programming, inventory
and equipment held for rental from NRTC (see Note 1-a).
7. Related Party Transactions
The note receivable -- partner bears interest at 10%; the principal
balance and accrued interest are due on or before July 1, 1997, based on the
occurrence of certain events per the agreement.
At December 31, 1995, the Partnership has a $500,000 line of credit with a
company affiliated by common ownership and management; the agreement expires
October 1, 1996, and contains an option to extend the agreement for an
additional year. Loans outstanding, if any, bear interest at 15%. Interest
expense, commitment fees, and financing costs incurred under this agreement
were $343, $7,500 and $2,500, respectively, for the year ended December 31,
1995. As part of the agreement, the Partnership issued to the affiliate a
warrant to purchase one Unit at a price of $25,000 which is exercisable
immediately, and a warrant to purchase 1.5 Units at a price of $25,000 per Unit
exercisable as defined in the agreement based on amounts borrowed. If the
agreement is extended to October 1, 1997, the Partnership will issue a warrant
to purchase two additional Units at a price of $25,000 per Unit exercisable as
defined in the agreement.
F-102
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 -- (Continued)
7. Related Party Transactions -- (Continued)
Companies affiliated by common ownership and management charge the
Partnership for expenses incurred by the Affiliates on behalf of the
Partnership. Total expenses of $38,008 and $63,375 were charged to the
Partnership for the years ended December 31, 1995 and 1994, respectively.
8. Lease Commitment
The Partnership leases its office facilities under a noncancelable
operating lease expiring in January, 1997; the lease contains a two-year
renewal option. Future minimum annual rentals under this lease are as follows:
Year Ending
December 31,
-------------
1996 ..................................... $34,661
1997 ..................................... 2,896
-------
$37,557
=======
Rent expense under all operating leases was $39,111 and $44,415 for the
years ended December 31, 1995 and 1994, respectively.
F-103
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Partners of Northeast DBS Enterprises, L.P.:
We have audited the accompanying balance sheet of NORTHEAST DBS
ENTERPRISES, L.P. (a Vermont limited partnership) as of December 31, 1996 and
the related statements of operations, changes in partners' capital, and cash
flows for the year then ended. These financial statements are the
responsibility of the Partnership'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 Northeast DBS Enterprises,
L.P. 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
February 21, 1997
F-104
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<CAPTION>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 128,589
Trade accounts receivable, net of allowance for doubtful accounts of $25,061 887,547
Due from partners .......................................................... 35,035
Inventory .................................................................. 268,179
Other, net (Note 2) ........................................................ 341,890
----------
Total current assets .................................................... 1,661,240
----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment .................................................... 483,793
Less accumulated depreciation .............................................. (241,426)
----------
242,367
----------
LEASED EQUIPMENT, at cost:
Leased equipment ........................................................... 934,822
Less accumulated depreciation .............................................. (220,932)
----------
713,890
----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ..................................... 2,967,427
----------
$5,584,924
==========
LIABILITIES AND PARTNERS' CAPITAL
CURRENT LIABILITIES:
Accounts payable ........................................................... $ 932,120
Accrued liabilities ........................................................ 969,781
Notes payable .............................................................. 1,209,917
Unearned revenue ........................................................... 1,052,611
----------
Total current liabilities ............................................... 4,164,429
----------
OTHER LIABILITIES ............................................................. 140,529
----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 3, and 5)
PARTNERS' CAPITAL:
Class A units, 565.72834 units issued and outstanding ...................... 1,279,966
Class B units, 9.5 units issued and outstanding ............................ --
----------
Total partners' capital ................................................. 1,279,966
----------
$5,584,924
==========
</TABLE>
The accompanying notes are an integral part of this balance sheet.
F-105
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
REVENUE:
Programming revenue ........................ $ 6,545,998
Equipment and installation revenue ......... 3,139,093
-------------
Total revenue ........................... 9,685,091
-------------
COST OF REVENUE:
Programming expense ........................ 3,453,667
Cost of equipment and installation ......... 2,399,483
Service fees ............................... 697,128
-------------
Total cost of revenue ................... 6,550,278
-------------
GROSS PROFIT .................................. 3,134,813
-------------
OPERATING EXPENSES:
Sales and marketing ........................ 2,804,769
General and administrative ................. 1,570,979
Depreciation and amortization .............. 592,732
-------------
Total operating expenses ................ 4,968,480
-------------
OPERATING LOSS ................................ (1,833,667)
-------------
OTHER INCOME (EXPENSE):
Interest expense ........................... (177,617)
Other income ............................... 21,033
-------------
(156,584)
-------------
NET LOSS ...................................... $ (1,990,251)
=============
The accompanying notes are an integral part of this statement.
F-106
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
STATEMENT OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
Limited Partners
General --------------------------
Partner Class A Class B Total
------------- -------------- --------- --------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ......... $ 11,195 $ 3,259,022 $ -- $ 3,270,217
Net loss ........................ (19,903) (1,970,348) -- (1,990,251)
--------- ------------ ---- ------------
BALANCE, December 31, 1996 ......... $ (8,708) $ 1,288,674 $ -- $ 1,279,966
========= ============ ==== ============
</TABLE>
The accompanying notes are an integral part of this statement.
F-107
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ..................................................................... $ (1,990,251)
-------------
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization ............................................. 592,732
Amortization of capitalized debt costs and debt discount .................. 12,120
Changes in operating assets and liabilities:
Accounts receivable, net ................................................. (525,657)
Inventory ................................................................ 103,616
Other, net ............................................................... (302,464)
Accounts payable ......................................................... 157,470
Accrued liabilities ...................................................... 495,524
Unearned revenue ......................................................... 804,507
-------------
Total adjustments ...................................................... 1,337,848
-------------
Net cash used in operating activities .................................. (652,403)
-------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment and lease equipment, net ................. (439,231)
Increase in amounts due from partners ........................................ --
-------------
Net cash used in investing activities .................................. (439,231)
-------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable ...................................... 1,285,000
Repayment of notes payable ................................................... (205,299)
Other assets ................................................................. (105,117)
-------------
Net cash provided by financing activities .............................. 974,584
-------------
NET DECREASE IN CASH AND CASH EQUIVALENTS ....................................... (117,050)
CASH AND CASH EQUIVALENTS at beginning of year .................................. 245,639
-------------
CASH AND CASH EQUIVALENTS at end of year ........................................ $ 128,589
=============
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .............................................. $ 103,470
=============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ....................................................... $ 127,531
=============
</TABLE>
The accompanying notes are an integral part of this statement.
F-108
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Organization and Nature of Business
Northeast DBS Enterprises, L.P. (the "Partnership") (d.b.a. Digital One
Television) is a limited partnership organized in Vermont. The Partnership was
formed on January 1, 1993 to acquire and operate rights to distribute direct
broadcast satellite ("DBS") services ("DIRECTV Services") offered by DirecTv,
Inc. ("DirecTv"). The Partnership is a continuation of a general partnership
which was known as Northeast DBS Enterprises.
The Partnership shall continue until terminated in accordance with
provisions defined in the partnership agreement. The Partnership has a general
partner in addition to its limited partners. The limited partners may not take
part in the management of the Partnership and are not liable for any debts,
obligations or losses of the Partnership in excess of their capital
contributions and their shares of the undistributed profits.
The partnership agreement provides that net losses are allocated 99% to
the limited partners and 1% to the general partner; however, no net losses will
be allocated to a limited partner in excess of the balance of the limited
partner's capital account. Profits are allocated (1) first to those partners
(the general and limited partners collectively) who have previously been
allocated losses in proportion to the excess of the amount of such losses
previously allocated to each partner over the profits previously allocated to
each partner until the aggregate amount of profits allocated equal the
aggregate amount of allocated losses; (2) next, 100% to the partners pro rata
in accordance with the number of units owned until aggregate profits have been
allocated equal $1,000 per unit per year; (3) next, 80% to the partners, pro
rata in accordance with the number of units owned by the partners and 20% to
the general partner until each of the partners has been allocated for the
current year and all prior years aggregate profits equal to 35% per year
compounded return on their initial capital contribution (the "Fixed Return");
and (4) finally, after the aggregate of all profits allocated to the partners
exceeds the Fixed Return, 65% to the Partners on a pro rata basis in accordance
with the number of units owned by the partners and 35% to the general partner.
The Partnership obtained the rights to distribute DIRECTV Services in
certain rural markets in Vermont and New Hampshire pursuant to agreements (the
"NRTC Member Agreements") with the National Rural Telecommunications
Cooperative ("NRTC") in exchange for approximately $3.6 million.
In November 1996, the Partnership entered into an asset purchase agreement
(the "Agreement") with DTS Management, LLC ("DTS"), which was subsequently
amended by an amendment dated February 11, 1997 by and among the Partnership,
DTS and Digital Television Services of Vermont, LLC ("DTS Vermont"), a
subsidiary of DTS. DTS is a subsidiary of Digital Television Services, LLC. The
Agreement provides that DTS Vermont will purchase the Partnership's NRTC Member
Agreement and other assets used in connection with the Partnership's business,
as defined in the Agreement, and will assume certain liabilities of the
Partnership, as defined in the Agreement. The purchase price is subject to an
adjustment based on the number of subscribers and working capital at the date
of closing of the Agreement.
2. Summary of Significant Accounting Policies
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.
Revenue Recognition
The Partnership earns programming revenue by providing DIRECTV Services to
its subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, or annual subscriptions; additional premium
programming available on an a la carte basis; sports programming available
under
F-109
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. Summary of Significant Accounting Policies -- (Continued)
monthly, annual, or seasonal subscriptions; and movies and events programming,
including premium programming, available on a pay-per-view basis. Programming
purchased on a monthly, quarterly, annual, or seasonal basis is billed in
advance and is recorded as unearned revenue. All programming revenue is
recognized when earned.
Equipment and installation revenue primarily consists 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 and
represents the amount paid by the customer.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the Partnership's subscribers. These costs include the direct
wholesale cost of purchasing related programming from DirecTv (through the NRTC
[Note 5]); monthly subscriber maintenance fees charged by DirecTV, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Costs of equipment and installation represents the
actual cost of the equipment to the Partnership plus the costs to install the
equipment.
Cash and Cash Equivalents
The Partnership considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Partnership maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Other Current Assets
Other current assets consist of the following at December 31, 1996:
Deferred promotional costs, net. ........... $310,667
Other ...................................... 31,223
--------
$341,890
========
Deferred promotional costs consist of costs related to a subscriber rebate
program sponsored by DirecTv. Under the program, new subscribers who agree to
prepay for one year of programming service receive a credit which is applied
toward the one year's programming subscription. Subscribers under this program
may choose to net the credit on their first bill or pay the full amount and
receive a refund from the Partnership for the credit. The Partnership defers
both the programming revenue and the cost of credit and amortizes them over the
one-year contract period. In addition, as a part of this program, the
Partnership receives $1 per month up to five years from the NRTC for each
subscriber whose account remains active. Such amounts are recorded as received
as a reduction in selling expenses in the accompanying statement of operations.
Property and Equipment and Leased Equipment
Property and equipment and leased equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these
F-110
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. Summary of Significant Accounting Policies -- (Continued)
assets are expensed currently. Depreciation for property and equipment and
leased equipment is provided using the straight-line method over the estimated
useful lives of the respective assets, ranging from three to seven years.
Depreciation expense for the year ended December 31, 1996 was $219,763. 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
earnings.
At December 31, 1996, future minimum rental revenues to be received from
operating leases of DSS(R) equipment are due as follows:
1997 ................................... $ 411,742
1998 ................................... 403,821
1999 ................................... 327,002
2000 ................................... 67,754
----------
$1,210,319
==========
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1996:
Contract rights .................... $3,624,514
Organization costs ................. 34,292
----------
3,658,806
Accumulated amortization ........... (939,563)
----------
2,719,243
NRTC patronage capital ............. 140,529
Debt issuance costs, net ........... 103,215
Other .............................. 4,440
----------
$2,967,427
==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide 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 $362,451.
Accumulated amortization at December 31, 1996 was $906,127.
Organization Costs: Organization costs are costs associated with the
formation of the Partnership 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
$10,518. Accumulated amortization at December 31, 1996 was $33,436.
Debt Issuance Costs: Debt issuance costs are amortized over the term of
the related long-term debt facility. Amortization expense, included in interest
expense in the accompanying statement of operations, for the year ended
December 31, 1996 was $12,120 and accumulated amortization at December 31, 1996
was $12,120.
NRTC Patronage Capital: The Partnership is an affiliate of the NRTC. While
affiliates have no vote, they do have an 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 is recognized as income when received and is
netted against programming expense in the accompanying statement of
F-111
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
2. Summary of Significant Accounting Policies -- (Continued)
operations. 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. The
Partnership includes noncash patronage capital as other assets, with an
offsetting deferred patronage income amount included in other liabilities in
the accompanying balance sheet. The patronage capital will be recognized as
income when cash distributions are declared by the NRTC.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1996:
Accrued programming expense ........... $325,462
Accrued salaries and wages ............ 251,128
Accrued commissions ................... 132,717
Other ................................. 260,474
--------
$969,781
========
Income Taxes
The Partnership is not considered a taxable entity for federal and state
income tax purposes. All taxable income or loss is allocated to the partners in
accordance with the terms of the partnership agreement. Accordingly, no
provision for income taxes is included in the accompanying financial
statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1996, management does not believe any significant concentration of credit risk
exists.
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. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying balance sheet are appropriately valued.
3. Commitments and Contingencies
Leases
The Partnership leases office and warehouse space and certain equipment
under noncancelable operating leases which expire through 1999. Future minimum
lease payments for noncancelable operating leases in effect at December 31,
1996 are as follows:
1997 .......................................... $46,430
1998 .......................................... 38,211
1999 .......................................... 2,958
-------
Total future minimum lease payments ........... $87,599
=======
F-112
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
3. Commitments and Contingencies -- (Continued)
Rental expense charged to general and administrative expenses in the
accompanying statement of operations for the year ended December 31, 1996
totaled $34,760.
Warrants
The Partnership has issued warrants to purchase 34.31 partnership units at
prices ranging from $10,000 to $25,000 per unit at December 31, 1996, no
warrants had been exercised.
NRTC
As part of the NRTC Member Agreements, the Partnership is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the
Partnership's Rural DirecTv Market, or up to 10,168 subscribers) and the
requirements of certain programming agreements between DirecTv and providers of
programming, beginning in the fourth year of operation of the NRTC Member
Agreement if the Partnership fails to obtain such minimum number of subscribers
prior to such time. The Partnership has achieved the minimum subscriber
requirement at December 31, 1996 and is therefore not required to pay such
fees.
Litigation
The Partnership is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Partnership's
financial position or results of operations.
4. Notes Payable
In October 1995, the Partnership entered into a credit agreement with one
of its limited partners providing for borrowings up to $500,000 through October
1, 1996 with interest at 15%. No borrowings were made under this agreement;
however, the limited partner was given warrants related to this agreement. No
warrants were exercised under this agreement. The Partnership paid commitment
fees of $22,500 to the limited partner under this agreement during 1996.
In August 1996, the Partnership entered into a loan agreement with a bank
in the form of a $500,000 line of credit ("LOC") and a $500,000 overline credit
facility ("OL Facility"). No borrowings were outstanding under the OL Facility
at year-end. Borrowings outstanding under the LOC at December 31, 1996 were
$434,900 and bear interest at 10.25%. Borrowings under the LOC became current
at year-end due to the pending change in ownership under the Agreement (Note
1). As part of the LOC and OL Facility, the Company issued warrants to the bank
which can be exercised for 2 partnership units at a price of $25,000 per unit.
No warrants had been exercised at December 31, 1997 (Note 3).
The Partnership obtained a $750,000 loan from a financing company at an
interest rate of 18%. Outstanding borrowings under this agreement were $655,180
at December 31, 1996. As part of this agreement, the Partnership also
discounted certain subscriber equipment leases with the financing company.
Subsequent to year-end, the Partnership repaid $758,650 to the financing
company, representing the outstanding loan balance as well as the settlement of
the outstanding leases. The lease liability of $103,470 is also included in
notes payable at December 31, 1996.
At December 31, 1996, the Partnership also had $16,367 in outstanding
notes payable with interest rates ranging from 9.5% to 10.75% and payable in
monthly installments.
F-113
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996
4. Notes Payable -- (Continued)
All outstanding notes payable and lease obligations are included as
current liabilities in the accompanying balance sheet. The carrying amount of
notes payable approximates fair value due to the relatively short period to
maturity of these instruments.
5. 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 Partnership 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 Partnership is, through the NRTC, a distributor of DIRECTV
Services, the Partnership 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 Communication 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 Partnership
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 Partnership would be required to acquire the services from other sources.
There can be no assurance that the cost to the Partnership to obtain these
services elsewhere would not exceed the amounts currently payable to the NRTC.
The Partnership 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
Partnership would no longer have the right to provide DIRECTV Services. There
can be no assurance that the Partnership 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 Partnership will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While the Partnership believes that 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 Partnership's
existing contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the Partnership from Hughes
or the NRTC; and, if available, there can be no assurance with regard to the
financial and other terms under which the Partnership could acquire the
services.
The Partnership'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 Partnership's DBS business.
DirecTv, and therefore the Partnership, is 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 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.
F-114
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Pee Dee
Electricom, Inc.:
We have audited the accompanying statements of assets and liabilities and
accumulated deficit of the DBS OPERATIONS OF NRTC SYSTEM NO. 0001 (an
unincorporated division of Pee Dee Electricom, Inc., a South Carolina
corporation) as of December 31, 1995 and November 26, 1996 and the related
statements of expenses over revenues and changes in accumulated deficit and
cash flows for the year ended December 31, 1995 and for the period from January
1, 1996 through November 26, 1996. These financial statements are the
responsibility of the System's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of NRTC
System No. 0001 as of December 31, 1995 and November 26, 1996 and the results
of its operations and its cash flows for the year ended December 31, 1995 and
for the period from January 1, 1996 through November 26, 1996 in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 4, 1997
F-115
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED DEFICIT
DECEMBER 31, 1995 AND NOVEMBER 26, 1996
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................................... $ 114,485 $ 166,325
Trade accounts receivable net of allowance for doubtful accounts of
$5,200 and $17,396 at December 31, 1995 and November 26, 1996,
respectively ..................................................... 147,506 306,305
Inventory ......................................................... 155,425 51,758
Deferred promotional costs, net (Note 2) .......................... -- 39,000
---------- ----------
Total current assets ........................................... 417,416 563,388
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ........................................... 6,636 19,441
Less accumulated depreciation ..................................... (2,262) (6,394)
---------- ----------
4,374 13,047
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ............................ 1,515,920 1,371,940
---------- ----------
$1,937,710 $1,948,375
========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable .................................................. $ 247,227 $ 186,027
Accrued liabilities ............................................... 17,449 13,685
Related-party payable ............................................. 1,757,438 1,757,438
Unearned revenue .................................................. 76,755 171,899
---------- ----------
Total current liabilities ...................................... 2,098,869 2,129,049
---------- ----------
OTHER LIABILITIES .................................................... 7,450 24,572
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 2, 4, and 5)
ACCUMULATED DEFICIT .................................................. (168,609) (205,246)
---------- ----------
$1,937,710 $1,948,375
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-116
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
STATEMENTS OF EXPENSES OVER REVENUES
AND CHANGES IN ACCUMULATED DEFICIT FOR THE
YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM JANUARY 1, 1996 THROUGH
NOVEMBER 26, 1996
<TABLE>
<CAPTION>
1995 1996
--------------- --------------
<S> <C> <C>
REVENUE:
Programming revenue ............................. $ 626,029 $ 1,442,380
Equipment and installation revenue .............. 386,519 161,474
----------- -----------
Total revenue ................................ 1,012,548 1,603,854
----------- -----------
COST OF REVENUE:
Programming expense ............................. 293,071 727,843
Cost of equipment and installation .............. 317,205 164,689
Service fees .................................... 56,039 113,253
----------- -----------
Total cost of revenue ........................ 666,315 1,005,785
----------- -----------
GROSS PROFIT ....................................... 346,233 598,069
----------- -----------
OPERATING EXPENSES:
Sales and marketing ............................. 64,084 110,926
General and administrative ...................... 181,950 358,546
Depreciation and amortization ................... 177,275 165,234
----------- -----------
Total operating expenses ..................... 423,309 634,706
----------- -----------
EXPENSES OVER REVENUES ............................. (77,076) (36,637)
ACCUMULATED DEFICIT at beginning of period ......... (91,533) (168,609)
----------- -----------
ACCUMULATED DEFICIT at end of period ............... $ (168,609) $ (205,246)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-117
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH NOVEMBER 26, 1996
<TABLE>
<CAPTION>
1995 1996
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Expenses over revenues ............................................. $ (77,076) $ (36,637)
---------- ----------
Adjustments to reconcile expenses over revenues to net cash provided
by operating activities:
Depreciation and amortization ................................... 177,275 165,234
Amortization of deferred promotional costs ...................... -- 7,800
Changes in operating assets and liabilities:
Trade accounts receivable, net ............................... (115,007) (158,799)
Inventory .................................................... 145,296 103,667
Deferred promotional costs ................................... -- (46,800)
Accounts payable ............................................. (102,138) (61,200)
Accrued liabilities .......................................... 12,405 (3,764)
Unearned revenue ............................................. 69,948 95,144
---------- ----------
Total adjustments ......................................... 187,779 101,282
---------- ----------
Net cash provided by operating activities ................. 110,703 64,645
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................ (198) (12,805)
---------- ----------
NET INCREASE IN CASH AND CASH EQUIVALENTS ............................. 110,505 51,840
CASH AND CASH EQUIVALENTS at beginning of period ...................... 3,980 114,485
---------- ----------
CASH AND CASH EQUIVALENTS at end of period ............................ $ 114,485 $ 166,325
========== ==========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .................................... $ 7,450 $ 17,122
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-118
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND NOVEMBER 26, 1996
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 0001 (the "System") is an
unincorporated division of Pee Dee Electricom, Inc. ("Pee Dee"), a South
Carolina corporation. Pee Dee is a wholly-owned subsidiary of Pee Dee Electric
Cooperative, Inc. ("Pee Dee EC"), a South Carolina cooperative association (Pee
Dee and Pee Dee EC collectively referred to as the "Sellers"). The System
operates the exclusive rights to distribute direct broadcast satellite ("DBS")
services ("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv") in certain
rural markets in South Carolina. The accompanying financial statements present
the financial position and excess of expenses over revenues of the System.
The Sellers obtained the rights to distribute DIRECTV Services in the
System's territory pursuant to an agreement (the "NRTC Member Agreement") with
the National Rural Telecommunications Cooperative ("NRTC"). Under the
provisions of the NRTC Member Agreement, Pee Dee has the exclusive right to
provide DIRECTV Services within certain rural territories in South Carolina.
In October 1996, the Sellers entered into an asset purchase agreement (the
"Agreement") with Digital Television Services of South Carolina I, LLC ("DTS
SCI"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC. The agreement provides that DTS SCI will
purchase Pee Dee's NRTC Member Agreement and other assets used in connection
with the System's business, as defined in the Agreement, and will assume
certain liabilities of the System, as defined in the Agreement. The purchase
price was subject to an adjustment for working capital at the date of closing
of the Agreement and new subscribers acquired by the Sellers between November
1, 1996 through the date of the closing of the Agreement. The closing date of
the Agreement was November 26, 1996.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Pee Dee nor has it been
operated as a separate division of Pee Dee. The financial statements of the
System have been derived from the records of Pee Dee and have been prepared to
present its financial position, excess of expenses over revenues, and cash
flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Pee Dee EC. The costs and expenses have been allocated to the
system based on actual amounts relative to DBS services or percentages as
determined by management through an analysis of DBS activity in the applicable
accounts. The System's management believes that the methodology used is
reasonable. Such allocated expenses may not be indicative of what such expenses
would have been had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, quarterly, 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 revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
F-119
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the NRTC [Note
5]); monthly subscriber maintenance fees charged by DirecTv, such as security
fees, ground service fees, system authorization fees, and fees for subscriber
billings; costs of equipment and installation; and certain subscriber operating
costs. Cost of equipment and installation represents the actual cost of the
equipment to the System plus the costs to install the equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Deferred Promotional Costs
Deferred promotional costs consist of costs deferred under a subscriber
rebate program sponsored by DirecTv. Under the program, new subscribers who
agree to prepay for one year of programming service receive a credit which is
applied toward the one-year's programming subscription. Subscribers under this
program may choose to net the credit on their first bill or pay the full amount
and receive a refund from the System for the credit. The System defers both the
program revenue and the cost of this credit and amortizes them over the one-year
contract period. In addition, as a part of this program, the System receives $1
per month from DirecTv for each customer for each month the subscriber remains
an active subscriber up to five years. Such amounts are recorded as a reduction
in sales and marketing expense in the accompanying statements of expenses over
revenues and changes in accumulated deficit.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
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 ended December 31, 1995
and for the period from January 1, 1996 through November 26, 1996 was $1,531
and $4,132, respectively. Upon retirement or disposal of assets, the cost and
related accumulated depreciation are removed from the statements of assets and
liabilities and accumulated deficit and any gain or loss is reflected in
earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and November 26, 1996:
1995 1996
------------- -------------
Contract rights ................... $1,757,438 $1,757,438
Accumulated amortization .......... (248,968) (410,070)
---------- ----------
1,508,470 1,347,368
NRTC patronage capital ............ 7,450 24,572
---------- ----------
$1,515,920 $1,371,940
========== ==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated
F-120
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
by DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, for
the year ended December 31, 1995 and for the period from January 1, 1996
through November 26, 1996 was $175,744 and $161,102, respectively.
NRTC Patronage Capital: Pee Dee EC is a voting member of the NRTC with an
ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage certificates represent 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 is recognized as income when received and is netted against
programming expense in the accompanying statement of expenses over revenues and
changes in accumulated deficit. 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. The System includes noncash patronage capital as other
assets, with an offsetting deferred patronage income amount included in other
liabilities in the accompanying statements of assets and liabilities and
accumulated deficit. The patronage capital will be recognized as income when
cash distributions are declared by the NRTC.
Income Taxes
Pee Dee, and thus the System, is not considered a taxable entity for
federal and state income tax purposes as it is a not-for-profit corporation.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at November 26,
1996, management does not believe any significant concentration of credit risk
exists.
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. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying statements of assets and liabilities and accumulated
deficit are appropriately valued.
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.
F-121
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Related-Party Transactions
Certain administrative services are performed by Pee Dee EC on behalf of
the System. Costs attributable to these support functions are included in
general and administrative expenses in the accompanying statements of expenses
over revenues and changes in accumulated deficit. The costs allocated to the
System were approximately $64,000 and $124,000 for the year ended December 31,
1995 and the period from January 1, 1996 through November 26, 1996,
respectively. Such allocations do not necessarily represent actual and/or
ongoing expenses of the System.
Pee Dee EC either advances funds to or borrows funds from the System.
Included in the accompanying statements of assets and liabilities and
accumulated deficit is a net payable to Pee Dee EC representing amounts due for
the initial purchase of contract rights and net operating activities as funds
by Pee Dee EC.
4. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 5,817 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
System fails to obtain such minimum number of subscribers prior to such time.
The System had achieved approximately 75% of the minimum subscriber requirement
at December 31, 1996. Based on the subscriber growth rate of the System to
date, management anticipates that the System will meet the minimum subscriber
requirement prior to the fourth year of operations of the NRTC Member
Agreements and is therefore not required to pay such fees.
5. Reliance on DirecTv and 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 System for these services on a monthly
basis. These fees are recorded as service fees in the accompanying statements
of expenses over revenues and changes in accumulated deficit. The NRTC also
sells DSS(R) Equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System 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 Communication 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 System 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 System would be required to acquire the services from other sources. There
can be no assurance that the cost to the System to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The System 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 System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System would be able to obtain similar DBS services from
other sources.
F-122
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and NRTC and Other Matters -- (Continued)
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 System will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While management believes that 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 System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
The System'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 System's DBS business.
DirecTv, and therefore the System, is 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 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.
F-123
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of Teg DBS
Services, Inc.:
We have audited the accompanying statements of assets and liabilities and
accumulated deficit of the DBS OPERATIONS OF NRTC SYSTEM NO. 1025 (an
unincorporated division of Teg DBS Services, Inc., a Nevada corporation) as of
December 31, 1995 and August 28, 1996 and the related statements of expenses
over revenues and changes in accumulated deficit and cash flows for the period
from March 10, 1995 (inception) through December 31, 1995 and the period from
January 1, 1996 through August 28, 1996. These financial statements are the
responsibility of the System's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the DBS Operations of NRTC
System No. 1025 as of December 31, 1995 and August 28, 1996 and the results of
its operations and its cash flows for the period from March 10, 1995
(inception) through December 31, 1995 and the period from January 1, 1996
through August 28, 1996 in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 4, 1997
F-124
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
STATEMENTS OF ASSETS AND LIABILITIES AND ACCUMULATED DEFICIT
DECEMBER 31, 1995 AND AUGUST 28, 1996
<TABLE>
<CAPTION>
1995 1996
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ...................... $ 100,158 $ 59,247
Accounts receivable:
Trade ....................................... 99,759 112,598
Other, net .................................. 48,226 37,111
---------- ----------
Total current assets ..................... 248,143 208,956
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Furniture and equipment ........................ 4,694 6,895
Less accumulated depreciation .................. (931) (2,261)
---------- ----------
3,763 4,634
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ......... 2,609,648 2,326,613
---------- ----------
$2,861,554 $2,540,203
========== ==========
LIABILITIES AND ACCUMULATED DEFICIT
CURRENT LIABILITIES:
Accounts payable ............................... $ 325,704 $ 262,887
Accrued liabilities ............................ 13,602 --
Related-party payable .......................... 1,367,206 2,080,169
Unearned revenue ............................... -- 63,323
Current maturities of note payable ............. 800,000 840,000
---------- ----------
Total current liabilities ................ 2,506,512 3,246,379
---------- ----------
LONG-TERM NOTE PAYABLE ............................ 800,000 --
COMMITMENTS AND CONTINGENCIES (Notes 2, 5 and 6)
ACCUMULATED DEFICIT ............................... (444,958) (706,176)
---------- ----------
$2,861,554 $2,540,203
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements
F-125
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
STATEMENTS OF EXPENSES OVER REVENUES
AND CHANGES IN ACCUMULATED DEFICIT
FOR THE PERIOD FROM MARCH 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 28, 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
REVENUE:
Programming revenue ............................. $ 486,108 $ 689,229
Equipment and installation revenue .............. 219,962 --
----------- -----------
Total revenue ................................ 706,070 689,229
----------- -----------
COST OF REVENUE:
Programming expense ............................. 243,206 340,218
Cost of equipment and installation .............. 201,964 --
Service fees .................................... 48,459 67,789
----------- -----------
Total cost of revenue ........................ 493,629 408,007
----------- -----------
GROSS PROFIT ....................................... 212,441 281,222
----------- -----------
OPERATING EXPENSES:
Sales and marketing ............................. 29,057 38,604
General and administrative ...................... 217,625 141,965
Depreciation and amortization ................... 264,289 288,630
----------- -----------
Total operating expenses ..................... 510,971 469,199
----------- -----------
OPERATING LOSS ..................................... (298,530) (187,977)
----------- -----------
OTHER INCOME (EXPENSE):
Interest expense ................................ (146,428) (80,146)
Other income .................................... -- 6,905
----------- -----------
(146,428) (73,241)
----------- -----------
EXPENSES OVER REVENUES ............................. (444,958) (261,218)
ACCUMULATED DEFICIT at beginning of period ......... -- (444,958)
----------- -----------
ACCUMULATED DEFICIT at end of period ............... $ (444,958) $ (706,176)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-126
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
STATEMENTS OF CASH FLOWS
FOR THE PERIOD FROM MARCH 10, 1995 (INCEPTION) THROUGH DECEMBER 31, 1995
AND THE PERIOD FROM JANUARY 1, 1996 THROUGH AUGUST 28, 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Expenses over revenues ............................................. $ (444,958) $ (261,218)
------------ -----------
Adjustments to reconcile expenses over revenues to net cash provided
by operating activities:
Depreciation and amortization ................................... 264,289 288,630
Changes in operating assets and liabilities:
Trade accounts receivable, net ................................. (99,759) (12,839)
Other assets ................................................... (48,226) 11,115
Related-party payable .......................................... 1,367,206 712,963
Accounts payable ............................................... 325,704 (62,817)
Accrued liabilities ............................................ 13,602 (13,602)
Unearned revenue ............................................... -- 63,323
------------ -----------
Total adjustments ............................................ 1,822,816 986,773
------------ -----------
Net cash provided by operating activities .................... 1,377,858 725,555
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment ................................ (4,694) (2,201)
Increase in other assets ........................................... (2,873,006) (4,265)
------------ -----------
Net cash used in investing activities ........................ (2,877,700) (6,466)
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of notes payable .......................................... 1,600,000 --
Repayment of notes payable ......................................... -- (760,000)
------------ -----------
Net cash provided by (used in) financing activities .......... 1,600,000 (760,000)
------------ -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................. 100,158 (40,911)
CASH AND CASH EQUIVALENTS at beginning of period ...................... -- 100,158
------------ -----------
CASH AND CASH EQUIVALENTS at end of period ............................ $ 100,158 $ 59,247
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ............................................. $ 146,428 $ 80,146
============ ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-127
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1995 AND AUGUST 28, 1996
1. Organization and Nature of Business
The DBS Operations of NRTC System No. 1025 (the "System") is an
unincorporated division of Teg DBS Services, Inc. ("Teg"), a Nevada
corporation, which began operations March 10, 1995. The System operates the
exclusive rights to distribute direct broadcast satellite ("DBS") services
("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv") in certain rural
markets in New Mexico. The accompanying financial statements present the
financial position and excess of expenses over revenues of the System.
Teg obtained the rights to distribute DIRECTV Services in the System's
territory pursuant to an agreement (the "NRTC Member Agreement") with the
National Rural Telecommunications Cooperative ("NRTC"). Under the provisions of
the NRTC Member Agreement, Teg has the exclusive right to provide DIRECTV
Services within certain rural territories in New Mexico.
In June 1996, Teg entered into an asset purchase agreement (the
"Agreement") with Digital Television Services of New Mexico, LLC ("DTS New
Mexico"), a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of
Digital Television Services, LLC (a Delaware limited liability company). The
Agreement provides that DTS New Mexico will purchase Teg's NRTC Member
Agreement and other assets used in connection with the System's business, as
defined in the Agreement, and will assume certain liabilities of the System, as
defined in the Agreement, for a purchase price which is subject to an
adjustment for working capital at the date of closing of the Agreement. The
closing date of the Agreement was August 28, 1996.
2. Summary of Significant Accounting Policies
Presentation
The System is not a separate subsidiary of Teg nor has it been operated as
a separate division of Teg. The financial statements of the System have been
derived from the records of Teg and have been prepared to present its financial
position, excess of expenses over revenues and changes in accumulated deficit,
and cash flows on a stand-alone basis. Accordingly, the accompanying financial
statements include certain costs and expenses which have been allocated to the
System from Teg. The costs and expenses have been allocated to the system based
on actual amounts relative to DBS services or percentages as determined by
management through an analysis of DBS activity in the applicable accounts. The
System's management believes that the methodology used is reasonable. Such
allocated expenses may not be indicative of what such expenses would have been
had the System been operated as a separate entity.
Revenue Recognition
The System earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, quarterly, 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 revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the System and is
recognized upon delivery of the equipment. Installation revenue is recognized
when the equipment is installed and represents the amounts paid by customers to
the System.
Cost of Revenues
Cost of revenues includes the cost associated with providing DIRECTV
Services to the System's subscribers. These costs include the direct wholesale
cost of purchasing related programming from DirecTv (through the
F-128
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
NRTC [Note 6]); monthly subscriber maintenance fees charged by DirecTv, such as
security fees, ground service fees, system authorization fees, and fees for
subscriber billings; costs of equipment and installation; and certain
subscriber operating costs. Cost of equipment and installation represents the
actual cost of the equipment to the System plus the costs to install the
equipment.
Inventories
The System maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment is provided using the straight-line
method over the estimated useful lives of the respective assets, ranging from
five to six years. Depreciation expense for the period from March 10, 1995
(inception) through December 31, 1995 and for the period from January 1, 1996
through August 28, 1996 was $931 and $1,330, respectively. Upon retirement or
disposal of assets, the cost and related accumulated depreciation are removed
from the statements of assets and liabilities and accumulated deficit and any
gain or loss is reflected in earnings.
Contract Rights and Other Assets
Contract rights and other assets consist of the following at December 31,
1995 and August 28, 1996:
1995 1996
------------- -------------
Contract rights ................... $2,873,006 $2,873,006
Accumulated amortization .......... (263,358) (550,658)
---------- ----------
2,609,648 2,322,348
Other ............................. -- 4,265
---------- ----------
$2,609,648 $2,326,613
========== ==========
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of expenses over revenues and changes in accumulated deficit, for
the period from March 10, 1995 (inception) through December 31, 1995 and the
period from January 1, 1996 through August 28, 1996 was $263,358 and $287,300,
respectively.
Income Taxes
Teg, and thus the System, is a taxable entity for federal and state income
tax purposes. No benefit or deferred tax assets have been recorded for the
System as of December 31, 1995 or August 28, 1996 or for the periods then
ended, as the realization of deferred tax assets associated with net operating
loss carryforwards is dependent upon generating sufficient taxable income prior
to their expiration, and management believes that there is a risk that these
net operating loss carryforwards may expire unused.
Cash and Cash Equivalents
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
F-129
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at August 28,
1996, management does not believe any significant concentration of credit risk
exists.
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. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying statements of assets and liabilities and accumulated
deficit are appropriately valued.
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.
3. Related-Party Transactions
Certain administrative services are performed by Teg on behalf of the
System on the accompanying statements of expenses over revenues and changes in
accumulated deficit. Costs attributable to these support functions are included
in general and administrative expenses. The costs allocated to the System were
approximately $36,000 and $11,000 for the period from March 10, 1995
(inception) through December 31, 1995 and the period from January 1, 1996
through August 28, 1996, respectively. Such allocations do not necessarily
represent actual and/or ongoing expenses of the System.
Teg either advances funds to or borrows funds from the System. Included in
the accompanying statements of assets and liabilities and accumulated deficit
is a net payable to Teg representing amounts due for the initial purchase of
contract rights and net operating activities as funded by Teg.
4. Note Payable
In connection with Teg's acquisition of the NRTC Member Agreement, Teg
entered into a promissory note dated April 1, 1995 payable to Multimedia
Development Corporation in the amount of $1,600,000, of which $800,000 was due
on April 1, 1996 with the balance due on April 1, 1997. The note bears interest
at 11% per annum, payable monthly. This note was repaid subsequent to August
28, 1996 in connection with the Agreement (Note 1) and, therefore, is
classified as current at August 28, 1996 in the accompanying statements of
assets and liabilities and accumulated deficit.
5. Commitments and Contingencies
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 2,945 subscribers) and the requirements of
certain
F-130
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Commitments and Contingencies -- (Continued)
programming agreements between DirecTv and providers of programming, beginning
in the fourth year of operation of the NRTC Member Agreement if the System
fails to obtain such minimum number of subscribers prior to such time. The
System had achieved the minimum subscriber requirement at December 31, 1996 and
is therefore not required to pay such fees.
6. 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 System for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements
of expenses over revenues and changes in accumulated deficit. The NRTC also
sells DSS(R) equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV
Services, the System 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 Communication 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 System 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 System would be required to acquire the services from other sources. There
can be no assurance that the cost to the System to obtain these services
elsewhere would not exceed the amounts currently payable to the NRTC.
The System 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 System
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the System 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 System will be able to
continue to acquire DBS services pursuant to the NRTC Member Agreements.
While management believes that 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 System's existing
contractual and membership relationship with the NRTC, there can be no
assurance that such services will be available to the System from Hughes or the
NRTC, and, if available, there can be no assurance with regard to the financial
and other terms under which the System could acquire the services.
The System'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 System's DBS business.
DirecTv, and therefore the System, is 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 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.
F-131
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (Continued)
6. Reliance on DirecTV and the NRTC and Other Matters -- (Continued)
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.
F-132
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Satellite Television Services, Inc.
Plainfield, Indiana
We have audited the accompanying balance sheets of Satellite Television
Services, Inc. (a wholly-owned subsidiary of Clay County Rural Telephone
Cooperative, Inc.) as of September 30, 1996 and 1997, and the related
statements of operations, shareholder's equity, and cash flows for each of the
three years in the period ended September 30, 1997. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Satellite Television Services, Inc. as of
September 30, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended September 30, 1997 in
conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Indianapolis, Indiana
November 10, 1997
F-133
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
--------------------------------- December 31,
1996 1997 1997
--------------- --------------- ---------------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 457,109 $ 308,903 $ 546,297
Certificates of deposit ........................... 304,325 306,920
Trade accounts receivable, net .................... 403,610 374,495 17,832
Receivable from Digital Television Services, Inc. . 26,381,412
Refundable income taxes ........................... 236,031
Inventory ......................................... 16,278 34,160 27,952
Deferred promotional costs ........................ 60,320 211,825 67,400
----------- ----------- -----------
Total current assets ............................ 937,317 1,469,739 27,347,813
----------- ----------- -----------
PROPERTY AND EQUIPMENT:
Furniture and fixtures ............................ 13,617 16,540 16,540
Computers and equipment ........................... 12,068 20,623 20,623
Vehicles .......................................... 54,148 54,148 54,148
Leasehold improvements ............................ 52,000 52,000
----------- -----------
79,833 143,311 143,311
Less accumulated depreciation ..................... (24,145) (37,056) (40,359)
----------- ----------- -----------
55,688 106,255 102,952
----------- ----------- -----------
OTHER ASSETS:
Contract rights (net of accumulated amortization
of $354,358 and $496,107, respectively).......... 1,041,561 899,812
Deferred taxes .................................... 76,613 108,415 72
NRTC patronage capital ............................ 52,756 90,943 90,943
----------- ----------- -----------
Total other assets .............................. 1,170,930 1,099,170 91,015
----------- ----------- -----------
$ 2,163,935 $ 2,675,164 $27,541,780
=========== =========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities .......... $ 368,812 $ 689,347 $ 896,048
Income taxes payable .............................. 72,819 9,380,949
Unearned revenue .................................. 307,026 511,043
----------- ----------- -----------
Total current liabilities ....................... 748,657 1,200,390 10,276,997
----------- ----------- -----------
SHAREHOLDER'S EQUITY:
Common stock -- without par value; 1,000 shares
authorized, issued and outstanding .............. 1,480,056 1,280,056 1,280,056
Retained earnings (deficit) ....................... (64,778) 194,718 15,984,727
----------- ----------- -----------
Total shareholder's equity ...................... 1,415,278 1,474,774 17,264,783
----------- ----------- -----------
$ 2,163,935 $ 2,675,164 $27,541,780
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-134
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------
1995 1996 1997
-------------- ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ................................... $ (36,734) $ 180,517 $ 259,496
Adjustments to reconcile net income (loss) to net
cash provided by
operating activities:
Provision for deferred tax ......................... (23,554) 29,008 (31,802)
Depreciation and amortization ...................... 150,660 154,956 155,835
NRTC patronage capital declared .................... (17,744) (47,515) (54,553)
Gain on sale of assets .............................
Changes in operating assets and liabilities:
Trade accounts receivable, net ................... (258,374) (119,989) 29,115
Inventory ........................................ (125,683) 170,744 (17,882)
Deferred promotional costs ....................... (60,320) (151,505)
Accounts payable and accrued liabilities ......... 247,935 47,062 320,535
Income taxes payable or receivable ............... 16,343 55,264 (308,850)
Unearned revenue ................................. 107,294 177,157 204,017
---------- ---------- ----------
Net cash provided by operating activities . 60,143 586,884 404,406
---------- ---------- ----------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of certificates of deposit ................ (304,325)
Purchase of property and equipment ................. (23,533) (23,717) (64,653)
Receipt of patronage capital ....................... 3,000 9,503 16,366
Refund of contract rights .......................... 21,527
----------
Net cash provided by (used in) investing
activities ....................................... (20,533) 7,313 (352,612)
---------- ---------- ----------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings under line of credit ................ 156,495 (298,901)
Note repayments to related party ................... (75,000) (91,444)
Return of capital .................................. (21,527) (200,000)
---------- ----------
Net cash provided by (used in) financing
activities ....................................... 81,495 (411,872) (200,000)
---------- ---------- ----------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... 121,105 182,325 (148,206)
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD ................................ 153,679 274,784 457,109
---------- ---------- ----------
END OF PERIOD ...................................... $ 274,784 $ 457,109 $ 308,903
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for income taxes ......................... $ 4,350 $ 63,750 $ 588,020
========== ========== ==========
Cash paid for interest ............................. $ 17,820 $ 42,282 $ --
========== ========== ==========
NONCASH INVESTING AND OPERATING
ACTIVITIES:
Receivable for sale of Member Agreements ........... $ -- $ -- $ --
========== ========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
--------------------------------
December 31, December 31,
1996 1997
-------------- ----------------
(unaudited) (unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) ................................... $ 60,674 $ 15,790,009
Adjustments to reconcile net income (loss) to net
cash provided by
operating activities:
Provision for deferred tax ......................... (7,887) 108,343
Depreciation and amortization ...................... 38,740 38,739
NRTC patronage capital declared ....................
Gain on sale of assets ............................. (25,613,732)
Changes in operating assets and liabilities:
Trade accounts receivable, net ................... (134,876) (81,455)
Inventory ........................................ (29,118) 6,208
Deferred promotional costs ....................... (244,680) 144,425
Accounts payable and accrued liabilities ......... (60,706) 348,259
Income taxes payable or receivable ............... (16,814) 9,616,980
Unearned revenue ................................. 409,831 (117,787)
----------- --------------
Net cash provided by operating activities . 15,164 239,989
----------- --------------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of certificates of deposit ................ (2,595)
Purchase of property and equipment ................. (1,108)
Receipt of patronage capital .......................
Refund of contract rights ..........................
Net cash provided by (used in) investing
activities ....................................... (1,108) (2,595)
----------- --------------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Net borrowings under line of credit ................
Note repayments to related party ...................
Return of capital ..................................
Net cash provided by (used in) financing
activities ....................................... -- --
----------- --------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... 14,056 237,394
CASH AND CASH EQUIVALENTS:
BEGINNING OF PERIOD ................................ 457,109 308,903
----------- --------------
END OF PERIOD ...................................... $ 471,165 $ 546,297
=========== ==============
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for income taxes ......................... $ 75,000 $ --
=========== ==============
Cash paid for interest ............................. $ -- $ --
=========== ==============
NONCASH INVESTING AND OPERATING
ACTIVITIES:
Receivable for sale of Member Agreements ........... $ -- $ 26,381,412
=========== ==============
</TABLE>
See notes to financial statements.
F-135
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------
Years Ended September 30,
---------------------------------------------- December 31, December 31,
1995 1996 1997 1996 1997
-------------- -------------- -------------- -------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
REVENUE:
Programming revenue ........................ $ 1,136,436 $ 2,697,404 $ 4,677,992 $1,053,255 $ 1,593,597
Equipment and installation revenue ......... 499,605 337,073 262,764 107,471 127,957
----------- ----------- ----------- ---------- ------------
Total revenue .............................. 1,636,041 3,034,477 4,940,756 1,160,726 1,721,554
----------- ----------- ----------- ---------- ------------
COST OF REVENUE:
Programming expense ........................ 527,629 1,296,294 2,161,935 550,207 777,512
Cost of equipment and installation ......... 457,663 349,272 476,320 119,600 237,384
Service fees ............................... 172,737 476,208 903,211 167,949 207,624
----------- ----------- ----------- ---------- ------------
Total cost of revenue ..................... 1,158,029 2,121,774 3,541,466 837,756 1,222,520
----------- ----------- ----------- ---------- ------------
GROSS PROFIT ................................ 478,012 912,703 1,399,290 322,970 499,034
----------- ----------- ----------- ---------- ------------
OPERATING EXPENSES:
Promotional ................................ 330,270 44,027 115,768
General and administrative ................. 388,969 498,019 566,411 146,855 527,255
Depreciation and amortization .............. 150,660 154,956 155,835 38,740 38,739
----------- ----------- ----------- ---------- ------------
Total operating expenses .................. 539,629 652,975 1,052,516 229,622 681,762
----------- ----------- ----------- ---------- ------------
OPERATING INCOME (LOSS) ..................... (61,617) 259,728 346,774 93,348 (182,728)
----------- ----------- ----------- ---------- ------------
OTHER INCOME (EXPENSE):
Interest expense ........................... (25,141) (27,593)
Other income ............................... 26,846 62,024 71,347 3,556 6,752
Gain on sale of assets ..................... 25,613,732
------------
1,705 34,431 71,347 3,556 25,620,484
----------- ----------- ----------- ---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES . (59,912) 294,159 418,121 96,904 25,437,756
INCOME TAXES ................................ 23,178 (113,642) (158,625) (36,230) (9,647,747)
----------- ----------- ----------- ---------- ------------
NET INCOME (LOSS) ........................... $ (36,734) $ 180,517 $ 259,496 $ 60,674 $ 15,790,009
=========== =========== =========== ========== ============
</TABLE>
See notes to financial statements.
F-136
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
Common Retained Total
-------------- --------------- ---------------
<S> <C> <C> <C>
October 1, 1994 ................................ $ (208,561) $ (208,561)
Conversion of debt to equity (Note 1) .......... $ 1,501,583 1,501,583
Net loss ....................................... (36,734) (36,734)
----------- -----------
September 30, 1995 ............................. 1,501,583 (245,295) 1,256,288
Net income ..................................... 180,517 180,517
Return of capital .............................. (21,527) (21,527)
----------- -----------
September 30, 1996 ............................. 1,480,056 (64,778) 1,415,278
Net income ..................................... 259,496 259,496
Return of capital .............................. (200,000) (200,000)
----------- -----------
September 30, 1997 ............................. 1,280,056 194,718 1,474,774
----------- ----------- -----------
Net income (unaudited) ......................... 15,790,009 15,790,009
----------- -----------
December 31, 1997 (unaudited) .................. $ 1,280,056 $15,984,727 $17,264,783
=========== =========== ===========
</TABLE>
See notes to financial statements.
F-137
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and Summary of Significant Accounting Policies
Satellite Television Services, Inc. ("STS" or the "Company") was
incorporated under the laws of the State of Indiana in February 1993, and is a
wholly-owned subsidiary of Clay County Rural Telephone Cooperative, Inc.
("CCRTC"). STS was formed to acquire and operate the exclusive rights to
distribute direct broadcast satellite ("DBS") services ("DIRECTV Services")
offered by DirecTv, Inc. ("DirecTv") in certain rural counties of Indiana.
Effective October 1, 1994, CCRTC converted to equity certain of its outstanding
notes receivable, including accrued interest, from STS.
STS obtained the rights to distribute DIRECTV Services in its territories
pursuant to agreements (the "NRTC Member Agreements") with the National Rural
Telecommunications Cooperative, Inc. (the "NRTC"). Under the provisions of the
NRTC Member Agreements the Company has the exclusive right to provide DIRECTV
Services within its territories in the State of Indiana.
In October 1997, CCRTC entered into an asset purchase agreement (the
"Agreement") with Digital Television Services of Indiana, LLC ("DTS Indiana"),
a subsidiary of DTS Management, LLC ("DTS"). DTS is a subsidiary of Digital
Television Services, LLC. The agreement provides that DTS Indiana will purchase
STS's NRTC Member Agreements and other assets used in connection with STS's
business, as defined in the Agreement, and will assume certain liabilities of
STS, as defined in the Agreement. The purchase was completed in January 1998
with an effective closing date of December 31, 1997 and a preliminary purchase
price of approximately $26.4 million subject to adjustment pursuant to the
terms of the Agreement. Accordingly, STS recorded a receivable from DTS of
approximately $26.4 million at December 31, 1997.
2. Summary of Significant Accounting Policies
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.
Revenue recognition -- The Company earns programming revenue by providing
DIRECTV Services to its subscribers. Programming revenue includes DIRECTV
Services purchased by subscribers in monthly, quarterly, 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, quarterly, annual, or seasonal basis,
including premium programming, is billed in advance and is recorded as unearned
revenue. All programming revenue is recognized as service is provided.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales are recognized upon delivery of the equipment to the customer.
Installation revenue is recognized when the equipment is installed.
Cost of revenue -- Cost of revenue 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 (Note 5)); monthly subscriber maintenance fees charged by
DirecTv and the NRTC, such as security fees, ground service fees, system
authorization fees, and fees for subscriber billings; costs of equipment and
installation; and certain subscriber operating costs. Cost of equipment and
installation represents the actual cost of the equipment to the Company plus
the costs to install the equipment.
Inventories -- The Company maintains inventories consisting of DSS(R)
equipment and related accessories. Inventory is valued at the lower of cost or
market, generally on an average cost basis.
Deferred promotional costs -- Deferred promotional costs consist of costs
related to a subscriber rebate program sponsored by DirecTv. Under the program,
new subscribers who agree to prepay for one year of programming service receive
a credit which can be applied toward the one year's programming subscription.
F-138
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
Subscribers under this program may choose to net the credit on their first
bill or pay the full amount and receive a refund from the Company for their
credit. In each case the Company defers the cost of this credit and amortizes
it over the one-year contract period. In addition, as a part of this program,
the Company receives $1 per month for up to five years from the NRTC for each
subscriber whose account remains active.
Property and equipment -- Property and equipment are stated at cost. Major
property additions, replacements, and betterments are capitalized, while
maintenance and repairs which do not extend the useful lives of these assets
are expensed currently. Depreciation for property and equipment is provided
using the straight-line method over the estimated useful lives (five years) of
the respective assets. 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 earnings. Depreciation expense of approximately
$5,000, $13,000 and $14,000 was recorded in fiscal 1995, 1996, and 1997,
respectively.
Contract rights -- Contract rights represent the cost of acquiring rights
to distribute DIRECTV Services. Contract rights are being amortized over ten
years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization expense
totalled approximately $142,000 during 1995, 1996, and 1997.
NRTC patronage capital -- The Company is a member of the NRTC. NRTC
patronage capital represents the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of the excess of its
revenues over expenses each year. Of the total patronage dividend, 15% to 30%
is paid in cash and the remaining 70% to 85% is distributed in the form of
noncash patronage capital, which may be redeemed in cash, but only at the
discretion of the NRTC. The total allocation is recorded as other income when
allocated.
Cash and cash equivalents -- The Company considers all highly liquid
investments purchased with an initial maturity of three months or less to be
cash equivalents.
Certificates of deposit -- The Company has three $100,000 certificates of
deposit at September 30, 1997 which are due January 25, April 25, and July 11,
1998 and bear interest at 4.76%, 5.5%, and 5.2%, respectively.
Income taxes -- Deferred income tax assets and liabilities are computed
based on differences between the financial statement and income tax bases of
assets and liabilities using enacted income tax rates. Deferred income tax
expense or benefit is based on the change in deferred tax assets and
liabilities from period to period, subject to an ongoing assessment of
realization of deferred tax assets.
Concentration of credit risk -- Concentration of credit risk with respect
to trade accounts receivable is due to the geographic proximity of the
Company's subscribers.
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. When events or changes in circumstances occur related to
long-lived assets, management estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. Having found no
instances whereby the sum of expected future cash flows (undiscounted and
without interest charges) was less than the carrying amount of the asset and
thus requiring the recognition of an impairment loss, management believes that
the long-lived assets in the accompanying balance sheets are appropriately
valued.
Commitments and contingencies -- As part of the NRTC Member Agreements,
the Company is required to pay certain programming fees based on a minimum
number of subscribers (such minimum number of subscribers being equal to up to
5% of the households in the Company's Rural DirecTv Market, or up to 5,885
subscribers) and the requirements of certain programming agreements between
DirecTv and providers of programming,
F-139
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
beginning in the fourth year of operation of the NRTC Member Agreement if the
Company fails to obtain such minimum number of subscribers prior to such time.
The Company has achieved the minimum subscriber requirement as of September 30,
1997 and is therefore not required to pay such fees.
3. Income Taxes
The tax provision for the year ended September 30 consists of the
following:
<TABLE>
<CAPTION>
1995 1996 1997
------------ ---------- -----------
<S> <C> <C> <C>
Current:
Federal .................................... $ 75,096 $ 166,224
State ...................................... $ 376 9,538 24,203
--------- -------- ---------
Total current provision ...................... 376 84,634 190,427
Deferred ..................................... (23,554) 29,008 (31,802)
--------- -------- ---------
Total income tax provision (benefit) ......... $ (23,178) $113,642 $ 158,625
========= ======== =========
</TABLE>
The difference between the income tax provision computed at the federal
statutory rate and the reported tax provision is comprised primarily of state
income taxes.
Deferred taxes at September 30 are comprised of the following:
1996 1997
---------- -----------
Deferred tax assets:
Service rights amortization .............. $ 73,707 $107,726
Other .................................... 5,145 2,572
-------- --------
Total deferred tax assets .................. 78,852 110,298
Deferred tax liabilities ......... (2,239) (1,883)
-------- --------
Net deferred tax assets .......... $ 76,613 $108,415
======== ========
4. 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. The NRTC bills the Company
for these services on a monthly basis. These fees are recorded as service fees
in the accompanying statements 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 Communication 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
F-140
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
4. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
remittance processing services. If the NRTC is unable to provide these services
for whatever reasons, 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.
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, is 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.
F-141
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Ocmulgee Communications, Inc.:
We have audited the accompanying balance sheets of OCMULGEE COMMUNICATIONS,
INC. (a Georgia corporation) as of December 31, 1996 and 1997 and the related
statements of operations, changes in stockholders' deficit, and cash flows for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ocmulgee Communications, Inc.
as of December 31, 1996 and 1997 and the results of its operations and its cash
flows for the years then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 10, 1998
F-142
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
ASSETS
<TABLE>
<CAPTION>
1996 1997
------------- --------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .............................................. $ 110,729 $ 378,998
Trade accounts receivable, net of allowance for doubtful accounts of
$9,504 and $6,347 at December 31, 1996 and 1997, respectively......... 179,779 194,330
Due from related parties ............................................... 2,026 0
Inventory .............................................................. 19,178 5,408
---------- ----------
Total current assets .............................................. 311,712 578,736
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land ................................................................... 38,450 38,450
Building and improvements .............................................. 128,787 128,787
Equipment .............................................................. 51,766 61,651
Furniture and fixtures ................................................. 11,413 11,414
---------- ----------
230,416 240,302
Less accumulated depreciation .......................................... (43,487) (62,468)
---------- ----------
186,929 177,834
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS, net (Note 3) .......................... 474,164 440,789
---------- ----------
$ 972,805 $1,197,359
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt ................................... $ 536,551 $ 753,433
Notes payable to related parties (Note 5) .............................. 318,003 314,649
Accounts payable ....................................................... 8,649 17,089
Accrued liabilities .................................................... 193,870 180,069
Unearned revenue ....................................................... 192,463 118,173
Advance payments ....................................................... 21,442 22,332
Deferred sale proceeds (Note 1) ........................................ 0 250,000
---------- ----------
Total current liabilities ......................................... 1,270,978 1,655,745
---------- ----------
LONG-TERM DEBT, less current maturities (Note 6) ........................ 308,542 960
---------- ----------
OTHER LIABILITIES ....................................................... 140,448 151,161
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 4 and 9)
STOCKHOLDERS' DEFICIT:
Common stock, no par value, 10,000 shares authorized, 10,000 shares
issued and outstanding at December 31, 1996 and 1997 ................. 0 0
Additional paid-in capital ............................................. 124,787 111,840
Accumulated deficit .................................................... (871,950) (722,347)
---------- ----------
Total stockholders' deficit ....................................... (747,163) (610,507)
---------- ----------
$ 972,805 $1,197,359
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-143
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
------------- -------------
<S> <C> <C>
REVENUE:
Programming revenue .......................... $1,370,555 $2,014,594
Equipment and installation revenue ........... 250,191 291,440
---------- ----------
Total revenue ........................... 1,620,746 2,306,034
---------- ----------
COST OF REVENUE:
Programming expense and service fees ......... 841,967 1,040,914
Cost of equipment and installation ........... 186,601 400,876
Royalties .................................... 162,461 166,262
---------- ----------
Total cost of revenue ................... 1,191,029 1,608,052
---------- ----------
GROSS PROFIT .................................. 429,717 697,982
---------- ----------
OPERATING EXPENSES:
Sales and marketing .......................... 126,164 85,085
General and administrative ................... 271,480 309,643
Depreciation and amortization ................ 67,768 69,560
---------- ----------
Total operating expenses ................ 465,412 464,288
---------- ----------
OPERATING (LOSS) INCOME ....................... (35,695) 233,694
---------- ----------
OTHER EXPENSE (INCOME):
Interest expense, net ........................ 103,488 101,666
Other income ................................. (59,899) (17,575)
---------- ----------
43,589 84,091
---------- ----------
NET (LOSS) INCOME ............................. $ (79,284) $ 149,603
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-144
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
Additional
Common Stock
------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
-------- -------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1995 ......... 10,000 $0 $ 124,787 $ (792,666) $ (667,879)
Net loss ........................ 0 0 0 (79,284) (79,284)
------ -- --------- ---------- ----------
BALANCE, December 31, 1996 ......... 10,000 0 124,787 (871,950) (747,163)
Net income ...................... 0 0 0 149,603 149,603
Capital withdrawal .............. 0 0 (12,947) 0 (12,947)
------ -- --------- ---------- ----------
BALANCE, December 31, 1997 ......... 10,000 $0 $ 111,840 $ (722,347) $ (610,507)
====== == ========= ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-145
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1997
<TABLE>
<CAPTION>
1996 1997
-------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income ................................................ $ (79,284) $ 149,603
---------- ----------
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Loss on sale of fixed assets ................................... 547 0
Depreciation and amortization .................................. 67,768 69,560
Amortization of deferred credit ................................ (6,491) (6,491)
Changes in operating assets and liabilities:
Accounts receivable, net ...................................... (51,751) (12,525)
Inventory ..................................................... 39,513 13,770
Accounts payable .............................................. (43,895) 8,440
Accrued liabilities ........................................... 34,874 (13,801)
Unearned revenue .............................................. 123,025 (74,290)
Advance payments .............................................. 8,825 890
---------- ----------
Total adjustments ............................................ 172,415 (14,447)
---------- ----------
Net cash provided by operating activities .................... 93,131 135,156
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment .............................. 0 (9,886)
Proceeds from sale of property and equipment ..................... 6,699 0
Proceeds received from potential acquiror ........................ 0 250,000
---------- ----------
Net cash provided by investing activities ................... 6,699 240,114
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable .......................... 35,657 397,841
Repayments of notes payable ...................................... (157,523) (491,895)
Capital withdrawal ............................................... 0 (12,947)
---------- ----------
Net cash used in financing activities ....................... (121,866) (107,001)
---------- ----------
NET CHANGE IN CASH AND CASH EQUIVALENTS ........................... (22,036) 268,269
CASH AND CASH EQUIVALENTS, beginning of year ...................... 132,765 110,729
---------- ----------
CASH AND CASH EQUIVALENTS, end of year ............................ $ 110,729 $ 378,998
========== ==========
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .................................. $ 48,919 $ 17,204
========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ........................................... $ 106,343 $ 104,365
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-146
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1997
1. ORGANIZATION AND NATURE OF BUSINESS
Ocmulgee Communications, Inc. (the "Company") is an S corporation
organized in Georgia. The Company was formed on February 5, 1993 to acquire and
operate the rights to distribute direct broadcast satellite ("DBS") services
("DIRECTV Services") offered by DirecTv, Inc. ("DirecTv").
The Company obtained the rights to distribute DIRECTV Services in 11 rural
markets in Georgia pursuant to agreements (the "NRTC Member Agreements") with
the National Rural Telecommunications Cooperative ("NRTC") in exchange for
approximately $500,000 (Note 3). The Company also obtained the rights to
distribute DIRECTV Services in 16 additional rural markets in Georgia and
Florida pursuant to the management agreements (the "Management Agreements")
with various investors (the "Sub-Investors") who had purchased the rights from
the NRTC (Note 10).
In January 1998, the Company entered into an asset purchase agreement (the
"Agreement") with Digital Television Services of Georgia, LLC ("DTS"). The
Agreement provides that DTS will purchase the Company's NRTC Member Agreements
and other assets used in connection with the Company's business, as defined in
the Agreement, and will assume certain liabilities of the Company, as defined
in the Agreement. The purchase price is subject to an adjustment based on the
number of subscribers and working capital at the date of closing of the
Agreement (Note 11).
In October 1997, prior to the consummation of the Agreement, the Company
received $250,000 from DTS as a good faith binder to proceed with the
negotiations. Because the retention of the binder by the Company is contingent
on good faith negotiations and transaction approvals, among other items, the
amount has been presented as deferred sale proceeds in the accompanying balance
sheet at December 31, 1997.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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.
Revenue Recognition
The Company earns programming revenue by providing DIRECTV Services to its
subscribers. Programming revenue includes DIRECTV Services purchased by
subscribers in monthly, quarterly, 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, including premium programming, available on a pay-per-view basis.
Programming purchased on a monthly, quarterly, annual, or seasonal basis is
billed in advance and is recorded as unearned revenue. All programming revenue
is recognized when earned.
Equipment and installation revenue primarily consists of the sale of
DSS(R) equipment and accessories and related installation charges. Equipment
sales revenue represents the amounts paid by customers to the Company and is
recognized upon delivery of the equipment to the customer. Installation revenue
is recognized when the equipment is installed and represents the amounts paid
by the customers to the Company for such services.
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
F-147
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
the NRTC [Note 9]); 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 sold; and certain subscriber
operating costs. These costs also include amounts paid to the Sub-Investors in
accordance with the Management Agreements (Note 10). Cost of equipment and
installation represents the actual cost of the equipment to the Company plus
the costs to install the equipment.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
Inventories
The Company maintains inventories consisting of DSS(R) equipment and
related accessories. Inventory is valued at the lower of cost or market,
generally on a specific identification basis.
Property and Equipment
Property and equipment are stated at cost. Major property additions,
replacements, and betterments are capitalized, while maintenance and repairs
which do not extend the useful lives of these assets are expensed currently.
Depreciation for property and equipment and leased equipment is provided using
the straight-line method over the estimated useful lives of the respective
assets ranging from 7 to 31 years for buildings and improvements, 5 to 7 years
for equipment, and 7 years for furniture and fixtures. Depreciation expense for
the years ended December 31, 1996 and 1997 was $17,189 and $18,981,
respectively. 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 earnings.
Accrued Liabilities
Accrued liabilities consist of the following at December 31, 1996 and
1997:
1996 1997
----------- -----------
Accrued programming expense .......... $149,258 $ 87,454
Other ................................ 44,612 92,615
-------- --------
$193,870 $180,069
======== ========
Income Taxes
The Company files its tax return as an S corporation for federal and state
income tax purposes. All taxable income or loss of an S corporation is
allocable to the stockholders of the Company in proportion to their respective
ownership interests and is included in their individual income tax returns.
Accordingly, no provision for income taxes is included in the accompanying
financial statements.
Concentration of Credit Risk
Concentration of credit risk with respect to accounts receivable is
limited due to the large number of subscribers. As a result, at December 31,
1997, management does not believe any significant concentration of credit risk
exists.
F-148
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued)
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. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying balance sheets are appropriately valued.
3. CONTRACT RIGHTS AND OTHER ASSETS, NET
Contract rights and other assets consist of the following at December 31,
1996 and 1997:
1996 1997
------------ ------------
Contract rights ................... $ 505,785 $ 505,785
Accumulated amortization .......... (126,446) (177,025)
---------- ----------
379,939 328,760
NRTC patronage capital ............ 94,825 112,029
---------- ----------
$ 474,164 $ 440,789
========== ==========
NRTC Patronage Capital
The Company is an affiliate of the NRTC. While affiliates have no vote,
they do have an 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, is recognized as income when received, and is netted against
programming expense in the accompanying statements of operations.
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. The Company
includes noncash patronage capital as other assets, with an offsetting deferred
patronage income amount included in other liabilities in the accompanying
balance sheets. The patronage capital will be recognized as income when cash
distributions are declared by the NRTC.
Contract Rights
Contract rights represent the Company's cost of acquiring the exclusive
rights to distribute DIRECTV Services. Contract rights are being amortized over
ten years, the estimated remaining useful life of the satellites operated by
DirecTv which provide service under the related contracts. Amortization
expense, included in depreciation and amortization in the accompanying
statements of operations, for both the years ended December 31, 1996 and 1997
was $50,579.
4. COMMITMENTS AND CONTINGENCIES
Minimum Subscribers
As part of the NRTC Member Agreements, the Company is required to pay
certain fees based on a minimum number of subscribers (such minimum number of
subscribers being equal to up to 5% of the households
F-149
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1997
4. COMMITMENTS AND CONTINGENCIES -- (Continued)
of the Company's Rural DirecTv Market, or up to 2,009 subscribers) beginning in
the fourth year of operation of the NRTC Member Agreement if the Company fails
to obtain such minimum number of subscribers prior to such time. The Company
has achieved the minimum subscriber requirement at December 31, 1997 and is
therefore not required to pay such fee.
Litigation
The Company is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Company's
financial position or results of operations.
5. NOTES PAYABLE TO RELATED PARTIES
At December 31, 1996 and 1997, the Company had outstanding notes payable
to certain stockholders and related parties. The outstanding notes payable to
certain stockholders and related parties are due on demand and are subordinate
to amounts outstanding under the notes payable due to banks (Note 6). The notes
payable to certain stockholders and related parties outstanding as of December
31, 1996 and 1997 are as follows:
1996 1997
----------- -----------
Note payable to a corporation related to certain
stockholders, principal due December 1, 1998,
bearing interest at the rate which a certain bank
pays on certain certificates of deposit plus 1%,
secured by the assets of the Company ............. $250,000 $250,000
Unsecured notes payable to the majority stockholder,
due on demand, payable in monthly installments
through December 1, 2006, bearing interest at
rates ranging from 7% to 7.6% .................... 51,300 49,946
Unsecured note payable to a minority stockholder,
due on demand, interest payable monthly at 8.5% . 16,703 14,703
-------- --------
$318,003 $314,649
======== ========
F-150
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1997
6. DEBT
The Company's long-term debt consists of the following as of December 31,
1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
----------- ----------
<S> <C> <C>
Note payable to a bank, payable in monthly installments of $4,800,
with final principal of $297,000 due February 10, 1998, secured by
all shares of the Company's common stock and certain personal
property of the stockholders and related parties, guaranteed by cer-
tain stockholders and a related-party corporation, bearing interest at
8.51% ................................................................. $430,621 $ 0
Note payable to a bank, payable in monthly installments of $10,200,
with final principal of $776,000 due April 10, 1998, secured by cer-
tain fixed assets of the Company, guaranteed by certain stockholders,
bearing interest at 8.51% ............................................. 0 748,143
Notes payable to a bank, principal due May 14, 1997, secured by
accounts receivable of the Company and certain personal property of
the stockholders, bearing interest at prime plus 2% ................... 400,044 0
Notes payable to a bank, payable in monthly principal and interest
installments of $750 through April 11, 1998 and August 11, 1999,
secured by certain fixed assets, bearing interest at rates ranging from
7.75% to 9% ........................................................... 14,428 6,250
-------- --------
845,093 754,393
Less current maturities of long-term debt .............................. 536,551 753,433
-------- --------
$308,542 $ 960
======== ========
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1997 are as
follows:
1998 ........... $753,433
1999 ........... 960
--------
$754,393
========
7. STOCKHOLDERS' AGREEMENT
On November 2, 1993, the stockholders executed a stockholders' agreement
(the "Stockholder Agreement"). Unless terminated pursuant to the terms of the
agreement, the Stockholder Agreement terminates on the death of the last
survivor of the stockholders who are parties to the agreement. The Stockholder
Agreement places certain restrictions on the transfer of the Company's common
stock and provides an option for existing stockholders to acquire the shares
proposed to be transferred by the stockholder.
8. BENEFIT PLAN
The Company's employees participate in a defined contribution retirement
plan with certain employees of the majority stockholder. The Company
contributes a discretionary amount to the plan. The contribution is allocated
in the proportion that each participant's compensation bears to the total
compensation of all participants. Employee contributions to the plan are not
permitted. The Plan was implemented during 1997, and total contributions to the
Plan were approximately $0 and $3,973 for the years ended December 31, 1996 and
1997, respectively.
F-151
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1997
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 statements
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 Communication 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 that 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.
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, is 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 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.
F-152
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
DECEMBER 31, 1996 AND 1997
10. MANAGEMENT AGREEMENTS
In 1993, the Company entered into the Management Agreements with the
Sub-Investors. The length of the Management Agreements was for a period of one
year, which was extended for additional periods as mutually agreed to by the
parties. The Company manages the operation of the Sub-Investors' markets
pursuant to the Management Agreements. The Company is the authorized dealer of
the NRTC with respect to the Sub-Investors' markets. Accordingly, all revenues
generated and expenses incurred in the Company's management and operation of
the Sub-Investors' markets are included in the accompanying statements of
operations. Pursuant to the Management Agreements, the Sub-Investors are
entitled to defined amounts of revenues generated in their respective markets.
Amounts paid to the Sub-Investors are reflected as royalties in the
accompanying statements of operations.
Pursuant to the Management Agreements, the Sub-Investors contributed
amounts equal to 10% of the cost (the "Deferred Credit") of their NRTC license
to the Company. The Deferred Credit was paid by the Sub-Investors in order to
offset the Company's costs in managing and operating the markets owned by the
Sub-Investors. The Deferred Credit is being amortized over ten years, the
estimated remaining useful life of the satellites operated by DirecTv which
provide service under the related contracts. Amortization of the Deferred
Credit, included as an offset to general and administrative expenses in the
accompanying statements of operations, was $6,491 for both the years ended
December 31, 1996 and 1997. The unamortized portion of the Deferred Credit
included in other liabilities in the accompanying balance sheets at December
31, 1996 and 1997 was $45,623 and $39,132, respectively.
The Sub-Investors retained the rights to the 16 rural markets in Georgia
and Florida. Therefore, the contract rights for the markets have not been
recorded in the accompanying balance sheets. The Company has the right of first
refusal to purchase the license rights in the event the Sub-Investors decide to
sell their rights in the markets. The Sub-Investors also retained the right to
apply as a licensee directly to the NRTC at any time during the term of the
Management Agreement and upon such acceptance and approval by the NRTC as a
direct licensee, the Management Agreement may be canceled upon 30 days notice.
Any remaining unamortized portion of the Deferred Credit would be recorded as
income, as the Company is not required to remit these amounts to the
Sub-Investors.
11. SUBSEQUENT EVENT
On January 8, 1998, the Company entered into the Agreement with DTS. The
Agreement provides that DTS will purchase the Company's NRTC Member Agreements
and certain other assets used in connection with the Company's business, as
defined in the Agreement, and will assume certain liabilities of the Company,
as defined in the Agreement. The purchase price of $9,500,000 is subject to an
adjustment based on the number of subscribers and working capital at the date
of closing of the Agreement.
The Agreement is contingent upon obtaining consents from Hughes and the
NRTC and is contingent upon the negotiation of a definitive agreement.
In connection with the Company's Agreement with DTS, the Company has
entered into agreements with the Sub-Investors to transfer their rights in the
16 rural markets in Georgia and Florida to DTS in exchange for approximately
$4,001,000 of the $9,500,000 aggregate purchase price.
The transactions contemplated by the Agreement and the agreements with the
Sub-Investors were consummated effective January 30, 1998.
F-153
<PAGE>
PEGASUS COMMUNICATIONS CORPORATION
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation
Pro forma consolidated statements of operations and other data for the
year ended December 31, 1997 give effect to (i) the Completed DBS Acquisitions,
(ii) the Pending DBS Acquisitions, (iii) the sale of the New England cable
systems, and (iv) the DTS Acquisition, all as if such events had occurred at
January 1, 1997.
The pro forma condensed consolidated balance sheet as of December 31,
1997, gives effect to (i) the Completed DBS Acquisitions, (ii) the Pending DBS
Acquisitions, all of which are anticipated to occur in the first half of 1998,
(iii) the sale of the New England cable systems which is anticipated to occur
in the third quarter of 1998 and (iv) the DTS Acquisition, 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 Balance Sheet and the Notes to Pro Forma Consolidated
Statements of Operations, as well as the financial statements and notes thereto
of the Company and 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 Acqusitions or the DTS Acquisition will be consummated.
F-154
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Balance Sheet
December 31, 1997
<TABLE>
<CAPTION>
DBS Acquisitions
---------------------------- Cable
Actual Completed(a) Pending(b) Sale(c) Subtotal
(dollars in thousands) ------------ -------------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ......... $ 44,049 ($ 1,850) ($ 53,008) $ 28,000 $ 17,191
Restricted cash ................... 1,220 1,220
Accounts receivable, net .......... 13,820 13,820
Inventory ......................... 975 975
Prepaid expenses and other
current assets ................... 5,450 5,450
Restricted cash, net ..............
Property and equipment, net ....... 27,687 (3,802) 23,885
Intangibles, net .................. 284,774 1,850 64,125 (2,047) 348,702
Other assets ...................... 2,887 2,887
--------- ---------
Total assets .................... $ 380,862 $ 11,117 $ 22,151 $ 414,130
========= ======== ======== =========
LIABILITIES AND TOTAL
EQUITY
Current liabilities ............... $ 17,214 $ 17,214
Accrued interest .................. 8,177 8,177
Current portion of long-term
debt ............................. 6,357 6,357
Current portion of program
rights payable ................... 1,419 1,419
Long-term debt, net ............... 5,016 $ 10,263 15,279
Pegasus Senior Notes .............. 115,000 115,000
Senior Subordinated Notes 81,982 81,982
DTS Credit Facility ...............
Program rights payable ............ 1,416 1,416
Other long term liabilities ....... 2,653 2,653
Pegasus Preferred Stock ........... 111,264 111,264
DTS Preferred Stock ...............
Minority Interest ................. 3,000 3,000
Pegasus Class A Common Stock 57 1 58
Pegasus Class B Common Stock 46 46
DTS Common Stock ..................
Additional paid in capital ........ 64,035 853 64,888
Retained earnings(deficit) ........ (36,774) $ 22,151 (14,623)
--------- -------- ---------
Total liabilities and equity..... $ 380,862 $ 11,117 $ 22,151 $ 414,130
========= ======== ======== =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DTS
--------------------------------------------
Completed
Actual Acquisition(d) Subtotal Adjustments(e) Pro Forma
(dollars in thousands) ------------ ---------------- ------------ ---------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Cash and cash equivalents ......... $ 39,113 $ 379 $ 39,492 ($ 5,300) $ 51,383
Restricted cash ................... 19,006 19,006 20,226
Accounts receivable, net .......... 4,630 4,630 18,450
Inventory ......................... 2,230 2,230 3,205
Prepaid expenses and other
current assets ................... 637 200 837 6,287
Restricted cash, net .............. 18,021 18,021 18,021
Property and equipment, net ....... 2,920 178 3,098 26,983
Intangibles, net .................. 169,772 9,996 179,768 $109,012 641,482
Other assets ...................... 1,333 1,333 17,250 17,470
-------- -------- -------- ---------
Total assets .................... $257,662 $10,753 $268,415 $120,962 $ 803,507
======== ======= ======== ======== =========
LIABILITIES AND TOTAL
EQUITY
Current liabilities ............... $ 40,139 $ 1,253 $ 41,392 $ 58,606
Accrued interest .................. 8,247 8,247 16,424
Current portion of long-term
debt ............................. 14,950 14,950 21,307
Current portion of program
rights payable ................... 1,419
Long-term debt, net ............... 9,211 9,211 24,490
Pegasus Senior Notes .............. 115,000
Senior Subordinated Notes.......... 152,931 152,931 234,913
DTS Credit Facility ............... 15,500 9,500 25,000 25,000
Program rights payable ............ 1,416
Other long term liabilities ....... 47 47 $31,288 33,988
Pegasus Preferred Stock ........... 111,264
DTS Preferred Stock ............... 14 14 (14)
Minority Interest ................. 3,000
Pegasus Class A Common Stock 55 113
Pegasus Class B Common Stock 46
DTS Common Stock .................. 21 21 (21)
Additional paid in capital ........ 25,826 25,826 80,430 171,144
Retained earnings(deficit) ........ (9,224) (9,224) 9,224 (14,623)
-------- -------- -------- ---------
Total liabilities and equity..... $257,662 $10,753 $268,415 $120,962 $ 803,507
======== ======= ======== ======== =========
</TABLE>
F-155
<PAGE>
Notes to Pro Forma Consolidated Balance Sheet (dollars in thousands)
(a) To record one Completed DBS Acquisition which occurred subsequent to
December 31, 1997. Intangible assets purchased consist entirely of DBS
rights, which are being amortized over a 10-year period,
as follows:
<TABLE>
<CAPTION>
Completed Total
DBS Acquisition Consideration Cash Notes Stock
- ------------------------------ --------------- --------- ------- ------
<S> <C> <C> <C> <C>
NRTC System No. 0434 ......... $1,850 $1,850 $ -- $ --
</TABLE>
(b) To record fourteen Pending DBS Acquisitions. Intangible assets to be
purchased consist of $63.6 million of DBS rights and $550,000 of
non-compete covenants, which are being amortized over a 10-year period and
the term of the related non-compete covenants (3-5 years), respectively,
as follows:
<TABLE>
<CAPTION>
Pending Total
Acquisitions Consideration Cash Notes Stock
- ---------------------------------------- --------------- --------- ---------- ------
<S> <C> <C> <C> <C>
NRTC System No. 0378 (partial) ......... $ 2,700 $ 2,700
NRTC System No. 0211 ................... 11,725 1,725 $10,000
NRTC System No. 0334 ................... 3,250 3,250
NRTC System No. 0174 ................... 12,500 12,500
NRTC System No. 0250 ................... 5,700 5,700
NRTC System No. 1011 ................... 1,675 821 $854
NRTC System No. 0037 ................... 3,625 3,562 63
NRTC System No. 0365 ................... 2,200 2,200
NRTC System No. 0379 ................... 2,600 2,600
NRTC System No. 0289 ................... 3,100 2,900 200
NRTC System No. 0368 ................... 1,500 1,500
NRTC System No. 0128 ................... 6,250 6,250
NRTC System No. 0267 ................... 5,200 5,200
NRTC System No. 0121 ................... 2,100 2,100
------- -------
Total ............................... $64,125 $53,008 $10,263 $854
======= ======= ======= ====
</TABLE>
(c) To record the pending sale of the New England cable operations resulting in
a nonrecurring gain of
$22.2 million.
(d) To record the DTS acquisition of Ocmulgee Communications, Inc.
Substantially all of the purchase price has been allocated to DBS rights,
which are being amortized over a 10-year period.
(e) To record the Pending DTS Acquisition. This acquisition is being accounted
for using the purchase method of accounting. The purchase price of $278.6
million was determined by combining the approximately 5.5 million shares
of Pegasus Class A Common Stock, valued at $21 per share, issued to the
shareholders of DTS and the assumption of net liabilities amounting to
$163.1 million. The Company also recorded approximately $30.0 million of a
net deferred tax liability. Of the $278.6 million purchase price, $255.0
million was allocated to DBS rights, which are being amortized over a
10-year period. Such amounts are based on a preliminary allocation of the
total consideration. The actual allocation may change immaterially based
upon the actual results of DTS from the period January 1, 1998 to closing.
F-156
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1997
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
DBS Acquisitions
---------------------------- Cable
Actual Completed(a) Pending(b) Sale(c)
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net Revenues:
DBS ................................... $ 38,254 $17,843 $14,024
Cable ................................. 16,688 ($ 6,324)
TV .................................... 31,726
Other ................................. 150
---------
Total net revenues .................... 86,818 17,843 14,024 (6,324)
--------- ------- ------- -------
Location operating expenses:
DBS ................................... 32,015 18,269 11,472
Cable ................................. 8,693 (3,146)
TV .................................... 21,349
Other ................................. 28
Incentive compensation ................ 1,274 (95)
Corporate expenses .................... 2,256 743 177
Depreciation and amortization ......... 27,792 1,007 962 (1,718)
--------- ------- ------- -------
Income (loss) from operations ......... (6,589) (2,176) 1,413 (1,365)
Interest expense ....................... (16,094) (566) (160)
Other income (expense), net ............ 816 97 75 37
--------- ------- ------- -------
Income (loss) before income taxes and
extraordinary items ................... (21,867) (2,645) 1,328 (1,328)
Provision (benefit) for income taxes ... 200 (10) 89
--------- ------- -------
Income(loss) before extraordinary items. (22,067) (2,635) 1,239 (1,328)
Dividends on Series A Preferred Stock .. (12,215)
---------
Income (loss) applicable to common
shares before extraordinary items ..... ($ 34,282) ($ 2,635) $ 1,239 ($ 1,328)
========= ======= ======= =======
Income (loss) per common share:
Income (loss) from operations .......... ($ 0.67)
=========
Loss before extraordinary items ........ ($ 3,48)
=========
Weighted average shares outstanding .... 9,858,244
=========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Adjustments Subtotal
------------------ --------------
<S> <C> <C>
Income Statement Data:
Net Revenues:
DBS ................................... $ 70,121
Cable ................................. 10,364
TV .................................... 31,726
Other ................................. 150
-----------
Total net revenues .................... 112,361
-----------
Location operating expenses:
DBS ................................... ($ 2,730)(e) 59,025
Cable ................................. 5,547
TV .................................... 21,349
Other ................................. 28
Incentive compensation ................ 1,179
Corporate expenses .................... (920)(f) 2,256
Depreciation and amortization ......... 12,481 (g) 40,524
--------- -----------
Income (loss) from operations ......... (8,831) (17,548)
Interest expense ....................... (7,022)(h) (23,842)
Other income (expense), net ............ (172)(i) 853
--------- -----------
Income (loss) before income taxes and
extraordinary items ................... (16,025) (40,537)
Provision (benefit) for income taxes ... (79)(j) 200
--------- -----------
Income(loss) before extraordinary items. (15,946) (40,737)
Dividends on Series A Preferred Stock .. (941)(k) (13,156)
--------- -----------
Income (loss) applicable to common
shares before extraordinary items ..... ($ 16,887) ($ 53,893)
========= ===========
Income (loss) per common share:
Income (loss) from operations .......... ($ 1.71)
===========
Loss before extraordinary items ........ ($ 5.26)
===========
Weighted average shares outstanding .... 10,253,748
===========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
DTS
----------------------------------
Adjustments Subtotal Adjustments Pro Forma
-------------------- ------------ ---------------- --------------
<S> <C> <C> <C> <C>
Income Statement Data:
Net Revenues:
DBS ................................... $ 59,805 $ 129,926
Cable ................................. 10,364
TV .................................... 31,726
Other ................................. 150
----------
Total net revenues .................... 59,805 172,166
-------- ----------
Location operating expenses:
DBS ................................... ($ 541)(l) 59,310 118,336
Cable ................................. 5,547
TV .................................... 21,349
Other ................................. 28
Incentive compensation ................ 541 (l) 541 1,720
Corporate expenses .................... 2,256
Depreciation and amortization ......... 4,844 (m) 20,046 $ 11,001(o) 71,571
----------- -------- -------- ----------
Income (loss) from operations ......... (4,844) (20,092) (11,001) (48,641)
Interest expense ....................... (11,035)(n) (25,605) (49,447)
Other income (expense), net ............ 22 (i) (196) 657
----------- -------- ----------
Income (loss) before income taxes and
extraordinary items ................... (15,857) (45,893) (11,001) (97,431)
Provision (benefit) for income taxes ... 200
----------
Income(loss) before extraordinary items. (15,857) (45,893) (11,001) (97,631)
Dividends on Series A Preferred Stock .. (13,156)
----------
Income (loss) applicable to common
shares before extraordinary items ..... ($ 15,857) ($ 45,893) ($ 11,001) ($ 110,787)
=========== ======== ======== ==========
Income (loss) per common share:
Income (loss) from operations .......... ($ 3.09)
==========
Loss before extraordinary items ........ ($ 7.03)
==========
Weighted average shares outstanding .... 15,753,748
==========
</TABLE>
F-157
<PAGE>
Notes to Pro Forma Consolidated Statements of Operations
(a) Represents the combined financial results of the Completed DBS Acquisitions
from the beginning of the period presented to the date of acquisition by
the Company or the end of the period.
(b) Represents the combined financial results of the Pending DBS Acquisitions
for the period presented.
(c) Financial results of the New England operations of Pegasus Cable
Television. The pro forma income statement data for the year ended
December 31, 1997 does not include a $4.5 million and a $22.1 million gain
resulting from the New Hampshire Cable Sale and the New England Cable
Sale.
(d) Represents the combined financial results of the DTS Completed DBS
Acquisitions from the beginning of the period presented to the date of
acquisition by DTS or the end of the period.
(e) Represents the elimination of costs associated with 26 call centers that
were not acquired and 14 call centers which will be eliminated prior to
acquisition, net of the additional customer service representatives (CSRs)
added to the Company's current call center operations. The Company
estimates that one CSR is required for every 1,500 subscribers. Eliminated
net costs are as follows:
<TABLE>
<CAPTION>
Completed Pending
Acquisitions Amount Acquisitions Amount
- ----------------------------------- ------------- -------------------------------- -------------
<S> <C> <C> <C>
NRTC System No. 1061 $ 15,000 NRTC System No. 0378 (partial) $ 102,000
NRTC System No. 1039 38,000 NRTC System No. 0211 123,000
NRTC System No. 1065 39,000 NRTC System No. 0334 60,000
NRTC System No. 1032 -- NRTC System No. 0174 52,000
NRTC System No. 1028 64,000 NRTC System No. 0250 80,000
NRTC System No. 1073 45,000 NRTC System No. 1011 --
NRTC System No. 0035 30,000 NRTC System No. 0037 --
NRTC System No. 0333 17,000 NRTC System No. 0365 73,000
NRTC System No. 1003 3,000 NRTC System No. 0379 25,000
NRTC System No. 0172 33,000 NRTC System No. 0289 58,000
NRTC System No. 1004 22,000 NRTC System No. 0368 --
NRTC System No. 0408 27,000 NRTC System No. 0128 488,000
NRTC System No. 1040 88,000 NRTC System No. 0267 34,000
NRTC System No. 0481 207,000 NRTC System No. 0121 5,000
----------
NRTC System No. 0043 96,000 Total Pending 1,100,000
----------
NRTC System No. 0086 47,000
NRTC System No. 0471 29,000 Total $2,730,000
==========
NRTC System No. 0396 5,000
NRTC System No. 0470 2,000
NRTC System No. 0152 73,000
NRTC System No. 0036 (partial) --
NRTC System No. 1045 389,000
NRTC System No. 0331 313,000
NRTC System No. 0391 11,000
NRTC System No. 1024 22,000
NRTC System No. 0434 14,000
----------
Total Completed $1,630,000
==========
</TABLE>
(f) To eliminate corporate expenses charged by prior owners. These costs
represent management fees charged by the prior owners in addition to their
regular salaries and benefits and other allocated costs. These costs will
not be incurred in future periods as the Company's corporate expenses do
not include management fees in excess of actual allocated costs.
F-158
<PAGE>
Notes to Pro Forma Consolidated Statements of Operations (continued)
(g) To remove depreciation expense of $183,000 and $709,000 relating to fixed
assets that were not acquired and to record additional amortization
expense of $7.2 million and $6.2 million resulting from the purchase
accounting treatment of the Completed DBS Acquisitions and the Pending DBS
Acquisitions, respectively. Substantially all of the purchase price has
been allocated to DBS rights which are being amortized over a 10-year
period. Such amounts are based on a preliminary allocation of the total
consideration. The actual depreciation and amortization may change
immaterially based upon the final allocation of the total consideration to
be paid to the tangible assets, if any, and intangible assets acquired.
(h) Interest expense is adjusted to give effect to the transactions as follows
(dollars in thousands):
Interest expense:
PM&C Notes ................................... $ 10,625
Senior Notes ................................. 11,069
Seller notes ................................. 2,049
Other debt ................................... 99
---------
Total .......................................... 23,842
Interest expense previously recorded ......... (16,820)
Adjustment ................................... $ 7,022
=========
As of December 31, 1997, all of Pegasus' outstanding debt has a fixed rate.
(i) To eliminate certain nonrecurring income and expenses, net. The expenses
are primarily comprised of legal and professional fees incurred by prior
owners in connection with the acquisitions.
(j) To eliminate the net tax provision in connection with the acquisitions.
(k) Dividends on the Series A Preferred Stock issued in connection with the
Unit Offering is adjusted as if the Unit Offering had occurred on January
1, 1997.
(l) To reclassify incentive compensation.
(m) To record additional amortization expense of $4.8 million resulting from
the purchase accounting treatment of the DTS Competed DBS Acquisitions.
Substantially all of the purchase price has been allocated to DBS rights
which are being amortized over a 10-year period. Such amounts are based on
a preliminary allocation of the total consideration. The actual
amortization may change immaterially based upon the final allocation of
the total consideration to be paid to the tangible assets, if any, and
intangible assets acquired.
(n) To record additional interest expense, as follows (dollars in thousands):
Interest expense:
DTS Credit Facility ..................... $ 2,250
DTS Senior Subordinated Notes ........... 8,598
DTS Seller notes ........................ 300
-------
Total ................................... 11,148
DTS Completed Acquisitions - amounts
previously recorded ..................... (113)
-------
Adjustment .............................. $11,035
=======
(o) To record additional amortization expense of $11.0 million resulting from
the purchase accounting treatment of the DTS merger and capitalized
acquisition costs. Substantially all of the purchase price has been
allocated to DBS rights which are being amortized over a 10-year period.
Such amounts are based on a preliminary allocation of the total
consideration. The actual amortization may change immaterially based upon
the final allocation of the total consideration to be paid.
F-159
<PAGE>
ANNEX I
AGREEMENT AND PLAN OF MERGER
among
PEGASUS COMMUNICATIONS CORPORATION
and certain of its shareholders,
PEGASUS DTS MERGER SUB, INC.,
and
DIGITAL TELEVISION SERVICES, INC.
and certain of its shareholders
---------------------
January 8, 1998
---------------------
<PAGE>
Table of Contents
<TABLE>
<S> <C> <C>
ARTICLE I
DEFINITIONS ............................................................. I-1
1.1 Certain Definitions ....................................................... I-1
1.2 Other Definitions ......................................................... I-7
ARTICLE II
BASIC TRANSACTION ....................................................... I-8
2.1 Merger; Surviving Corporation ............................................. I-8
2.2 Certificate of Incorporation .............................................. I-8
2.3 By-Laws ................................................................... I-8
2.4 Directors and Officers .................................................... I-8
2.5 Effective Time ............................................................ I-8
2.6 Exchange of Certificates .................................................. I-8
2.7 Merger Consideration; Conversion and Cancellation of Securities ........... I-8
2.8 Stock Transfer Books ...................................................... I-10
2.9 Dissenting Shares ......................................................... I-10
2.10 Failure to Surrender Share Certificates ................................... I-10
2.11 Closing ................................................................... I-10
2.12 Treatment of Certain Outstanding Warrants and Options of the Company ...... I-10
2.13 Shareholder Notes ......................................................... I-11
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY ........................... I-12
3.1 Organization and Qualification ............................................ I-12
3.2 Capitalization ............................................................ I-12
3.3 Authority and Validity .................................................... I-13
3.4 No Breach or Violation .................................................... I-13
3.5 Consents and Approvals .................................................... I-13
3.6 Title to Assets ........................................................... I-14
3.7 Intellectual Property ..................................................... I-14
3.8 Compliance with Legal Requirements ........................................ I-14
3.9 Financial and Other Information ........................................... I-14
3.10 Company Credit Facility ................................................... I-15
3.11 Subsequent Events ......................................................... I-15
3.12 Undisclosed Liabilities ................................................... I-15
3.13 Legal Proceedings ......................................................... I-15
3.14 Taxes ..................................................................... I-15
3.15 Employee Benefits; Employees .............................................. I-16
3.16 Contracts ................................................................. I-17
3.17 Books and Records ......................................................... I-19
3.18 Business Information ...................................................... I-19
3.19 Insurance ................................................................. I-19
3.20 Disclosure ................................................................ I-19
3.21 Brokers or Finders ........................................................ I-19
3.22 Certain Payments .......................................................... I-20
3.23 Subscribers ............................................................... I-20
3.24 Favorable Business Relationships .......................................... I-20
3.25 Securities Matters ........................................................ I-20
3.26 Billing and Authorization System .......................................... I-20
</TABLE>
I-i
<PAGE>
<TABLE>
<S> <C> <C>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PRINCIPAL COMPANY SHAREHOLDERS .......................................... I-20
4.1 Authority and Validity ........................................................ I-20
4.2 Ownership ..................................................................... I-21
4.3 Consents and Approvals ........................................................ I-21
4.4 Certain Information ........................................................... I-21
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS ................................... I-21
5.1 Organization and Qualification ................................................ I-21
5.2 Capitalization ................................................................ I-21
5.3 Authority and Validity ........................................................ I-22
5.4 No Breach or Violation ........................................................ I-22
5.5 Consents and Approvals ........................................................ I-22
5.6 Title to Assets ............................................................... I-22
5.7 Intellectual Property ......................................................... I-22
5.8 Compliance with Legal Requirements ............................................ I-23
5.9 Legal Proceedings ............................................................. I-23
5.10 Subsequent Events ............................................................. I-23
5.11 Financial and Other Information ............................................... I-23
5.12 Undisclosed Liabilities ....................................................... I-24
5.13 Taxes ......................................................................... I-24
5.14 Employee Benefits; Employees .................................................. I-24
5.15 Contracts ..................................................................... I-25
5.16 Business Information .......................................................... I-26
5.17 Disclosure .................................................................... I-26
5.18 Brokers or Finders ............................................................ I-26
5.19 Certain Payments .............................................................. I-26
5.20 Subscribers ................................................................... I-26
5.21 Favorable Business Relationships .............................................. I-27
5.22 Securities Matters ............................................................ I-27
5.23 FCC Matters ................................................................... I-27
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MERGER SUB ................................ I-27
6.1 Organization and Qualification ................................................ I-27
6.2 Certificate of Incorporation and Bylaws ....................................... I-28
6.3 Authority ..................................................................... I-28
6.4 No Conflict; Required Filings and Consents .................................... I-28
6.5 Vote Required ................................................................. I-28
ARTICLE VII
PRE-CLOSING COVENANTS OF THE SELLERS ........................................ I-29
7.1 Additional Information ........................................................ I-29
7.2 Exclusivity ................................................................... I-29
7.3 Continuity and Maintenance of Operations ...................................... I-29
7.4 Consents and Approvals ........................................................ I-31
7.5 Adoption by Shareholders ...................................................... I-31
7.6 Securities Filings; Financial Information ..................................... I-31
7.7 Notification of Certain Matters ............................................... I-32
7.8 Supplements to Company Disclosure Statement and Company Registration Statement I-32
7.9 Duty of Good Faith and Fair Dealing ........................................... I-32
7.10 Employee Matters .............................................................. I-32
7.11 1997 Company Financial Statements ............................................. I-32
</TABLE>
I-ii
<PAGE>
<TABLE>
<S> <C> <C>
7.12 1997 Tax Returns ......................................................... I-32
7.13 Indemnity under Prior Company Acquisitions ............................... I-33
ARTICLE VIII
PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES ........................... I-33
8.1 Additional Information ................................................... I-33
8.2 Exclusivity .............................................................. I-33
8.3 Conduct of Business ...................................................... I-33
8.4 Consents and Approvals ................................................... I-34
8.5 Adoption by Pegasus Shareholders ......................................... I-34
8.6 Merger Registration Statement ............................................ I-34
8.7 Notification of Certain Matters .......................................... I-34
8.8 Supplements to Pegasus Disclosure Statement .............................. I-35
8.9 Duty of Good Faith and Fair Dealing ...................................... I-35
8.10 Tax Certificate .......................................................... I-35
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES.............. I-35
9.1 Accuracy of Representations .............................................. I-35
9.2 Covenants ................................................................ I-35
9.3 Consents and Approvals ................................................... I-35
9.4 Dissenters' Rights ....................................................... I-36
9.5 Delivery of Documents .................................................... I-36
9.6 No Material Adverse Change ............................................... I-37
9.7 No Litigation ............................................................ I-37
9.8 NRTC Compliance Certificate .............................................. I-37
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS ..................... I-37
10.1 Accuracy of Representations .............................................. I-38
10.2 Covenants ................................................................ I-38
10.3 Consents and Approvals ................................................... I-38
10.4 Delivery of Documents .................................................... I-38
10.5 No Material Adverse Change ............................................... I-39
10.6 Litigation ............................................................... I-39
ARTICLE XI
POST-CLOSING COVENANTS ................................................. I-39
11.1 Transition ............................................................... I-39
11.2 Indemnification of Directors, Officers and Managers of the Company and its
Predecessors; Directors' and Officers' Insurance ......................... I-39
11.3 Certain Securities Law Matters ........................................... I-40
11.4 Offer to Purchase ........................................................ I-40
ARTICLE XII
TERMINATION ............................................................ I-40
12.1 Events of Termination .................................................... I-40
12.2 Effect of Termination .................................................... I-41
12.3 Procedure Upon Termination ............................................... I-41
ARTICLE XIII
INDEMNIFICATION ........................................................ I-42
13.1 Survival of Representations and Warranties ............................... I-42
13.2 Indemnification Provisions for Benefit of the Pegasus Parties ............ I-42
13.3 Indemnification Provisions for Benefit of the Shareholders ............... I-43
13.4 Matters Involving Third Parties .......................................... I-43
</TABLE>
I-iii
<PAGE>
<TABLE>
<S> <C> <C>
13.5 Determination of Adverse Consequences ..................... I-44
13.6 Payment in Shares ......................................... I-44
13.7 No Indemnification for Certain Disclosed Matters .......... I-45
ARTICLE XIV
MISCELLANEOUS ........................................... I-45
14.1 Parties Obligated and Benefited ........................... I-45
14.2 Notices ................................................... I-45
14.3 Attorneys' Fees ........................................... I-46
14.4 Headings .................................................. I-46
14.5 Choice of Law ............................................. I-46
14.6 Rights Cumulative ......................................... I-46
14.7 Further Actions ........................................... I-46
14.8 Time of the Essence ....................................... I-46
14.9 Late Payments ............................................. I-46
14.10 Counterparts .............................................. I-46
14.11 Entire Agreement .......................................... I-46
14.12 Amendments and Waivers .................................... I-46
14.13 Construction .............................................. I-47
14.14 Expenses .................................................. I-47
14.15 Disclosure ................................................ I-47
14.16 Company Action ............................................ I-47
</TABLE>
Exhibits
Exhibit 1 Fleet Confidentiality Agreement
Exhibit 2 Indemnification Agreement of Columbia Principals
Exhibit 3 Noncompetition Agreement -- Management
Exhibit 4 Noncompetition Agreement -- Owners
Exhibit 5 Registration Rights Agreement
Exhibit 6 Voting Agreement
Exhibit 7 Certificate of Merger
Exhibit 8 Tax Certificate
Exhibit 9 Certain addresses for notices
I-iv
<PAGE>
AGREEMENT AND PLAN OF MERGER, dated January 8, 1998 (the "Agreement"),
among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation ("Pegasus"),
PEGASUS DTS MERGER SUB, INC., a Delaware corporation ("Merger Sub"), DIGITAL
TELEVISION SERVICES, INC., a Delaware corporation (the "Company," which term
also includes (unless the context otherwise requires) Digital Television
Services, LLC, a Delaware limited liability company to which the Company
succeeded by merger (the "Corporate Conversion") on October 10, 1997, the
shareholders of Pegasus that have executed this Agreement (the "Principal
Pegasus Shareholders"), and the shareholders of the Company that have executed
this Agreement (the "Principal Company Shareholders"). Pegasus, Merger Sub, the
Company, the Principal Pegasus Shareholders and the Principal Company
Shareholders are collectively referred to herein as the "Parties." The Company
and the Principal Company Shareholders are sometimes referred to herein
collectively as the "Sellers." Pegasus, Merger Sub and the Principal Pegasus
Shareholders are sometimes referred to herein collectively as the "Pegasus
Parties."
RECITALS:
Subsidiaries (this and certain other terms are defined in Article I) of
the Company are party to certain NRTC Distribution Agreements with the National
Rural Telecommunications Cooperative ("NRTC"), pursuant to which Subsidiaries
of the Company hold rights to distribute DIRECTV(R) ("DIRECTV") programming
offered by DirecTV, Inc. in the Service Areas.
The Parties intend for Pegasus to acquire the Company and its Subsidiaries
by means of the merger of Merger Sub with and into the Company, upon the terms
and subject to the conditions set forth herein.
For federal income tax purposes, it is intended that the Merger will
qualify as a reorganization under Section 368(a) of the Code.
NOW, THEREFORE, in consideration of the premises and mutual promises
herein made, and in consideration of the representations, warranties, covenants
and agreements herein contained, and intending to be legally bound hereby, the
Parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 Certain Definitions. The following terms shall, when used in this
Agreement, have the following meanings:
"Accounts Receivable" means the accounts receivable identified in the
Books and Records and reported on NRTC Report 19A.
"Acquisition" means the acquisition by a Person of any business (including
a DIRECTV Distribution Business), assets or property other than in the Ordinary
Course, whether by way of the purchase of assets or stock, by merger,
consolidation or otherwise.
"Adverse Consequences" means all actions, suits, proceedings, hearings,
investigations, charges, complaints, claims, demands, injunctions, judgments,
orders, decrees, rulings, damages, assessments, dues, penalties, fines,
interest, costs, amounts paid in settlement, Liabilities, obligations, Taxes,
liens, losses, expenses and fees (including court costs, settlement costs,
legal, accounting, experts' and other fees, costs and expenses).
"Affiliate" means, with respect to any Person: (i) any Person directly or
indirectly owning, controlling, or holding with power to vote 10% or more of
the outstanding voting securities of such other Person; (ii) any Person 10% or
more of whose outstanding voting securities are directly or indirectly owned,
controlled, or held with power to vote, by such other Person; (iii) any Person
directly or indirectly controlling, controlled by, or under common control with
such other Person; and (iv) any officer, director or partner of such other
Person. "Control" for the foregoing purposes shall mean the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities or voting interests, by contract or otherwise.
"Agreement in Principle" means that certain letter agreement dated
November 5, 1997, among the Parties.
I-1
<PAGE>
"Applicable Rate" means the prime rate reported in The Wall Street Journal
from time to time, plus 3%.
"Assets" mean all properties, assets, privileges, powers, rights,
interests and claims of every type and description that are owned, leased,
held, used or useful in the Business and in which the Company or any of its
Subsidiaries has any right, title or interest or in which the Company or any of
its Subsidiaries acquires any right, title or interest on or before the Closing
Date, wherever located, whether known or unknown, and whether or not now or on
the Closing Date on the Books and Records of the Company or any of its
Subsidiaries, including Accounts Receivable, Books and Records, Consumer
Contracts, Contracts, Intangibles, Intellectual Property, Inventory, NRTC
Patronage Capital, Personal Property and subscribers.
"Basis" means any past or present fact, situation, circumstance, status,
condition, activity, practice, plan, occurrence, event, incident, action,
failure to act or transaction that forms or could form the basis for any
specified consequence.
"Books and Records" mean all of the Company's and its Subsidiaries' books
and records, including purchase and sale order files, invoices, sales materials
and records, customer lists, mailing lists, marketing information, personnel
records and files, technical data and records, all NRTC Reports and invoices,
all correspondence with and documents pertaining to NRTC, DIRECTV, subscribers,
suppliers, Governmental Authorities and other third parties, all records
evidencing the Accounts Receivable and a schedule of Accounts Receivable aging,
all other financial records and all books and records relating to the Company's
and its Subsidiaries' formation and capitalization, including corporate seals,
minute books and stock books.
"Business" means the DIRECTV distribution business conducted by the
Company and its Subsidiaries pursuant to rights granted under the NRTC
Distribution Agreements.
"Business Day" means any day other than Saturday, Sunday or a day on which
banking institutions in New York, New York, are required or authorized to be
closed.
"Code" means the Internal Revenue Code of 1986, as amended.
"Collateral Documents" mean the Exhibits and any other documents,
instruments and certificates to be executed and delivered by the Parties
hereunder or thereunder.
"Columbia Principals" means James B. Murray, Jr., David P. Mixer, Mark R.
Warner, Robert B. Blow, Mark J. Kington, Harry F. Hopper, III, R. Philip
Herget, III, Neil P. Byrne, Barton Schneider, and James Fleming.
"Commission" means the Securities and Exchange Commission or any
Governmental Authority that succeeds to its functions.
"Committed Member Residence" has the meaning assigned to it in the NRTC
Distribution Agreement.
"Company Credit Agreement" means the Second Amended and Restated Credit
Agreement dated as of July 30, 1997, as amended as of October 30, 1997, among
the Company, the lenders identified therein, and Canadian Imperial Bank of
Commerce, New York Agency, as agent.
"Company Disclosure Statement" means the disclosure statement delivered by
the Company and the Principal Company Shareholders to Pegasus concurrently with
the execution of this Agreement, as supplemented pursuant to Section 7.8.
"Company Financial Model" means the Company's financial projections
attached as Exhibit A to the Company Disclosure Statement, as updated from time
to time pursuant to Section 7.3(c)(i).
"Company Indenture" means the indenture dated as of July 30, 1997, among
the Company as successor by merger to Digital Television Services, LLC, DTS
Capital, Inc., the Guarantors identified therein, and the Bank of New York, as
trustee, as supplemented by a supplemental indenture dated as of October 10,
1997.
"Company Registration Statement" means the Company's registration
statement on Form S-4, No. 333-36217, as filed with the Commission on September
24, 1997, by Digital Television Services, LLC, DTS Capital, Inc. and the other
registrants identified therein, as amended by Amendment No. 1 thereto, filed
with the
I-2
<PAGE>
Commission on November 19, 1997, by Amendment No. 2 thereto, filed with the
Commission on December 15, 1997, by Amendment No. 3 thereto, filed with the
Commission on December 23, 1997, and by Amendment No. 4 thereto, filed with the
Commission on December 24, 1997, and as amended from time to time thereafter.
"Company Senior Management" means Douglas S. Holladay, Jr., Earl A.
MacKenzie and Donald A. Doering.
"Confidentiality Agreement" means the Confidentiality Agreement dated
April 10, 1997, between Pegasus and the Company, as successor by merger to
Digital Television Services, LLC.
"Consumer Contract" means any rental agreement, lease agreement,
installment sale agreement or other agreement or arrangement under which the
Company or any of its Subsidiaries (or predecessors in interest) has rented,
leased or sold any DSS System or other Inventory to a subscriber or has
otherwise financed the acquisition or use of any DSS System or other Inventory
by a subscriber.
"DIRECTV Distribution Business" means the distribution of any service
transmitted using the frequencies licensed to Hughes Communications Galaxy or
its successors at the 101(0) West orbital location.
"DSS System" means the satellite receiving system for DIRECTV consisting
of an eighteen inch satellite antenna dish, an integrated receiver decoder and
a remote control.
"Employee Benefit Plan" means any: (a) nonqualified deferred compensation
or retirement plan or arrangement that is an Employee Pension Benefit Plan; (b)
qualified defined contribution retirement plan or arrangement that is an
Employee Pension Benefit Plan; (c) qualified defined benefit retirement plan or
arrangement that is an Employee Pension Benefit Plan (including any
Multiemployer Plan); (d) Employee Welfare Benefit Plan; or (e) other employee
benefit arrangement or payroll practice.
"Employee Pension Benefit Plan" has the meaning set forth in ERISA Section
3(2).
"Employee Welfare Benefit Plan" has the meaning set forth in ERISA Section
3(l).
"Encumbrance" means any mortgage, pledge, lien, encumbrance, charge,
security interest, security agreement, conditional sale or other title
retention agreement, limitation, option, assessment, restrictive agreement,
restriction, adverse interest, restriction on transfer or any exception to or
defect in title or other ownership interest (including restrictive covenants,
leases and licenses).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Escrow Agent" means First Union National Bank.
"Escrow Agreement" means an escrow agreement in form and substance
reasonably satisfactory to the Parties to be entered into on the Closing Date
to provide for the escrow of the Company Escrow Shares pursuant to Section
2.7(b), which shall in all material respects conform to Revenue Procedure
84-42.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Exchange Offer" means the exchange offer made by means of the Company
Registration Statement.
"Fleet Confidentiality Agreement" means the form of confidentiality
agreement attached hereto as Exhibit 1.
"GAAP" means United States generally accepted accounting principles as in
effect from time to time.
"Governmental Authority" means: (i) the United States of America; (ii) any
state, commonwealth, territory or possession of the United States of America
and any political subdivision thereof (including counties, municipalities and
the like); (iii) any foreign (as to the United States of America) sovereign
entity and any political subdivision thereof; or (iv) any agency, authority or
instrumentality of any of the foregoing, including any court, tribunal,
department, bureau, commission or board.
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
I-3
<PAGE>
"Indemnification Agreement" means the form of indemnification agreement
attached hereto as Exhibit 2, as executed by the Columbia Principals and each
of the Successor Principal Company Shareholders.
"Intangibles" mean all accounts, notes and other receivables, claims,
deposits, prepayments, refunds, causes of action, choses in action, rights of
recovery, rights of set-off, rights of recoupment and other intangible assets
owned, used or held for use in the Business.
"Intellectual Property" means (i) trademarks, service marks, trade dress,
logos, trade names and corporate names, together with all translations,
adaptations, derivations and combinations thereof and all applications,
registrations and renewals in connection therewith; (ii) all copyrightable
works, all copyrights and all applications, registrations and renewals in
connection therewith; (iii) trade secrets and confidential business information
(including ideas, research and development, know-how, formulas, compositions,
manufacturing and production processes and techniques, technical data, designs,
drawings, specifications, customer and supplier lists, pricing and cost
information and business and marketing plans and proposals); (iv) all computer
software (including data and related documentation); (v) all other proprietary
rights; and (vi) all copies and tangible embodiments thereof (in whatever form
or medium).
"Inventory" means the DSS Systems and other equipment owned by the Company
or any of its Subsidiaries for sale, lease or rent to subscribers or that has
been rented or leased to subscribers or sold to subscribers on an installment
basis.
"Judgment" means any judgment, writ, order, injunction, award or decree of
any court, judge, justice, magistrate or any other Governmental Authority.
"Legal Requirement" means any statute, ordinance, law, rule, regulation,
code, plan, injunction, judgment, order, decree, ruling, charge or other
requirement, standard or procedure enacted, adopted or applied by any
Governmental Authority, including judicial decisions applying common law or
interpreting any other Legal Requirement.
"Liability" means any liability or obligation (whether known or unknown,
whether asserted or unasserted, whether absolute or contingent, whether accrued
or unaccrued, whether liquidated or unliquidated, and whether due or to become
due), including any liability for Taxes.
"Market Price" per share of Pegasus Class A Common Stock on any day means
the average of the Quoted Prices of the Pegasus Class A Common Stock for 30
consecutive trading days commencing 45 trading days before such day. The
"Quoted Price" of the Pegasus Class A Common Stock on any day means the last
reported sale price on such day of the Pegasus Class A Common Stock as reported
by the Nasdaq National Market or, if the Pegasus Class A Common Stock is listed
on a securities exchange, the last reported sale price of the Pegasus Class A
Common Stock on such exchange, which shall be for consolidated trading if
applicable to such exchange, or, if not so reported or listed, the last
reported bid price of the Pegasus Class A Common Stock.
"Material Adverse Effect on the Company" means a material adverse effect
on (a) the Company, its Subsidiaries, the Assets and the Business, taken as a
whole, (b) the validity, binding effect or enforceability of this Agreement or
the Collateral Documents, or (c) the ability of the Company or any of the DTS
Parties to perform its obligations under this Agreement or any of the
Collateral Documents.
"Material Adverse Effect on Pegasus" means a material adverse effect on
(a) Pegasus, its Subsidiaries and their assets and business, taken as a whole,
(b) the validity, binding effect or enforceability of this Agreement or the
Collateral Documents, or (c) the ability of any of the Pegasus Parties to
perform its obligations under this Agreement or any of the Collateral
Documents.
"Merger Consideration" means the shares of Pegasus Class A Common Stock
and the cash in lieu of fractional shares of Pegasus Class A Common Stock
deliverable by Pegasus in exchange for Company Capital Stock pursuant to
Section 2.7.
"Multiemployer Plan" has the meaning set forth in ERISA Section 3(37).
"Noncompetition Agreement -- Management" means the form of noncompetition
agreement attached hereto as Exhibit 3.
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"Noncompetition Agreement -- Owners" means the form of noncompetition
agreement attached hereto as Exhibit 4.
"NRTC Distribution Agreement" means any contract, commitment, agreement,
instrument or other document pursuant to which NRTC and/or DirecTV, Inc. and/or
any of their Affiliates has granted the Company or any of its Subsidiaries
rights relating to the marketing and distribution of DIRECTV in the Service
Areas, including those certain NRTC/Member Agreements for Marketing and
Distribution of DBS Services, as amended and supplemented, identified in
Section 3.16 of the Company Disclosure Statement.
"NRTC Patronage Capital" means any equity interest in NRTC allocated to
the Company or any of its Subsidiaries or if such equity interest is not
transferrable the right to receive any distributions on account of such equity
interest.
"Offer to Purchase" means the Offer to Purchase (as defined in the Company
Indenture) required by Section 4.14 of the Company Indenture to be made as a
result of the Merger.
"Ordinary Course" means the ordinary course of business consistent with
past custom and practice (including with respect to quantity and frequency).
"Pegasus Class A Common Stock" means the Class A Common Stock, par value
$0.01 per share, of Pegasus.
"Pegasus Credit Agreement" means the credit agreement dated as of December
10, 1997, among Pegasus Media & Communications, Inc., the lenders party
thereto, and Bankers Trust Company, as agent for such lenders.
"Pegasus Disclosure Statement" means the disclosure statement delivered by
the Pegasus Parties to the Company concurrently with the execution of this
Agreement, as supplemented pursuant to Section 8.8.
"Pegasus Exchange Offer Registration Statement" means Pegasus's
registration statement on Form S-4, No. 333-40205, as filed with the Commission
on November 14, 1997, and as amended from time to time thereafter.
"Permit" means any license, permit, consent, approval, registration,
authorization, qualification or similar right granted by a Governmental
Authority.
"Permitted Liens" means (i) liens for Taxes not yet due and payable or
being contested in good faith by appropriate proceedings; (ii) rights reserved
to any Governmental Authority to regulate the affected property; (iii)
statutory liens of banks and rights of set-off; (iv) as to leased Assets,
interests of the lessors thereof and liens affecting the interests of the
lessors thereof; (v) inchoate materialmen's, mechanics', workmen's, repairmen's
or other like liens arising in the ordinary course of business; (vi) liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation and other types of social security; (vii) earnest money
deposits made to secure the performance of contracts to acquire DIRECTV
Distribution Businesses, so long as no foreclosure, sale or similar proceedings
have been commenced; (viii) licenses of trademarks or other intellectual
property rights granted by the Company in the ordinary course and not
interfering in any material respect with the ordinary conduct of the business
of the Company; and (ix) as to real property, any encumbrance, adverse
interest, constructive or other trust, claim, attachment, exception to or
defect in title or other ownership interest (including, but not limited to,
reservations, rights of entry, rights of first refusal, possibilities of
reverter, encroachments, easement, rights-of-way, restrictive covenants,
leases, and licenses) of any kind, which otherwise constitutes an interest in
or claim against property, whether arising pursuant to any Legal Requirement,
under any Contract or otherwise, that do not, individually or in the aggregate,
materially and adversely affect or impair the value or use thereof as it is
currently being used in the Ordinary Course or render title thereto
unmarketable or uninsurable.
"Permitted Redemption" means the redemption of or the agreement to redeem
shares of the Company's common stock (or the agreement described in Section
2.13(b) to purchase shares of Pegasus Class A Common Stock into which the
Company's common stock is converted pursuant to the Merger) held by the maker
of any Shareholder Note (or such maker's successors and assigns) solely in
exchange for all or a portion of such maker's Shareholder Note. "Person" means
any natural person, corporation, partnership, trust, unincorporated
organization, association, limited liability company, Governmental Authority or
other entity.
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"Personal Property" means all tangible personal property of the Company
and its Subsidiaries, whether or not identified in Section 3.6 of the Company
Disclosure Statement.
"Registration Rights Agreement" means the form of registration rights
agreement attached hereto as Exhibit 5. "Representative" means any director,
officer, employee, agent, consultant, adviser or other representative of a
Person, including legal counsel, accountants and financial advisors.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations thereunder.
"Service Areas" means the areas identified on Exhibits "C" of each NRTC
Distribution Agreement identified in Section 3.16 of the Company Disclosure
Statement.
"Shareholder Notes" means those three noninterest bearing, nonrecourse
promissory notes in the aggregate principal amount of $870,490 received by the
Company from Douglas S. Holladay, Jr., Donald A. Doering and William Dorran in
connection with their purchase of 87,049 shares of the Company's common stock.
"Specified Owners" means Columbia Capital Corporation, Columbia DBS, Inc.,
Columbia DBS Investors, L.P., Columbia DBS Class A Investors, LLC, the Columbia
Principals, J.H. Whitney Equity Partners LLC, and Whitney Equity Partners, L.P.
"Subscriber" means any subscriber who is reported by the NRTC as an active
DIRECTV subscriber account of the Business, excluding the account of any
subscriber who (i) does not pay for a core DIRECTV programming package (except
commercial subscribers); (ii) receives a discount from the Company for DIRECTV
programming other than pursuant to promotions of the NRTC or DIRECTV; (iii)
resides outside the Service Areas or is not otherwise a Committed Member
Residence; (iv) is pending disconnection for any reason; or (v) is 60 days or
more past due in the payment of any amount payable to the Company or any of its
Subsidiaries or is categorized as a "Level 2 Disconnection".
"Subsidiary" of a specified Person means (a) any Person if securities
having ordinary voting power (at the time in question and without regard to the
happening of any contingency) to elect a majority of the directors, trustees,
managers or other governing body of such Person are held or controlled by the
specified Person or a Subsidiary of the specified Person; (b) any Person in
which the specified Person and its Subsidiaries collectively hold a 50% or
greater equity interest; (c) any partnership or similar organization in which
the specified Person or Subsidiary of the specified Person is a general
partner; or (d) any Person the management of which is directly or indirectly
controlled by the specified Person and its Subsidiaries through the exercise of
voting power, by contract or otherwise.
"Successor Principal Company Shareholders" means those Persons who, at any
time after the date hereof and prior to the Effective Time, become the owners
of any of the capital stock of the Company owned by the Principal Company
Shareholders on the date hereof.
"Tax" means any federal, state, local or foreign income, gross receipts,
license, payroll, employment, excise, severance, stamp, occupation, premium,
windfall profits, environmental, customs duties, capital stock, franchise,
profits, withholding, social security (or similar), unemployment, disability,
real property, personal property, sales, use, transfer, registration, value
added, alternative or add-on minimum, estimated or other tax of any kind
whatsoever, including any interest, penalties, fees, deficiencies, assessments,
additions or other charges of any nature with respect thereto, whether disputed
or not.
"Tax Return" means any return, declaration, report, claim for refund or
information return or statement relating to Taxes, including any schedule or
attachment thereto, and including any amendment thereof.
"Voting Agreement" means the form of voting agreement attached hereto as
Exhibit 5.
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1.2 Other Definitions. The following terms shall, when used in this
Agreement, have the meanings assigned to such terms in the Sections indicated.
Term Section
---------------
"Additional Shareholder Note Shares" ............. 2.13
"Agreement" ...................................... Preamble
"Certificate of Merger" .......................... 2.5
"Claim" .......................................... 11.2
"Closing" ........................................ 2.11
"Closing Date" ................................... 2.11
"Company Alternative Transaction" ................ 7.2
"Company Capital Stock" .......................... 2.7
"Company Financial Statements" ................... 3.19
"Company Indemnitees" ............................ 13.3
"Contracts" ...................................... 3.16
"Conversion Ratio" ............................... 2.7 (b)
"Corporate Conversion" ........................... Preamble
"DGCL" ........................................... 2.1
"DIRECTV" ........................................ Recitals
"Dissenting Shares" .............................. 2.9
"DTS Indemnified Parties" ........................ 11.2
"DTS Parties" .................................... 3.3
"Effective Time" ................................. 2.5
"Escrowed Shares" ................................ 2.7 (b)
"FCC" ............................................ 5.23
"FCC Licenses" ................................... 5.23
"Indemnification Period" ......................... 13.2
"Indemnified Party" .............................. 13.4
"Indemnifying Party" ............................. 13.4
"Merger" ......................................... 2.1
"NRTC" ........................................... Recitals
"Options" ........................................ 2.12
"Parties" ........................................ Preamble
"Pegasus Alternative Transaction" ................ 8.2
"Pegasus Financial Statements" ................... 5.11
"Pegasus Indemnitees" ............................ 13.2
"Pegasus Merger Registration Statement" .......... 8.6
"Pegasus Parties" ................................ Preamble
"Pegasus SEC Reports" ............................ 5.22
"Proxy Statement/Prospectus" ..................... 8.6
"Sellers" ........................................ Preamble
"Shareholders" ................................... 2.6
"Surviving Corporation" .......................... 2.1
"Third Party Claim" .............................. 13.4
"Unvested Bing Warrants" ......................... 2.12
"Vested Bing Warrants" ........................... 2.12
"Warrants" ....................................... 2.12
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ARTICLE II
BASIC TRANSACTION
2.1 Merger; Surviving Corporation. In accordance with and subject to the
provisions of this Agreement and the General Corporation Law of the State of
Delaware ("DGCL"), at the Effective Time, Merger Sub shall be merged with and
into the Company (the "Merger"), and the Company shall be the surviving
corporation in the Merger (hereinafter sometimes called the "Surviving
Corporation") and shall continue its corporate existence under the laws of the
State of Delaware. At the Effective Time, the separate existence of Merger Sub
shall cease. All properties, franchises and rights belonging to the Company and
Merger Sub, by virtue of the Merger and without further act or deed, shall be
vested in the Surviving Corporation, which shall thenceforth be responsible for
all the liabilities and obligations of each of Merger Sub and the Company.
2.2 Certificate of Incorporation. The Company's certificate of
incorporation shall be amended and restated effective at the Effective Time to
be as set forth in the Certificate of Merger, and, as so amended and restated,
shall thereafter continue in full force and effect as the certificate of
incorporation of the Surviving Corporation until altered or amended as provided
therein or by law, to the extent permitted by Section 11.2.
2.3 By-Laws. The Company's by-laws, as in effect at the Effective Time,
shall be the by-laws of the Surviving Corporation until altered, amended or
repealed as provided therein or by law, to the extent permitted by Section
11.2.
2.4 Directors and Officers. The directors of the Surviving Corporation
following the Effective Time shall be the persons serving as directors of
Merger Sub immediately before the Effective Time and shall serve thereafter in
accordance with the certificate of incorporation and by-laws of the Surviving
Corporation and the DGCL. The officers of Merger Sub immediately before the
Effective Time shall serve in the same capacities as officers of the Surviving
Corporation at the pleasure of the board of directors of the Surviving
Corporation following the Effective Time in accordance with the certificate of
incorporation and by-laws of the Surviving Corporation and the DGCL.
2.5 Effective Time. The Merger shall become effective at the time and date
that the certificate of merger (the "Certificate of Merger"), in the form
attached hereto as Exhibit 7, is accepted for filing by the Secretary of State
of the State of Delaware in accordance with the provisions of Section 251 of
the DGCL. The Certificate of Merger shall be executed by the Surviving
Corporation and delivered to the Secretary of State of the State of Delaware
for filing on the Closing Date. The date and time when the Merger becomes
effective are referred to herein as the "Effective Time."
2.6 Exchange of Certificates. At the Closing, immediately after the
Effective Time, all of the shareholders of the Company (the "Shareholders"),
who are listed in Section 3.2(b) of the Company Disclosure Statement along with
their respective ownership interests (as Section 3.2(b) of the Company
Disclosure Statement may be modified pursuant to Section 2.7(b)), shall
surrender to the Surviving Corporation all of the outstanding certificates
theretofore representing shares of Company Capital Stock in exchange for the
Merger Consideration deliverable to the Shareholders as provided in Section
2.7. Until such certificates are surrendered, outstanding certificates formerly
representing shares of Company Capital Stock shall be deemed for all purposes
as evidencing the right to receive the Merger Consideration into which such
shares are converted as though said surrender and exchange had taken place. In
no event will a holder of shares of Company Capital Stock be entitled to
interest on the Merger Consideration issuable in respect of such shares.
2.7 Merger Consideration; Conversion and Cancellation of Securities.
(a) Conversion of Company Capital Stock. At the Effective Time of the
Merger all of the issued and outstanding shares of the common stock, par value
$.01 per share and preferred stock, par value $.01 per share, of the Company
(the "Company Capital Stock") outstanding immediately before the Effective
Time, other than shares described in Section 2.7(c) and other than Dissenting
Shares, shall be converted, by virtue of the Merger and without any further
action on the part of the holders thereof, into the number of shares of Pegasus
Class A Common Stock determined as follows:
(i) 5,500,000 shares of Pegasus Class A Common Stock, plus
(ii) the adjustment specified in Section 2.13(a) or (c), if any, minus
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(iii) the number of shares of Pegasus Class A Common Stock having an
aggregate Market Price on the Closing Date equal to one-half of the difference
between (A) the aggregate Market Price on the Closing Date of the Pegasus Class
A Common Stock underlying the warrants and options that replace the Vested Bing
Warrants and the Warrants and Options described in Section 2.12(a)(i) and (B)
the aggregate exercise price of such replacement warrants and replacement
options, minus
(iv) the number of shares of Pegasus Class A Common Stock having an
aggregate Market Price on the Closing Date equal to the difference between (A)
the aggregate Market Price on the Closing Date of the Pegasus Class A Common
Stock underlying the options that replace the Options described in Section
2.12(a)(ii) and (B) the aggregate exercise price of such replacement options,
minus
(v) the number of shares of Pegasus Class A Common Stock having an
aggregate Market Price on the Closing Date equal to $75,000.
(b) Conversion Ratio; Escrowed Shares; Delivery of Shares at Closing.
The ratio of the number of shares of Pegasus Class A Common Stock into which
each share of the Company's preferred stock and common stock, respectively,
shall be converted (the "Conversion Ratio") shall be computed pursuant to the
formula specified in Section 3.2(b) of the Company Disclosure Statement. Not
later than 24 hours before the Closing, the Company shall provide to Pegasus
(i) a list of the Shareholders specifying that portion of the total number of
shares computed as provided in Section 2.7(a) to be issued to each such
Shareholder based upon the Conversion Ratio, and (ii) an amendment to Section
3.2(b) of the Company Disclosure Statement consistent with such list. Both the
list and the amendment shall be signed by each of the Principal Company
Shareholders. At the Closing, Pegasus shall (subject to Section 2.10) deliver
(A) to the Escrow Agent (subject to the provisions of Section 13.6 and the
Escrow Agreement) share certificates registered in the name of the Escrow Agent
evidencing 10% of the number of shares of Pegasus Class A Common Stock (rounded
down to the next whole share) that would be included in the Merger
Consideration if there were no Dissenting Shares (the "Escrowed Shares," which
shares shall be deemed to be owned by the Shareholders (other than holders of
Dissenting Shares) in proportion to their entitlement to the Merger
Consideration, subject to the Escrow Agreement), and (B) to such Shareholders
(other than holders of Dissenting Shares), or a person designated in writing by
the Company to serve as agent for the Shareholders, share certificates
registered in the names of the applicable Shareholders evidencing the balance
of the shares of Pegasus Class A Common Stock to be received by each such
Shareholder (other than holders of Dissenting Shares), rounded down to the
nearest whole share and accompanied by any payment in lieu of fractional shares
required by Section 2.7(e).
(c) Treasury Shares, Etc. Each share of Company Capital Stock held in
the treasury of the Company and each share of Company Capital Stock, if any,
held by Pegasus or any Subsidiary of Pegasus or of the Company immediately
before the Effective Time shall be cancelled and extinguished, and nothing
shall be issued or paid in respect thereof.
(d) Conversion of Merger Sub Shares. Each share of common stock, par
value $1.00 per share, of Merger Sub issued and outstanding immediately before
the Effective Time shall be converted into one share of common stock, par value
$1.00 per share, of the Surviving Corporation.
(e) Fractional Shares. No certificates or scrip evidencing fractional
shares of Pegasus Class A Common Stock shall be issued in exchange for Company
Capital Stock. In lieu of any such fractional shares, each holder of Company
Capital Stock shall be paid an amount in cash (without interest), rounded to
the nearest cent, determined by multiplying (i) the Market Price on the Closing
Date of the Pegasus Class A Common Stock by (ii) the fractional share of
Pegasus Class A Common Stock to which such holder would otherwise be entitled
(taking into account all shares held of record by such holder at the Effective
Time).
(f) Withholding. Pegasus (or any Affiliate thereof) shall be entitled to
deduct and withhold from the consideration otherwise payable pursuant to this
Agreement to any former holder of Company Capital Stock such amounts, if any,
as Pegasus (or any Affiliate thereof) is required to deduct and withhold with
respect to the making of such payment under the Code, or any other provision of
federal, state, local or foreign tax law. To the extent that amounts are so
withheld by Pegasus, such withheld amounts shall be treated for all purposes of
this Agreement as having been paid to the former holder of the Company Capital
Stock in respect of which such deduction and withholding was made by Pegasus
(or such Affiliate).
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2.8 Stock Transfer Books. At the Effective Time, the stock transfer books
of the Company shall be closed, and there shall be no further registration of
transfers of shares of Company Capital Stock thereafter on the records of the
Company.
2.9 Dissenting Shares. Shares of Company Capital Stock which are issued
and outstanding immediately prior to the Effective Time and which are held by
persons who have properly exercised, and not withdrawn or waived, appraisal
rights with respect thereto in accordance with Section 262 of the DGCL (the
"Dissenting Shares") will not be converted into the right to receive the Merger
Consideration, and holders of such shares of Company Capital Stock will be
entitled, in lieu thereof, to receive payment of the appraised value of such
shares of Company Capital Stock in accordance with the provisions of such
Section 262 unless and until such holders fail to perfect or effectively
withdraw or lose their rights to appraisal and payment under the DGCL. If,
after the Effective Time, any such holder fails to perfect or effectively
withdraws or loses such right, such shares of Company Capital Stock will
thereupon be treated as if they had been converted at the Effective Time into
the right to receive the Merger Consideration, without any interest thereon.
The Company will give Pegasus prompt notice of any demands received by the
Company for appraisal of shares of Company Capital Stock. Prior to the
Effective Time, the Company will not, except with the prior written consent of
Pegasus make any payment with respect to, or settle or offer to settle, any
such demands.
2.10 Failure to Surrender Share Certificates. Pegasus shall be obligated
to deliver certificates evidencing the Merger Consideration and cash in lieu of
fractional shares only upon receipt of certificates representing the Company
Capital Stock converted by reason of the Merger into the Merger Consideration.
If the share certificates delivered to Pegasus at the Closing represent fewer
than all the outstanding shares of Company Capital Stock, Pegasus may withhold
from its delivery to the applicable Shareholder and the Escrow Agent the
corresponding portion of the Merger Consideration until such time as the
applicable share certificates (or, in case of lost, stolen or missing share
certificates, an affidavit of loss and unsecured indemnity agreement reasonably
satisfactory to Pegasus) shall be delivered.
2.11 Closing. The closing of the transactions contemplated by this
Agreement and the Collateral Documents ("Closing") shall take place at the
offices of Drinker Biddle & Reath LLP, Philadelphia National Bank Building,
1345 Chestnut Street, Philadelphia, Pennsylvania 19107, or at such other
location as the parties may agree, at 10:00 a.m., Eastern Time, on a Business
Day specified by Pegasus that may be on, but shall not be more than five
Business Days after, all conditions precedent to the Closing set forth in
Articles IX and X have been satisfied or waived, or on such other date and at
such other time as the Parties may agree, provided that all such conditions
precedent have been satisfied or waived. The date on which the Closing actually
occurs is referred to herein as the "Closing Date."
2.12 Treatment of Certain Outstanding Warrants and Options of the Company.
(a) The Company represents and warrants that only the following warrants
("Warrants") and options ("Options") to acquire Company Capital Stock are
outstanding on the date hereof:
(i) Warrants to purchase an aggregate of 79,500 shares of the
Company's common stock for an exercise price of $22.50 per share and Options to
purchase an aggregate of 30,000 shares of the Company's common stock for an
exercise price of $22.50 per share, held by members of Company Senior
Management and by Craig Benn and Suzanne Beisner;
(ii) Options to purchase an aggregate of 11,133 shares of the
Company's common stock for an exercise price of $22.50 per share, granted to
members of Company Senior Management as of October 30, 1997, and expiring two
years after such date, as ratified by action of the Company's board of
directors taken at its meeting on December 16, 1997.
(iii) Warrants to purchase an aggregate of 25,000 shares of the
Company's common stock for an exercise price of $22.50 per share, held by
Steven Bing, 3,181 of which have vested or are anticipated to vest prior to the
Closing Date (the "Vested Bing Warrants"), and the balance of which are
unvested (the "Unvested Bing Warrants"); and
(iv) Warrants to purchase an aggregate of 19,500 shares of the
Company's common stock for an exercise price of $22.50 per share and Options to
purchase 2,500 shares of the Company's common stock for an exercise price of
$22.50 per share, held by employees of the Company other than those identified
in paragraphs (i) and (ii), none of which vests before May 1, 1998.
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(b) The Company shall not issue additional Options or Warrants between
the date of this Agreement and the Closing Date.
(c) At the Effective Time, Pegasus will assume the Company's obligations
under the Vested Bing Warrants and the Warrants and Options described in
Section 2.12(a)(i), (a)(ii) and (a)(iv), and will replace them (upon surrender
thereof by the Persons who hold them) with warrants and options to purchase the
number of shares of Pegasus Class A Common Stock equal to the Conversion Ratio
applicable to the Company's common stock times the number of shares of Company
common stock issuable upon the exercise of such Warrants and Options, for an
exercise price equal to the exercise price applicable to such Warrants and
Options divided by the Conversion Ratio applicable to the Company's common
stock.
(d) Neither Pegasus nor the Surviving Corporation shall have any
obligation in respect of the Unvested Bing Warrants, and the indemnification
obligations under Section 13.2 shall apply to the Unvested Bing Warrants.
2.13 Shareholder Notes.
(a) If Pegasus shall be reasonably satisfied (by way of obtaining the
concurrence of the trustee under the Company Indenture, an amendment to the
Company Indenture or otherwise) that the following is permitted under the
Company Indenture, then:
(i) the Merger Consideration shall be adjusted upward by the number of
shares of Pegasus Class A Common Stock (the "Additional Shareholder Note
Shares") equal to the outstanding balance of the Shareholder Notes as of the
Closing Date divided by the Market Price of a share of Pegasus Class A Common
Stock on the Closing Date, provided that
(ii) the Surviving Corporation and each maker of a Shareholder Note
enter into an agreement on or before the Closing Date under which each such
maker agrees to sell to the Surviving Corporation, and the Surviving
Corporation agrees to purchase from such maker, upon the termination of such
maker's employment with the Surviving Corporation, all of such maker's
Additional Shareholder Note Shares for a price per share equal to the Market
Price of a share of Pegasus Class A Common Stock on the Closing Date, payable
by cancellation of such maker's Shareholder Note.
(b) If Pegasus shall not be reasonably satisfied that the transactions
described will be permitted under the Company Indenture, then, on the Closing
Date and simultaneously with the Closing:
(i) the employment of each maker of a Shareholder Note with the
Company will be terminated, and such maker will become an employee of Pegasus
or one of its Subsidiaries;
(ii) Pegasus and such maker will enter into agreements confirming the
existing agreements (as previously approved by Pegasus) between such maker and
the Company relating to base compensation, bonus and severance (including the
vesting of Warrants and Options) and modifying such agreements to provide that
employment by Pegasus or one of its Subsidiaries after the Closing will be the
equivalent of continued employment by the Company; and
(iii) there will be no adjustment to the Merger Consideration pursuant
to Section 2.7(a)(ii); and
(iv) just prior to Closing, the Company shall be permitted to redeem
shares of the Company's common stock held by the makers of the Shareholder
Notes solely in exchange for such Shareholder Notes, and if it does so and the
Closing occurs prior to May 20, 1998, the Company shall be entitled in its
discretion to pay such makers a special bonus, not exceeding $88,000 in the
aggregate, reasonably calculated to compensate such makers for the difference,
if any, between the federal tax rate applicable to capital gain on capital
assets held for one year but not more than 18 months, and the federal tax rate
applicable to capital gain on capital assets held for more than 18 months.
(c) In the event that the Company does not enter into an agreement with
the maker of one or more of the Shareholder Notes for a Permitted Redemption as
described in either Section 2.13(a) or 2.13(b) prior to Closing and as a
consequence such maker's Shareholder Note becomes due in full upon the Closing,
then (i) to the extent such Shareholder Notes are paid in full in cash, Pegasus
shall adjust the Merger Consideration upward
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by the Additional Shareholder Note Shares computed with respect to the amount
of such Shareholder Notes that are paid, and (ii) to the extent such
Shareholders Notes are not paid, Pegasus shall cause the Company to foreclose
on or otherwise exercise the Company's rights with respect to that portion of
the Merger Consideration otherwise receivable by the maker of such Shareholder
Note with respect to such maker's shares of the Company's common stock that are
pledged as security for the payment of the Shareholder Note and shall adjust
the Merger Consideration upward by the net proceeds to the Company of such
foreclosure or exercise of other rights.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Pegasus Parties that the
statements contained in Article III are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date
of this Agreement throughout Article III).
3.1 Organization and Qualification. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware, and each Subsidiary of the Company is a business organization of the
type described in Section 3.1 of the Company Disclosure Statement and is duly
organized, validly existing and in good standing under the laws of the state
identified in Section 3.1 of the Company Disclosure Statement. All of the
Company's Subsidiaries are identified in Section 3.1 of the Company Disclosure
Statement. Digital Television Services, LLC, a Delaware limited liability
company, merged with and into the Company on October 10, 1997, and the Company
has succeeded to all property and rights formerly held by Digital Television
Services, LLC and has become the successor issuer under the Company Indenture.
The Company has, and each of its Subsidiaries has, all requisite power and
authority to own, lease and use its assets as they are currently owned, leased
and used and to conduct its business as it is currently conducted. The Company
is, and each of its Subsidiaries is, duly qualified or licensed to do business
in and is in good standing in each jurisdiction in which the character of the
properties owned, leased or used by it or the nature of the activities
conducted by it make such qualification necessary, all of which are identified
in Section 3.1 of the Company Disclosure Statement, except any such
jurisdiction where the failure to be so qualified or licensed would not have a
Material Adverse Effect on the Company.
3.2 Capitalization.
(a) The authorized, issued and outstanding capital stock and other
ownership interests of the Company and each of its Subsidiaries are fully and
accurately described in Section 3.2 (a) of the Company Disclosure Statement.
(b) All of the issued and outstanding shares of Company Capital Stock,
are owned of record, and to the best knowledge of the Company beneficially, by
the Persons set forth in Section 3.2 (b) of the Company Disclosure Statement,
in the numbers and percentages set forth therein, and, to the best knowledge of
the Company, no other Person has any right, title or interest, whether legal or
equitable, in said shares other than equitable distribution rights and other
similar rights.
(c) All of the issued and outstanding ownership interests in each
Subsidiary of the Company are owned, beneficially and of record, by the Persons
set forth in Section 3.2(c) of the Company Disclosure Statement, in the numbers
and percentages set forth therein, and no other Person has any right, title or
interest, whether legal or equitable, in said ownership interests.
(d) Except as described in Section 3.2 (d) of the Company Disclosure
Statement, there are no outstanding or authorized options, warrants, purchase
rights, preemptive rights or other contracts or commitments that could require
the Company or any of its Subsidiaries to issue, sell, or otherwise cause to
become outstanding any of its capital stock or other ownership interests. There
are no authorized or outstanding stock appreciation, phantom stock, profit
participation, or similar rights with respect to the Company or any of its
Subsidiaries.
(e) All of the issued and outstanding shares of Company Capital Stock,
and all outstanding ownership interests of each of its Subsidiaries, have been
duly authorized and are validly issued and outstanding, fully paid and
nonassessable (with respect to Subsidiaries that are corporations), have been
issued in compliance with applicable securities laws and other Legal
Requirements, and are subject to no Encumbrances other than under the Company
Credit Agreement, or as described in Section 3.2(e) of the Company Disclosure
Statement, or where any such Encumbrance would not have a Material Adverse
Effect on the Company.
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(f) This Section 3.2 does not prohibit the transfer of Company Capital
Stock, consistent with applicable law, between the date of this Agreement and
the Closing Date, provided that any Principal Company Shareholder so
transferring shares of Company Capital Stock requires its transferee to a agree
in writing to be bound by this Agreement (including the covenant in Section 7.5
to vote for the Merger). All such transfers will be reflected in the Company's
notification and in the amendment to Section 3.2(b) of the Company Disclosure
Statement delivered pursuant to Section 2.7(b). If any shares of Company
Capital Stock shall be transferred before the Closing Date, shares of Pegasus
Class A Common Stock issued in exchange for the transferred shares shall be
treated for purposes of Section 4.1 of the Voting Agreement as Covered Shares
received by the transferor at the Closing and transferred to the transferee
thereafter, and the form of Voting Agreement executed at the Closing shall be
appropriately modified. If, however, the Principal Company Shareholders shall
transfer all their shares of Company Capital Stock before the Closing Date to a
partnership or limited liability company owned by them, the form of Voting
Agreement executed at the Closing shall include such partnership or limited
liability company as an additional party and the shares of Pegasus Class A
Common Stock issued in exchange therefor shall not be treated pursuant to the
immediately preceding sentence as having been transferred after the Closing
Date for purposes of Section 4.1 of the Voting Agreement.
3.3 Authority and Validity. The Company has all requisite corporate power
to execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement. The execution and delivery by the
Company of, the performance by the Company of its obligations under, and the
consummation by the Company of the transactions contemplated by, this Agreement
have been duly authorized by all requisite action of the Company (subject to
the approval of the Shareholders as contemplated by Section 7.5). This
Agreement has been duly executed and delivered by the Company and is the legal,
valid, and binding obligation of the Company, enforceable against it in
accordance with its terms. Each Person other than Pegasus and its Affiliates
that is required by this Agreement to execute, or that does execute, this
Agreement or any of the Collateral Documents (collectively, the "DTS Parties")
has all requisite power to execute and deliver, to perform its obligations
under, and to consummate the transactions contemplated by the Collateral
Documents to which it is a party. Upon the execution and delivery by the DTS
Parties of the Collateral Documents, the Collateral Documents will be the
legal, valid and binding obligations of each of them, enforceable against each
in accordance with their respective terms.
3.4 No Breach or Violation. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Governmental Authorities and Persons identified in the
exceptions to Section 3.5, the execution, delivery and performance by the
Sellers of this Agreement and by the DTS Parties of the Collateral Documents,
and the consummation of the transactions contemplated hereby and thereby in
accordance with the terms and conditions hereof and thereof, do not and will
not conflict with, constitute a violation or breach of, constitute a default or
give rise to any right of termination or acceleration of any right or
obligation of the Company or any other DTS Party under, or result in the
creation or imposition of any Encumbrance upon the Company, any of its
Subsidiaries, the Assets, the Business or the Company Capital Stock by reason
of the terms of (i) the certificate of incorporation, by-laws or other charter
or organizational document of the Company, any of the other DTS Parties or any
Subsidiary of the Company, (ii) any material contract, agreement, lease,
indenture or other instrument to which the Company, any of the other DTS
Parties or any Subsidiary of the Company is a party or by or to which the
Company, any of the other DTS Parties, any Subsidiary of the Company or the
Assets may be bound or subject, (iii) any order, judgment, injunction, award or
decree of any arbitrator or Governmental Authority or any statute, law, rule or
regulation applicable to the Company, any of the other DTS Parties or any
Subsidiary of the Company or (iv) any Permit of the Company or any Subsidiary
of the Company, which in the case of (ii), (iii) or (iv) above would have a
Material Adverse Effect on the Company.
3.5 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Offer to
Purchase following the Closing, and (iii) requirements described in Section 3.5
of the Company Disclosure Statement, no consent, approval, authorization or
order of, registration or filing with, or notice to, any Governmental Authority
or any other Person is necessary to be obtained, made or given by the Company
or any DTS Party in connection with the execution, delivery and performance by
them of this Agreement or any Collateral Document or for the consummation by
them of the transactions contemplated hereby or thereby, except to the extent
the failure to obtain any such consent, approval, authorization or order or to
make any such registration or filing would not have a Material Adverse Effect
on the Company.
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3.6 Title to Assets. Section 3.6 of the Company Disclosure Statement
includes an accurate and complete description of (i) all real property owned by
the Company or any of its Subsidiaries (identifying the owner), (ii) all real
property leased by the Company or any of its Subsidiaries (identifying the
lessee and the lessor and describing the term and the payment terms), and (iii)
each place of business of the Company or any of its Subsidiaries. The Company
and its Subsidiaries have exclusive, good and marketable title to the material
Assets, free and clear of any and all Encumbrances, except (A) Encumbrances
arising under the Company Credit Agreement, (B) the security interest in the
interest escrow established by the Company Indenture and the related escrow
agreement, (C) the matters described in Section 3.6 of the Company Disclosure
Statement, (D) Permitted Liens and (E) Encumbrances (other than in the nature
of liens and security interests) that would not have a Material Adverse Effect
on the Company. Except as provided by this Agreement, and except as described
in Section 3.2 or 3.6 of the Company Disclosure Statement, no Person has any
right to acquire, directly or indirectly, any interest in any of the Company's
Subsidiaries or any material Assets, and there is no agreement to which any
Seller, any Subsidiary of the Company or any of their Affiliates is a party or
is otherwise bound relating to the direct or indirect sale of any of the NRTC
Distribution Agreements or the capital stock, other ownership interests or any
material Assets of the Company or any of its Subsidiaries.
3.7 Intellectual Property.
(a) Neither the Company nor any of its Subsidiaries uses or holds any
copyrights, trade names, trademarks, service marks, service names, logos,
licenses, permits or other similar intellectual property rights and interests
in the operations of the Business that do not incorporate the name "Digital
Television Services," abbreviations or variations thereof or names permitted
for use by the Company and its Subsidiaries under the NRTC Distribution
Agreements.
(b) To the best knowledge of the Company, neither the Company nor any of
its Subsidiaries has in its operation of the Business interfered with,
infringed upon, misappropriated or otherwise come into conflict with, and the
operation of the Business as currently conducted does not violate or infringe
upon, any Intellectual Property rights of third parties, and neither the
Company nor any of its Subsidiaries has received any charge, complaint, claim,
demand or notice alleging any such interference, infringement, misappropriation
or violation (including any claim that the Company or any of its Subsidiaries
or any of their predecessors in interest must license or refrain from using any
Intellectual Property rights of any third party). To the best knowledge of the
Sellers, no third party has interfered with, infringed upon, appropriated or
otherwise come into conflict with any Intellectual Property rights of the
Company or any of its Subsidiaries.
3.8 Compliance with Legal Requirements. The Company and its Subsidiaries
have operated the Business in material compliance with all material Legal
Requirements and requirements of the NRTC (including NRTC's by-laws, policies,
procedures and guidelines) applicable to the Company and its Subsidiaries. No
action, suit, proceeding, hearing, investigation, charge, complaint, claim,
demand or notice has been filed, commenced or, to the best of the Sellers'
knowledge, threatened against the Company, any of its Subsidiaries or any of
the Principal Company Shareholders alleging any failure to so comply, and, to
the best knowledge of the Sellers, there is no Basis for any claim that such a
failure to comply exists.
3.9 Financial and Other Information.
(a) The historical financial statements ("Company Financial Statements")
contained in the Company Registration Statement (including the notes thereto)
have been prepared in accordance with GAAP applied on a consistent basis
throughout the periods covered thereby and present fairly the financial
condition of the Persons reported on and their results of operations as of the
dates and for the periods indicated, subject in the case of the unaudited
financial statements only to normal year-end adjustments (none of which will be
material in amount) and the omission of footnotes.
(b) The Company Registration Statement became effective on December 24,
1997. The Company Registration Statement did not, as of its effective date, and
will not, as of the date the Exchange Offer is consummated, contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading.
(c) No written information concerning the Company or its Shareholders
furnished to Pegasus by the Company specifically for inclusion in the Pegasus
Merger Registration Statement will at the time provided and,
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assuming that the Company is given reasonable opportunity to review and comment
on the filings with the Commission, as of the filing date thereof, the filing
date of any amendment thereof, or the effective date thereof, or as of the
Closing Date, contain any untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading.
(d) The Company Financial Model has been prepared in good faith and on
the basis of assumptions believed to be reasonable by the Company's management
and the Principal Company Shareholders.
3.10 Company Credit Facility. Except as described in Section 3.10 of the
Company Disclosure Statement, the credit facility established under the Company
Credit Agreement is adequate, to satisfy all future cash requirements of the
Company and its Subsidiaries to the extent shown in the Company Financial
Model, including but not limited to capital expenditures, working capital and
debt service (excluding the Offer to Purchase).
3.11 Subsequent Events. Except as set forth in Section 3.11 of the Company
Disclosure Statement, in connection with the Corporate Conversion, or to the
extent consented to in writing by Pegasus, since September 30, 1997: (i)
neither the Company nor any of its Subsidiaries has sold, leased, transferred
or assigned any of the Assets except in the Ordinary Course; (ii) no third
party has accelerated, terminated, modified or canceled any material agreement,
contract, lease or license (or series of related agreements, contracts, leases
and licenses) relating to the Company, any of its Subsidiaries or the Business;
(iii) neither the Company nor any of its Subsidiaries has imposed or permitted
the imposition of any Encumbrance upon any of the material Assets; (iv) neither
the Company nor any of its Subsidiaries has made any capital investment in, any
loan to, or any Acquisition of the securities or assets of, any other Person
(or series of related capital investments, loans or Acquisitions) other than
Subsidiaries of the Company; (v) neither the Company nor any of its
Subsidiaries has issued any note, bond or other debt security or created,
incurred, assumed or guaranteed any indebtedness for borrowed money or
capitalized lease obligations except under the Company Credit Agreement or as
contemplated by the Exchange Offer; (vi) neither the Company nor any of its
Subsidiaries has delayed or postponed the payment of accounts payable and other
Liabilities outside the Ordinary Course; (vii) neither the Company nor any of
its Subsidiaries has canceled, compromised, waived or released any right or
claim (or series of related rights and claims) involving more than $150,000 or
outside the Ordinary Course; (viii) neither the Company nor any of its
Subsidiaries has granted any license or sublicense of any rights under or with
respect to any Intellectual Property used or useful in the Business, other than
in connection with the Acquisition of certain portions of the DIRECTV
Distribution Business of the Company; (ix) there has not been any other
material occurrence, event, incident, action, failure to act or transaction
outside the Ordinary Course involving the Company or any of its Subsidiaries
except matters generally known to, and that generally affect, other NRTC
members and affiliates; and (x) neither the Company nor any of its Subsidiaries
has committed to any of the foregoing. Since September 30, 1997, no event has
occurred which is likely, individually or in the aggregate, to have a Material
Adverse Effect on the Company.
3.12 Undisclosed Liabilities. Neither the Company nor any of its
Subsidiaries has any Liability and there is no Basis for any Liability, except
for (i) Liabilities reflected in the Company Financial Statements, (ii) current
Liabilities incurred after September 30, 1997, in the Ordinary Course, (iii)
Liabilities incurred after September 30, 1997, under the Company Credit
Agreement to finance expenditures not prohibited by this Agreement, (iv)
Liabilities incurred after September 30, 1997, in connection with Acquisitions
permitted by Section 7.3(c)(i), (v) Liabilities disclosed in Section 3.12 of
the Company Disclosure Statement, and (vi) Liabilities in an aggregate amount
not exceeding $500,000.
3.13 Legal Proceedings. Other than proceedings affecting the direct
broadcast satellite industry generally, and except as set forth in Section 3.13
of the Company Disclosure Statement, (i) there are no outstanding judgments or
orders against or otherwise affecting or related to the Company, any of its
Subsidiaries, the Business or the Assets; (ii) there is no action, suit,
complaint, proceeding or investigation, judicial, administrative or otherwise,
that is pending or, to the best of any Seller's knowledge, threatened that, if
adversely determined, might result in Adverse Consequences in an amount
exceeding $500,000, or that challenges the validity or propriety of any of the
transactions contemplated by this Agreement or the Collateral Documents; and
(iii) there is no Basis upon which any such action, suit, proceeding or
investigation could be brought or initiated.
3.14 Taxes. The Company has, and each of its Subsidiaries has, duly and
timely filed in proper form all Tax Returns for all Taxes required to be filed
with the appropriate Governmental Authority, except where the
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Adverse Consequences of all such failures to file do not exceed $500,000 in the
aggregate. All Taxes due and payable by the Company and its Subsidiaries (or
claimed to be due and payable) have been paid (regardless whether Tax Returns
relating to such Taxes have been duly and timely filed or, if filed, regardless
whether such Tax Returns are deficient), except such amounts as (i) are not in
the aggregate material or (ii) are being contested diligently and in good faith
and for which the Company has adequately reserved in the Company Financial
Statements. The Company has furnished to Pegasus true and correct copies of all
federal and state income Tax Returns ever filed by it or any of its
Subsidiaries, all of which are accurate and complete in all material respects.
Except as set forth in Section 3.14 of the Company Disclosure Statement, there
are no pending tax audits, claims or proceedings relating to the Company any of
its Subsidiaries, the Assets or the Business and income therefrom. Neither the
Company nor any of its Subsidiaries has agreed to any waiver or extension of
any statute of limitations relating to any Tax.
3.15 Employee Benefits; Employees. All Employee Benefit Plans maintained
or contributed to by the Company are set forth in Section 3.15 of the Company
Disclosure Statement. Except for matters that individually and in the aggregate
would not have Adverse Consequences in excess of $500,000:
(a) Except as set forth in Section 3.15 of the Company Disclosure
Statement, all such Employee Pension Benefit Plans are, and have been at all
times since their establishment, qualified for federal income tax purposes
under Code Section 401(a) and the related trusts are, and have been at all
times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the applicable
reporting and disclosure requirements, as they relate to such plans, and the
Company is not subject to any liabilities based on past non-compliance, if any.
Pegasus and Merger Sub are not required under ERISA, the Code, any collective
bargaining agreement or any other agreement to maintain or to continue to
contribute to any Employee Benefit Plan maintained or contributed to by the
Company.
(b) The Company has made all required contributions under each Employee
Benefit Plan listed in Section 3.15 of the Company Disclosure Statement for all
periods through and including the fiscal year ended December 31, 1996, and has
made all required contributions for subsequent periods or has provided adequate
accruals therefor in the Company Financial Statements.
(c) There is not now, and has not been, any violation of the Code or
ERISA with respect to the filing of applicable reports, documents, and notices
regarding the Employee Benefit Plans maintained or contributed to by the
Company with the Secretary of Labor and the Secretary of the Treasury or the
furnishing of such documents to the participants or beneficiaries of the
Employee Benefit Plans.
(d) No fiduciary or other party in interest with respect to any of the
Employee Benefit Plans maintained or contributed to by the Company has caused
any of such plans to engage in a "prohibited transaction," as defined in ERISA
Section 406.
(e) The Company has never been obligated to contribute to any
Multiemployer Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B and
Part 6 of Subtitle B of Title I of ERISA with respect to any Employee Benefit
Plan maintained by the Company to which such continuation coverage requirements
apply.
(g) The Company does not maintain retiree life and retiree health
insurance plans which are Employee Welfare Benefit Plans providing for
continuing benefits or coverage for any employee or any beneficiary of any
employee after such employee's termination of employment (except to the extent
such continued coverage is required by Code Section 4980B and Part 6 of
Subtitle B of Title I of ERISA).
(h) Prior to the Closing, the Company will not establish or create any
new Employee Benefit Plan, except with the consent of Pegasus, nor will the
Company amend or modify as to any benefit or in any other way any existing
Employee Benefit Plan, except with the consent of Pegasus.
(i) The Company does not maintain and is not obligated to contribute to
any Employee Pension Benefit Plan that is a defined benefit plan, and has not
maintained and has not been obligated to contribute to such a plan within the
last six years.
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(j) "Company," as used in subsections (a) through (i) of this Section
3.15 shall include any other entity required to be aggregated with the Company
under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the
regulations thereunder.
(k) There are no collective bargaining agreements applicable to any
Persons employed by the Company or any of its Subsidiaries, and the Company and
its Subsidiaries have no duty to bargain with any labor organization with
respect to any such Person. There are not pending any unfair labor practice
charges against the Company or any of its Subsidiaries, nor is there any demand
for recognition, or any other request or demand from a labor organization for
representative status with respect to any Person employed by the Company or any
of its Subsidiaries.
(l) The Company and its Subsidiaries are in substantial compliance with
all applicable Legal Requirements respecting employment conditions and
practices, have withheld all amounts required by any applicable Legal
Requirements or Contracts to be withheld from the wages or salaries of their
employees, and are not liable for any arrears of wages or any Taxes or
penalties for failure to comply with any of the foregoing.
(m) The Company and its Subsidiaries have not engaged in any unfair
labor practice within the meaning of the National Labor Relations Act and have
not violated any Legal Requirement prohibiting discrimination on the basis of
race, color, national origin, sex, religion, age, marital status, or handicap
in their employment conditions or practices, except where such violations would
not have a Material Adverse Effect on the Company. There is not pending or, to
the best of the Company's knowledge, threatened any unfair labor practice
charge or discrimination complaint relating to race, color, national origin,
sex, religion, age, marital status, or handicap against the Company or any of
its Subsidiaries before any Governmental Authority nor, to the best of the
Company's knowledge, does any Basis therefor exist.
(n) There is no existing or, to the best of the Company's knowledge,
threatened, labor strike, dispute, grievance or other labor controversy
affecting the Company or any of its Subsidiaries. There is no pending or, to
the best of the Company's knowledge, threatened representation question
respecting the employees of the Company or any of its Subsidiaries. There is no
pending or, to the best of the Company's knowledge, threatened arbitration
proceeding under any Contract. To the best of the Company's knowledge, there
exists no Basis for any of the above.
(o) Except as disclosed in Section 3.15 of the Company Disclosure
Statement, neither the Company nor any of its Subsidiaries is a party to any
employment agreement or arrangement, written or oral, relating to any employee,
consultant or independent contractor that cannot be terminated at will by the
Company or such Subsidiary without further liability.
(p) Section 3.15 of the Company Disclosure Statement sets forth a true
and complete list of the names, titles and rates of compensation of all of the
Company's employees.
3.16 Contracts.
(a) Section 3.16 of the Company Disclosure Statement contains a true,
correct and complete list of (or a specific cross-reference to one or more
other sections of the Company Disclosure Statement where there is described)
the following contracts, agreements and commitments, whether written or oral,
to which the Company or any its Subsidiaries is a party ("Contracts"):
(i) each NRTC Distribution Agreement (together with the Service Area
covered by each) and any other agreement with NRTC or DirecTV, Inc. or any of
their Affiliates;
(ii) each agreement to which the Company or any of its Subsidiaries is
a party relating to the Acquisition of a DIRECTV Distribution Business;
(iii) any agreement (or group of related agreements) relating to the
financing, lease or rental of Personal Property to the Company or any of its
Subsidiaries by any Person requiring payments in excess of $75,000 per year;
(iv) each lease of real property to which the Company or any of its
Subsidiaries is a party;
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(v) each form of agreement used by the Company or any of its
Subsidiaries to provide for the maintenance or installation of DSS Systems
since the date of the Company's Acquisition of the DIRECTV Distribution
Business in which such agreement or contract is used;
(vi) any agreement (or group of related agreements) for the purchase
or sale of supplies, products or other personal property, or for the furnishing
or receipt of services (including any forms of agreement or purchase order
relating to the sale of DSS Systems or the sale of DIRECTV services) requiring
payments in excess of $75,000 per year;
(vii) any agreement concerning a partnership or joint venture;
(viii) any agreement with the Shareholders (or any of them), including
agreements related to registration rights;
(ix) any agreement (or group of related agreements) under which the
Company or any of its Subsidiaries has created, incurred, assumed or guaranteed
any indebtedness for borrowed money, or any capitalized lease obligation, or
under which the Company or any of its Subsidiaries has imposed an Encumbrance,
the liability on which, determined in accordance with GAAP, exceeds $75,000;
(x) any agreement concerning confidentiality or noncompetition;
(xi) any agreement involving any officer, director, shareholder or
member of the Company or any of its Affiliates;
(xii) any agreement for the employment or hire of any individual on a
full-time, part-time, consulting or other basis requiring payments in excess of
$50,000 per year;
(xiii) each form of agreement used by the Company or any of its
Subsidiaries relating to the services of sales representatives, agents and
other independent contractors (including agreements relating to the maintenance
or installation of DSS Systems) since the date of the Company's Acquisition of
the DIRECTV Distribution Business with respect to which such agreement or
contract is used;
(xiv) any agreement under which the Company or any of its Subsidiaries
has advanced or lent any amount to any employee or any of the current or former
directors, officers or shareholders of the Company or any of its Affiliates
(other than advances against properly documented and properly reimbursable
business expenses in the Ordinary Course);
(xv) any agreement under which the consequences of a default or
termination could have a Material Adverse Effect on the Company; and
(xvi) any other agreement (or group of related agreements) entered
into other than in the Ordinary Course the performance of which involves
consideration in excess of $150,000.
The Company has delivered to Pegasus a correct and complete copy of each
written agreement listed in Section 3.16 of the Company Disclosure Statement
and a written summary setting forth the terms and conditions of each oral
agreement listed therein. With respect to each such agreement, except as
described in Section 3.16 of the Company Disclosure Statement: (A) the
agreement is legal, valid, binding, enforceable and in full force and effect;
(B) subject to obtaining any consent referred to in Section 3.5 or disclosed in
Section 3.5 of the Company Disclosure Statement, the agreement will continue to
be legal, valid, binding, enforceable and in full force and effect on identical
terms following the consummation of the transactions contemplated hereby; (C)
neither the Company nor any of its Subsidiaries, nor, to the best knowledge of
the Company, any other party thereto, is in breach or default, and no event has
occurred which with notice or lapse of time would constitute a breach or
default, or permit termination, modification or acceleration, under the
agreement; (D) neither the Company nor any of its Subsidiaries, nor, to the
best knowledge of the Company, any other party thereto, has repudiated any
provision of the agreement; and (E) to the best knowledge of the Company, there
is no Basis for any Person to claim that any of clauses (A) through (D) is
untrue.
(b) Each Consumer Contract conforms, and the Company's and its
Subsidiaries' conduct in the origination, administration and enforcement of
each Consumer Contract has conformed, to all applicable Legal Requirements,
including those relating to usury, consumer credit, consumer credit disclosure
and terms, consumer leasing and rental, debt collection and enforcement
practices, equal credit opportunity and credit reporting practices, except
where failures to so conform would not, in the aggregate have a Material
Adverse Effect on the Company.
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3.17 Books and Records. Section 3.17 of the Company Disclosure Statement
identifies and describes all of the Books and Records. The Books and Records
accurately and fairly represent the Business and its results of operations in
all material respects. All Accounts Receivable and Inventory of the Business
are reflected properly on such Books and Records in all material respects.
3.18 Business Information. Section 3.18 of the Company Disclosure
Statement sets forth a materially true and accurate description of the
following information as of the date set forth therein: (i) the approximate
number of Committed Member Residences in each Service Area; (ii) the
approximate number of Committed Member Residences in each Service Area that is
cabled; (iii) the approximate number of Committed Member Residences in each
Service Area that is uncabled; and (iv) the rates charged to subscribers in
each Service Area.
3.19 Insurance. Section 3.19 of the Company Disclosure Statement sets
forth the following information with respect to each insurance policy relating
to the Business (including policies providing property, casualty, liability,
directors' and officers' liability and workers' compensation coverage and bond
and surety arrangements) to which the Company or any of its Subsidiaries has
been a party, a named insured, or otherwise the beneficiary of coverage at any
time:
(i) the name, address, and telephone number of the agent;
(ii) the name of the insurer, the name of the policyholder and the
name of each covered insured;
(iii) the policy number and the period of coverage;
iv) the scope (including an indication of whether the coverage was on
a claims made, occurrence or other basis) and amount (including a description
of how deductibles and ceilings are calculated and operate) of coverage; and
(v) a description of any retroactive premium adjustments or other
loss-sharing arrangements.
With respect to each such insurance policy: (A) the policy is legal,
valid, binding, enforceable, and in full force and effect; (B) neither the
Company, nor any predecessor in interest nor any other party to the policy is
in breach or default (including with respect to the payment of premiums or the
giving of notices), and no event has occurred which, with notice or the lapse
of time, would constitute such a breach or default, or permit termination,
modification or acceleration, under the policy; and (C) no party to the policy
has repudiated any provision thereof. The Business and the Assets have been
covered since the beginning of Business operations in scope and amount
customary and reasonable for such a business and in the case of workers'
compensation coverage, in scope and amount required by applicable Legal
Requirements. Section 3.19 of the Company Disclosure Statement describes any
self-insurance arrangements affecting the Assets or the Business. Section 3.19
of the Company Disclosure Statement also sets forth each insurance claim (other
than medical claims) in excess of $100,000 made or loss incurred relating to
the Business pursuant to property, casualty, liability, workers' compensation
and bond and surety policies and, except as indicated therein, no such claim is
outstanding.
3.20 Disclosure. No representation or warranty of any Seller in this
Agreement or of any DTS Party in the Collateral Documents and no statement in
any certificate, report, instrument, list or other document furnished or to be
furnished by the Company pursuant to this Agreement or by any DTS Party in the
Collateral Documents contained, contains or will contain on the date such
agreement, certificate, report, instrument, list or other document was or is
delivered, any untrue statement of a material fact, or omitted, omits or will
omit on such date to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading; nor will any such representation or warranty or statement contain
on the Closing Date any untrue statement of a material fact or omit on the
Closing Date to state any material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading. There is no fact known to any Seller and not disclosed in this
Agreement (other than facts generally known to, and that generally affect, NRTC
members and affiliates providing DIRECTV services) that could be reasonably
likely to have a Material Adverse Effect on the Company.
3.21 Brokers or Finders. No broker or finder has acted directly or
indirectly for the Company, any Seller or any of their Affiliates in connection
with the transactions contemplated by this Agreement. Neither the Company, any
Seller nor any of their Affiliates has incurred any obligation to pay any
brokerage or finder's fee or other commission in connection with the
transaction contemplated by this Agreement.
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3.22 Certain Payments. Neither the Company, any of the Sellers, any of
their Affiliates nor the Representatives of any of them has directly or
indirectly, on behalf of or for the purpose of assisting the Business, made any
contribution, gift, bribe, rebate, payoff, influence payment, kickback, or
other similar payments to any Person, private or public, regardless of form,
whether in money, property or services, to obtain favorable treatment in
securing business, to pay for favorable treatment for business secured, to
obtain special concessions or for special concessions already obtained, in
violation of any Legal Requirement, nor has any such Person established or
maintained any fund or asset that has not been recorded in the Books and
Records.
3.23 Subscribers.
(a) As of December 7, 1997, the Company had the number of Subscribers
shown in Section 3.23 of the Company Disclosure Statement, inclusive of persons
included in the most recent Subscribers Without Core Packages Report.
(b) Neither the Company, any of its Affiliates, nor any of their
Representatives has solicited, nor has the Company, any of its Affiliates, or
any of their Representatives employed any scheme or device for the purpose of
encouraging, Persons residing outside the Service Areas or Persons who would
not be deemed Committed Member Residences to become subscribers of the DIRECTV
service offered by the Business. Except as disclosed in the most recent
Subscribers Without Core Packages Reports for all the Service Areas, which have
been provided by the Company to Pegasus, the Business does not provide DIRECTV
service to any Person who does not pay for a core DIRECTV programming package,
who to the best knowledge of the Company resides outside the Service Areas or
who is not a Committed Member Residence for a reason other than residing
outside the Service Areas.
3.24 Favorable Business Relationships. To the best knowledge of the
Sellers, except as described in Section 3.24 of the Company Disclosure
Statement, there are no favorable business relationships relating to the
Business with lessors, licensors, subscribers, suppliers or other business
associates of the Company or any of its Subsidiaries which will terminate after
Closing.
3.25 Securities Matters. Each Principal Company Shareholder is an
"accredited investor," as that term is defined in Rule 501 under the Securities
Act, and not more than 35 Persons to whom Pegasus Class A Common Stock will be
issued at the Closing are not "accredited investors."
3.26 Billing and Authorization System. The Company has not altered,
modified or manipulated the NRTC Reporting System and/or the Billing and
Authorization System (together, the "Information Systems") in any way out of
the Ordinary Course for NRTC members and affiliates generally, including,
without limitation, alteration, modification or manipulation of the collection
or processing of data by the Information Systems, the standard parameters set
by the Information Systems with respect to subscriber authorization, billing
and cut-off and the standard reports generated by the Information Systems.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PRINCIPAL COMPANY SHAREHOLDERS
Each of the Principal Company Shareholders, severally and not jointly,
represents and warrants to the Pegasus Parties that with respect to itself the
statements contained in Article IV are correct and complete as of the date of
this Agreement and will be correct and complete as of the Closing Date (as
though made then and as though the Closing Date were substituted for the date
of this Agreement throughout Article IV).
4.1 Authority and Validity. Each Principal Company Shareholder has all
requisite power to execute and deliver, to perform its obligations under, and
to consummate the transactions contemplated by, this Agreement and the
Collateral Documents to which it is or is to be a party. The execution and
delivery by each Principal Company Shareholder of, the performance by each
Principal Company Shareholder of its obligations under, and the consummation by
each Principal Company Shareholder of the transactions contemplated by, this
Agreement and the Collateral Documents to which it is or is to be a party have
been duly authorized by all requisite action of such Principal Company
Shareholder. This Agreement has been duly executed and delivered by each
Principal Company Shareholder and is the legal, valid, and binding obligation
of such Principal Company Shareholder,
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enforceable against it in accordance with its terms. Upon the execution and
delivery by such Principal Company Shareholder of the Collateral Documents to
which it is or is to be a party, such Collateral Documents will be the legal,
valid and binding obligations of such Principal Company Shareholder,
enforceable against it in accordance with its terms.
4.2 Ownership. Each Principal Company Shareholder owns, beneficially and
of record, the number of shares of Company Capital Stock shown as owned by it
on Schedule 3.2(b) of the Company Disclosure Statement. Except as described in
Section 3.2(d) or 4.2 of the Company Disclosure Statement, no Person has any
right to acquire, and there are no Encumbrances on, the shares of Company
Capital Stock owned by such Principal Company Shareholder, other than transfer
restrictions under applicable securities laws.
4.3 Consents and Approvals. Except for (i) requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act, the HSR Act, and
the Company Credit Agreement, (ii) the requirement to make the Offer to
Purchase following the Closing, and (iii) requirements described in Section 3.5
of the Company Disclosure Statement, no consent, approval, authorization or
order of, registration or filing with, or notice to, any Governmental Authority
or any other Person is necessary to be obtained, made or given by any Principal
Company Shareholder in connection with the execution, delivery and performance
by them of this Agreement or any Collateral Document or for the consummation by
them of the transactions contemplated hereby or thereby.
4.4 Certain Information. No written information concerning any Principal
Company Shareholder or its interest in the Company furnished to Pegasus by any
Principal Company Shareholder specifically for inclusion in the Pegasus Merger
Registration Statement will at the time provided and, assuming that such
Principal Company Shareholder is given reasonable opportunity to review and
comment on the filings with the Commission, as of the filing date thereof, the
filing date of any amendment thereof, or the effective date thereof, or as of
the Closing Date, contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS
Pegasus represents and warrants to the Company and the Principal Company
Shareholders that the statements contained in this Article V are correct and
complete as of the date of this Agreement and, except as provided in Section
10.1, will be correct and complete as of the Closing Date (as though made then
and as though the Closing Date were substituted for the date of this Agreement
throughout this Article V, except in the case of representations and warranties
stated to be made as of the date of this Agreement or as of another date).
5.1 Organization and Qualification. Each of Pegasus and Merger Sub is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, and each Subsidiary of Pegasus is duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation or formation. Pegasus has, and each Subsidiary of
Pegasus (including Merger Sub) has all requisite power and authority to own,
lease and use its assets as they are currently owned, leased and used and to
conduct its business as it is currently conducted. Pegasus is, and each of its
Subsidiaries (including Merger Sub) is, duly qualified or licensed to do
business in and is in good standing in each jurisdiction in which the character
of the properties owned, leased or used by it or the nature of the activities
conducted by it makes such qualification necessary, except any such
jurisdiction where the failure to be so qualified or licensed and in good
standing would not have a Material Adverse Effect on Pegasus.
5.2 Capitalization. Pegasus's authorized capital stock consists of (i)
30,000,000 shares of Class A Common Stock, par value $.01 per share, of which
5,739,842 shares are outstanding, (ii) 15,000,000 shares of Class B Common
Stock, par value $.01 per share, of which 4,581,900 shares are outstanding, and
(iii) 5,000,000 shares of preferred stock, par value $.01 per share,
112,214.9875 of which have been designated as 12.75% Series A Cumulative
Exchangeable Preferred Stock, all of which is outstanding. Except as described
in Section 5.2 of the Pegasus Disclosure Statement, there are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, preemptive rights or other contracts or commitments
that could require Pegasus to issue, sell, or otherwise cause to become
outstanding any of its capital stock. There are no outstanding or authorized
stock appreciation, phantom stock, profit participation, or similar rights with
respect
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to Pegasus. The issuance by Pegasus of additional capital stock or other
securities between the date of this Agreement and the Closing Date shall not be
deemed to cause the representations and warranties in this Section to be untrue
or breached as of the Closing Date. The shares of Pegasus Class A Common Stock
included in the Merger Consideration, when issued in accordance with this
Agreement, will have been duly authorized, validly issued and outstanding and
will be fully paid and nonassessable.
5.3 Authority and Validity. Each Pegasus Party has all requisite power to
execute and deliver, to perform its obligations under, and to consummate the
transactions contemplated by, this Agreement and the Collateral Documents. The
execution and delivery by each Pegasus Party of, the performance by each
Pegasus Party of its respective obligations under, and the consummation by the
Pegasus Parties of the transactions contemplated by, this Agreement and the
Collateral Documents have been duly authorized by all requisite action of each
Pegasus Party (subject to the approval of Pegasus's shareholders as
contemplated by Section 8.5). This Agreement has been duly executed and
delivered by each of the Pegasus Parties and is the legal, valid and binding
obligation of each Pegasus Party, enforceable against each of them in
accordance with its terms. Upon the execution and delivery by each of the
Pegasus Parties and Marshall W. Pagon of the Collateral Documents to which each
of them is a party, the Collateral Documents will be the legal, valid and
binding obligations of each such Person, as the case may be, enforceable
against each of them in accordance with their respective terms.
5.4 No Breach or Violation. Subject to obtaining the consents, approvals,
authorizations, and orders of and making the registrations or filings with or
giving notices to Governmental Authorities and Persons identified in the
exceptions to Section 5.5, the execution, delivery and performance by the
Pegasus Parties of this Agreement and the Collateral Documents to which each is
a party and the consummation of the transactions contemplated hereby and
thereby in accordance with the terms and conditions hereof and thereof, do not
and will not conflict with, constitute a violation or breach of, constitute a
default or give rise to any right of termination or acceleration of any right
or obligation of any Pegasus Party under, or result in the creation or
imposition of any Encumbrance upon the property of Pegasus or Merger Sub by
reason of the terms of (i) the certificate of incorporation, by-laws or other
charter or organizational document of any Pegasus Party, (ii) any material
contract, agreement, lease, indenture or other instrument to which any Pegasus
Party is a party or by or to which any Pegasus Party or its property may be
bound or subject, (iii) any order, judgment, injunction, award or decree of any
arbitrator or Governmental Authority or any statute, law, rule or regulation
applicable to any Pegasus Party or (iv) any Permit of Pegasus or Merger Sub,
which in the case of (ii), (iii) or (iv) above would have a Material Adverse
Effect on Pegasus.
5.5 Consents and Approvals. Except for requirements under the NRTC
Distribution Agreements, the Securities Act, the Exchange Act and the HSR Act,
no consent, approval, authorization or order of, registration or filing with,
or notice to, any Governmental Authority or any other Person is necessary to be
obtained, made or given by any Pegasus Party in connection with the execution,
delivery and performance by them of this Agreement or any Collateral Documents
or for the consummation by them of the transactions contemplated hereby or
thereby, except to the extent the failure to obtain such consent, approval,
authorization or order or to make such registration or filings or to give such
notice would not have a Material Adverse Effect on Pegasus.
5.6 Title to Assets. Pegasus and its Subsidiaries have exclusive, good and
marketable title to their material property and assets, free and clear of any
and all Encumbrances, except (i) Encumbrances arising under the Pegasus Credit
Agreement, (ii) Permitted Liens, (iii) the matters described in Section 5.6 of
the Pegasus Disclosure Statement and (iv) Encumbrances (other than in the
nature of liens and security interests) that would not have a Material Adverse
Effect on Pegasus. Except as provided by this Agreement, and except as
described in Section 5.2 or 5.6 of the Pegasus Disclosure Statement, no Person
has any right to acquire, directly or indirectly, any interest in any of
Pegasus's Subsidiaries or any substantial portion of their respective
properties or assets, and there is no agreement to which Pegasus or any of its
Subsidiaries is a party relating to the direct or indirect sale of any
substantial portion of such properties or assets or the capital stock or other
ownership interests of Pegasus or any of its Subsidiaries.
5.7 Intellectual Property. To the best knowledge of Pegasus, neither
Pegasus nor any of its Subsidiaries has in the operation of their respective
businesses interfered with, infringed upon, misappropriated or otherwise come
into conflict with, and the operation of such businesses as currently conducted
does not violate or infringe upon, any Intellectual Property rights of third
parties, and neither Pegasus nor any of its Subsidiaries has
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received any charge, complaint, claim, demand or notice alleging any such
interference, infringement, misappropriation or violation (including any claim
that Pegasus or any of its Subsidiaries or any of their predecessors in
interest must license or refrain from using any Intellectual Property rights of
any third party). To the best knowledge of the Pegasus Parties, no third party
has interfered with, infringed upon, appropriated or otherwise come into
conflict with any Intellectual Property rights of Pegasus or any of its
Subsidiaries.
5.8 Compliance with Legal Requirements. Pegasus and its Subsidiaries have
operated their respective businesses in material compliance with all material
Legal Requirements and requirements of the NRTC (including NRTC's by-laws,
policies, procedures and guidelines) applicable to Pegasus and its
Subsidiaries. No action, suit, proceeding, hearing, investigation, charge,
complaint, claim, demand or notice has been filed, commenced or, to the best
knowledge of the Pegasus Parties, threatened against Pegasus, any of its
Subsidiaries or any of the Principal Pegasus Shareholders alleging any failure
to so comply and, to the best knowledge of the Pegasus Parties, there is no
Basis for any claim that such a failure to comply exists.
5.9 Legal Proceedings. Other than proceedings affecting the broadcast
television, cable television or direct broadcast satellite industry generally,
and except as set forth in Section 5.9 of the Pegasus Disclosure Statement, (i)
there are no outstanding judgments or orders against or otherwise affecting or
related to Pegasus, any of its Subsidiaries, or their business or assets; (ii)
there is no action, suit, complaint, proceeding or investigation, judicial,
administrative or otherwise, that is pending or, to the best knowledge of any
Pegasus Party, threatened that, if adversely determined, could have a Material
Adverse Effect on Pegasus; and (iii) there is no Basis upon which any such
action, suit, proceeding or investigation could be brought or initiated.
5.10 Subsequent Events. Except as set forth in Section 5.10 of the Pegasus
Disclosure Statement or to the extent consented to in writing by the Company,
between September 30, 1997, and the date of this Agreement: (i) neither Pegasus
nor any of its Subsidiaries has sold, leased, transferred or assigned any
substantial portion of its properties or assets except in the Ordinary Course;
(ii) no third party has accelerated, terminated, modified or canceled any
material agreement, contract, lease or license (or series of related
agreements, contracts, leases and licenses) relating to Pegasus any of its
Subsidiaries; (iii) neither Pegasus nor any of its Subsidiaries has imposed or
permitted the imposition of any Encumbrance upon any substantial portion of its
properties or assets except under the Pegasus Credit Agreement; (iv) neither
Pegasus nor any of its Subsidiaries has made any capital investment in, any
loan to, or any Acquisition of the securities or assets of, any other Person
(or series of related capital investments, loans or Acquisitions) in excess of
$500,000, other than in Subsidiaries of the Company and other than Acquisitions
of DIRECTV Distribution Businesses; (v) neither Pegasus nor any of its
Subsidiaries has issued any note, bond or other debt security or created,
incurred, assumed or guaranteed any indebtedness for borrowed money or
capitalized lease obligations except under the Pegasus Credit Agreement; (vi)
neither Pegasus nor any of its Subsidiaries has delayed or postponed the
payment of accounts payable and other Liabilities outside the Ordinary Course;
(vii) neither Pegasus nor any of its Subsidiaries has canceled, compromised,
waived or released any right or claim (or series of related rights and claims)
involving more than $500,000 or outside the Ordinary Course; (viii) neither
Pegasus nor any of its Subsidiaries has granted any license or sublicense of
any rights under or with respect to any Intellectual Property used or useful in
the DIRECTV Distribution Business of Pegasus, other than in the Ordinary Course
or in connection with the Acquisition of certain parts of such business; (ix)
there has not been any other material occurrence, event, incident, action,
failure to act or transaction outside the Ordinary Course involving Pegasus or
any of its Subsidiaries except matters generally known to, and that generally
affect, other NRTC members and affiliates or that generally affect the
broadcast television or cable television industries; and (x) neither Pegasus
nor any of its Subsidiaries has committed to any of the foregoing. Since
September 30, 1997, no event has occurred which is likely, individually or in
the aggregate, to have a Material Adverse Effect on Pegasus.
5.11 Financial and Other Information.
(a) The historical financial statements ("Pegasus Financial Statements")
contained (or incorporated by reference) in the Pegasus Exchange Offer
Registration Statement (including the notes thereto) have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby, and present fairly the financial condition of the Persons
reported on and their results of operations as of the dates and for the periods
indicated, subject in the case of the unaudited financial statements only to
normal year-end adjustments (none of which will be material in amount) and the
omission of footnotes.
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(b) Except as provided in subsection (d), the Pegasus Exchange Offer
Registration Statement did not, as of its filing date, and does not as of the
date of this Agreement, contain (directly or by incorporation by reference) any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein (or incorporated therein reference) not
misleading.
(c) Except as provided in subsection (d), the Pegasus Merger
Registration Statement will not, as of its effective date, at the date it is
first mailed to the shareholders of Pegasus, at the time of the meeting of
shareholders of Pegasus contemplated by Section 8.5, or as of the Closing Date,
contain (directly or by incorporation by reference) any untrue statement of a
material fact or omit to state (directly or by incorporation by reference) a
material fact required to or stated therein (or incorporated therein by
reference) or necessary to make the statements therein (or incorporated therein
by reference) not misleading.
(d) The representation and warranties in subsections (b) and (c) do not
extend to any information concerning the Company, any of its Subsidiaries or
any of the Principal Company Shareholders furnished by the Company or any of
the Principal Company Shareholders and contained or incorporated by reference
in the Pegasus Exchange Offer Registration Statement or the Pegasus Merger
Registration Statement.
5.12 Undisclosed Liabilities. Neither Pegasus nor any of its Subsidiaries
has any Liability and there is no Basis for any Liability, except for (i)
Liabilities reflected in the Pegasus Financial Statements, (ii) current
Liabilities incurred after September 30, 1997, in the Ordinary Course, (iii)
Liabilities incurred after September 30, 1997, under the Pegasus Credit
Agreement, (iv) Liabilities incurred after September 30, 1997, in connection
with Acquisitions that do not give rise to a right of termination under Section
12.1(d) (or Acquisitions that are approved in writing by the Company), (v)
Liabilities disclosed in Section 5.12 of the Pegasus Disclosure Statement, and
(vi) Liabilities in an aggregate amount of up to $1,000,000.
5.13 Taxes. Pegasus has, and each of its Subsidiaries has, duly and timely
filed in proper form all Tax Returns for all Taxes required to be filed with
the appropriate Governmental Authority, except where the Adverse Consequences
of all such failures to file do not exceed $500,000 in the aggregate. All Taxes
due and payable by Pegasus and its Subsidiaries (or claimed to be due and
payable) have been paid (regardless whether Tax Returns relating to such Taxes
have been duly and timely filed or, if filed, regardless whether such Tax
Returns are deficient), except such amounts as (i) are not in the aggregate
material or (ii) are being contested diligently and in good faith and for which
Pegasus has adequately reserved in the Pegasus Financial Statements. All copies
of federal and state income Tax Returns furnished or to be furnished by Pegasus
to the Company are accurate and complete in all material respects. There are no
pending tax audits, claims or proceedings relating to Pegasus, any of its
Subsidiaries, their assets or their business and income therefrom. Neither the
Pegasus nor any of its Subsidiaries has agreed to any waiver or extension of
any statute of limitations relating to any Tax.
5.14 Employee Benefits; Employees. All Employee Benefit Plans maintained
or contributed to by Pegasus as of the date of this Agreement are set forth in
Section 5.14 of the Pegasus Disclosure Statement. Except for matters that
individually or in the aggregate would not have Adverse Consequences in excess
of $250,000:
(a) Except as set forth in Section 5.14 of the Pegasus Disclosure
Statement, all such Employee Pension Benefit Plans are, and have been at all
times since their establishment, qualified for federal income tax purposes
under Code Section 401(a) and the related trusts are, and have been at all
times since their establishment, exempt from federal income tax under Code
Section 501(a). All such Employee Benefit Plans are in compliance with all
applicable provisions of ERISA, including, but not limited to, the applicable
reporting and disclosure requirements, as they relate to such plans, and
Pegasus is not subject to any liabilities based on past non-compliance, if any.
(b) Pegasus has made all required contributions under each Employee
Benefit Plan listed in Section 5.14 of the Company Disclosure Statement for all
periods through and including the fiscal year ended December 31, 1996, and has
made all required contributions for subsequent periods or has provided adequate
accruals therefor in the Company Financial Statements.
(c) There is not now, and has not been, any violation of the Code or
ERISA with respect to the filing of applicable reports, documents, and notices
regarding the Employee Benefit Plans maintained or contributed to by Pegasus
with the Secretary of Labor and the Secretary of the Treasury or the furnishing
of such documents to the participants or beneficiaries of the Employee Benefit
Plans.
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(d) No fiduciary or other party in interest with respect to any of the
Employee Benefit Plans maintained or contributed to by Pegasus has caused any
of such plans to engage in a "prohibited transaction," as defined in ERISA
Section 406.
(e) Pegasus has never been obligated to contribute to any Multiemployer
Plan.
(f) There has been no violation of the "continuation coverage
requirements" of "group health plans" as set forth in Code Section 4980B and
Part 6 of Subtitle B of Title I of ERISA with respect to any Employee Benefit
Plan maintained by Pegasus to which such continuation coverage requirements
apply.
(g) Pegasus does not maintain retiree life and retiree health insurance
plans which are Employee Welfare Benefit Plans providing for continuing
benefits or coverage for any employee or any beneficiary of any employee after
such employee's termination of employment (except to the extent such continued
coverage is required by Code Section 4980B and Part 6 of Subtitle B of Title I
of ERISA).
(h) Pegasus does not maintain and is not obligated to contribute to any
Employee Pension Benefit Plan that is a defined benefit plan, and has not
maintained and has not been obligated to contribute to such a plan within the
last six years.
(i) "Pegasus," as used in subsections (a) through (h) of this Section
5.14 shall include any other entity required to be aggregated with Pegasus
under Sections 414(b), 414(c), 414(m), or 414(o) of the Code and the
regulations thereunder.
(j) There are no collective bargaining agreements applicable to any
Persons employed by Pegasus or any of its Subsidiaries, and Pegasus and its
Subsidiaries have no duty to bargain with any labor organization with respect
to any such Person. There are not pending any unfair labor practice charges
against Pegasus or any of its Subsidiaries, nor is there any demand for
recognition, or any other request or demand from a labor organization for
representative status with respect to any Person employed by Pegasus or any of
its Subsidiaries.
(k) Pegasus and its Subsidiaries are in substantial compliance with all
applicable Legal Requirements respecting employment conditions and practices,
have withheld all amounts required by any applicable Legal Requirements or
Contracts to be withheld from the wages or salaries of their employees, and are
not liable for any arrears of wages or any Taxes or penalties for failure to
comply with any of the foregoing.
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(l) Pegasus and its Subsidiaries have not engaged in any unfair labor
practice within the meaning of the National Labor Relations Act and have not
violated any Legal Requirement prohibiting discrimination on the basis of race,
color, national origin, sex, religion, age, marital status, or handicap in
their employment conditions or practices, except where such violations would
not have a Material Adverse Effect on Pegasus. There is not pending or, to the
best knowledge of Pegasus, threatened any unfair labor practice charge or
discrimination complaint relating to race, color, national origin, sex,
religion, age, marital status, or handicap against Pegasus or any of its
Subsidiaries before any Governmental Authority nor, to the best knowledge of
Pegasus, does any Basis therefor exist.
(m) There is no existing or, to the best knowledge of Pegasus,
threatened, labor strike, dispute, grievance or other labor controversy
affecting Pegasus or any of its Subsidiaries. There is no pending or, to the
best knowledge of Pegasus, threatened representation question respecting the
employees of Pegasus or any of its Subsidiaries. There is no pending or, to the
best knowledge of Pegasus, threatened arbitration proceeding under any
Contract. To the best knowledge of Pegasus, there exists no Basis for any of
the above.
(n) Neither Pegasus nor any of its Subsidiaries is a party to any
employment agreement or arrangement, written or oral, relating to any employee,
consultant or independent contractor that cannot be terminated at will by
Pegasus or such Subsidiary without further liability.
5.15 Contracts. Section 5.15 of the Pegasus Disclosure Statement contains
a true, correct and complete list as of the date hereof of (or a specific
cross-reference to one or more other sections of the Pegasus Disclosure
Statement where there is described) (i) each NRTC Distribution Agreement
(together with the Service Area covered by each) and any other agreement with
NRTC or DirecTV, Inc. or any of their Affiliates to which Pegasus or any of its
Subsidiaries is a party, (ii) a description of any agreement pursuant to which
Pegasus or
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any of its Subsidiaries acquired any portion of their DIRECTV Distribution
Business (other than rights acquired directly from the NRTC), and (iii) any
other agreement entered into other than in the Ordinary Course the performance
of which involves consideration in excess of $150,000.
Pegasus has made available to the Company the opportunity to inspect and
copy a correct and complete copy of each agreement referred to in this Section
5.15. With respect to each such agreement: except as included in Section 5.15
of the Pegasus Disclosure Statement (A) the agreement is legal, valid, binding,
enforceable and in full force and effect; (B) subject to obtaining any consent
referred to in Section 5.5 or disclosed in Section 5.5 of the Pegasus
Disclosure Statement, the agreement will continue to be legal, valid, binding,
enforceable and in full force and effect on identical terms following the
consummation of the transactions contemplated hereby; (C) neither Pegasus nor
any of its Subsidiaries, nor to the best knowledge of Pegasus, any other party
thereto, is in breach or default, and no event has occurred which with notice
or lapse of time would constitute a breach or default, or permit termination,
modification or acceleration, under the agreement; (D) neither Pegasus nor any
of its Subsidiaries, nor to the best knowledge of Pegasus, any other party
thereto, has repudiated any provision of the agreement; and (E) to the best
knowledge of the Pegasus, there is no Basis for any Person to claim that any of
clauses (A) through (D) is untrue.
5.16 Business Information. Section 5.16 of the Pegasus Disclosure
Statement sets forth a materially true and accurate description of the
following information as of the date of this Agreement: (i) the approximate
number of Committed Member Residences in each Service Area; (ii) the
approximate number of Committed Member Residences in each Service Area that is
cabled; and (iii) the approximate number of Committed Member Residences in each
Service Area that is uncabled.
5.17 Disclosure. No representation or warranty of any Pegasus Party in
this Agreement or in the Collateral Documents and no statement in any
certificate, report, instrument, list or other document furnished or to be
furnished by any Pegasus Party pursuant to this Agreement or the Collateral
Documents, contained, contains or will contain on the date such agreement,
certificate, report, instrument, list or other document was or is delivered,
any untrue statement of a material fact, or omitted, omits or will omit on such
date to state any material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading; nor
will any such representation or warranty or statement (to the extent it is
required by Section 10.1 to be accurate at the Closing Date) contain on the
Closing Date any untrue statement of a material fact or omit on the Closing
Date to state any material fact necessary in order to make the statements made,
in light of the circumstances under which they were made, not misleading. There
is no fact known to any Pegasus Party and not disclosed in this Agreement
(other than facts generally known to, and that generally affect, NRTC members
and affiliates providing DIRECTV services or Persons in the broadcast
television or cable television industry) that could reasonably be expected to
have a Material Adverse Effect on Pegasus.
5.18 Brokers or Finders. No broker or finder (with the possible exception
of the services rendered by Merrill Lynch & Co., as financial adviser to
Pegasus and in connection with rendering its fairness opinion relating to the
Merger) has acted directly or indirectly for any of the Pegasus Parties in
connection with the transactions contemplated by this Agreement, and none of
the Pegasus Parties has incurred any obligation to pay any brokerage or
finder's fee or other commission in connection therewith.
5.19 Certain Payments. Neither Pegasus, any of its Subsidiaries, any of
their Affiliates nor the Representatives of any of them has directly or
indirectly, on behalf of or for the purpose of assisting their business, made
any contribution, gift, bribe, rebate, payoff, influence payment, kickback, or
other similar payments to any Person, private or public, regardless of form,
whether in money, property or services, to obtain favorable treatment in
securing business, to pay for favorable treatment for business secured, to
obtain special concessions or for special concessions already obtained, in
violation of any Legal Requirement, nor has any such Person established or
maintained any fund or asset that has not been recorded in its books and
records.
5.20 Subscribers.
(a) As of December 7, 1997, Pegasus had the number of subscribers shown
in Section 5.20 of the Pegasus Disclosure Statement, inclusive of persons
included in the most recent Subscribers Without Core Packages Report.
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(b) Neither Pegasus, any of its Affiliates, nor any of their
Representatives has solicited, nor has Pegasus, any of its Affiliates, or any
of their Representatives employed any scheme or device for the purpose of
encouraging, Persons residing outside the Service Areas or Persons who would
not be deemed Committed Member Residences to become subscribers of the DIRECTV
service offered by Pegasus and its Subsidiaries. Except as disclosed in the
most recent Subscribers Without Core Packages Reports for all the Service
Areas, which have been provided by Pegasus to the Company, Pegasus and its
Subsidiaries do not provide DIRECTV service to any Person who does not pay for
a core DIRECTV programming package, who to the best knowledge of Pegasus
resides outside the Service Areas or who is not a Committed Member Residence
for a reason other than residing outside the Service Areas.
5.21 Favorable Business Relationships. To the best knowledge of Pegasus,
there are no favorable business relationships relating to the business of
Pegasus and its Subsidiaries with lessors, licensors, subscribers, suppliers or
other business associates of Pegasus or any of its Subsidiaries which will
terminate after Closing.
5.22 Securities Matters. Pegasus has filed all forms, reports, statements
and other documents required to be filed with the Commission, and has
heretofore made available to the Company, in the form filed with the
Commission, together with any amendments thereto, its (i) Annual Reports on
Form 10-K, (ii) all Quarterly Reports on Form 10-Q, (iii) all proxy statements
relating to meetings of stockholders (whether annual or special), (iv) all
reports on Form 8-K, and (v) all other reports or registration statements filed
by Pegasus (collectively, the "Pegasus SEC Reports"). As of their respective
filing dates the Pegasus SEC Reports (i) complied as to form in all material
respects with the requirements of the Exchange Act and the Securities Act and
(ii) did not contain any untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading.
5.23 FCC Matters. Pegasus and its Subsidiaries hold all licenses,
authorizations and permits (the "FCC Licenses") from the Federal Communications
Commission (the "FCC") necessary for the operation of the broadcast television
stations (the "Stations") operated by Pegasus and its Subsidiaries, except to
the extent the absence thereof would not have a Material Adverse Effect on
Pegasus, and except as disclosed in Section 5.23 of the Pegasus Disclosure
Statement. Each of the FCC Licenses is in full force and effect, and no
material default by Pegasus or any of its Subsidiaries has occurred and is
continuing thereunder. As of the date hereof, except as limited by the
provisions of the Communications Act of 1934, as amended, and the FCC's rules
and regulations and as otherwise specified on the face of any FCC License, none
of the FCC Licenses is subject to any restriction or condition that would limit
in any material respect the operation of the business of Pegasus and its
Subsidiaries as it is now conducted. There is not, as of the date hereof,
pending or to, the knowledge of Pegasus, threatened any action by or before the
FCC to revoke, cancel, rescind or modify (including a reduction in coverage
area) any of the FCC Licenses (other than proceedings to amend FCC rules of
general applicability) or refuse to renew the FCC Licenses, and there is not
now issued or outstanding, pending or, to the knowledge of Pegasus threatened
by or before the FCC, any order to show cause, notice of violation, notice of
apparent liability, or notice of forfeiture or complaint against Pegasus or any
of its Subsidiaries with respect to any of the FCC Licenses. Pegasus has no
reason to believe that any of the FCC licenses will be revoked or will not be
renewed in the ordinary course.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MERGER SUB
Each of Pegasus and Merger Sub, severally and jointly, represents and
warrants to the Company that the statements contained in Article VI are correct
and complete as of the date of this Agreement and, except as provided in
Section 10.1, will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout Article VI), except in the case of representations and
warranties stated to be made as of the date of this Agreement or as of another
date.
6.1 Organization and Qualification. Merger Sub is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of it incorporation. Merger Sub was formed solely for the purpose
of engaging in the transactions contemplated by this Agreement. As of the date
of this Agreement, except for obligations or liabilities incurred in connection
with its incorporation or organization and the transactions
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contemplated by this Agreement, Merger Sub has no assets (other than not more
than $1,000 in cash) and has not incurred, directly or indirectly, any
obligations or liabilities or engaged in any business activities of any type or
kind whatsoever or entered into any agreements or arrangements with any person.
6.2 Certificate of Incorporation and Bylaws. Merger Sub has heretofore
made available to the Company a complete and correct copy of the certificate of
incorporation and the bylaws of Merger Sub, each as amended to date. Such
certificate of incorporation and bylaws are in full force and effect. Merger
Sub is not in violation of any of the provisions of its certificate of
incorporation or bylaws.
6.3 Authority. Merger Sub has the necessary corporate power and authority
to enter into this Agreement, to perform its obligations hereunder and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement by Merger Sub and the consummation by Merger Sub of the
transactions contemplated hereby have been duly and validly authorize by all
necessary corporate action and no other corporate proceedings on the part of
Merger Sub are necessary to authorize this Agreement or to consummate the
transactions contemplated hereby. This Agreement has been duly executed and
delivered by Merger Sub and, assuming the due authorization, execution and
delivery by the Company and the Principal Company Shareholders, constitutes a
legal, valid and binding obligation of Merger Sub, enforceable in accordance
with its terms, except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws of general
applicability relating to or affecting creditors' rights generally and by the
application of general principles of equity.
6.4 No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Merger Sub do not,
and the performance by Merger Sub of its obligations under this Agreement will
not (i) conflict with or violate the certificate of incorporation or bylaws of
Merger Sub, (ii) conflict with or violate any law, statute ordinance, rule
regulation, order, judgment or decree applicable to Merger Sub or by which any
of its properties is bound or affected, or (iii) result in any breach of or
constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, or result in the creation of any
Encumbrance on any of the properties or assets of Merger Sub pursuant to, any
note, bond, mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which Merger sub is a party or
by which Merger Sub or any of its properties or assets is bound or affected,
except, in the case of clauses (ii) and (iii) above for any such conflicts,
violations, breaches, defaults or other alterations or occurrences that would
not prevent or delay consummation of the Merger in any material respect, or
otherwise prevent Merger Sub from performing its obligations under this
Agreement in any material respect.
(b) The execution and delivery of this Agreement by Merger Sub does not,
and the performance of this Agreement by Merger Sub will not, require any
consent, approval, authorization or permit of, or filing with or notification
to, any Governmental Entity, except (i) for (A) applicable requirements, if
any, of the Securities Act, the Exchange Act, state takeover laws, exchanges on
which Pegasus's securities are traded, the HSR Act and the Communications Act,
(B) filings and recordation of appropriate merger documents as required by
Delaware Law and (ii) where failure to obtain such consents, approvals,
authorizations or permits, or to make such filings or notifications, would not
prevent or delay consummation of the Merger in any material respect.
6.5 Vote Required. The affirmative vote of Pegasus, the sole stockholder
of Merger Sub, is the only vote of the holder of any class or series of Merger
Sub capital stock necessary to approve any of the transactions contemplated
hereby.
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ARTICLE VII
PRE-CLOSING COVENANTS OF THE SELLERS
The Sellers jointly and severally covenant and agree as follows:
7.1 Additional Information. The Sellers shall provide to Pegasus and its
Representatives such financial, operating and other documents, data and
information relating to the Company and its Subsidiaries, the Business and the
Assets and Liabilities of the Company and its Subsidiaries, including pending
and completed Acquisitions of DIRECTV Distribution Businesses, as Pegasus or
its Representatives may reasonably request. Such access shall include the right
of Pegasus and its Representatives to inspect the records, reports and material
correspondence of NRTC and DIRECTV and discuss such records, reports and
correspondence with NRTC and DIRECTV, and the Company shall take all action
necessary to facilitate the foregoing. In addition, the Sellers shall take all
action necessary to enable Pegasus and its Representatives (including Coopers &
Lybrand L.L.P.) to review, inspect and audit the Assets, Business and
Liabilities of the Company and its Subsidiaries and discuss them with the
Company's officers, employees, independent accountants, and counsel.
Notwithstanding any investigation that Pegasus may conduct of the Company and
its Subsidiaries, the Business, the Assets and Liabilities, the Pegasus Parties
may fully rely on the Sellers' warranties, covenants and indemnities set forth
in this Agreement, the Collateral Documents and any documents, instruments or
certificates delivered hereunder and thereunder, which will not be waived or
affected by or as a result of such investigation.
7.2 Exclusivity. Neither any Seller, nor any Affiliate or Representative
of any Seller shall directly or indirectly, solicit or initiate any
discussions, submissions of proposals or offers or negotiations with, or,
subject to any fiduciary obligations under applicable law after taking into
account the advice of counsel with respect thereto, participate in any
negotiations or discussions with, or provide any information or data of any
nature whatsoever, to, or otherwise cooperate in any other way with, or assist
or participate in, facilitate or encourage any effort or attempt by, any
Person, other than Pegasus and its shareholders, employees, Representatives,
agents and Affiliates, concerning any merger, consolidation, sale of
substantial assets, sale of shares of capital stock or other equity securities
or similar transaction involving the Company or any of its Subsidiaries (all
such transactions being referred to herein as "Company Alternative
Transactions"); provided, however, that the term "Company Alternative
Transactions" shall not be deemed to include, and the foregoing shall not
prohibit (i) acquisitions permitted under Section 7.3(c)(i), excluding any
business affiliated with Golden Sky Systems, Inc., (ii) the consummation of
Exchange Offer, and (iii) other transactions expressly permitted under this
Agreement. The Sellers shall immediately notify Pegasus if any proposal, offer,
inquiry or other contact is received by, any information is requested from, or
any discussions or negotiations are sought to be initiated or continued with,
any Seller in respect of a Company Alternative Transaction, and shall, in any
such notice to Pegasus, indicate the identity of the offeror.
7.3 Continuity and Maintenance of Operations.
(a) The Company shall, and shall cause its Subsidiaries to, and the
Principal Company Shareholders shall cause the Company and its Subsidiaries to:
(i) comply with all Legal Requirements and requirements of the NRTC applicable
to the Company and its Subsidiaries (including NRTC's by-laws, policies,
procedures and guidelines) relating to the Business; (ii) fulfill all of its
obligations under and maintain in full force and effect all Contracts,
including the NRTC Distribution Agreements, and shall not, without the prior
written consent of Pegasus, alter, modify or amend any of the foregoing in a
manner adverse to the Company or its Subsidiaries; (iii) use its commercially
reasonable efforts in consultation with Pegasus and its Affiliates, to promote
the financial success of the Business and promptly notify Pegasus of any
adverse change in the prospects or condition (financial or otherwise) of the
Business; and (iv) use its commercially reasonable efforts to promote, develop
and preserve its relationships with the NRTC, DSS retailers, participating
cooperatives and its present employees as well as the goodwill of its
suppliers, customers and others having business relations with it, and promptly
notify Pegasus of any adverse change in its relationship with any such Person.
Without limiting the generality of the foregoing, the Company shall, and shall
cause its Subsidiaries to, and the Principal Company Shareholders shall cause
the Company and its Subsidiaries to, maintain the Assets in good order,
condition and repair, maintain insurance relating to the Business as in effect
on the date of this Agreement, continue promotion and other activities with
respect to the Business (including, without limitation, billing, collection and
subscriber matters) substantially in accordance with past practice and in
compliance with NRTC bylaws, policies, procedures and
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guidelines, maintain inventories of DSS Systems and supplies at reasonable
levels, and keep and maintain all of the Books and Records in the Ordinary
Course. Other than in the Ordinary Course, the Company and its Subsidiaries
shall not pay or credit in any way any Accounts Receivable prior to the Closing
Date, and shall not permit any of its Representatives to do so either. The
Company shall, and the Principal Company Shareholders shall cause the Company
and its Subsidiaries to, enforce procedures for disconnection and/or
discontinuance of service to subscribers (i) whose accounts are delinquent,
(ii) who do not pay for core DIRECTV programming packages, or (iii) who are not
Committed Member Residences, all in accordance with NRTC by-laws, policies,
procedures and guidelines.
(b) The Company shall not, and shall cause its Subsidiaries not to, and
the Principal Company Shareholders shall cause the Company and its Subsidiaries
not to, without the prior written consent of Pegasus: (i) deviate from DIRECTV
national programming packages or rates; (ii) engage in marketing promotions
other than in the Ordinary Course; (iii) sell, lease, transfer, convey or
assign any of the Assets other than in the Ordinary Course (or enter into any
contract to do any of the foregoing) or permit the creation of any Encumbrance
on any of the Assets except under the Company Credit Agreement, the interest
escrow established under the Company Indenture and the related escrow
agreement, as disclosed in Section 3.6 of the Company Disclosure Statement, or
as otherwise contemplated by this Agreement; or (iv) permit the amendment or
cancellation of any NRTC Distribution Agreement or any other Contract.
(c) Unless the Company shall have obtained the prior written consent of
Pegasus, the Company shall not, and shall cause its Subsidiaries not to, and
the Principal Company Shareholders shall cause the Company and its Subsidiaries
not to:
(i) engage in any Acquisition unless (A) the Acquisition is of a
DIRECTV Distribution Business; (B) the Acquisition is funded solely out of the
Company's cash on hand as of the date hereof, borrowings under the Company
Credit Agreement, debt incurred to the Sellers, and equity contributions from
the Company's shareholders; (C) on a pro forma basis, after giving effect to
the Acquisition and any debt incurred in connection therewith, the Company
would be in compliance with the Company Credit Agreement (including any
amendments thereto permitted hereby) and the Company Indenture, and the Company
shall have furnished Pegasus with satisfactory evidence to that effect; (D) on
a projected basis, after giving effect to the Acquisition and any debt incurred
in connection therewith, the Company's cash resources (including available
credit under the Company Credit Agreement) will be sufficient to satisfy its
future cash requirements as reflected in the Company Financial Model, as
updated to reflect such proposed Acquisition (other than the two pending
acquisitions reflected in the Company Financial Model), including, without
limitation, to fund Acquisitions of DIRECTV Distribution Businesses that have
been completed or are pending at the time of the Acquisition and to fund
operating expenses, working capital, debt service and capital expenditures
(other than the Offer to Purchase) (it being acknowledged that the Company
Financial Model reflects certain covenant noncompliance), and such updated
projection shall show no worsening in any of the foregoing matters, including
the extent of covenant noncompliance;
(ii) amend the Company Indenture, amend the Company Credit Agreement
to increase the amount of credit available thereunder or, except as permitted
by Section 9.3(b), otherwise amend the Company Credit Agreement;
(iii) declare or pay any dividends or make any other distributions to
the Shareholders;
(iv) redeem or repurchase any stock (other than stock of employees in
connection with termination of their employment and other than with Permitted
Redemptions;
(v) issue additional stock or options or warrants to acquire stock
(except in connection with the exercise of outstanding options and warrants or
Acquisitions permitted by paragraph (i));
(vi) incur any material debt (except in connection with Acquisitions
permitted by paragraph (i), borrowings under the Company Credit Agreement to
finance expenditures not prohibited by this Agreement, and other obligations
incurred in the Ordinary Course); or
(vii) make any loans other than in the Ordinary Course.
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Notwithstanding paragraph (v), the Company may sell additional shares of
Company Capital Stock for cash to some or all of its Shareholders if the
proceeds are used solely to pay cash dividends to the holders of its preferred
stock, and notwithstanding paragraph (iii), the Company may pay cash dividends
to such holders solely out of such proceeds.
(d) No Seller shall take or omit to take any action that would cause any
of them to be in breach of any representations, warranties or covenants in this
Agreement or the Collateral Documents or that would, if such action had been
taken or omitted on or before the date of this Agreement, have been required to
be disclosed in Section 3.11 of the Company Disclosure Statement.
(e) Prior to the Closing Date, the Company shall, and the Principal
Company Shareholder shall cause the Company to, terminate any consulting
arrangements specified by Pegasus providing for aggregate annual payments in
excess of $50,000.
7.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement, the
Sellers shall use commercially reasonable efforts to obtain any necessary
consent, approval, authorization or order of, make any registration or filing
with or give any notice to, any Governmental Authority or Person as is required
to be obtained, made or given by any of the Sellers to consummate the
transactions contemplated by this Agreement and the Collateral Documents,
including, without limitation: (i) consents required under the NRTC
Distribution Agreements; and (ii) any authorizations, consents, approvals,
actions, filings or notices set forth in Section 3.5 of the Company Disclosure
Statement (other than consents required pursuant to indebtedness of the Company
incurred in the Acquisition of a DIRECTV Distribution Business where such
indebtedness is secured in full by a letter of credit issued pursuant to the
Company Credit Agreement, provided that the completion of the Merger in the
absence of such consents will not result in a Default or Event of Default under
and as defined in the Company Credit Agreement).
(b) The Sellers shall cooperate with Pegasus in providing such
information and reasonable assistance as may be required in connection with the
obligations of the Pegasus Parties under Section 8.4(a).
7.5 Adoption by Shareholders. The Sellers shall use their respective best
efforts to secure the vote or consent of the Shareholders required by the DGCL
and the Company's certificate of incorporation and bylaws to approve and adopt
this Agreement and the Merger, and the board of directors of the Company shall
recommend to the Shareholders such approval and adoption. Unless the Company
elects to obtain shareholder approval by written consent, the Company shall
take all steps necessary to duly call, give notice of, convene and hold a
meeting of the Shareholders to be held as soon as is reasonably practicable
after the availability of the Pegasus Merger Registration Statement for the
purpose of voting upon the approval of this Agreement and the Merger. The
Company will furnish to each Shareholder a notice of its rights to dissent from
the Merger under Section 262 of the DGCL and to demand an appraisal of its
shares of Company and Common Stock and shall provide Pegasus with a copy of
such notice prior to the Closing Date. Each of the Principal Company
Shareholders (i) hereby waives its dissenters' appraised rights under Section
262 of the DGCL and (ii) shall vote all of its shares of Company Capital Stock,
or otherwise give its consent, to approve this Agreement and the Merger.
7.6 Securities Filings; Financial Information. The Sellers shall, promptly
after execution of this Agreement and from time to time thereafter, provide
such information and documents to Pegasus and its Affiliates concerning the
Company, its Subsidiaries and the Principal Company Shareholders as may be
required or appropriate for inclusion in the Pegasus Merger Registration
Statement and any other filing, notification or report made by Pegasus or any
Affiliate of Pegasus under the Securities Act, the Exchange Act or any state
securities law; shall cause their respective counsel and independent
accountants to cooperate with Pegasus, its Affiliates and their investment
bankers, counsel and independent accountants in the preparation of such
filings, notifications and reports; and shall use their best efforts to obtain
consents and "comfort letters" from such accountants as required in connection
with such filings, notifications and reports. The Sellers represent and warrant
to Pegasus that no information or document provided by any Seller for inclusion
in any filing, notification or report made by Pegasus or any Affiliate under
the Securities Act or the Exchange Act will contain any untrue statement of
material fact or omit to state any material fact necessary in order to make the
statements made therein, in light of the circumstances under which they are
made, not misleading.
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7.7 Notification of Certain Matters. The Sellers shall promptly provide to
Pegasus copies of any material notices from or correspondence from and to the
NRTC or DIRECTV or any Affiliates of DIRECTV. The Sellers shall promptly notify
Pegasus of any fact, event, circumstance or action that is reasonably likely to
cause any Seller to be unable to perform any of its covenants contained herein
or any condition precedent in Article VII not to be satisfied, or that, if
known on the date of this Agreement, would have been required to be disclosed
to Pegasus pursuant to this Agreement or the existence or occurrence of which
would cause any of the Sellers' representations or warranties under this
Agreement not to be correct and/or complete. The Sellers shall give prompt
written notice to Pegasus of any adverse development causing a breach of any of
the representations and warranties in Article III or IV. However, no disclosure
by the Sellers pursuant to this Section, and no supplement to the Company
Registration Statement referred to in Section 13.2(a), shall be deemed to amend
or supplement this Agreement or to prevent or cure any misrepresentation,
breach of warranty, or breach of covenant by the Sellers.
7.8 Supplements to Company Disclosure Statement and Company Registration
Statement. The Sellers shall, from time to time prior to Closing, supplement
the Company Disclosure Statement and the Company Registration Statement with
additional information that, if existing or known to it on the date of this
Agreement, would have been required to be included therein. For purposes of
determining the satisfaction of any of the conditions to the obligations of the
Pegasus Parties in Article IX, the Company Disclosure Statement and the Company
Registration Statement shall be deemed to include only (a) the information
contained therein on the date of this Agreement and (b) information added to
the Company Disclosure Statement or the Company Registration Statement by
written supplements delivered prior to Closing by the Sellers that (i) are
accepted in writing by Pegasus, (ii) are described in Section 2.7(b) or (iii)
reflect actions expressly permitted by this Agreement to be taken prior to
Closing. Any supplement to the Company Registration Statement shall be in
writing and delivered to Pegasus, but not be filed with the Commission unless
the Company is otherwise required to do so.
7.9 Duty of Good Faith and Fair Dealing. The Sellers shall act in good
faith with regard to all matters that are the subject of this Agreement, and
shall neither intentionally nor knowingly take any action or omit to take any
action at any time for the primary purpose of depriving the Pegasus Parties
unfairly of any right or benefit that any of them has at such time under this
Agreement.
7.10 Employee Matters. Not later than ten Business Days prior to the
Closing Date, the Company shall, or shall cause the sponsor of the Digital
Television Services 401(k) Plan (the "401(k) Plan") to, take the following
actions: (i) adopt resolutions, or take such other action as required by the
401(k) Plan, to (A) terminate the 401(k) Plan effective as of the Closing Date,
subject to receipt of a ruling from the District Director of Internal Revenue
that the termination of the 401(k) Plan does not adversely affect the tax
qualified status of the 401(k) Plan, and (B) cease contributions under the
401(k) Plan effective as of the Closing Date; and (ii) file Internal Revenue
Service Form 5310 (Application for Determination for Terminating Plan) with
respect to the 401(k) Plan termination with the District Director of Internal
Revenue, such Form fully disclosing the corporate transaction contemplated by
this Agreement and the status of 401(k) Plan participants after the
transaction. Such resolutions (or other action required by the 401(k) Plan) and
Form 5310 shall be in a form satisfactory to Pegasus.
7.11 1997 Company Financial Statements. The Company will deliver to
Pegasus at least ten days before the Closing Date its audited financial
statements as of and for the year ended December 31, 1997, accompanied by (i)
the report thereon of Arthur Andersen, L.L.P. and (ii) a schedule prepared by
Arthur Andersen, L.L.P. showing adjustments to the Company Financial Statements
as of and for the period ended September 30, 1997 determined to be appropriate
as a result of their audits. The delivery of such audited financial statements
shall constitute a representation and warranty that such financial statements
(including the notes thereto) have been prepared in accordance with GAAP on a
consistent basis with the Company Financial Statements and that such financial
statements present fairly the financial condition of the Company and its
Subsidiaries and the results of their operations as of December 31, 1997, and
for the year then ended.
7.12 1997 Tax Returns. The Company will deliver to Pegasus a draft copy of
the partnership Tax Returns to be filed by Digital Television Services, LLC for
the period ended October 10, 1997, and will provide Pegasus and its auditors a
reasonable amount of time in which to review it before it is filed. The Company
will deliver to Pegasus at or before the Closing Date drafts of Tax Returns for
the Company and its Subsidiaries for the period ended December 31, 1997.
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7.13 Indemnity under Prior Company Acquisitions. If reasonably requested
by Pegasus, the Company will assert claims for indemnification under, and in
accordance with, agreements under which it has made Acquisitions of DIRECTV
Distribution Businesses, provided that in the Company's judgment a reasonable
basis for such claim exists.
ARTICLE VIII
PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES
The Pegasus Parties jointly and severally covenant and agree as follows.
8.1 Additional Information. The Pegasus Parties shall provide to the
Sellers and their Representatives such financial, operating and other
documents, data and information relating to Pegasus and its Subsidiaries,
including pending and completed Acquisitions of DIRECTV Distribution
Businesses, as the Sellers or their Representatives may reasonably request.
Such access shall include the right of the Sellers and their Representatives to
inspect the records, reports and material correspondence of NRTC and DIRECTV
and discuss such records, reports and correspondence with NRTC and DIRECTV, and
the Pegasus Parties shall take all action necessary to facilitate the
foregoing. In addition, the Pegasus Parties shall take all action necessary to
enable the Sellers and their Representatives (including Arthur Andersen,
L.L.P.) to review and inspect books and records of Pegasus and its Subsidiaries
and discuss them with the officers, employees, independent accountants, and
counsel of the Pegasus Parties. Notwithstanding any investigation that the
Sellers may conduct of Pegasus and its Subsidiaries, the Sellers may fully rely
on the Pegasus Parties' warranties, covenants and indemnities set forth in this
Agreement, the Collateral Documents and any documents, instruments or
certificates delivered hereunder and thereunder, which will not be waived or
affected by or as a result of such investigation.
8.2 Exclusivity. Neither any Pegasus Party, nor any of their Affiliates,
nor any of their respective Representatives shall directly or indirectly,
solicit or initiate any discussions, submissions of proposals or offers or
negotiations with, or, subject to any fiduciary obligations under applicable
law after taking into account the advice of counsel with respect thereto,
participate in any negotiations or discussions with, or provide any information
or data of any nature whatsoever to, or otherwise cooperate in any other way
with, or assist or participate in, facilitate or encourage any effort or
attempt by, any Person, other than the Company and its shareholders, employees,
Representatives, agents and Affiliates, concerning any merger, consolidation,
sale of substantial assets, sale of shares of capital stock or other equity
securities or similar transaction involving Pegasus or any of its Subsidiaries
(all such transactions being referred to as "Pegasus Alternative
Transactions"); provided, however, that the term "Pegasus Alternative
Transactions" shall not be deemed to include, and the foregoing shall not
prohibit (i) acquisitions of media and communications businesses (including
issuances of securities in connection therewith); (ii) sales or other
extraordinary transactions relating to Pegasus's cable systems; (iii) a public
offering of equity or debt securities; or (iv) any transaction described in
Section 10.1(d). Pegasus shall immediately notify the Company if any proposal,
offer, inquiry or other contact is received by, any information is requested
from, or any discussions or negotiations are sought to be initiated or
continued with, Pegasus in respect of a Pegasus Alternative Transaction, and
shall, in any such notice to the Company, indicate the identity of the offeror.
8.3 Conduct of Business. Unless Pegasus shall have obtained the prior
written consent of the Company, Pegasus shall, and shall cause each of its
Subsidiaries to, and the Principal Pegasus Shareholders shall cause Pegasus and
each of its Subsidiaries to:
(a) conduct its business in the Ordinary Course (for purposes hereof,
Acquisitions of media and communications businesses, including issuances of
securities in connection therewith, sales or extraordinary transactions
involving cable systems, public offerings of equity and debt securities and
transactions described in Section 12.1(d) will be deemed conduct of business in
the Ordinary Course);
(b) use its commercially reasonable efforts to maintain its business,
assets and operations, and its relationships with employees, subscribers, and
others with whom it has significant business relationships, as an ongoing
business in accordance with past practice and custom;
(c) except for continuation or replacement arrangements relating to the
Pegasus employee loan program (as described in Section 5.15 of the Pegasus
Disclosure Statement), not enter into any material transaction with an
affiliated person except on terms not less favorable to Pegasus than could have
been obtained with unaffiliated parties; and
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(d) not take or omit to take any action that would cause any of the
Pegasus Parties to be in breach of any representation or warranty in this
Agreement or the Collateral Documents the accuracy of which on the Closing Date
is a condition precedent to the Sellers' obligations under Section 10.1, or in
breach of any covenant in this Agreement or the Collateral Documents.
8.4 Consents and Approvals.
(a) As soon as practicable after execution of this Agreement, the
Pegasus Parties shall use their best efforts to obtain any necessary consent,
approval, authorization or order of, make any registration or filing with or
give notice to, any Governmental Authority or Person as is required to be
obtained, made or given by any of the Pegasus Parties to consummate the
transactions contemplated by this Agreement and the Collateral Documents,
including without limitation: (i) consents required under the NRTC Distribution
Agreements; and (ii) any authorizations, consents, approvals, actions, filings
or notices set forth in Section 4.5 of the Pegasus Disclosure Statement.
Notwithstanding anything in this Section to the contrary, the Pegasus Parties
shall not be required to agree to any amendment, modification or change in, the
waiver of any term or condition of, or the imposition of any condition to the
transfer to Pegasus of, any NRTC Distribution Agreement in order to obtain the
consents required under the NRTC Distribution Agreements.
(b) The Pegasus Parties shall cooperate with the Sellers in providing
such information and reasonable assistance as may be required in connection
with the Sellers' obligations under Section 5.4(a).
8.5 Adoption by Pegasus Shareholders. Pegasus shall, promptly after the
effective date of the Pegasus Merger Registration Statement, take all actions
necessary in accordance with the DGCL and its certificate of incorporation and
by-laws to convene a special meeting of Pegasus's shareholders to act on this
Agreement, to be held as soon as practicable following the effectiveness of the
Pegasus Merger Registration Statement. Pegasus shall use all reasonable efforts
to secure the vote of its shareholders required by the DGCL and its certificate
of incorporation and by-laws to approve and adopt this Agreement, and the board
of directors of Pegasus shall recommend to the shareholders of Pegasus such
approval and adoption. Each of the Principal Pegasus Shareholders shall vote
all of its shares of Pegasus's common stock to approve this Agreement and the
Merger.
8.6 Merger Registration Statement. As soon as practicable, and in any
event within ten Business Days after the date of this Agreement, Pegasus shall
prepare and file with the Commission a registration statement on Form S-4 (such
registration statement, together with any amendments thereof or supplements
thereto, being the "Pegasus Merger Registration Statement") registering under
the Securities Act of the Pegasus Class A Common Stock to be issued in the
Merger. The Pegasus Merger Registration Statement will contain a combined proxy
statement and prospectus (the "Proxy Statement/Prospectus") that will
constitute (i) a prospectus to be delivered to the Shareholders in connection
with the meeting or solicitation of consents referred to in Section 7.5 and
(ii) a proxy statement to be delivered to Pegasus's shareholders in connection
with the meeting of Pegasus's shareholders referred to in Section 8.5. Pegasus
shall provide the Sellers and their counsel reasonable opportunity to review
and comment upon the contents of the Registration Statement. Pegasus will use
commercially reasonable efforts to cause the Pegasus Merger Registration
Statement to become effective as promptly as practicable. As promptly as
practicable after the Pegasus Merger Registration Statement shall have become
effective, Pegasus shall mail or deliver the Proxy Statement/Prospectus to the
Shareholders and to the shareholders of Pegasus entitled to notice of and to
vote at the Pegasus shareholders' meeting referred to in Section 8.5. All
documents that Pegasus is responsible for filing with the Commission in
connection with the transactions contemplated herein will comply as to form in
all material respects with the applicable requirements of the Securities Act,
the Exchange Act and the rules and regulations thereunder. Pegasus will use
commercially reasonable efforts to cause the Pegasus Class A Common Stock to be
issued in the Merger to be approved for listing on the Nasdaq National Market,
subject to notice of issuance prior to the Effective Time.
8.7 Notification of Certain Matters. The Pegasus Parties shall promptly
provide to the Sellers copies of any material notices from or correspondence
from and to the NRTC or DIRECTV or any Affiliates of DIRECTV. The Pegasus
Parties shall promptly notify the Sellers of any fact, event, circumstance or
action that is reasonably like to cause any Pegasus Party to be unable to
perform any of its covenants contained herein or any condition precedent in
Article X not to be satisfied, or that, if known on the date of this Agreement,
would have been required to be disclosed to the Sellers pursuant to this
Agreement or the existence or occurrence of which
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would cause any of the Pegasus Parties' representations or warranties under
this Agreement not to be correct and/or complete. The Pegasus Parties shall
give prompt written notice to the Sellers of any adverse development causing a
breach of any of the representations and warranties in Article V or VI as of
the date made. No disclosure by the Pegasus Parties pursuant to this Section,
however, shall be deemed to amend or supplement this Agreement or to prevent or
cure any misrepresentation, breach of warranty, or breach of covenant by the
Pegasus Parties.
8.8 Supplements to Pegasus Disclosure Statement. The Pegasus Parties
shall, from time to time prior to Closing, supplement the Pegasus Disclosure
Statement with additional information that, if existing or known to it on the
date of this Agreement, would have been required to be included therein. For
purposes of determining the satisfaction of any of the conditions to the
obligations of the Sellers in Article X, the Pegasus Disclosure Statement shall
be deemed to include only (a) the information contained therein on the date of
this Agreement and (b) information added to the Pegasus Disclosure Statement by
written supplements delivered prior to Closing by the Pegasus Parties that (i)
are accepted in writing by the Company or (ii) reflect actions taken or events
occurring after the date hereof and prior to Closing that (A) do not breach any
covenant in this Agreement so as to cause the condition precedent stated in
Section 10.2 not to be fulfilled at or prior to the Closing, (B) do not give
rise to a right on the part of the Sellers to terminate this Agreement pursuant
to Section 12.1(d), and (C) do not in the aggregate have a Material Adverse
Effect on Pegasus.
8.9 Duty of Good Faith and Fair Dealing. The Pegasus Parties shall act in
good faith with regard to all matters that are the subject of this Agreement
and shall neither intentionally nor knowingly take any action or omit to take
any action at any time for the primary purpose of depriving the Sellers
unfairly of any right or benefit that any of them has at such time under this
Agreement.
8.10 Tax Certificate. The Pegasus Parties shall take no action that would
preclude them from delivering at Closing a tax certificate in the form of
Exhibit 8 attached hereto.
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES
All obligations of the Pegasus Parties under this Agreement shall be
subject to the fulfillment at or prior to Closing of each of the following
conditions, it being understood that the Pegasus Parties may, in their sole
discretion, to the extent permitted by applicable Legal Requirements, waive any
or all of such conditions in whole or in part.
9.1 Accuracy of Representations. All representations and warranties of the
Company, the Principal DTS Shareholders and the DTS Parties contained in this
Agreement, the Collateral Documents and any other document, instrument or
certificate delivered by any of the Sellers or any of the DTS Parties at or
prior to Closing shall be, if specifically qualified by materiality, true in
all respects and, if not so qualified, shall be true in all material respects,
in each case on and as of the Closing Date with the same effect as if made on
and as of the Closing Date, other than representations and warranties expressly
stated to be made as of the date of this Agreement or as of another date other
than the Closing Date. The Company shall have delivered to Pegasus and Merger
Sub a certificate dated the Closing Date to the foregoing effect.
9.2 Covenants. The Sellers shall, in all material respects, have performed
and complied with each of the covenants, obligations, conditions and agreements
contained in this Agreement that are to be performed or complied with by them
at or prior to Closing. The Company shall have delivered to Pegasus and Merger
Sub a certificate dated the Closing Date to the foregoing effect.
9.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be made
with or given to, any Governmental Authority or Person as provided in Sections
7.4(a) and 8.4(a) shall have been duly obtained, made or given, as the case may
be, and shall be in full force and effect, and any waiting period required by
applicable law, including the HSR Act, or any
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Governmental Authority in connection with such transactions shall have expired
or have been earlier terminated, unless the failure to obtain, make or give any
such consent, approval, authorization, order, registration, filing or notice,
or to allow any such waiting period to expire or terminate would not have a
Material Adverse Effect on the Company.
(b) Notwithstanding the foregoing, the condition precedent stated in
subsection (a) shall not have been satisfied if any consent, approval,
authorization or order obtained in connection with the transactions
contemplated by this Agreement and the Collateral Documents is conditioned upon
or related to the amendment, modification, cancellation or termination of, or
waiver of any term or condition of, any contract, commitment or agreement, or
imposes upon Pegasus or the Surviving Corporation any condition or requirement
or change in policy not now imposed upon Pegasus, the Company, the Business or
the DIRECTV Distribution Business of Pegasus (regardless of whether such
imposition is specifically related to or predicated upon or precedes or follows
such consent, approval, authorization or order) except that the consent of the
lenders under the Company Credit Agreement may be conditioned on a reduction of
the amount of credit available thereunder to an amount not less than that
necessary to satisfy the standard described in Section 3.10 and on other
modifications that are not, in Pegasus's judgment, materially burdensome.
(c) This Agreement and the Merger shall have been approved by the
requisite vote of Pegasus's shareholders in accordance with the DGCL and the
rules of the Nasdaq Stock Market.
(d) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL.
(e) Pegasus and Merger Sub shall have been furnished with appropriate
evidence, reasonably satisfactory to it and its counsel, of the granting of
such consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (c) and (d).
9.4 Dissenters' Rights. The period for assertion of dissenters' rights
pursuant to Section 262 of the DGCL shall have expired, and the holders of
Company Capital Stock entitled to receive not more than five percent of the
Pegasus Class A Common Stock included in the Merger Consideration shall have
perfected their dissenters' appraisal rights under Section 262 of the DGCL in
connection with the Merger.
9.5 Delivery of Documents. The Sellers shall have delivered, or caused to
be delivered, to Pegasus and Merger Sub the following documents:
(i) Fleet Confidentiality Agreement, executed by Fleet Venture
Resources, Inc., Fleet Equity Partners IV, L.P., and Chisholm Partners III,
L.P.
(ii) Noncompetition Agreements -- Owners, executed by each of the
Specified Owners.
(iii) Noncompetition Agreements -- Management, executed by each member
of Company Senior Management.
(iv) Registration Rights Agreement, executed by the each Principal
Company Shareholder, each Columbia Principal, and each member of Company Senior
Management who elects to do so.
(v) Escrow Agreement, executed by the Escrow Agent and the Company,
and delivery to the Escrow Agent of the shares of Pegasus Class A Common Stock
required by Section 2.7 to be delivered to the Escrow Agent.
(vi) Voting Agreement, executed by the Principal Company Shareholders.
(vii) Indemnification Agreement, executed by each of the Successor
Principal Company Shareholders and each of the Columbia Principals.
(viii) Schedule satisfactory to Pegasus and certified as being
complete and correct by the Company reflecting the number of Subscribers in
each of the Service Areas as of the Closing Date, based upon reports of the
NRTC, including the most recent ad hoc Active Subscribers Report, ad hoc Active
Subscribers Without Core Packages Report and the ad hoc Cut Off Report by
Level.
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(ix) Evidence reasonably satisfactory to Pegasus that each Seller has
taken all action necessary to authorize the execution of this Agreement and the
Collateral Documents to which it is a party and the consummation of the
transactions contemplated hereby and thereby.
(x) Opinion of Nelson Mullins Riley & Scarborough, L.L.P., counsel to
the Sellers, dated the Closing Date, in form and substance reasonably
satisfactory to Pegasus.
(xi) The Books and Records.
(xii) All originally executed NRTC Agreements, and all originally
executed amendments thereto, that are in the Company's possession.
(xiii) To the extent in the Company's possession, all original
Consumer Contracts and all original files relating thereto, including
disclosure statements required by applicable Legal Requirements.
(xiv) Resignations of all members of the board of directors or similar
body of the Company and each of its Subsidiaries effective as of the Effective
Time.
(xv) Such other documents and instruments as Pegasus may reasonably
request: (A) to evidence the accuracy of the Company's and the DTS Parties'
representations and warranties under this Agreement, the Collateral Documents
and any documents, instruments or certificates required to be delivered
thereunder; (B) to evidence the performance by the Company and the DTS Parties
of, or the compliance by the Company and the DTS Parties with, any covenant,
obligation, condition and agreement to be performed or complied with by the
Company or any of the DTS Parties under this Agreement and the Collateral
Documents; or (C) to otherwise facilitate the consummation or performance of
any of the transactions contemplated by this Agreement and the Collateral
Documents.
9.6 No Material Adverse Change. There shall have been no material adverse
change in the Assets or in the business, financial condition, prospects or
operations of the Company and its Subsidiaries, taken as a whole, other than
those affecting the DIRECTV Distribution Business in general.
9.7 No Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority, and no Legal Requirement or
policy (other than Legal Requirements affecting the direct broadcast satellite
industry generally) of the NRTC, DirecTV, Inc. or any of their Affiliates, or
any applicable regulatory authority, shall have been enacted, promulgated or
issued that would: (i) prohibit or adversely affect Pegasus's or the Surviving
Corporation's and its Subsidiaries' ownership or operation of all or a material
portion of the Business or the Assets or otherwise impair the ability of
Pegasus or the Surviving Corporation and its Subsidiaries to realize the
benefits of the transactions contemplated by this Agreement and the Collateral
Documents or adversely affect the value of the Assets; (ii) restrict or limit
or otherwise condition Pegasus's or the Surviving Corporation's and its
Subsidiaries' right to transfer and/or assign the Business or the Assets in the
future; (iii) compel Pegasus or the Surviving Corporation or any of its
Subsidiaries to dispose of or hold separate all or a material portion of the
Business or the Assets as a result of any of the transactions contemplated by
this Agreement and the Collateral Documents; (iv) prevent or make illegal the
consummation of any transactions contemplated by this Agreement and the
Collateral Documents; or (v) cause any of the transactions contemplated by this
Agreement and the Collateral Documents to be rescinded following consummation.
9.8 NRTC Compliance Certificate. The Company shall have delivered to
Pegasus a certificate or letter from NRTC dated as of the Closing Date to the
effect that the Company and its Subsidiaries are in compliance with the NRTC
Distribution Agreements and there are no payments due by the Company under the
NRTC Distribution Agreements other than payments for fees due in the Ordinary
Course and not yet payable.
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS
All obligations of the Sellers under this Agreement shall be subject to
the fulfillment at or prior to Closing of the following conditions, it being
understood that the Sellers may, in their sole discretion, to the extent
permitted by applicable Legal Requirements, waive any or all of such conditions
in whole or in part.
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10.1 Accuracy of Representations. All representations and warranties of
the Pegasus Parties contained in this Agreement (giving effect to Section 8.8)
and the Collateral Documents and any other document, instrument or certificate
delivered by any of the Pegasus Parties at or prior to the Closing shall be, if
specifically qualified by materiality, true and correct in all respects and, if
not so qualified, shall be true and correct in all material respects, in each
case on and as of the Closing Date with the same effect as if made on and as of
the Closing Date, other than representations and warranties expressly stated to
be made as of the date of this Agreement or as of another date other than the
Closing Date. The Pegasus Parties shall have delivered to the Sellers a
certificate dated the Closing Date to the foregoing effect.
10.2 Covenants. The Pegasus Parties shall, in all material respects, have
performed and complied with each obligation, agreement, covenant and condition
contained in this Agreement and the Collateral Documents and required by this
Agreement and the Collateral Documents to be performed or complied with by the
Pegasus Parties at or prior to Closing. The Pegasus Parties shall have
delivered to the Company a certificate dated the Closing Date to the foregoing
effect.
10.3 Consents and Approvals.
(a) All consents, approvals, authorizations and orders required to be
obtained from, and all registrations, filings and notices required to be made
with or given to, any Governmental Authority or Person as provided in Section
8.4(a) shall have been duly obtained, made or given, as the case may be, and
shall be in full force and effect, and any waiting period required by
applicable, including the HSR Act, or any Governmental Authority in connection
with such transactions shall have expired or have been earlier terminated,
unless the failure to obtain, make or give any such consent, approval,
authorization, order, registration, filing or notice, or to allow any such
waiting period to expire or terminate would not have a Material Adverse Effect
on Pegasus.
(b) This Agreement and the Merger shall have been approved by the
requisite vote of Pegasus's shareholders in accordance with the DGCL and the
rules of the Nasdaq Stock Market.
(c) This Agreement and the Merger shall have been approved by the
requisite vote of the Company's Shareholders in accordance with the DGCL.
(d) The Sellers shall have been furnished with the appropriate evidence,
reasonably satisfactory to them and their counsel, of the granting of such
consents, approvals, authorizations and orders, the making of such
registrations and filings and the giving of such notices referred to in
subsections (a), (b) and (c).
10.4 Delivery of Documents. The Pegasus Parties, as applicable, shall have
executed and delivered, or caused to be executed and delivered, to the Company
and the Principal Company Shareholders the following documents:
(i) Noncompetition Agreements -- Owners, executed by Pegasus.
(ii) Noncompetition Agreements -- Management, executed by Pegasus.
(iii) Registration Rights Agreement, executed by Pegasus.
(iv) Escrow Agreement, executed by Pegasus and the Escrow Agent.
(v) Voting Agreement, executed by the Principal Pegasus Shareholders
and by Marshall W. Pagon.
(vi) Schedule satisfactory to the Company and certified as being
complete and correct by Pegasus reflecting the number of subscribers in each of
the service areas served by Pegasus as of the Closing Date, based on reports of
the NRTC, including the most recent ad hoc Active Subscribers Report, ad hoc
Active Subscribers Without Core Packages Report and ad hoc Cut Off Report by
Level.
(vii) Evidence reasonably satisfactory to the Sellers that the Pegasus
Parties have each taken all action necessary to authorize the execution of this
Agreement and the Collateral Documents and the consummation of the transactions
contemplated hereby.
(viii) Such other documents and instruments as the Sellers may
reasonably request: (A) to evidence the accuracy of the representations and
warranties of the Pegasus Parties under this Agreement and the
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Collateral Documents and any documents, instruments or certificates required to
be delivered thereunder; (B) to evidence the performance by the Pegasus Parties
of, or the compliance by the Pegasus Parties with, any covenant, obligation,
condition and agreement to be performed or complied with by the Pegasus Parties
under this Agreement and the Collateral Documents; or (C) to otherwise
facilitate the consummation or performance of any of the transactions
contemplated by this Agreement and the Collateral Documents.
(ix) Opinion of Drinker Biddle & Reath LLP, counsel to the Pegasus
Parties, dated the Closing Date, in form and substance reasonably satisfactory
to the Company.
(x) Opinion of counsel to the Principal Company Shareholders, in form
reasonably satisfactory to them, to the effect that their receipt of the
Pegasus Class A Common Stock in the Merger is tax-deferred under the Code.
10.5 No Material Adverse Change. There shall have been no material adverse
change in the business, financial condition, prospects or operations of Pegasus
and its Subsidiaries taken as a whole, other than those affecting the DIRECTV
Distribution Business or the broadcast or cable television industry in general.
10.6 Litigation. No action, suit or proceeding shall be pending or
threatened by or before any Governmental Authority and no Legal Requirement
shall have been enacted, promulgated or issued or deemed applicable to any of
the transactions contemplated by this Agreement and the Collateral Documents
that would: (i) prevent consummation of any of the transactions contemplated by
this Agreement and the Collateral Documents; or (ii) cause any of the
transactions contemplated by this Agreement and the Collateral Documents to be
rescinded following consummation.
ARTICLE XI
POST-CLOSING COVENANTS
The Parties agree as follows with respect to the period following Closing:
11.1 Transition. None of the Principal Company Shareholders shall take any
action that is designed or intended to have the effect of discouraging any
lessor, licensor, subscriber, supplier or other business associate of the
Company, its Subsidiaries or the Business from maintaining the same business
relationships with Pegasus, the Surviving Corporation and its Subsidiaries
after Closing as it maintained with the Company and its Subsidiaries prior to
Closing.
11.2 Indemnification of Directors, Officers and Managers of the Company
and its Predecessors; Directors' and Officers' Insurance.
(a) The certificate of incorporation and bylaws of the Surviving
Corporation (and of any corporation that shall succeed to it by merger,
consolidation or otherwise) shall contain the provisions with respect to
indemnification set forth in the certificate of incorporation and bylaws of the
Company on the date of this Agreement, which provisions shall not be amended,
repealed or otherwise modified for a period of six (6) years after the
Effective Time in any manner that would adversely affect the rights thereunder
of persons who at any time prior to the Effective Time were identified as
prospective indemnitees under the certificate of incorporation or bylaws of the
Company in respect of actions or omissions occurring at or prior to the
Effective Time (including, without limitation, the transactions contemplated by
this Agreement), unless such modification is required by applicable law.
(b) From and after the Effective Time, the Surviving Corporation shall
indemnify, defend and hold harmless the present and former officers, directors
and employees of the Company (and its predecessors) and its Subsidiaries
(collectively, the "DTS Indemnified Parties") against all losses, expenses,
claims, damages, liabilities or amounts that are paid in settlement of, with
the approval of Pegasus and the Surviving Corporation (which approval shall not
be unreasonably withheld), or otherwise in connection with, any claim, action,
suit, proceeding or investigation (a "Claim"), based in whole or in part on the
fact that such person is or was such a director, manager, officer or employee
and arising out of actions or omissions occurring at or prior to the Effective
Time (including, without limitation, the transactions contemplated by this
Agreement), in each case to the fullest extent permitted under the DGCL (and
shall pay expenses in advance of the final disposition of any such action or
proceeding to each DTS Indemnified Party to the fullest extent permitted under
the DGCL, upon receipt from the Indemnified Party to whom expenses are advanced
of the undertaking to repay such advances contemplated by Section 145(e) of
DGCL).
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(c) Without limiting the foregoing, in the event any Claim is brought
against any DTS Indemnified Party (whether arising before or after the
Effective Time) after the Effective Time, (i) subject to the last sentence of
this subsection (c), the Surviving Corporation may retain counsel reasonably
acceptable to the DTS Indemnified Parties to represent them in connection with
the claim, and if it shall fail to do so the DTS Indemnified Parties may retain
their regularly engaged independent legal counsel as of the date of this
Agreement, or other independent legal counsel satisfactory to them provided
that such other counsel shall be reasonably acceptable to Pegasus and the
Surviving Corporation, (ii) the Surviving Corporation shall pay all reasonable
fees and expenses of such counsel for the DTS Indemnified Parties promptly as
statements therefor are received, and (iii) the Surviving Corporation will use
its reasonable efforts to assist in the vigorous defense of any such matter,
provided that the Surviving Corporation shall not be liable for any settlement
of any Claim effected without its written consent, which consent shall not be
unreasonably withheld. Any DTS Indemnified Party wishing to claim
indemnification under this Section 11.2, promptly upon learning of any such
Claim, shall notify the Surviving Corporation (although the failure so to
notify the Surviving Corporation shall not relieve the Surviving Corporation
from any liability which the Surviving Corporation may have under this Section
11.2, except to the extent such failure prejudices the Surviving Corporation),
and shall deliver to the Surviving Corporation the undertaking contemplated by
Section 145(e) of DGCL. The DTS Indemnified Parties and the Surviving
Corporation and its Affiliates as a group shall be represented by one law firm
(in addition to local counsel) with respect to each such matter unless there
is, under applicable standards of professional conduct (as reasonably
determined by counsel to such DTS Indemnified Parties) a conflict on any
significant issue between the position of the Surviving Corporation and its
Affiliates, on the one hand, and one or more DTS Indemnified Parties, on the
other hand, or between the position of any two or more of such DTS Indemnified
Parties, as the case may be, in which event additional counsel as may be
required may be retained by such DTS Indemnified Parties.
(d) Pegasus shall cause to be maintained in effect for not less than
six (6) years after the Effective Time the current policies of directors' and
officers' liability insurance and fiduciary liability insurance maintained by
the Company with respect to matters occurring prior to the Effective Time;
provided, however, that Pegasus may substitute therefor policies of
substantially the same coverage containing terms and conditions that are
substantially the same for the DTS Indemnified Parties to the extent reasonably
available.
(e) This Section 11.2 is intended to be for the benefit of, and shall
be enforceable by, the DTS Indemnified Parties referred to herein, their heirs
and personal representatives and shall be binding on Pegasus and Merger Sub and
the Surviving Corporation and their respective successors and assigns.
11.3 Certain Securities Law Matters. For a period of six (6) months
following the Closing, Pegasus shall take no action which would cause those
Shareholders who are beneficial owners of 10 percent (10%) or more of the
Pegasus Class A Common Stock (as determined under Section 16(b) of the Exchange
Act) at the Closing by virtue of their receipt or entitlement to the Merger
Consideration to have liability under Section 16(b) of the Exchange Act.
11.4 Offer to Purchase. Promptly following the Closing, Pegasus shall
cause the Surviving Corporation to commence the Offer to Purchase.
ARTICLE XII
TERMINATION
12.1 Events of Termination. This Agreement may be terminated and the
transactions contemplated by this Agreement may be abandoned at any time prior
to Closing as provided below:
(a) This Agreement may be terminated by the mutual written consent of
both Pegasus and the Company at any time prior to Closing.
(b) The Pegasus Parties may terminate this Agreement by giving written
notice to the Sellers at any time prior to Closing (i) on or before January 15,
1998, if the Pegasus Parties' continuing due diligence investigation of the
Company, the Business or the Assets is not satisfactory to the Pegasus Parties;
or (ii) if the Company or any of the Sellers breaches any representation,
warranty or covenant contained in this Agreement, which breach if unremedied
would cause any condition precedent stated in Article IX not to be satisfied,
Pegasus notifies the Sellers of the breach, and the breach continues without
cure for a period of 30 days after the notice of breach.
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(c) The Company may terminate this Agreement by giving written notice
to Pegasus at any time prior to Closing if any Pegasus Party breaches any
representation, warranty or covenant contained in this Agreement, which breach
if unremedied would cause any condition precedent stated in Article X not to be
satisfied, the Sellers notify Pegasus of the breach, and the breach continues
without cure for a period of 30 days after the notice of breach.
(d) The Company may terminate this Agreement if any of the following
occurs after the date hereof and before the Closing (it being understood that
the occurrence of any of the following will not constitute a breach of this
Agreement by any of the Pegasus Parties):
(i) Pegasus or any of its Subsidiaries makes any Acquisition or an
investment in any business in any single transaction or series of
related transactions for total consideration in excess of $25,000,000,
other than of a DIRECTV Distribution Business;
(ii) Pegasus or any of its Subsidiaries disposes of any of its assets
out of the Ordinary Course, or any of its businesses, in either case, in
any single transaction or series of related transactions for
consideration in excess of $25,000,000, other than in connection with
the disposition of its New England cable operations;
(iii) Pegasus or any of its Subsidiaries issues equity securities or
securities convertible into or exchangeable for equity securities in any
single transaction or series of related transactions at an offering
price that is both greater than $25,000,000 in the aggregate and less
than $25 per share on a common stock equivalent basis, other than (A) in
connection with acquisitions, (B) under existing employee benefit plans,
or (C) in payment in kind of regularly scheduled dividends on Pegasus's
Series A Preferred Stock;
(iv) Pegasus or any of its Subsidiaries incurs indebtedness in excess
of $15,000,000 in the aggregate other than in connection with
acquisitions (including increases in the letter of credit posted in
favor of NRTC) and other than under the Pegasus Credit Agreement; or
(v) Pegasus declares or pays any dividend or other distribution on
its capital stock or redeems or repurchases any of its capital stock,
other than regularly scheduled dividend payments on Pegasus's Series A
Preferred Stock and other than redemptions or repurchase of shares of
employees in connection with the termination of their employment.
(vi) Pegasus or any of its Subsidiaries enters into any transaction
(or series of related transactions), other than transactions in the
Ordinary Course and other than transactions of the nature described in
any of paragraphs (i) through (v), resulting in an expenditure or
commitment in excess of $15,000,000.
(e) The Pegasus Parties may terminate this Agreement if the Company or
any of its Subsidiaries enters into any agreement to make an Acquisition of or
investment in any business permitted by Section 5.3(c)(i) for consideration in
excess of $15,000,000 in any single transaction or series of related
transactions (it being understood that any such action will not constitute a
breach of this Agreement by any of the Sellers).
(f) Either Pegasus or the Company may terminate this Agreement if the
Closing shall not have occurred on or before June 1, 1998, otherwise than
because of a breach by the terminating Party of any of its representations,
warranties or covenants in this Agreement.
12.2 Effect of Termination. Upon any termination of this Agreement, all
obligations under this Agreement shall cease, except for any obligation or
liability of any Party based on or arising from a breach or default by such
Party with respect to any of its covenants or agreements contained in this
Agreement, other than covenants or agreements contained in Sections 7.1, 7.3
through 7.8, 7.10 through 7.13, 8.1, 8.3 through 8.8, and 8.10 and Article XI.
No termination of this Agreement shall affect any Party's obligation under the
Confidentiality Agreement.
12.3 Procedure Upon Termination. If this Agreement is terminated by any
Party pursuant to this Article, notice of such termination shall promptly be
given by the terminating Party to the other Party.
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ARTICLE XIII
INDEMNIFICATION
13.1 Survival of Representations and Warranties.
(a) Except to the extent waived pursuant to Section 13.7, the
representations and warranties contained in Sections 2.12, 3.12, 5.11(a), 5.12
and 7.11 and the last sentence of Section 5.2 shall survive Closing and shall
expire on November 5, 1998; provided, however, that such survival shall be for
the sole purpose of supporting indemnification claims under Section 13.2 and
13.3; and provided further that such expiration will not include, extend or
apply to any claim for indemnification made pursuant to Section 13.2 or 13.3
prior to such date.
(b) Except as provided in Section 13.1(a), all of the representations
and warranties contained in this Agreement shall be deemed conditions to the
Merger, to the extent stated in Sections 9.1 and 10.1, and shall not survive
the Closing or the termination of this Agreement.
(c) If the Closing occurs (i) the covenants and agreements contained in
Sections 7.1 through 7.8, 7.10 through 7.13, 8.1 through 8.8 and 8.10 shall
expire at the Closing (including any claim based on a breach of any such
covenant or agreement occurring before the Closing), and (ii) the other
covenants and agreements of the Pegasus Parties and the Sellers in this
Agreement shall survive indefinitely.
13.2 Indemnification Provisions for Benefit of the Pegasus Parties.
(a) If the Company breaches (or if any third party alleges facts that,
if true, would mean the Company has breached) any representation or warranty of
the Company that survives the Closing pursuant to Section 13.1, or if the
Company Registration Statement (or if any third party alleges facts that, if
true, would mean the Company Registration Statement), together with written
supplements thereto provided to Pegasus prior to the Closing Date (whether or
not filed with the Commission) contained, as of the Closing Date, an untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances in which they are made, not misleading, and if in any such case
Pegasus makes a written claim for indemnification no later than November 5,
1998 (the "Indemnification Period"), then, subject to the limitations contained
elsewhere in this Article XIII, the Shareholders shall, severally and in
proportion to the amount of the Merger Consideration received by each,
indemnify Pegasus, the Surviving Corporation and their Affiliates and the
shareholders, directors, officers, employees, agents, successors and assigns of
any of such Persons (the "Pegasus Indemnitees") from and against any Adverse
Consequences that any such Person may suffer through and after the date of the
claim for indemnification (including any Adverse Consequences that any such
Person may suffer after the end of the Survival Period) resulting from, arising
out of, relating to or caused by the breach, untrue statement or omission.
(b) In addition to the their obligations under Section 13.2(a), the
Principal Company Shareholders and (as provided in the Indemnification
Agreement) each of the Successor Principal Company Shareholders and the
Columbia Principals shall, severally and in proportion to the amount of the
Merger Consideration received by each, indemnify the Pegasus Indemnitees from
and against any Adverse Consequences described in Section 13.2(a), subject to
the limitations described elsewhere in this Article XIII.
(c) Notwithstanding the foregoing, the Shareholders, the Principal
Company Shareholders, any Successor Principal Company Shareholders, and the
Columbia Principals collectively shall not have any obligation to indemnify any
Pegasus Indemnitee under Section 13.2(a) or (b) unless the Adverse Consequences
with respect thereto shall exceed $2,000,000 in the aggregate, in which case
they shall be required to indemnify the Pegasus Indemnitees only for the excess
of such Adverse Consequences over $1,150,000. This limitation shall not apply
to obligations arising out of the breach of any representation or warranty
contained in Section 2.12.
(d) Notwithstanding the foregoing, (i) the liability of any Shareholder
under Section 13.2(a) shall be satisfied only by the delivery pursuant to
Section 13.6 of Escrowed Shares held for such Shareholder's account by the
Escrow Agent, valued in accordance with Section 13.6; and (ii) the liability of
any Principal Company Shareholder, Successor Principal Shareholder or Columbia
Principal under Section 13.2(b) or under the Indemnification Agreement (A)
shall be satisfied only by the delivery pursuant to Section 13.6 of shares of
Pegasus Class A Common Stock, valued in accordance with Section 13.6, or, at
the election of each Principal Company Shareholder, each Columbia Principal or
each Successor Principal Company Shareholder, cash of equal value,
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(B) shall be limited in the aggregate to five percent of the total number of
shares of Pegasus Class A Common Stock included in the Merger Consideration and
received by such Principal Company Shareholder, Successor Principal Shareholder
or Columbia Principal, and (C) shall not apply until all of the Escrowed Shares
shall have been delivered to Pegasus in satisfaction of indemnification
obligations under Section 13.2(a). This limitation shall not apply to
obligations arising out of the breach of any representation or warranty
contained in Section 2.12.
13.3 Indemnification Provisions for Benefit of the Shareholders.
(a) If Pegasus breaches (or if any third party alleges facts that, if
true, would mean that Pegasus has breached) any representation or warranty of
Pegasus that survives the Closing pursuant to Section 13.1 or if the Pegasus
Merger Registration Statement (or if any third party alleges facts that, if
true, would mean that the Pegasus Merger Registration Statement), as of the
Closing Date, contained an untrue statement of material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made,
not misleading (except for statements made or facts omitted in reliance on and
in conformity with information furnished in writing by the Company or any
Principal Company Shareholder specifically for inclusion therein), and if, in
any such case, any Shareholder makes a written claim for indemnification
against Pegasus and the Surviving Corporation within the Indemnification
Period, then subject to the limitations contained elsewhere in this Article
XIII, Pegasus and the Surviving Corporation shall jointly and severally
indemnify, defend and hold harmless the Shareholders, the former directors,
officers, employees and agents of the Company and its Affiliates and the
successors and assigns of any of such Persons (the "Company Indemnitees"), from
and against any Adverse Consequences that any such Person may suffer through
and after the date of the claim for indemnification (including any Adverse
Consequences that any such Person may suffer after the end of the
Indemnification Period) resulting from, arising out of, relating to or caused
by the breach, untrue statement or omission.
(b) Notwithstanding the foregoing, Pegasus and the Surviving
Corporation shall not have any obligation to indemnify any Company Indemnitee
under Section 13.3(a) unless the Adverse Consequences described therein shall
exceed $2,000,000 in the aggregate, in which case they shall be required to
indemnify the Company Indemnitees only for the excess of such Adverse
Consequences over $1,150,000. This limitation shall not apply to obligations
arising out of the breach of any representation or warranty contained in the
last sentence of Section 5.2.
(c) Notwithstanding the foregoing, the liability of Pegasus and the
Surviving Corporation under Section 13.3(a) shall be satisfied only by the
delivery pursuant to Section 13.6 of additional shares of Pegasus Class A
Common Stock, valued in accordance with Section 13.6, and shall be limited in
the aggregate to 15 percent of the total number of shares of Pegasus Class A
Common Stock included in the Merger Consideration, valued in accordance with
Section 13.6. This limitation shall not apply to obligations arising out of the
breach of any representation or warranty contained in the last sentence of
Section 5.2.
13.4 Matters Involving Third Parties.
(a) If any third party shall notify either Pegasus, the Surviving
Corporation or any Principal Company Shareholder (the "Indemnified Party")
prior to the expiration of the Indemnification Period with respect to any
matter (a "Third Party Claim") that may give rise to a claim for
indemnification against the other (the "Indemnifying Party") under this
Article, then the Indemnified Party shall promptly notify the Indemnifying
Party thereof in writing; provided, however, that no delay on the part of the
Indemnified Party in notifying any Indemnifying Party (but not beyond the
expiration of the Indemnification Period, or, in the case of notice of a Third
Party Claim received by the Indemnified Party on the last day of the
Indemnification Period, the next Business Day) shall relieve the Indemnifying
Party from any obligation hereunder unless (and then solely to the extent) the
Indemnifying Party thereby is prejudiced.
(b) Any Indemnifying Party shall have the right to defend the
Indemnified Party against the Third Party Claim with counsel of its choice
reasonably satisfactory to the Indemnified Party so long as: (i) the
Indemnifying Party notifies the Indemnified Party in writing within 15 days
after the Indemnified Party has given notice of the Third Party Claim that the
Indemnifying Party will indemnify the Indemnified Party from and against the
entirety of any Adverse Consequences the Indemnified Party may suffer (limited
as provided in this
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Article XIII) resulting from, arising out of, relating to, in the nature of or
caused by the Third Party Claim; (ii) the Indemnifying Party provides the
Indemnified Party with evidence acceptable to the Indemnified Party that the
Indemnifying Party will have the financial resources to defend against the
Third Party Claim and fulfill its indemnification obligations hereunder
(subject to the aggregate limitations contained herein); (iii) the Third Party
Claim involves only money damages and does not seek an injunction or other
equitable relief; (iv) settlement of, or an adverse judgment with respect to,
the Third Party Claim is not, in the good faith judgment of the Indemnified
Party, likely to (A) exceed the limit of the Indemnifying Party hereunder or
(B) establish a precedent, custom or practice materially adverse to the
continuing business interests of the Indemnified Party; and (v) the
Indemnifying Party conducts the defense of the Third Party Claim actively and
diligently.
(c) So long as the Indemnifying Party is conducting the defense of the
Third Party Claim in accordance with subsection (b): (i) the Indemnified Party
may retain separate co-counsel at its sole cost and expense and participate in
the defense of the Third Party Claim; (ii) the Indemnified Party shall not
consent to the entry of any judgment or enter into any settlement with respect
to the Third Party Claim without the prior written consent of the Indemnifying
Party (not to be withheld unreasonably); and (iii) the Indemnifying Party shall
not consent to the entry of any judgment or enter into any settlement with
respect to the Third Party Claim without the prior written consent of the
Indemnified Party (not to be withheld unreasonably).
(d) If any of the conditions in Section 13.4(b) is not or no longer
satisfied, however: (i) the Indemnified Party may defend against, and consent
to the entry of any judgment or enter into any settlement with respect to, the
Third Party Claim in any manner it reasonably may deem appropriate (and the
Indemnified Party need not consult with, or obtain any consent from, any
Indemnifying Party in connection therewith); (ii) the Indemnifying Party shall
reimburse the Indemnified Party promptly and periodically for the costs of
defending against the Third Party Claim (including attorneys' fees and
expenses) by delivery of shares of Pegasus Class A Common Stock, from the
Escrowed Shares or otherwise, valued as set forth in Section 13.6; and (iii)
the Indemnifying Party shall remain responsible for any Adverse Consequences
the Indemnified Party may suffer resulting from, arising out of, relating to,
in the nature of or caused by the Third Party Claim to the fullest extent, but
subject to the limitations, provided in this Article XIII.
13.5 Determination of Adverse Consequences. Pegasus, the Surviving
Corporation and the Shareholders shall take into account the time cost of money
(using the Applicable Rate as the discount rate) in determining Adverse
Consequences for purposes of this Article XIII. Adverse Consequences arising
from a breach or alleged breach of any representation or warranty referred to
in Section 13.2 or 13.3 shall be calculated, and whether there is a breach of
any such representation or warranty for purposes of Section 13.2 or 13.3 shall
be determined, without reference to any dollar threshold or materiality
threshold contained in any such representation or warranty (it being understood
that any such threshold shall be given effect for determining whether any
condition precedent stated in Section 9.1 or 10.1 shall have been satisfied as
of the Closing Date). All indemnification obligations under this Article shall
be net of any insurance proceeds received by the Indemnified Party in respect
of the event or circumstance giving rise to the claim for indemnification and
shall be deemed adjustments to the Merger Consideration.
13.6 Payment in Shares. All shares of Pegasus Class A Common Stock
delivered in satisfaction of any indemnity claim under this Article XIII shall
be delivered free and clear of all Encumbrances other than transfer
restrictions under applicable securities laws. Each share of Pegasus Class A
Common Stock (whether included in the Escrowed Shares or otherwise) delivered
in satisfaction of any such indemnity claim shall be valued at the Market Price
on the Closing Date (adjusted for stock splits and reclassifications). Any
dividends previously paid and any other distributions made after the Closing
Date in respect of shares of Pegasus Class A Common Stock delivered to Pegasus
in settlement of any indemnity claim (whether paid in cash, securities or other
property) shall also be transferred, free and clear of all Encumbrances other
than transfer restrictions under applicable Securities laws, to Pegasus; and in
the case of Pegasus Class A Common Stock delivered to any Company Indemnitee in
settlement or any indemnity claim, Pegasus shall be required to deliver to such
Company Indemnitee the amount of any cash, securities or other property, valued
at the date of such settlement, that such Company Indemnitee would have
received had such Company Indemnitee owned such shares on the date of such
dividend or distribution.
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13.7 No Indemnification for Certain Disclosed Matters.
(a) If any of the Sellers shall disclose in writing to Pegasus on or
before the Closing Date pursuant to Section 7.7 or 7.8 (but not otherwise) any
fact that would cause any condition precedent stated in Article IX not to be
satisfied or would give rise to a right on the part of the Pegasus Parties to
terminate this Agreement pursuant to Section 12.1, if the Pegasus Parties do
not terminate this Agreement pursuant to Section 12.1, then the Pegasus
Indemnitees shall be deemed to have waived any claim to indemnification based
on such fact upon completion of the Closing.
(b) If Pegasus shall disclose in writing to the Company on or before
the Closing Date pursuant to Section 8.7 or 8.8 (but not otherwise) any fact
that would cause any condition precedent stated in Article X not to be
satisfied or would give rise to a right on the part of the Company to terminate
this Agreement pursuant to Section 12.1, if the Company does not terminate this
Agreement pursuant to Section 12.1, then the Company Indemnitees shall be
deemed to have waived any claim to indemnification based on such fact upon
completion of the Closing.
ARTICLE XIV
MISCELLANEOUS
14.1 Parties Obligated and Benefited. This Agreement shall be binding upon
the Parties and their respective successors by operation of law and shall inure
solely to the benefit of the Parties and their respective successors by
operation of law, and no other Person shall be entitled to any of the benefits
conferred by this Agreement, except that the Shareholders shall be third party
beneficiaries of this Agreement. Without the priorwritten consent of the other
Party, no Party may assign this Agreement or the Collateral Documents or any of
its rights or interests or delegate any of its duties under this Agreement or
the Collateral Documents; provided, however, that Pegasus may collaterally
assign its rights under this Agreement and the Collateral Documents to any
Persons providing debt financing to Pegasus or its Affiliates.
14.2 Notices. Any notices and other communications required or permitted
hereunder shall be in writing and shall be effective upon delivery by hand or
upon receipt if sent by certified or registered mail (postage prepaid and
return receipt requested) or by a nationally recognized overnight courier
service (appropriately marked for overnight delivery) or upon transmission if
sent by telex or facsimile (with request for immediate confirmation of receipt
in a manner customary for communications of such respective type and with
physical delivery of the communication being made by one or the other means
specified in this Section as promptly as practicable thereafter). Notices shall
be addressed as follows:
(a) If to Pegasus, Merger Sub or the Surviving Corporation, to:
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporate Center
100 Matsonford Road, Suite 454
Radnor, Pennsylvania 19087
Attn: Mr. Marshall W. Pagon
Telecopier: 610-341-1835
(with a copy to Ted S. Lodge, Esquire at the same address)
(b) If to the Company before the Closing Date or to the Principal
Company Shareholders before or after the Closing Date, to:
Digital Television Services, Inc.
880 Holcomb Bridge Road
Building C-200
Roswell, Georgia 30076
Attn: Douglas S. Holladay, Jr.
Telecopier: 770-645-9429
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with a copy to:
Nelson Mullins Riley & Scarborough, L.L.P.
NationsBank Corporate Center
100 North Tryon Street, Suite 2600
Charlotte, North Carolina 28202-4000
Attn: H. Bryan Ives, III, Esq.
Telecopier: 704-377-4814
(c) If to any Shareholder after the Closing Date, as set forth on
Exhibit 9. Any Party may change the address to which notices are required to be
sent by giving notice of such change in the manner provided in this Section.
14.3 Attorneys' Fees. In the event of any action or suit based upon or
arising out of any alleged breach by any Party of any representation, warranty,
covenant or agreement contained in this Agreement or the Collateral Documents,
the prevailing Party shall be entitled to recover reasonable attorneys' fees
and other costs of such action or suit from the other Party.
14.4 Headings. The Article and Section headings of this Agreement are for
convenience only and shall not constitute a part of this Agreement or in any
way affect the meaning or interpretation thereof.
14.5 Choice of Law. This Agreement and the rights of the Parties under it
shall be governed by and construed in all respects in accordance with the laws
of the Commonwealth of Pennsylvania, without giving effect to any choice of law
provision or rule (whether of the Commonwealth of Pennsylvania or any other
jurisdiction that would cause the application of the laws of any jurisdiction
other than the Commonwealth of Pennsylvania).
14.6 Rights Cumulative. All rights and remedies of each of the Parties
under this Agreement shall be cumulative, and the exercise of one or more
rights or remedies shall not preclude the exercise of any other right or remedy
available under this Agreement or applicable law.
14.7 Further Actions. The Parties shall execute and deliver to each other,
from time to time at or after Closing, for no additional consideration and at
no additional cost to the requesting party, such further assignments,
certificates, instruments, records, or other documents, assurances or things as
may be reasonably necessary to give full effect to this Agreement and to allow
each party fully to enjoy and exercise the rights accorded and acquired by it
under this Agreement.
14.8 Time of the Essence. Time is of the essence under this Agreement. If
the last day permitted for the giving of any notice or the performance of any
act required or permitted under this Agreement falls on a day which is not a
Business Day, the time for the giving of such notice or the performance of such
act shall be extended to the next succeeding Business Day.
14.9 Late Payments. If either Party fails to pay the other any amounts
when due under this Agreement, the amounts due will bear interest from the due
date to the date of payment at the Applicable Rate.
14.10 Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14.11 Entire Agreement. This Agreement (including the Exhibits, the
Company Disclosure Statement, the Pegasus Disclosure Statement and any other
documents, instruments and certificates referred to herein, which are
incorporated in and constitute a part of this Agreement) contains the entire
agreement of the Parties and supersedes all prior oral or written agreements,
understandings and representations to the extent that they relate in any way to
the subject matter hereof, including the Agreement in Principle, but excluding
the Confidentiality Agreement, which shall survive the execution and delivery
of, and any termination of, this Agreement.
14.12 Amendments and Waivers. No amendment of any provision of this
Agreement shall be valid unless the same shall be in writing and signed by the
Parties. No waiver by any party of any default, misrepresentation or breach of
warranty or covenant hereunder shall be valid unless the same shall be in
writing and signed by the Person against whom its enforcement is sought, and no
such waiver whether intentional or not, shall be deemed to extend to any prior
or subsequent default, misrepresentation or breach of warranty or covenant
hereunder or affect in any way any rights arising by virtue of any prior or
subsequent such occurrence.
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14.13 Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. If an ambiguity or question of
intent or interpretation arises, this Agreement shall be construed as if
drafted jointly by the parties and no presumption or burden of proof shall
arise favoring or disfavoring any party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local,
or foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context requires otherwise. The
word "including" shall mean "including without limitation." If any Party has
breached any representation, warranty or covenant contained herein in any
respect, the fact that there exists another representation, warranty or
covenant relating to the same subject matter (regardless of the relative levels
of specificity) which the Party has not breached shall not detract from or
mitigate the fact that the party is in breach of the first representation,
warranty or covenant.
14.14 Expenses. Except as otherwise provided in this Agreement, each Party
shall bear its own costs and expenses (including legal fees and expenses and
accountants' fees and expenses) incurred in connection with the negotiation of
this Agreement, the performance of its obligations and the consummation of the
transactions contemplated hereby.
14.15 Disclosure. The terms of this Agreement are confidential and no
Party shall disclose to any individual or entity such terms, except that (i)
any Party may make such disclosure about this Agreement and information related
thereto as is required (in the opinion of its counsel) by law (including
filings and other disclosure required under the Securities Act or the Exchange
Act); (ii) any Party may make such disclosure to its Representatives and
lenders who agree to keep the terms of this Agreement confidential; (iii) the
Parties may disclose the terms of this Agreement to the NRTC and DirecTV, Inc.;
(iv) the Sellers may disclose the terms of this Agreement to the Shareholders;
(v) Pegasus may disclose the terms of this Agreement to its shareholders; and
(vi) no Party shall have any obligation to refrain from disclosing any matter
that shall have become a matter of public knowledge other than by a breach of
such Party's obligations hereunder. Each of the Parties will be responsible for
any damages resulting from the unauthorized disclosure of the terms of this
Agreement by it or its Representatives.
14.16 Company Action. Any action, consent or approval required or
permitted to be taken, given, granted or withheld by the Company hereunder
shall be taken, given, granted or withheld by action of the Company's Board of
Directors and, unless such board action receives the unanimous vote of all the
directors then in office, shall be subject to approval by the holders of 70% or
more of the issued and outstanding shares of the Company's PIK Preferred Stock.
This Section is for the exclusive purpose of regulating the relationship among
the DTS Parties. Pegasus may conclusively rely on any writing signed on behalf
of the Company as having received any approval required by this Section and
shall not be under any duty to inquire as to the extent of any such
authorization.
IN WITNESS WHEREOF, the Parties hereto have duly executed this Agreement
as of the day and year first above written.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Marshall W. Pagon
------------------------------------
Marshall W. Pagon,
Chairman and President
PEGASUS DTS MERGER SUB, INC.
By: /s/ Marshall W. Pagon
------------------------------------
Marshall W. Pagon,
Chairman and President
DIGITAL TELEVISION SERVICES, INC.
By: /s/ Douglas S. Holladay, Jr.
------------------------------------
Douglas S. Holladay, Jr.,
President
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Principal Pegasus Shareholders:
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General
Partner
By: /s/ Marshall W. Pagon
------------------------------------
Marshall W. Pagon,
Chairman and President
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By: /s/ Marshall W. Pagon
------------------------------------
Marshall W. Pagon,
Chairman and President
Principal Company Shareholders:
WHITNEY EQUITY PARTNERS, L.P.
By: J.H. Whitney Equity Partners LLC
Its General Partner
By: /s/ Michael C. Brooks
------------------------------------
Michael C. Brooks,
Managing Member
FLEET VENTURE RESOURCES, INC.
By: /s/ Riordon B. Smith
------------------------------------
Riordon B. Smith,
Senior Vice President
FLEET EQUITY PARTNERS VI, L.P.
By: Fleet Growth Resources II, Inc.
Its General Partner
By: /s/ Riordon B. Smith
------------------------------------
Riordon B. Smith,
Senior Vice President
CHISHOLM PARTNERS, III, L.P.
By: Silverado III L.P., its general
partner
By: Silverado III Corp., its general
partner
By: /s/ Riordon B. Smith
------------------------------------
Riordon B. Smith,
Senior Vice President
KENNEDY PLAZA PARTNERS
By: /s/ Riordon B. Smith
------------------------------------
Riordon B. Smith,
General Partner
COLUMBIA DBS CLASS A INVESTORS, LLC
By: /s/ Mark R. Warner
------------------------------------
Mark R. Warner,
Member
I-48
<PAGE>
COLUMBIA DBS INVESTORS, L.P.
By: Columbia Capital Corporation
Its General Partner
By: /s/ Harry F. Hopper, III
------------------------------------
Harry F. Hopper, III,
Managing Director
COLUMBIA DBS, INC.
By: /s/ Harry F. Hopper, III
------------------------------------
Harry F. Hopper,
President
I-49
<PAGE>
ANNEX II
FORM OF VOTING AGREEMENT
VOTING AGREEMENT, dated _____________, 1998, among PEGASUS COMMUNICATIONS
CORPORATION, a Delaware corporation (the "Company"); COLUMBIA CAPITAL
CORPORATION, a Virginia corporation, COLUMBIA DBS CLASS A INVESTORS, LLC., a
Delaware limited liability company, COLUMBIA DBS, INC., a Virginia corporation,
and COLUMBIA DBS INVESTORS, L.P., a Delaware limited partnership; WHITNEY
EQUITY PARTNERS, L.P., a ---------------- limited partnership; FLEET VENTURE
RESOURCES, INC., a Rhode Island corporation, FLEET EQUITY PARTNERS VI, L.P., a
Delaware limited partnership, CHISHOLM PARTNERS III, L.P., a Delaware limited
partnership, and KENNEDY PLAZA PARTNERS, a Rhode Island general partnership;
and PEGASUS COMMUNICATIONS HOLDINGS, INC. a Delaware corporation, PEGASUS
CAPITAL, L.P., a Pennsylvania limited partnership, and MARSHALL W. PAGON, an
individual.
The Company, Pegasus DTS Merger Sub, Inc., a Delaware corporation ("Merger
Sub"), Digital Television Services, Inc., a Delaware corporation ("DTS"), and
certain shareholders of the Company and of DTS are parties to an Agreement and
Plan of Merger dated January 8, 1998 (the "Merger Agreement"). Certain of the
DTS Parties (this and certain other terms are defined in Section 1) or certain
of their equity holders are shareholders of DTS.
PCH and PCLP hold all the issued and outstanding shares of Class B Common
Stock. Pagon controls PCH and PCLP.
At the Closing held today under the Merger Agreement, Merger Sub is being
merged with and into DTS, DTS is thereby becoming a wholly-owned subsidiary of
the Company, and certain of the DTS Parties or certain of their equity holders
are receiving shares of Class A Common Stock as the Merger Consideration. It is
a condition precedent to the Closing that the parties execute and deliver this
Agreement.
NOW, THEREFORE, in consideration of the completion of the transactions
contemplated by the Merger Agreement and of the mutual covenants contained
herein, and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows,
intending to be legally bound.
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<PAGE>
SECTION 1
DEFINITIONS
1.1 Definitions. As used in this Agreement, the following terms have the
following terms have the following meanings:
"Audit Committee": the audit committee of the Board of Directors referred
to in Section 3.4.
"Board of Directors": the Board of Directors of the Company.
"Chisholm": Chisholm Partners III, L.P., a Delaware limited partnership.
"Chisholm Designee": a person designated by Chisholm to serve as a
director in accordance with this Agreement.
"Class A Common Stock": the Company's Class A Common Stock, par value
$0.01 per share.
"Class B Common Stock": the Company's Class B Common Stock, par value
$0.01 per share.
"Columbia Capital": Columbia Capital Corporation, a Virginia corporation.
"Columbia Designee": a person designated by Columbia Capital to serve as a
director in accordance with this Agreement.
"Columbia Parties": Columbia Capital, Columbia DBS Class A Investors, LLC,
a Delaware limited liability company, Columbia DBS, Inc., a Virginia
corporation, and Columbia DBS Investors, L.P., a Delaware limited partnership.
"Columbia Principals": each of James B. Murray, Jr., David P. Mixer, Mark
R. Warner, Robert B. Blow, Mark J. Kington, Harry F. Hopper, III, R. Philip
Herget, III, Neil P. Byrne, Barton Schneider and James Fleming.
"Committee": the Audit Committee, the Compensation Committee or the
Nominating Committee.
"Compensation Committee": the compensation committee of the Board of
Directors referred to in Section 3.4.
"Covered Shares": (a) the shares of Class A Common Stock received as the
Merger Consideration by the shareholders of DTS that are parties to this
Agreement; and (b) all shares of voting securities of the Company now or
hereafter beneficially owned (within the meaning of the Securities Exchange Act
of 1934) by PCH, PCLP or Pagon.
"Designation Right Loss Event": With respect to any person, any of the
following, as determined by a majority of the Independent Directors (whose
determination shall be conclusive):
(a) such person's designee as a director commits a breach of fiduciary
duty to the Company or a material violation of any federal or state
securities law in connection with the purchase or sale of any of the
Company's securities;
(b) such person (or, in the case of Columbia Capital, any Columbia
Principal who owns at the time 100,000 or more shares of Class A Common
Stock) commits a material violation of any federal or state securities law
in connection with the purchase or sale of any of the Company's securities;
(c) such person materially breaches its or his noncompetition or
confidentiality agreement with the Company;
(d) such person shall own, control, manage or be financially interested,
directly or indirectly, in any business (other than a less than 5% interest
in a publicly held company) that competes with the Company or any of its
Subsidiaries in any geographic area in which the Company does business; but
this paragraph (d) shall not apply (1) to any investment held on November
5, 1997, (2) to any investment in a business that comes into competition
with the Company or any of its Subsidiaries as a result of the Company's
acquisition or establishment of a new business or its expansion into a
geographic area in which it did not
II-2
<PAGE>
previously operate if such person shall have held such investment before
the Company's management proposes to the Board of Directors such
acquisition, establishment or expansion, (3) to any investment in an
investment fund or pool that itself makes or holds an investment in a
competitive business if such person (A) is regularly engaged in making
investment of that kind and (B) does not have the power to, and does not in
fact, exercise an influence on the decision of the fund or pool in making
the investment in the competitive business, and (4) unless prior to the
exercise by a majority of the Independent Directors of the right to
terminate the relevant person's right to designate a director, such person
is given notice of the potential applicability of this paragraph (d) and a
reasonable opportunity to cure or modify the relationship to the
satisfaction of a majority of the Independent Directors;
(e) such person shall violate Section 2; or
(f) any director designated by such person shall take or omit to take
any action in his capacity as a director or Committee member in a manner
materially inconsistent with this Agreement, and the Person who has the
right to designate such director has not obtained such director's
resignation as a director within 30 days after being requested to do so by
the Board of Directors.
"Director" or "director": a member of the Board of Directors.
"DTS": as defined in the recitals.
"DTS Designee": a Columbia Designee, a Chisholm Designee or a Whitney
Designee.
"DTS Parties": the Columbia Parties, Whitney and the Fleet Parties.
"Fleet Parties": Chisholm, Fleet Venture Resources, Inc., a Rhode Island
corporation, Fleet Equity Partners VI, L.P., a Delaware limited partnership,
and Kennedy Plaza Partners, a Rhode Island general partnership.
"Independent Director": a natural person who (a) is not Marshall W. Pagon
or a Columbia Principal or an officer, employee or principal of the Company,
PCH, PCLP, any of the Columbia Parties, Whitney, any of the Fleet Parties, DTS,
or any of their subsidiaries or affiliates, or any spouse or sibling, or any
ancestor or lineal descendant of any such person, spouse or sibling ("immediate
family") (b) is not a former officer or employee of any such person, (c) does
not in addition to such person's role as a director, act on a regular basis,
either individually or as a member or representative of an organization,
serving as a professional adviser, legal counsel or consultant to any such
person, if, in the reasonable discretion of the Nominating Committee, such
relationship is material to any such person, and (d) does not represent, and is
not a member of the immediate family of, a person who would not satisfy the
requirements of the preceding clauses (a), (b) and (c) of this sentence. A
person who has been or is a partner, officer or director of an organization
that has customary commercial, industrial, banking or underwriting
relationships with any of the persons named in clause (a) of the preceding
sentence that are carried on in the ordinary course of business and on an
arms-length basis and who otherwise satisfies the requirements set forth in
clauses (a), (b), (c) and (d) of the first sentence of this definition, may
qualify as a Independent Director unless, in the reasonable discretion of the
Nominating Committee, such person is not independent or may not be independent
with respect to the management of the business and affairs of the Company. A
person shall not be disqualified as an Independent Director under clause (b),
(c) or (d) above solely because of such person's (or a member of such person's
immediate family's) having served in any capacity with a business (other than
DTS) acquired by the Company, or solely because such person is a representative
or designee of any such business (whether or not the Company shall enter into a
consulting agreement with such person in connection with such acquisition).
"Merger Agreement": as defined in the recitals.
"Merger Consideration": as defined in the Merger Agreement.
"Pagon": Marshall W. Pagon, an individual.
"Pagon Designee": a person designated by Pagon (or, in the event of his
death or incapacity, by PCLP or another person appointed by Pagon for this
purpose) to serve as a director in accordance with this Agreement.
"PCH": Pegasus Communications Holdings, Inc., a Delaware corporation.
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<PAGE>
"PCLP": Pegasus Capital, L.P., a Pennsylvania limited partnership.
"Permitted Transferee": as defined in the Company's certificate of
incorporation on the date hereof.
"Person or "person": an individual, a partnership (general or limited),
corporation, limited liability company, joint venture, business trust,
cooperative, association or other form of business organization, whether or not
regarded as a legal entity under applicable law, a trust (inter vivos or
testamentary), an estate of a deceased, insane or incompetent person, a
quasi-governmental entity, a government or any agency, authority, political
subdivision or other instrumentality thereof, or any other entity.
"Subsidiary": as defined in the Merger Agreement.
"Whitney": Whitney Equity Partners, L.P., a Delaware limited partnership.
"Whitney Designee": a person designated by Whitney to serve as a director
in accordance with this Agreement.
SECTION 2
VOTING
Section 2.1 Each party warrants to the others that it has voting control
over the number of Covered Shares set forth opposite its name on Exhibit A.
Each party shall vote all Covered Shares held by it, or over which it has the
power to direct the voting, as specified in this Agreement and shall take any
and all other action necessary or appropriate to implement the provisions of
this Agreement, including without limitation proposing and voting on amendments
to the Company's certificate of incorporation and by-laws as may be necessary
to fully implement the provisions hereof. No party shall permit any Covered
Shares held by it, or over which it has the power to direct the voting, to be
voted in any manner inconsistent with this Agreement. "Voting" includes the
execution of written consents.
SECTION 3
COMPOSITION OF BOARD OF DIRECTORS
AND COMMITTEES
Section 3.1 Board of Directors. Except as otherwise provided in Section
3.3, the Board of Directors shall consist of nine members, of whom:
(a) three will be Pagon Designees;
(b) one will be a Columbia Designee until Columbia Capital ceases to
have the right to designate a director under Section 4.1;
(c) one will be a Whitney Designee until Whitney ceases to have the
right to designate a director under Section 4.1;
(d) one will be a Chisholm Designee until Chisholm ceases to have the
right to designate a director under Section 4.1; and
(e) three will be Independent Directors, who shall be the persons
identified in Section 3.5(e) (so long as they continue to satisfy the
definition of "Independent Director") or their successors (who satisfy the
definition of "Independent Director") nominated by the Nominating
Committee.
Section 2.1 shall apply to the election of directors specified in this Section
3.1.
Section 3.2 Vacancies Caused by Resignation, etc. Any vacancy in the Board
of Directors or a Committee caused by the resignation, removal, incapacity or
death of a Pagon Designee or a DTS Designee shall be filled by a person
designated by the party that had the right to designate the resigned, removed,
incapacitated or dead director or Committee member, except as provided in
Section 3.3. Section 2.1 shall apply to the election of directors and Committee
members specified in this Section 3.2.
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<PAGE>
Section 3.3 Other Vacancies.
(a) If Columbia Capital, Whitney or Chisholm ceases to have the right to
designate a director pursuant to Section 4.1, such party shall promptly cause
the director designated by it to resign if so requested by Pagon (or, in the
event of his death or incapacity, by PCLP or another person appointed for Pagon
for this purpose), except that in case of the loss pursuant to Section
4.1(a)(1), (b)(1) or (c)(1) of the right of Columbia Capital, Whitney or
Chisholm to designate a director, as the case may be, which also results in the
termination of this Agreement pursuant to Section 4.3, such party shall cause
the director designated by it to resign not later than the date on which this
Agreement terminates. Failing such resignation, such director may be removed in
the manner provided by law. If a vacancy occurs in the Board of Directors by
reason of any such required resignation or permitted removal, the Board of
Directors (as constituted after giving effect to such vacancy) shall either (1)
reduce the number of directors to eliminate the vacancy or (2) instruct the
Nominating Committee to nominate an Independent Director to fill the vacancy.
(b) The size of the Board of Directors may be increased as provided by
law. Each director elected to fill any position created by an increase in the
size of the Board of Directors shall be an Independent Director.
(c) No party to this Agreement will take any action to fill a vacancy
created under this Section 3.3 by a person who is not an Independent Director.
Otherwise, Section 2.1 shall not apply to the election of directors to fill
vacancies created under this Section 3.3
Section 3.4 Committees. The Board of Directors shall establish an Audit
Committee, a Nominating Committee and a Compensation Committee, each of which
shall consist of three directors who shall be (1) a director designated by
Pagon, (2) a director designated by a majority of the DTS Designees then
serving as directors; and (3) one of the Independent Directors specified in
Section 3.1(e) designated by the Board of Directors in the manner provided by
law. [NOTE: Need to consider suitability of DTS designees for Compensation
Committee for purposes of Section 16 and Section 162(m)]. The Audit Committee
and the Compensation Committee shall have the powers and functions of the
present audit committee and compensation committee of the Board of Directors.
The Nominating Committee shall nominate all persons (other than the Pagon
Designees and the DTS Designees) to serve as directors, which nominee shall be
subject to election by the shareholders of the Company or subject to
appointment by the Board of Directors to fill vacancies. The Company shall not
establish a committee with the authority to act on all or substantially all
matters on which the Board of Directors may act (commonly known as an
"executive committee") without the consent of a majority of the DTS Designees.
Section 3.5 Initial Designations. The parties make the following
designations pursuant to this Section 3:
(a) The Pagon Designees are Pagon, Robert N. Verdecchio and __________.
(b) The Columbia Designee is __________.
(c) The Whitney Designee is ___________.
(d) The Chisholm Designee is ___________.
(e) The Independent Directors specified in Section 3.1(e) are James J.
McEntee, III, Mary C. Metzger and Donald W. Weber, each of whom is currently a
director of the Company.
(f) The Audit Committee shall consist of the persons serving thereon on
the date of this Agreement (_____________ and _____________) and __________.
[DTS Designee].
(g) The Nominating Committee shall consist of the persons serving thereon
on the date of this Agreement (_______________ and _______________) and
__________ [DTS Designee].
(h) The Compensation Committee shall consist of the persons serving
thereon on the date of this Agreement (______________ and _______________) and
__________ [DTS Designee]. Immediately following the execution of this
Agreement, the Board of Directors shall take such action as shall be required
to create vacancies on the Board of Directors and the present audit, nominating
and compensation committees of the Board of Directors, and to elect persons to
the Board of Directors and to the Committees as specified in this Section 3.5
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<PAGE>
Section 3.6 Subsequent Designations. Except as provided in Section 3.5,
each party to this Agreement that is entitled to designate one or more
directors or Committee members shall do so by written notice to each of the
other parties to this Agreement and to the Secretary of the Company, signed by
the Person making such designation.
Section 3.7 Removal. Any director may be removed by the shareholders of
the Company in the manner provided by law, except that no DTS Designee may be
removed without the written consent of the party that designated him unless
such party shall have ceased to have the right to designate a director pursuant
to Section 4.1. Section 2.1 shall apply to this Section 3.7.
Section 3.8 Chairman, President and Chief Executive Officer. For so long
as this Agreement is in effect, Pagon will be elected by the Board of Directors
as Chairman, President and Chief Executive Officer of the Company, except in
case of incapacity.
Section 3.9 Preferred Stock. If the holders of the Company's 12 3/4%
Series A Cumulative Exchangeable Preferred Stock shall become entitled to elect
directors in accordance with the terms thereof, this Agreement shall not apply
to any additional directorships to which their rights apply.
SECTION 4
TERMINATION
Section 4.1 Termination of Designation Rights.
(a) Columbia Capital shall cease to have the right to designate a director
if at any time (1) the Columbia Parties and the Columbia Principals
collectively own less than half the Covered Shares received by the Columbia
Parties and the Columbia Principals pursuant to the Merger Agreement, or (2) a
Designation Right Loss Event occurs with respect to any Columbia Party or any
Columbia Principal.
(b) Whitney shall cease to have the right to designate a director if at
any time (1) Whitney owns less than half the Covered Shares received by it
pursuant to the Merger Agreement, or (2) a Designation Right Loss Event occurs
with respect to Whitney.
(c) Chisholm shall cease to have the right to designate a director if at
any time (1) the Fleet Parties collectively own less than half the Covered
Shares received by them pursuant to the Merger Agreement, or (2) a Designation
Right Loss Event occurs with respect to any Fleet Party.
(d) For purposes of this Section 4.1, a party no longer owns Covered
Shares distributed to its equity holders unless the distributee is also a party
to this Agreement or, in the case of the Columbia Parties, is a Columbia
Principal. Continuing ownership of Covered Shares shall be determined by the
specific identification method.
(e) For purposes of this Section 4.1, if the Columbia Parties, the
Columbia Principals, the Fleet Parties and Whitney, or any of them, shall
transfer any Covered Shares to a partnership or limited liability company
wholly owned by such transferors immediately following the Closing, then for
purposes of this Section 4.1 the transferor shall be deemed to own a portion of
the Covered Shares transferred to such partnership or limited liability
company, which portion shall be designated in writing by such partnership or
limited liability company to the Company at the time of the transfer of such
Covered Shares, as long as (i) such partnership or limited liability company
continues to own such Covered Shares, and (ii) such transferors continue to own
all of the equity interests in such partnership or limited liability company.
Section 4.2 Termination of Voting Obligations.
(a) The obligations of any party under Section 2.1 shall terminate with
respect to any Covered Share upon the sale or other transfer of such Covered
Share to any person who is not a party to this Agreement and is not required by
subsection (b) to become a party to this Agreement.
(b) PCH or PCLP shall not sell or otherwise transfer any Covered Shares to
a Permitted Transferee unless the Permitted Transferee agrees in writing to be
bound by, and to become a party to, this Agreement (including the requirements
of this subsection) to the same extent as its transferor, as it relates to the
Covered Shares so transferred.
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<PAGE>
Section 4.3 Termination of Agreement. This Agreement shall terminate in
its entirety on the date of the meeting of the Company's shareholders at which
directors are scheduled to be elected next following the date on which all of
Columbia Capital, Whitney and Chisholm shall cease to have the right to
designate a director pursuant to Section 4.1. Neither Section 2 nor the
requirements of this Agreement relating to actions by the Nominating Committee
shall apply to the election of directors to occur at such meeting.
SECTION 5
MISCELLANEOUS
Section 5.1 Notices. Except as otherwise provided below, whenever it is
provided in this Agreement that any notice, demand, request, consent, approval,
declaration or other communication shall or may be given to or served upon any
of the parties hereto, or whenever any of the parties hereto, wishes to provide
to or serve upon the other party any other communication with respect to this
Agreement, each such notice, demand, request, consent, approval, declaration or
other communication shall be in writing and shall be delivered in person or
sent by telecopy, as follows:
Section 5.2 Entire Agreement. This Agreement represents the entire
agreement and understanding among the parties hereto with respect to the
subject matter hereof and supersedes any and all prior oral and written
agreements, arrangements and understandings among the parties hereto with
respect to such subject matter; and this Agreement can be amended, supplemented
or changed, and any provision hereof can be waived or a departure from any
provision hereof can be consented to, only by a written instrument making
specific reference to this Agreement signed by all parties to this Agreement
other than (a) the Columbia Parties if Columbia Capital shall no longer have
the right to designate a director pursuant to Section 4.1, (b) Whitney if
Whitney shall no longer have the right to designate a director pursuant to
Section 4.1, or (c) the Fleet Parties if Chisholm shall no longer have the
right to designate a director under Section 4.1.
Section 5.3 Paragraph Headings. The paragraph headings contained in this
Agreement are for general reference purposes only and shall not affect in any
manner the meaning, interpretation or construction of the terms or other
provisions of this Agreement.
Section 5.4 Applicable Law. This Agreement shall be governed by, construed
and enforced in accordance with the laws of Delaware applicable to contracts to
be made, executed, delivered and performed wholly within such state and, in any
case, without regard to the conflicts of law principles of such state.
Section 5.5 Severability. If any provision of this Agreement shall be held
by any court of competent jurisdiction to be illegal, void or unenforceable,
such provision shall be of no force and effect, but the illegality or
unenforceability of such provision shall have no effect upon and shall not
impair the enforceability of any other provision of this Agreement.
Section 5.6 No Waiver. The failure of any party at any time or times to
require performance of any provision hereof shall not affect the right at a
later time to enforce the same. No waiver by any party of any condition, and no
breach of any provision, term, covenant, representation or warranty contained
in this Agreement, whether by conduct or otherwise, in any one or more
instances, shall be deemed to be construed as a further or continuing waiver of
any such condition or of the breach of any other provision, term, covenant,
representation or warranty of this Agreement.
Section 5.7 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute but one and the same original instrument. Not all
parties need sign the same counterpart. Delivery by facsimile of a signature
page to this Agreement shall have the same effect as delivery of an original
executed counterpart.
Section 5.8 Successors and Assigns. Subject to Section 4.1(d), this
Agreement shall inure to the benefit of and be binding upon the successors,
assigns and transferees of each of the parties.
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<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
the date first written above.
PEGASUS COMMUNICATIONS CORPORATION
By:-------------------------------------------
Title:
PEGASUS CAPITAL, L.P.
By: Pegasus Capital, Ltd., General Partner
By:-------------------------------------------
Title:
PEGASUS COMMUNICATIONS HOLDINGS, INC.
By:-------------------------------------------
Title:
----------------------------------------------
Marshall W. Pagon
WHITNEY EQUITY PARTNERS, L.P.
By: J.H. Whitney Equity Partners LLC
Its General Partner
By:-------------------------------------------
Title: Managing Member
FLEET VENTURE RESOURCES, INC.
By:-------------------------------------------
Title: Senior Vice President
FLEET EQUITY PARTNERS VI, L.P.
By: Fleet Growth Resources II, Inc.
Its General Partner
By:-------------------------------------------
Title: Senior Vice President
CHISHOLM PARTNERS III, L.P.
By: Silverado III L.P., its general partner
By: Silverado III Corp., its general partner
By:-------------------------------------------
Title: Senior Vice President
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<PAGE>
KENNEDY PLAZA PARTNERS
By:-------------------------------------------
Title: General Partner
COLUMBIA CAPITAL CORPORATION
By:-------------------------------------------
COLUMBIA DBS CLASS A INVESTORS, LLC.
By:-------------------------------------------
Title: Member
COLUMBIA DBS INVESTORS, L.P.
By: Columbia Capital Corporation
Its General Partner
By:-------------------------------------------
Title:
COLUMBIA DBS, INC.
By:-------------------------------------------
Title:
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<PAGE>
ANNEX III
AMENDMENT NO. 1 TO THE
PEGASUS COMMUNICATIONS RESTRICTED STOCK PLAN
(As Amended and Restated Effective as of February 1, 1997)
WHEREAS, Pegasus Communications Corporation (the "Company") amended and
restated the Pegasus Communications Restricted Stock Plan (the "Plan")
effective as of February 1, 1997;
WHEREAS, Section 9 of the Plan provides that the Company may amend the
Plan;
WHEREAS, the Company desires to amend the Plan to increase the number of
shares of Class A common stock of the Company available for awards under the
Plan;
NOW, THEREFORE, subject to the requisite shareholder approval, the first
sentence of Section 5 of the Plan is amended to read as follows:
SECTION 5
Stock
The number of shares of Common Stock that may be subject to Awards under
the Plan shall be 350,000 shares, subject to adjustment as hereinafter
provided.
* * *
The effectiveness of this Amendment is conditioned on the completion of
the merger of a wholly-owned subsidiary of the Company into Digital Television
Services, Inc. ("DTS") pursuant to the Agreement and Plan of Merger dated
January 8, 1998 (the "Merger Agreement"), among the Company, DTS, Pegasus DTS
Merger Sub, Inc. and certain stockholders of the Company and DTS. This
Amendment shall become effective at the Effective Time (as defined in the
Merger Agreement).
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<PAGE>
ANNEX IV
AMENDMENT NO. 1 TO THE
PEGASUS COMMUNICATIONS 1996 STOCK OPTION PLAN
WHEREAS, Pegasus Communications Corporation (the "Company") established
the Pegasus Communications 1996 Stock Option Plan (the "Plan") effective
September 30, 1996;
WHEREAS, Section 12 of the Plan provides that the Company may amend the
Plan;
WHEREAS, the Company desires to amend the Plan (i) to increase the number
of shares of Class A common stock of the Company ("Common Stock") that may be
subject to options under the Plan, (ii) to increase the number of shares of
Common Stock that may be subject to options granted to any key employee over
the life of the Plan; and (iii) to provide for the assumption of certain
outstanding Digital Television Services, Inc. options;
NOW, THEREFORE, the Plan is amended as follows:
1. The first sentence of Section 4 is amended to read as follows,
effective on the date requisite shareholder approval of this Amendment is
obtained:
4. Stock. Options may be granted under the Plan to purchase up to a
maximum of 970,000 shares of Class A common stock of the Company ("Common
Stock"); provided, however, that no Key Employee shall receive Options for more
than 550,000 shares of the Company's Common Stock over the life of the
Plan. * * *
2. A new Section 20 is added following Section 19 to read as follows,
effective at the Effective Time (as defined in the Merger Agreement hereinafter
mentioned):
20. Special Provisions Regarding Digital Television Services, Inc. Digital
Television Services, Inc. ("DTS") became a wholly-owned subsidiary of the
Company by means of the merger (the "Merger") of a wholly-owned subsidiary of
the Company into DTS pursuant to the Agreement and Plan of Merger dated January
8, 1998 (the "Merger Agreement") among the Company, DTS, Pegasus DTS Merger
Sub, Inc. and certain stockholders of the Company and DTS. Section 2.12 of the
Merger Agreement provides that the Company will assume certain outstanding DTS
options specified therein. Section 2.12 of the Merger Agreement also provides
that such DTS options will be replaced with options (the "Replacement Options")
to purchase the number of shares of Common Stock equal to the "conversion
ratio" (as defined in the Merger Agreement) times the number of shares of DTS
common stock issuable upon the exercise of such options, for an exercise price
equal to the exercise price applicable to such options divided by the
"conversion ratio."
Each Replacement Option shall be exercisable under the Plan in accordance
with the terms of the agreement entered into between the Company and the holder
of the Replacement Option (the "Replacement Agreement"), the terms of which
shall govern in the event of any conflict with the provisions of the Plan.
The following provisions of the Plan shall not apply to the Replacement
Options:
(a) Section 11 ("Change in Control");
(b) Section 7(d)(2)(D) (regarding payment of exercise price with the
proceeds of a loan from the Company); and
(c) Section 7(m) (regarding payment of income tax obligations with the
proceeds of a loan from the Company).
In addition, any provision of the Plan that would provide an additional benefit
(within the meaning of section 424(a)(2) of the Code and Treasury Regulations
thereunder) shall not apply to the Replacement Options.
IV-1
<PAGE>
ANNEX V
MERRILL LYNCH OPINION
MERRILL LYNCH
Investment Banking Group
World Financial Center
North Tower
New York, New York 10281-1329
212-449 1000
December 31, 1997
Board of Directors
Pegasus Communications Corporation
5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
Members of the Board of Director
Pegasus Communications Corporation (the "Acquiror"), Pegasus DTS Merger
Sub, Inc., a newly formed, wholly owned subsidiary of the Acquiror (the
"Acquisition Sub"), Digital Television Services, Inc. (the "Company"), and
certain of the Acquiror's and the Company's shareholders propose to enter into
an Agreement and Plan of Merger (the "Agreement") pursuant to which the
Acquisition Sub will be merged with and into the Company in a transaction (the
"Merger") in which all outstanding shares of the Company's common stock and
preferred stock, each par value $0.01 per share (the "Company Shares"), will be
converted into the right to receive an aggregate of 5,500,000 shares of the
common stock of the Acquiror, par value $0.01 per share (the "Acquiror
Shares"), as adjusted for certain options, warrants and other obligations of
the Company as set forth in the Agreement (the "Consideration").
You have asked us whether, in our opinion, the Consideration to be paid by
the Acquiror in the Merger is fair from a financial point of view to the
Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company and the Acquiror that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and prospects
of the Company and the Acquiror furnished to us by the Company and the
Acquiror, as well as the amount and timing of the cost savings and
related expenses expected to result from the Merger (the "Expected
Synergies") furnished to us by the Acquiror;
(3) Conducted discussions with members of senior management of the Company
and the Acquiror concerning the matters described in clauses 1 and 2
above, as well as their respective businesses and prospects before and
after giving effect to the Merger and the Expected Synergies;
(4) Reviewed the market prices for the Acquiror Shares and valuation
multiples for the Company Shares and the Acquiror Shares and compared
them with those of certain publicly traded companies that we deemed to
be relevant;
(5) Reviewed the results of operations of the Company and the Acquiror and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Reviewed a draft dated December 30, 1997 of the Agreement; and
V-1
<PAGE>
(8) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and we have not
assumed any responsibility for independently verifying such information or
undertaken an independent evaluation or appraisal of any of the assets or
liabilities of the Company of the Acquiror or been furnished with any such
evaluation or appraisal. In addition, we have not assumed any obligation to
conduct, nor have we conducted, any physical inspection of the properties or
facilities of the Company or the Acquiror. With respect to the financial
forecast information and the Expected Synergies furnished to or discussed with
us by the Company or the Acquiror, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of the Company's or the Acquiror's management as to the expected
future financial performance of the Company or the Acquiror, as the case may
be, and the Expected Synergies. We have further assumed that the Merger will be
accounted for as a purchase under generally accepted accounting principles and
that it will qualify as a tax-free reorganization for U.S. federal income tax
purposes. We have also assumed that the final form of the Agreement will be
substantially similar to the last draft reviewed by us.
Our opinion is necessarily based upon market, economic and other
conditions as they exist and can be evaluated on, and on the information made
available to us as of, the date hereof. We have assumed that in the course of
obtaining the necessary regulatory or other consents or approvals (contractual
or otherwise) for the Merger, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger. We have
also assumed that no increase in the amount of Consideration or other payments
and no incurrence of other liabilities that in any case would be material to
our analysis will be required under the Agreement.
We are acting as financial advisor to the Acquiror in connection with the
Merger and will receive a fee from the Acquiror for our services, significant
portions of which are contingent upon the execution of the Agreement and the
consummation of the Merger. In addition, the Acquiror has agreed to indemnify
us for certain liabilities arising out of our engagement. We may provide
financial advisory and financing services to the Acquiror in the future and may
receive fees for the rendering of such services. In addition, in the ordinary
course of our business, we may actively trade the Acquiror Shares for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Merger and does not constitute a recommendation
to any shareholder of the Acquiror as to how such shareholder should vote on
the proposed Merger or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration to be paid by the Acquiror in the
Merger is fair from a financial point of view to the Acquiror.
Very truly yours,
-------------------------------------
/s/ Merrill Lynch, Pierce
Fenner & Smith Incorporated
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
V-2
<PAGE>
MERRILL LYNCH
Investment Banking Group
World Financial Center
North Tower
New York, New York 10281-1329
January 8, 1998
Board of Directors
Pegasus Communications Corporation
5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
Members of the Board of Directors:
Pegasus Communications Corporation (the "Acquiror"), Pegasus DTS Merger
Sub, Inc., a newly formed, wholly owned subsidiary of the Acquiror (the
"Acquisition Sub"), Digital Television Services, Inc. (the "Company"), and
certain of the Acquiror's and the Company's shareholders have entered into an
Agreement and Plan of Merger dated January 8, 1998 (the "Agreement"), pursuant
to which the Acquisition Sub will be merged with and into the Company in a
transaction (the "Merger") in which all outstanding shares of the Company's
common stock and preferred stock, each par value $0.01 per share (the "Company
Shares"), will be converted into the right to receive an aggregate of 5,500,000
shares of the common stock of the Acquiror, par value $0.01 per share (the
"Acquiror Shares"), as adjusted for certain options, warrants and other
obligations of the Company as set forth in the Agreement (the "Consideration").
You have asked us whether, in our opinion, the Consideration to be paid by
the Acquiror in the Merger is fair from a financial point of view to the
Acquiror.
In arriving at the opinion set forth below, we have, among other things:
(1) Reviewed certain publicly available business and financial information
relating to the Company and the Acquiror that we deemed to be relevant;
(2) Reviewed certain information, including financial forecasts, relating
to the business, earnings, cash flow, assets, liabilities and prospects
of the Company and the Acquiror furnished to us by the Company and the
Acquiror, as well as the amount and timing of the cost savings and
related expenses expected to result from the Merger (the "Expected
Synergies") furnished to us by the Acquiror;
(3) Conducted discussions with members of senior management of the Company
and the Acquiror concerning the matters described in clauses 1 and 2
above, as well as their respective businesses and prospects before and
after giving effect to the Merger and the Expected Synergies;
(4) Reviewed the market prices for the Acquiror Shares and valuation
multiples for the Company Shares and the Acquiror Shares and compared
them with those of certain publicly traded companies that we deemed to
be relevant;
(5) Reviewed the results of operations of the Company and the Acquiror and
compared them with those of certain publicly traded companies that we
deemed to be relevant;
(6) Compared the proposed financial terms of the Merger with the financial
terms of certain other transactions that we deemed to be relevant;
(7) Reviewed the Agreement; and
(8) Reviewed such other financial studies and analyses and took into
account such other matters as we deemed necessary, including our
assessment of general economic, market and monetary conditions.
In preparing our opinion, we have assumed and relied on the accuracy and
completeness of all information supplied or otherwise made available to us,
discussed with or reviewed by or for us, or publicly available, and
V-3
<PAGE>
we have not assumed any responsibility for independently verifying such
information or undertaken an independent evaluation or appraisal of any of the
assets or liabilities of the Company or the Acquiror or been furnished with any
such evaluation or appraisal. In addition, we have not assumed any obligation
to conduct, nor have we conducted, any physical inspection of the properties or
facilities of the Company or the Acquiror. With respect to the financial
forecast information and the Expected Synergies furnished to or discussed with
us by the Company or the Acquiror, we have assumed that they have been
reasonably prepared and reflect the best currently available estimates and
judgment of the Company's or the Acquiror's management as to the expected
future financial performance of the Company or the Acquiror, as the case may
be, and the Expected Synergies. We have further assumed that the Merger will be
accounted for as a purchase under generally accepted accounting principles and
that it will qualify as a tax-free reorganization for U.S. federal income tax
purposes.
Our opinion is necessarily, based upon market, economic and other
conditions as they exist and can be evaluated on, and on the information made
available to us as of, the date hereof. We have assumed that in the course of
obtaining the necessary regulatory or other consents or approvals (contractual
or otherwise) for the Merger, no restrictions, including any divestiture
requirements or amendments or modifications, will be imposed that will have a
material adverse effect on the contemplated benefits of the Merger. We have
also assumed that no increase in the amount of Consideration or other payments
and no incurrence of other liabilities that in any case would be material to
our analysis will be required under the Agreement.
We are acting as financial advisor to the Acquiror in connection with the
Merger and will receive a fee from the Acquiror for our services, significant
portions of which are contingent upon the execution of the Agreement and the
consummation of the Merger. In addition, the Acquiror has agreed to indemnify
us for certain liabilities arising out of our engagement. We may provide
financial advisory and financing services to the Acquiror in the future and may
receive fees for the rendering of such services. In addition, in the ordinary
course of our business, we may actively trade the Acquiror Shares for our own
account and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
This opinion is for the use and benefit of the Board of Directors of the
Acquiror. Our opinion does not address the merits of the underlying decision by
the Acquiror to engage in the Merger and does not constitute a recommendation
to any shareholder of the Acquiror as to how such shareholder should vote on
the proposed Merger or any matter related thereto.
We are not expressing any opinion herein as to the prices at which the
Acquiror Shares will trade following the announcement or consummation of the
Merger.
On the basis of and subject to the foregoing, we are of the opinion that,
as of the date hereof, the Consideration to be paid by the Acquiror in the
Merger is fair from a financial point of view to the Acquiror.
This opinion is a confirmation of our previous opinion dated December 31,
1997.
Very truly yours,
-------------------------------------
/s/ Merrill Lynch, Pierce
Fenner & Smith Incorporated
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
V-4
<PAGE>
ANNEX VI -- FORM OF PROXY
PEGASUS COMMUNICATIONS CORPORATION
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD
PROMPTLY USING THE ENCLOSED ENVELOPE
The undersigned, revoking all prior proxies, hereby appoints Marshall W. Pagon,
Robert N. Verdecchio and Ted S. Lodge, or any of them, with full power of
substitution, as the undersigned's proxies to vote all the shares of Class A
Common Stock and Class B Common Stock or Pegasus Communications Corporation
(the "Company") held of record by the undersigned on March 2, 1998, at the
Special Meeting of Stockholders of the Company to be held on April 16, 1998 and
at any adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDERS. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2, 3 and 4.
Proposal 1: Approval of the Merger Agreement and the transactions contemplated
thereby, including the issuance of approximately 5.5 million shares of
Class A Common Stock.
-- FOR -- AGAINST -- ABSTAIN
Proposal 2: Approval of the proposal to amend the Pegasus Restricted Stock Plan
to increase the number of shares of Class A Common Stock that may be
issued thereunder from 270,000 to 350,000
-- FOR -- AGAINST -- ABSTAIN
Proposal 3: Approval of the proposal to amend the Pegasus Communications 1996
Stock Option Plan to increase the number of shares of Class A Common
Stock that may be issued thereunder from 450,000 to 900,000 and to
increase the maximum number of shares of Class A Common Stock that may
be issued under options granted to any executive officer from 275,000
to 550,000.
-- FOR -- AGAINST -- ABSTAIN
Proposal 4: Approval of the proposal to amend the Certificate of Designation,
Preferences and Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and
Restrictions Thereof relating to the Company's 12 3/4% Series A
Cumulative Exchangeable Preferred Stock due 2007.
-- FOR -- AGAINST -- ABSTAIN
Proposal 5: IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH
OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING.
You are urged to sign and return this proxy so that you may be sure that your
shares will be voted.
Dated:---------------------------- ,
1998
-------------------------------------
Signature of Stockholder
-------------------------------------
Signature of Stockholder
Please sign exactly as your name appears hereon, date and return promptly. When
shares are held by joint tenants, both should sign. Executors, administrators,
trustees and other fiduciaries should indicate their capacity when signing.
VI-1
<PAGE>
PART II. INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The Registrant's Amended and Restated Certificate of Incorporation
provides that a director of the Registrant shall have no personal liability to
the Registrant or to its stockholders for monetary damages for breach of
fiduciary duty as a director except to the extent that Section 102(b)(7) (or
any successor provision) of the Delaware General Corporation Law, as amended
from time to time, expressly provides that the liability of a director may not
be eliminated or limited.
Article 6 of the Registrant's By-Laws provides that any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative, by reason of the fact that such person is or was a director
or officer of the Registrant, or is or was serving while a director of officer
of the Registrant at the request of the Registrant as a director, officer,
employee, agent, fiduciary or other representative of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
shall be indemnified by the Registrant against expenses (including attorneys'
fees), judgments, fines, excise taxes and amounts paid in settlement actually
and reasonably incurred by such person in connection with such action, suit or
proceeding to the full extent permissible under Delaware law. Article 6 also
provides that any person who is claiming indemnification under the Registrant's
By-Laws is entitled to advances from the Registrant for the payment of expenses
incurred by such person in the manner and to the full extent permitted under
Delaware law.
The Registrant has obtained directors' and officers' liability insurance.
Item 21. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -----------------------------------------------------------------------------------------------------
<S> <C>
2.1 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30,
1996 (including form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agree-
ment) (which is incorporated by reference to Exhibit 2.2 to Pegasus' Registration Statement on Form
S-1 (File No. 333-05057).
2.2 Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to Pegasus' Form 8-K, dated
October 8, 1996).
2.3 Amendment No. 2 to Exhibit 2.1 (which is incorporated by reference to Exhibit 2.5 to Pegasus'
Registration Statement on Form S-1 (File No. 333-057057).
2.4 Amendment No. 3 to Exhibit 2.1 (which is incorporated by reference to Exhibit 4 to Pegasus' Form
8-K dated October 8, 1996).
2.5 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communica-
tions Corporation and Harron Communications Corp. dated as of October 8, 1996 (which is incor-
porated by reference to Exhibit 5 to Pegasus' Form 8-K dated October 8, 1996).
2.6 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Commu-
nications Corporation and Harron Communications Corporation dated as of October 8, 1996 (which
is incorporated by reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996).
2.7 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Com-
munications Corporation and Harron Communications Corp. dated October 8, 1996 (which is incor-
porated by reference to Exhibit 7 to Pegasus Form 8-K dated as of October 8, 1996).
2.8 Agreement and Plan of Merger dated January 8, 1998 among Pegasus Communications Corporation
and certain of its shareholders, Pegasus DTS Merger Sub, Inc., and Digital Television Services, Inc.
and certain of its shareholders, including forms of Registration Rights Agreement and Voting Agree-
ment as exhibits (which is incorporated by reference herein to Exhibit 2.1 to Pegasus's Form 8-K
dated December 10, 1997).
2.9 Asset Purchase Agreement dated as of January 16, 1998 between Avalon Cable of New England,
LLC and Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (which is
incorporated by reference herein to Pegasus' Form 8-K dated January 16, 1998).
</TABLE>
II-1
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -------------------------------------------------------------------------------------------------------
<S> <C>
3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit
3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
3.3 Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights
of Preferred Stock and Qualifications, Limitations and Restrictions Thereof which is incorporated by
reference to Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-23595).
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the
Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National Association,
as Trustee, relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form
of Notes and Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to
Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
4.2 Form of 12 1/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee with respect to the 12 1/2% Series B Senior Subordinated Notes due
2005 (included in Exhibit 4.1 above).
4.4 Indenture by and between Pegasus and First Union National Bank, as trustee, relating to the
Exchange Notes (included in Exhibit 3.3 above).
4.5 Indenture, dated as of October 21, 1997, by and between Pegasus Communications Corporation and
First Union National Bank, as trustee, relating to the Senior Notes (which is incorporated by refer-
ence herein to Exhibit 4.1 to Amendment No. 1 to Pegasus' Form 8-K dated September 8, 1997).
5.1* Opinion of Drinker Biddle & Reath LLP.
8.1* Tax Opinion of Drinker Biddle & Reath LLP.
10.1 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. &
K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by
reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on
Form S-4 (File No. 33-95042).
10.2 Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox
Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which
is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scran-
ton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference
to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox
Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which
is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.5 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Non-
duplication Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus
Broadcast Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incor-
porated herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registra-
tion Statement on Form S-4 (File No. 33-95042).
10.6 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus
Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by ref-
erence to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form
S-4 (File No. 33-95042).
10.7 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and
WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit
10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No.
33-95042).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------------ ------------------------------------------------------------------------------------------------------
<S> <C>
10.8 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox
Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI
(which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to
Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File
No. 33-95042).
10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993,
between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042) (other similar agreements with the
National Rural Telecommunications Cooperative are not being filed but will be furnished upon
request, subject to restrictions on confidentiality).
10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated
June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable
Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite
Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television sys-
tems for the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana
Grande and Maricao (which is incorporated herein by reference to Exhibit 2 to Pegasus Media &
Communications, Inc.'s Form 8-K dated March 21, 1996).
10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems
for the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference
to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996).
10.15 Credit Agreement dated as of December 9, 1997 by and among Pegasus Media & Communications,
Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated
by reference herein to Exhibit 10.1 to Pegasus' Form 8-K dated December 10, 1997).
10.16 Pegasus Restricted Stock Plan (which is incorporated by reference to Exhibit 10.28 to Pegasus' Reg-
istration Statement on Form S-1 (File No. 333-05057).
10.17 Option Agreement for Donald W. Weber (which is incorporated by reference to Exhibit 10.29
Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
10.18 Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus'
Registration Statement on Form S-1 (File No. 333-05057).
10.19 Amendment to Option Agreement for Donald W. Weber, dated December 19, 1996 (which is incor-
porated by reference to Exhibit 10.31 to Pegasus' Registration Statement on Form S-1 (File No.
333-18739).
10.20 Warrant Agreement between Pegasus and First Union National Bank, as Warrant Agent relating to
the Warrants (which is incorporated by reference to Exhibit 10.32 to Pegasus' Registration Statement
on Form S-1 (File No. 333-23595).
10.21* Amendment to Credit Agreement executed as of March 10, 1998 by and among Pegasus Media &
Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders.
21.1* Subsidiaries of Pegasus.
23.1* Consent of Drinker Biddle & Reath LLP (included in their opinion filed as Exhibit 5.1).
23.2* Consent of Coopers & Lybrand L.L.P.
23.3* Consent of Arthur Andersen LLP.
23.4* Consent of Fishbein & Co., P.C.
23.5* Consent of Deloitte & Touche LLP.
24.1 + Powers of Attorney (included in Signatures and Powers of Attorney).
27.1* Financial Data Schedule for Pegasus.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ---------- -----------------------------------------------------------------
<S> <C>
27.2* Financial Data Schedule for DTS.
99.1* Consent of Merrill, Lynch, Pierce, Fenner & Smith, Incorporated.
99.2* Consent of Harry F. Hopper, III.
99.3* Consent of Michael C. Brooks.
99.4* Consent of Riordon B. Smith.
</TABLE>
- ------------
* Filed herewith.
+ Previously filed.
Item 22. Undertakings.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(2) It will respond to requests for information that is incorporated by
reference into the prospectus pursuant to Item 4, 10(b), 11, or 13 of this
form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means. This
includes information contained in documents filed subsequent to the effective
date of the registration statement through the date of responding to the
request.
(3) It will supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it
became effective.
II-4
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended,
the Registrant has duly caused this Amendment to Registration Statement to be
signed on its behalf by the undersigned, hereunto duly authorized in the city
of Radnor, Commonwealth of Pennsylvania, on the 18th day of March, 1998.
PEGASUS COMMUNICATIONS CORPORATION
By: /s/ Marshall W. Pagon
----------------------------------------
Name: Marshall W. Pagon
Title: Chief Executive Officer and
President
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated. Each person whose signature appears
below hereby constitutes and appoints Marshall W. Pagon, Robert N. Verdecchio
and Ted S. Lodge as his or her attorneys-in-fact and agents, with full power of
substitution for him or her in any and all capacities, to sign any or all
amendments or post-effective amendments to the Registration Statement, or any
Registration Statement for the same offering that is to be effective upon
filing pursuant to Rule 462(b) under the Securities Act of 1933, as amended,
and to file the same, with exhibits thereto and other documents in connection
therewith or in connection with the registration of the Notes under the
Securities Exchange Act of 1934, as amended, with the Securities and Exchange
Commission, granting unto each of such attorneys-in-fact the agents full power
and authority to do and perform each and every act and thing requisite and
necessary in connection with such matters and hereby ratifying and confirming
all that each of such attorneys-in-fact and agents or his or her substitutes
may do or cause to be done by virtue hereof.
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------------------------------ ------------------------------------------ ---------------
<S> <C> <C>
/s/ Marshall W. Pagon President, Chief Executive Officer and March 18, 1998
----------------------------- Chairman of the Board
Marshall W. Pagon (Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, Chief Financial March 18, 1998
- ----------------------------- Officer, Assistant Secretary and Director
Robert N. Verdecchio (Principal Financial and Accounting Officer)
/s/ James J. McEntee, III Director March 18, 1998
- -----------------------------
James J. McEntee, III
/s/ Mary C. Metzger Director March 18, 1998
- -----------------------------
Mary C. Metzger
/s/ Donald W. Weber Director March 18, 1998
- -----------------------------
Donald W. Weber
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- -------- -------------------------------------------------------------------------------------------------------
<S> <C>
2.1 Contribution and Exchange Agreement by and between the Parent and Harron dated as of May 30,
1996 (including form of Joinder Agreement, Stockholder's Agreement and Noncompetition Agree-
ment) (which is incorporated by reference to Exhibit 2.2 to Pegasus' Registration Statement on Form
S-1 (File No. 333-05057).
2.2 Amendment No. 1 to Exhibit 2.1 (which is incorporated by reference to Pegasus' Form 8-K, dated
October 8, 1996).
2.3 Amendment No. 2 to Exhibit 2.1 (which is incorporated by reference to Exhibit 2.5 to Pegasus'
Registration Statement on Form S-1 (File No. 333-057057).
2.4 Amendment No. 3 to Exhibit 2.1 (which is incorporated by reference to Exhibit 4 to Pegasus' Form
8-K dated October 8, 1996).
2.5 Joinder Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Communica-
tions Corporation and Harron Communications Corp. dated as of October 8, 1996 (which is incor-
porated by reference to Exhibit 5 to Pegasus' Form 8-K dated October 8, 1996).
2.6 Stockholders' Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Commu-
nications Corporation and Harron Communications Corporation dated as of October 8, 1996 (which
is incorporated by reference to Exhibit 6 to Pegasus' Form 8-K dated as of October 8, 1996).
2.7 Non-Competition Agreement by and among Pegasus Communications Holdings, Inc., Pegasus Com-
munications Corporation and Harron Communications Corp. dated October 8, 1996 (which is incor-
porated by reference to Exhibit 7 to Pegasus Form 8-K dated as of October 8, 1996).
2.8 Agreement and Plan of Merger dated January 8, 1998 among Pegasus Communications Corporation
and certain of its shareholders, Pegasus DTS Merger Sub, Inc., and Digital Television Services, Inc.
and certain of its shareholders, including forms of Registration Rights Agreement and Voting Agree-
ment as exhibits (which is incorporated by reference herein to Exhibit 2.1 to Pegasus's Form 8-K
dated December 10, 1997).
2.9 Asset Purchase Agreement dated as of January 16, 1998 between Avalon Cable of New England,
LLC and Pegasus Cable Television, Inc. and Pegasus Cable Television of Connecticut, Inc. (which is
incorporated by reference herein to Pegasus' Form 8-K dated January 16, 1998).
3.1 Certificate of Incorporation of Pegasus, as amended (which is incorporated by reference to Exhibit
3.1 to Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
3.2 By-Laws of Pegasus (which is incorporated by reference to Exhibit 3.2 to Pegasus' Registration
Statement on Form S-1 (File No. 333-05057).
3.3 Certificate of Designation, Preferences and Relative, Participating, Optional and Other Special Rights
of Preferred Stock and Qualifications, Limitations and Restrictions Thereof which is incorporated by
reference to Exhibit 3.3 to Pegasus' Registration Statement on Form S-1 (File No. 333-23595).
4.1 Indenture, dated as of July 7, 1995, by and among Pegasus Media & Communications, Inc., the
Guarantors (as this term is defined in the Indenture), and First Fidelity Bank, National Association,
as Trustee, relating to the 12 1/2 % Series B Senior Subordinated Notes due 2005 (including the form
of Notes and Subsidiary Guarantee) (which is incorporated herein by reference to Exhibit 4.1 to
Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
4.2 Form of 12 1/2% Series B Senior Subordinated Notes due 2005 (included in Exhibit 4.1 above).
4.3 Form of Subsidiary Guarantee with respect to the 12 1/2% Series B Senior Subordinated Notes due
2005 (included in Exhibit 4.1 above).
4.4 Indenture by and between Pegasus and First Union National Bank, as trustee, relating to the
Exchange Notes (included in Exhibit 3.3 above).
4.5 Indenture, dated as of October 21, 1997, by and between Pegasus Communications Corporation and
First Union National Bank, as trustee, relating to the Senior Notes (which is incorporated by refer-
ence herein to Exhibit 4.1 to Amendment No. 1 to Pegasus' Form 8-K dated September 8, 1997).
5.1* Opinion of Drinker Biddle & Reath LLP.
8.1* Tax Opinion of Drinker Biddle & Reath LLP.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and D. &
K. Broadcast Properties L.P. relating to television station WDBD (which is incorporated herein by
reference to Exhibit 10.5 to Pegasus Media & Communications, Inc.'s Registration Statement on
10.1 Form S-4 (File No. 33-95042).
Agreement and Amendment to Station Affiliation Agreement, dated as of June 11, 1993, between Fox
Broadcasting Company and Donatelli & Klein Broadcast relating to television station WDBD (which
10.2 is incorporated herein by reference to Exhibit 10.6 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
<S> <C>
10.3 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcast Company and Scran-
ton TV Partners Ltd. relating to television station WOLF (which is incorporated herein by reference
to Exhibit 10.8 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4
(File No. 33-95042).
10.4 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox
Broadcasting Company and Scranton TV Partners, Ltd. relating to television station WOLF (which
is incorporated herein by reference to Exhibit 10.9 to Pegasus Media & Communications, Inc.'s
Registration Statement on Form S-4 (File No. 33-95042).
10.5 Amendment to Fox Broadcasting Company Station Affiliation Agreement Regarding Network Non-
duplication Protection, dated December 2, 1993, between Fox Broadcasting Company and Pegasus
Broadcast Television, L.P. relating to television stations WOLF, WWLF, and WILF (which is incor-
porated herein by reference to Exhibit 10.10 to Pegasus Media & Communications, Inc.'s Registra-
tion Statement on Form S-4 (File No. 33-95042).
10.6 Consent to Assignment, dated May 1, 1993, between Fox Broadcasting Company and Pegasus
Broadcast Television, L.P. relating to television station WOLF (which is incorporated herein by ref-
erence to Exhibit 10.11 to Pegasus Media & Communications, Inc.'s Registration Statement on Form
S-4 (File No. 33-95042).
10.7 Station Affiliation Agreement, dated March 30, 1992, between Fox Broadcasting Company and
WDSI Ltd. relating to television station WDSI (which is incorporated herein by reference to Exhibit
10.12 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File No.
33-95042).
10.8 Agreement and Amendment to Station Affiliation Agreement, dated June 11, 1993, between Fox
Broadcasting Company and Pegasus Broadcast Television, L.P. relating to television station WDSI
(which is incorporated herein by reference to Exhibit 10.13 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.9 Franchise Agreement for Mayaguez, Puerto Rico (which is incorporated herein by reference to
Exhibit 10.14 to Pegasus Media & Communications, Inc.'s Registration Statement on Form S-4 (File
No. 33-95042).
10.10 NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated June 24, 1993,
between the National Rural Telecommunications Cooperative and Pegasus Cable Associates, Ltd.
(which is incorporated herein by reference to Exhibit 10.28 to Pegasus Media & Communications,
Inc.'s Registration Statement on Form S-4 (File No. 33-95042) (other similar agreements with the
National Rural Telecommunications Cooperative are not being filed but will be furnished upon
request, subject to restrictions on confidentiality).
10.11 Amendment to NRTC/Member Agreement for Marketing and Distribution of DBS Services, dated
June 24, 1993, between the National Rural Telecommunications Cooperative and Pegasus Cable
Associates, Ltd. (which is incorporated herein by reference to Exhibit 10.29 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.12 DIRECTV Sign-Up Agreement, dated May 3, 1995, between DIRECTV, Inc. and Pegasus Satellite
Television, Inc. (which is incorporated herein by reference to Exhibit 10.30 to Pegasus Media &
Communications, Inc.'s Registration Statement on Form S-4 (File No. 33-95042).
10.13 Franchise Agreement granted to Dom's Tele-Cable, Inc., to build and operate cable television sys-
tems for the municipalities of Cabo Rojo, San German, Lajas, Hormigueros, Guanica, Sabana
Grande and Maricao (which is incorporated herein by reference to Exhibit 2 to Pegasus Media &
Communications, Inc.'s Form 8-K dated March 21, 1996).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.14 Franchise Agreement granted to Dom's Tele-Cable, Inc. to build and operate cable television systems
for the municipalities of Anasco, Rincon and Las Marias (which is incorporated herein by reference
to Exhibit 3 to Pegasus Media & Communications, Inc.'s Form 8-K dated March 21, 1996).
10.15 Credit Agreement dated as of December 9, 1997 by and among Pegasus Media & Communications,
Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders (which is incorporated
by reference herein to Exhibit 10.1 to Pegasus' Form 8-K dated December 10, 1997).
10.16 Pegasus Restricted Stock Plan (which is incorporated by reference to Exhibit 10.28 to Pegasus' Reg-
istration Statement on Form S-1 (File No. 333-05057).
10.17 Option Agreement for Donald W. Weber (which is incorporated by reference to Exhibit 10.29
Pegasus' Registration Statement on Form S-1 (File No. 333-05057).
10.18 Pegasus 1996 Stock Option Plan (which is incorporated by reference to Exhibit 10.30 to Pegasus'
Registration Statement on Form S-1 (File No. 333-05057).
10.19 Amendment to Option Agreement for Donald W. Weber, dated December 19, 1996 (which is incor-
porated by reference to Exhibit 10.31 to Pegasus' Registration Statement on Form S-1 (File No.
333-18739).
10.20 Warrant Agreement between Pegasus and First Union National Bank, as Warrant Agent relating to
the Warrants (which is incorporated by reference to Exhibit 10.32 to Pegasus' Registration Statement
on Form S-1 (File No. 333-23595).
10.21* Amendment to Credit Agreement executed as of March 10, 1998 by and among Pegasus Media &
Communications, Inc., the lenders thereto, and Bankers Trust Company, as agent for the lenders.
21.1* Subsidiaries of Pegasus.
23.1* Consent of Drinker Biddle & Reath LLP (included in their opinion filed as Exhibit 5.1).
23.2* Consent of Coopers & Lybrand L.L.P.
23.3* Consent of Arthur Andersen LLP.
23.4* Consent of Fishbein & Co., P.C.
23.5* Consent of Deloitte & Touche LLP.
24.1+ Powers of Attorney (included in Signatures and Powers of Attorney).
27.1* Financial Data Schedule for Pegasus.
27.2* Financial Data Schedule for DTS.
99.1* Consent of Merrill, Lynch, Pierce, Fenner & Smith, Incorporated.
99.2* Consent of Harry F. Hopper, III.
99.3* Consent of Michael C. Brooks.
99.4* Consent of Riordon B. Smith.
</TABLE>
- ------------
* Filed herewith.
+ Previously filed.
<PAGE>
EXHIBIT 5.1
Law Offices
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
March 17, 1998
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
5 Radnor Corporate Center, Suite 454
100 Matsonford Road
Radnor, Pennsylvania 19087
Ladies and Gentlemen:
We have acted as counsel to Pegasus Communications
Corporation, a Delaware corporation (the "Company"), in connection with the
preparation and filing with the Securities and Exchange Commission of a
Registration Statement on Form S-4 (File No. 333-44929)(the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
relating to the issuance of up to 5,500,000 shares of the Company's Class A
Common Stock, par value $.01 per share (the "Shares"), to the stockholders of
Digital Television Services, Inc., a Delaware corporation ("DTS"), in a merger
in which Pegasus DTS Merger Sub Inc., a wholly-owned Delaware subsidiary of the
Company (the "Merger Sub"), will be merged with and into DTS, and DTS will
become a wholly-owned subsidiary of the Company.
In that capacity, we have examined the originals and copies,
certified or otherwise identified to our satisfaction, of the Agreement and Plan
of Merger dated January 8, 1998 (the "Merger Agreement"), among the Company,
DTS, the Merger Sub, certain stockholders of the Company, and certain
stockholders of DTS, the certificate of incorporation and by-laws of the
Company, resolutions of the Company's board of directors and such other
documents and corporate records relating to the Company and the issuance and
sale of the Shares as we have deemed appropriate. This opinion is based
exclusively on the Delaware General Corporation Law.
On the basis of the foregoing, we are of the opinion that the
Shares have been duly authorized for issuance and that
<PAGE>
Pegasus Communications Corporation
March 17, 1998
Page 2
upon issuance of the Shares at the Closing (as defined in the Merger Agreement)
pursuant to the terms of the Merger Agreement, the Shares will have been validly
issued and will be fully paid and non-assessable.
We hereby consent to the reference to our firm under the
caption "Legal Matters" in the Proxy Statement/Prospectus included in the
Registration Statement and to the filing of this opinion as an exhibit to the
Registration Statement. This does not constitute a consent under Section 7 of
the Securities Act of 1933, and in consenting to such reference to our firm we
have not certified any part of the Registration Statement and do not otherwise
come within the categories of persons whose consent is required under Section 7
or under the rules and regulations of the Securities and Exchange Commission
issued thereunder.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
<PAGE>
EXHIBIT 8.1
Law Offices
DRINKER BIDDLE & REATH LLP
Philadelphia National Bank Building
1345 Chestnut Street
Philadelphia, PA 19107-3496
Telephone: (215) 988-2700
Fax: (215) 988-2757
March 17, 1998
PEGASUS COMMUNICATIONS CORPORATION
c/o Pegasus Communications Management Company
5 Radnor Corporate Center, Suite 454
100 Matsonford Road
Radnor, Pennsylvania 19087
Ladies and Gentlemen:
As counsel to Pegasus Communications Corporation, a Delaware
corporation (the "Company"), we have assisted in the preparation and filing of
the Company's Registration Statement on Form S-4 (File No. 333-44929) (the
"Registration Statement"), filed with the Securities and Exchange Commission
under the Securities Act of 1933, as amended, relating to 5,500,000 shares of
the Company's Class A Common Stock, par value $.01 per share.
In our opinion, the statements in the proxy
statement/prospectus contained in the Registration Statement (the "Proxy
Statement/Prospectus") under the caption "The Merger -- Certain Federal Income
Tax Consequences," to the extent they constitute matters of law or legal
conclusions, expresses the material federal income tax consequences with respect
to the Merger (as this term is defined in the Proxy Statement/Prospectus).
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement, and we consent to the reference of our name under
the caption "Legal Matters" in the Proxy Statement/Prospectus.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
<PAGE>
FIRST AMENDMENT TO CREDIT AGREEMENT
THIS FIRST AMENDMENT TO CREDIT AGREEMENT ("this Amendment"), executed
as of March 10, 1998 and effective as of January 1, 1998, is by and among
PEGASUS MEDIA & COMMUNICATIONS, INC., a Delaware corporation (the "Borrower");
the undersigned financial institutions, in their capacities as "Lenders" under
the Credit Agreement referred to below, and being the "Required Lenders", as
defined in the Credit Agreement, for purposes of this Amendment (the "Required
Lenders"); and BANKERS TRUST COMPANY, as agent for the Lenders (in such
capacity, together with its successors and assigns in such capacity, the
"Agent").
RECITALS
A. The Borrower, the Lenders and the Agent are parties to a Credit
Agreement dated as of December 10, 1997 (the "Credit Agreement"). Capitalized
terms used herein without definition have the meanings assigned to them in the
Credit Agreement.
B. The Borrower has requested the amendment of the Credit Agreement to
(1) extend until April 16, 1998 the date as of which the Borrower is required to
perfect the security interests in property covered by the Uniform Commercial
Code in effect in Puerto Rico, in order to address certain delays in the
production of necessary documentation by the applicable governmental authorities
in Puerto Rico, (2) permit the issuance of Seller Letters of Credit with expiry
dates of up to four (4) years from the date of issuance; and (3) permit PSTH to
form a special purpose wholly owned subsidiary to finance Subscriber Acquisition
Costs incurred by or on behalf of the DBS Subsidiaries, in exchange for certain
commissions, which subsidiary would not be required to provide a guaranty or any
other credit support for the Obligations and would not be included as one of the
"Subsidiaries" for purposes of calculating the Applicable Margin or the
Borrower's compliance with certain financial covenants.
C. Subject to certain terms and conditions, the Agent and the Required
Lenders are willing to agree to such requests, concurrently with the execution
of this Amendment.
NOW THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto agree as
follows:
I. Amendments to Credit Agreement.
Subject to the satisfaction of each of the conditions set forth in
Section III, the Agent and the Required Lenders hereby agree with the Borrower
as follows:
A. Security. Paragraph 6 of Schedule 2.01(a) to the Credit Agreement is
hereby amended by deleting the reference to the date "January 31, 1998" and
substituting therefor the date "April 16, 1998", thereby extending by 75 days
the time within which the Borrower is required to perfect the security interests
in property covered by the Uniform Commercial Code, as in effect in Puerto Rico.
<PAGE>
B. Expiry of Certain Seller Letters of Credit.
Section 1.02(a)(v) of the Credit Agreement is amended by deleting the
first sentence thereof and substituting therefor the following:
"Each Letter of Credit shall have an expiry date occurring not later
than the earlier of the date which is one year from the date of issuance (or,
solely with respect to Seller Letters of Credit issued after February __, 1998,
four (4) years from the date of issuance) and the date which is ten (10)
Business Days prior to the Expiration Date."
C. Formation of Special Purpose Subsidiary and Related Matters.
1. Formation of Special Purpose Subsidiary.
Section 7.04(a) of the Credit Agreement is amended to read in its
entirety as follows:
"(a) Form any subsidiary (other than the Special Purpose
Subsidiary) or otherwise change the corporate structure or organization of the
Borrower or the Subsidiaries from that set forth in Schedule 4.23, except in
connection with, and in accordance with the conditions to, any Permitted
Acquisition;
2. Limits on Activities of Special Purpose Subsidiary.
Section 7.09 of the Credit Agreement is amended by changing its title
to "Change in Business; Limits on Activities of Special Purpose Subsidiary", and
by adding at the end thereof the following:
"The Special Purpose Subsidiary shall not engage, directly or
indirectly, in any business other than that of paying, or reimbursing the DBS
Subsidiaries for, Subscriber Acquisition Costs incurred by the DBS Subsidiaries
(such payments or reimbursements being referred to collectively herein as the
"SAC Payments") in exchange for commissions payable by the DBS Subsidiaries not
exceeding $4.17 per month for each affected subscriber to DBS Services
(collectively, the "SAC Commissions"), and shall
(a) hold no assets other than such funds,
(b) not incur, create, assume, become or be liable, directly,
indirectly or contingently, in any manner with respect to, any Indebtedness or
liability (other than liabilities to make SAC Payments accrued in the ordinary
course),
(c) not create, incur, assume, suffer or permit to exist any mortgage,
pledge, lien, charge or other encumbrance of any nature whatsoever on any of its
assets, now or hereafter owned,
(d) not make any payments or engage in any other transactions, other
than SAC Payments and distributions to PSTH,
<PAGE>
(e) not maintain cash on hand and other liquid investments exceeding
$3,500,000 in the aggregate at any time, and
(f) distribute to PSTH (i) all SAC Commissions on a regular basis (and,
in any event, no less frequently than every second month) and (ii) any cash or
other liquid investments exceeding $3,500,000 ("Excess SAC Cash") no later than
thirty (30) Business Days after such excess shall arise.
3. Borrower's Investments in the Special Purpose Subsidiary.
The definition of "Permitted Investments" set forth in Article XI of
the Credit Credit Agreement is amended by deleting the word "and" where it
appears after clause (k) thereof, adding a semi-colon after clause (l) thereof
and inserting directly thereafter and immediately prior to the period at the end
of such definition the following:
"(m) equity investments by PSTH in the Special Purpose Subsidiary made
solely for the purpose of funding SAC Payments and subject to the Special
Purpose Subsidiary's obligations to distribute SAC Payments and Excess SAC Cash
to PSTH under Section 7.09, and (n) equity investments by the Borrower in PSTH
made solely for the purpose of funding the equity investments referred to in
clause (m) above"
4. Definition of Special Purpose Subsidiary and Related Terms.
Article XI of the Credit Agreement is further amended by adding
thereto, in appropriate alphabetical location, the following new definitions:
Excess SAC Cash. See Section 7.09.
SAC Commissions. See Section 7.09.
SAC Payments. See Section 7.09.
Special Purpose Subsidiary Pegasus Satellite Development Corporation, a
Delaware corporation wholly owned by PSTH and formed for the sole
purpose of reimbursing the DBS Subsidiaries for Subscriber Acquisition
Costs.
5. No Credit Support Provided by Special Purpose Subsidiary.
Section 2.01(a) is amended to add " (other than the Special Purpose
Subsidiary)" after all references to "the Subsidiaries" which appear in
subparagraphs (i), (ii), (iii) and (iv) thereof, thereby providing that the
Borrower shall not be required to provide a security interest in the assets of
the Special Purpose Subsidiary as collateral for the Obligations, but shall
remain obligated to cause PSTH to pledge all of the issued and outstanding
shares of capital stock of the Special Purpose Subsidiary to secure the
Obligations.
6. Special Purpose Subsidiary Excluded for Certain Financial Covenants
and for Pricing Calculations.
<PAGE>
In order to assure that the operations of the Special Purpose
Subsidiary are not considered in the calculation of financial covenants under
Sections 5.01 through 5.04 or in the calculation of the Applicable Margin:
(a) Article V of the Credit Agreement is amended by adding " (other
than the Special Purpose Subsidiary, except with respect to Section 5.05)" after
the reference to "its Subsidiaries" which appears in the preamble thereto; and
(b) Article XI of the Credit Agreement is amended by adding "(other
than the Special Purpose Subsidiary)" after (i) all references to "Subsidiaries"
appearing in the definitions of Adjusted EBITDA, Annualized EBITDA, Location
Cash Flow, Total Funded Debt and Transaction Costs set forth therein and (ii)
all references to "Companies" appearing in the definitions of Current Assets,
Current Liabilities, Fixed Charges, Interest Expense, Maintenance Capital
Expenditures, Management Fees and Net Income set forth therein.
7. Combined Financial Reporting for 1997 Audit.
Section 6.05(a) of the Credit Agreement is amended to add the following
at the end thereof and immediately prior to the semi-colon:
", and provided, further, that the annual audited financial statements
of the Borrower and its Subsidiaries for the fiscal year ended December 31, 1997
may be provided on a combined and combining basis for all purposes of the
forgoing, including without limitation the opinion of the Accountants, in order
to include the results of operations of Pegasus Development Corporation, a
wholly owned subsidiary of the Parent responsible for funding Subscriber
Acquisition Costs prior to January 1, 1998"
D. Correction of Leverage Ratio Definition.
Article XI of the Credit Agreement is further amended by deleting the
definition of "PCC Consolidated Leverage Ratio" set forth therein and replacing
it with the following:
PCC Consolidated Leverage Ratio. The meaning given to the term
"Indebtedness to Adjusted Operating Cash Flow Ratio" (as applied to
indebtedness classified as having been incurred on the basis of such
ratio) in the PCC Indenture, as in effect on the date hereof, without
giving effect to any amendment thereto after the date hereof (unless
the Required Lenders agree in writing, in their sole discretion, that
any such amendment shall be given effect for purposes of this
Agreement).
E. No Further Amendments.
Except for such amendments, the text of the Credit Agreement and all
other Loan Documents shall remain unchanged and in full force and effect and is
hereby ratified and confirmed by the Borrower.
II. Representations, Warranties and Covenants of the Borrower.
<PAGE>
The Borrower hereby represents and warrants to, and covenants and
agrees with, the Lenders that:
A. The execution and delivery of this Amendment have been duly
authorized by all requisite corporate action on the part of the Borrower.
B. After giving effect to this Amendment, all warranties and
representations set forth in the Credit Agreement and the other Loan Documents
are true and correct in all material respects (except to the extent they
expressly relate to an earlier specified date or are affected by transactions or
events occurring after the Closing Date and permitted or not prohibited under
the Credit Agreement).
C. As of the date hereof and since the Closing Date, no event or
circumstance has occurred which has had or could have a Material Adverse Effect.
D. After giving effect to this Amendment, no Default has occurred and
is continuing.
E. None of the Borrower or any of its Affiliates is required to obtain
any consent, approval or authorization from, or to file any declaration or
statement with, any governmental instrumentality or other agency or any other
person or entity (including without limitation the Parent and the Subsidiaries)
in connection with or as a condition to the execution, delivery or performance
of this Amendment.
F. This Amendment constitutes the legal, valid and binding obligation
of the Borrower, enforceable against it in accordance with its terms, subject to
bankruptcy, insolvency, reorganization, moratorium and similar laws affecting
the rights and remedies of creditors generally or the application of principles
of equity, whether in any action at law or proceeding in equity, and subject to
the availability of the remedy of specific performance or of any other equitable
remedy or relief to enforce any right thereunder.
III. General Conditions.
The willingness of the Agent and the Required Lenders to agree to the
foregoing is subject to the condition that the Borrower shall have executed and
delivered to the Agent (or shall have caused to be duly executed and delivered
to the Agent by the appropriate persons) the following:
A. This Amendment.
B. True and complete copies of any required stockholders' and/or
directors' consents and/or resolutions, authorizing the execution and delivery
of this Amendment, certified by the Secretary of the appropriate company.
C. Any and all such documents (including additional Security
Documents), certificates and opinions as the Agent shall reasonably request with
respect to this Amendment and the formation of the Special Purpose Subsidiary
and as otherwise required to
<PAGE>
ensure or evidence compliance by the Borrower with the requirements of Sections
2.01(a)(v) and 2.01(b)(ii) of the Credit Agreement in connection therewith.
IV. Miscellaneous.
A. As provided in the Loan Agreement, the Borrower agrees to reimburse
the Agent upon demand for all reasonable fees and disbursements of counsel to
the Agent incurred in connection with the preparation of this Amendment.
B. This Amendment shall be governed by and construed in accordance with
the laws of the State of New York.
C. This Amendment may be executed by the parties hereto in several
counterparts hereof and by the different parties hereto on separate counterparts
hereof, all of which counterparts shall together constitute one and the same
agreement. Delivery of an executed signature page of this Amendment by facsimile
transmission shall be effective as an in hand delivery of an original executed
counterpart hereof.
*The Next Page is the Signature Page*
<PAGE>
IN WITNESS WHEREOF, the Agent, the Borrower and the undersigned
Required Lenders have caused this Amendment to be duly executed as a sealed
instrument by their duly authorized representatives, all as of the day and year
first above written.
BORROWER:
PEGASUS MEDIA & COMMUNICATIONS, INC.
By: /s/ Robert N. Verdecchio
-------------------------------------------------
Robert N. Verdecchio, Senior Vice President
AGENT:
BANKERS TRUST COMPANY
By: /s/ Gregory P. Chefrin
-------------------------------------------------
Name: Gregory P. Chefrin
Title: Vice President
LENDERS:
BANKERS TRUST COMPANY
By: /s/ Gregory P. Chefrin
-------------------------------------------------
Name: Gregory P. Chefrin
Title: Vice President
<PAGE>
BANKBOSTON, N.A.
By: /s/ Cindy C. Chen
--------------------------------------
Name: Cindy C. Chen
Title: Director
<PAGE>
BANQUE PARIBAS
By: /s/ Lynne S. Randall
------------------------------------
Name: Lynne S. Randall
Title: Director
<PAGE>
BANK OF MONTREAL, CHICAGO BRANCH
By: /s/ R. Encarnacion
-------------------------------------
Name: R. Encarnacion
Title: Director
<PAGE>
FLEET NATIONAL BANK
By: /s/ Vincent J. Rivers
--------------------------------------
Name: Vincent J. Rivers
Title: Assistant Vice President
<PAGE>
IBJ SCHRODER BANK & TRUST COMPANY
By: /s/ Mark H. Minter
-------------------------------------
Name: Mark H. Minter
Title: Managing Director
<PAGE>
MEESPIERSON CAPITAL CORP.
By: /s/ Claudia J. Chifos
---------------------------------------------------
Name: Claudia J. Chifos
Title: Managing Director
By: /s/ John T. Connors
---------------------------------------------------
Name: John T. Connors
Title: President and Chief Operating Officer
<PAGE>
STATE STREET BANK AND TRUST COMPANY
By: /s/ Hamilton H. Wood, Jr.
------------------------------------
Name: Hamilton H. Wood, Jr.
Title: Vice President
<PAGE>
COMPAGNIE FINANCIERE DE CIC
ET DE L'UNION EUROPEENNE
By:/s/ Marcus Edward
------------------------------------
Name: Marcus Edward
Title: Vice President
By:/s/ Brian O'Leary
------------------------------------
Name: Brian O'Leary
Title: Vice President
<PAGE>
UNION BANK OF CALIFORNIA
By: /s/ Christine P. Ball
------------------------------------
Name: Christine P. Ball
Title: Vice President
<PAGE>
EXHIBIT 21.1
Subsidiaries of Pegasus Communications Corporation
Subsidiary Jurisdiction
---------- ------------
Bride Communications, Inc. Delaware
B.T. Satellite, Inc. Maine
HMW, Inc. Maine
Lafayette County Satellite TV, Inc. Wisconsin
MCT Cablevision, Limited Partnership Delaware
MCT Cablevision, Ltd. Pennsylvania
Northern Electric Service Corporation Minnesota
PCT SG, Inc. Puerto Rico
Peach State Satellite Television, Inc. Delaware
Pegasus Anasco Holdings, Inc. Delaware
Pegasus Broadcast Associates, L.P. Pennsylvania
Pegasus Broadcast Television, Inc. Pennsylvania
Pegasus Cable Television, Inc. Massachusetts
Pegasus Cable Television of Anasco, Inc. Puerto Rico
Pegasus Cable Television of Connecticut, Inc. Connecticut
Pegasus Cable Television of San German, Inc. Delaware
Pegasus Communications Management Company Pennsylvania
Pegasus Development Corp. Delaware
Pegasus Media & Communications, Inc. Delaware
Pegasus Multistate Satellite Television, Inc. Delaware
Pegasus Satellite Development Corporation Delaware
Pegasus Satellite Holdings, Inc. Delaware
Pegasus Satellite Television, Inc. Delaware
<PAGE>
Pegasus Satellite Television of Arkansas, Inc. Delaware
Pegasus Satellite Television of Florida, Inc. Delaware
Pegasus Satellite Television of Georgia, Inc. Delaware
Pegasus Satellite Television of Indiana, Inc. Delaware
Pegasus Satellite Television of Michigan, Inc. Delaware
Pegasus Satellite Television of Minnesota, Inc. Delaware
Pegasus Satellite Television of Mississippi, Inc. Delaware
Pegasus Satellite Television of Ohio, Inc. Delaware
Pegasus Satellite Television of Texas, Inc. Delaware
Pegasus Satellite Television of Virginia, Inc. Delaware
Pegasus Towers, Inc. Delaware
Portland Broadcasting, Inc. Maine
PP Broadcasting, Inc. Delaware
PST Holdings, Inc. Delaware
Telecast of Florida, Inc. Florida
WDBD License Corp. Delaware
WDSI License Corp. Delaware
WILF Inc. Delaware
WOLF License Corp. Delaware
WTLH, Inc. Delaware
WTLH License Corp. Delaware
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the inclusion in this Registration Statement of Pegasus
Communications Corporation on Form S-4 (File No. 333-44929) of our report dated
February 26, 1998 on our audits of the consolidated financial statements
of Pegasus Communications Corporation as of December 31, 1996 and 1997 and for
the three years in the period ended December 31, 1997. We also consent to the
reference to our firm under the captions "Experts" and "Pegasus Selected
Historical and Pro Forma Consolidated Financial Data."
/s/ Coopers & Lybrand L.L.P.
-------------------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
March 17, 1998
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion
in this Registration Statement of Pegasus Communications Corporation on Form S-4
of our report relating to the consolidated balance sheets of Digital Television
Services, Inc. and Subsidiaries as of December 31, 1996 and 1997 and the related
consolidated statements of operations, members equity, and cash flows for the
period from inception (January 30, 1996) through December 31, 1996 and for the
year ended December 31, 1997 dated February 18, 1998, our report relating to the
balance sheet of WEP Intermediate Corp. as of September 30, 1997 and the related
statement of cash flows for the period from inception (January 28, 1997) to
September 30, 1997 dated October 10, 1997, our report relating to the balance
sheets of Direct Programming Services Limited Partnership as of December 31,
1995 and 1996 and the related statements of operations, changes in partners'
capital, and cash flows for the years ended December 31, 1994, 1995 and 1996
dated February 21, 1997, our report relating to the balance sheets of Kansas
DBS, L.L.C. as of December 31, 1995 and 1996 and the related statements of
operations, changes in accumulated deficit, and cash flows for the years ended
December 31, 1995 and 1996 dated February 21, 1997, our report relating to the
statements of assets and liabilities and accumulated deficit of the DBS
Operations of NRTC System No. 0422 as of December 31, 1995 and 1996 and the
related statements of expenses over revenues and changes in accumulated deficit
and cash flows for the years ended December 31, 1995 and 1996 dated February 21,
1997, our report relating to the statement of assets and liabilities and
accumulated earnings of the DBS Operations of NRTC System No. 0073 as of
December 31, 1996 and the related statements of revenues over expenses and
changes in accumulated earnings and cash flows for the year ended December 31,
1996 dated February 21, 1997, our report relating to the balance sheet of
Northeast DBS Enterprises, L.P. as of December 31, 1996, and the related
statements of operations, changes in partners' capital and cash flows for the
year ended December 31, 1996 dated February 21, 1997, our report relating to the
statements of assets and liabilities and accumulated deficit of the DBS
Operations of NRTC System No. 0001 as of December 31, 1995 and November 26, 1996
and the related statements of expenses over revenues and changes in accumulated
deficit and cash flows for the year ended December 31, 1995 and for the period
from January 1, 1996 through November 26, 1996 dated March 4, 1997, our report
relating to the statements of assets and liabilities and accumulated deficit of
the DBS Operations of NRTC System No. 1025 as of December 31, 1995 and August
28, 1996 and the related statements of expenses over revenues and changes in
accumulated deficit and cash flows for the period from March 10, 1995
(inception) through December 31, 1995 and the period from January 1, 1996
through August 28, 1996 dated March 4, 1997, and our report relating to the
balance sheets of Ocmulgee Communications, Inc. as of December 31, 1996 and 1997
and the related statements of operations, stockholder's deficit, and cash flows
for the years ended December 31, 1996 and 1997 dated February 10, 1998. We also
consent to the reference to us under the heading "Experts" in the Prospectus,
which is a part of the Registration Statement.
/s/ Arthur Andersen, LLP
---------------------------------
ARTHUR ANDERSEN, LLP
Atlanta, Georgia
March 17, 1998
<PAGE>
Exhibit 23.4
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion in this Registration Statement of Pegasus
Communications Corporation on Form S-4 (file no. 333-44929) of our report dated
February 23, 1996 relating to the December 31, 1994 and December 31, 1995
audited financial statements of Northeast DBS Enterprises, L.P. We also consent
to the reference to us under the heading "Experts" in the Prospectus, which is
part of the Registration Statement.
/s/ Fishbein & Company, P.C.
-----------------------------
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
March 17, 1998
<PAGE>
Exhibit 23.5
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-44929 of Pegasus Communications Corporation of our report dated November 10,
1997 on the financial statements of Satellite Television Services, Inc.
appearing in the Prospectus, which is a part of such Registration Statement, and
to the reference to us under the heading "Experts" in such Prospectus.
/s/Deloitte & Touche LLP
-------------------------
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
March 17, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 00001015629
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 45,269,153
<SECURITIES> 0
<RECEIVABLES> 14,138,571
<ALLOWANCES> 319,000
<INVENTORY> 974,920
<CURRENT-ASSETS> 65,514,112
<PP&E> 52,247,304
<DEPRECIATION> 24,560,658
<TOTAL-ASSETS> 380,861,713
<CURRENT-LIABILITIES> 33,167,074
<BONDS> 196,981,997
0
114,264,424
<COMMON> 103,218
<OTHER-SE> 27,363,504
<TOTAL-LIABILITY-AND-EQUITY> 380,861,713
<SALES> 86,818,426
<TOTAL-REVENUES> 86,818,426
<CGS> 0
<TOTAL-COSTS> 93,406,812
<OTHER-EXPENSES> (723,439)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 16,094,037
<INCOME-PRETAX> (29,630,973)
<INCOME-TAX> 200,000
<INCOME-CONTINUING> (29,830,973)
<DISCONTINUED> 0
<EXTRAORDINARY> (1,656,164)
<CHANGES> 0
<NET-INCOME> (31,487,137)
<EPS-PRIMARY> (3.19)
<EPS-DILUTED> (3.19)
</TABLE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001035722
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 76,140,240
<SECURITIES> 0
<RECEIVABLES> 4,820,186
<ALLOWANCES> 190,647
<INVENTORY> 2,229,918
<CURRENT-ASSETS> 65,616,080
<PP&E> 3,474,754
<DEPRECIATION> 554,537
<TOTAL-ASSETS> 257,662,066
<CURRENT-LIABILITIES> 63,336,431
<BONDS> 152,930,815
0
14,041
<COMMON> 21,370
<OTHER-SE> 16,601,702
<TOTAL-LIABILITY-AND-EQUITY> 257,662,066
<SALES> 47,443,126
<TOTAL-REVENUES> 47,443,126
<CGS> 6,443,374
<TOTAL-COSTS> 56,578,929
<OTHER-EXPENSES> (111,350)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,457,088
<INCOME-PRETAX> (30,147,615)
<INCOME-TAX> 0
<INCOME-CONTINUING> (30,147,615)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (30,147,615)
<EPS-PRIMARY> (14.11)
<EPS-DILUTED> (14.11)
</TABLE>
<PAGE>
Exhibit 99.1
Consent of Merrill Lynch
We hereby consent to the use of our opinion letters, dated December 31,
1997 and January 8, 1998, to the Board of Directors of Pegasus Communications
Corporation included as Annex V to the Proxy Statement/Prospectus which forms a
part of the Registration Statement on Form S-4 relating to the proposed merger
of Pegasus DTS Merger Sub, Inc., a wholly owned subsidiary of Pegasus
Communications Corporation, with and into Digital Telivision Services, Inc. and
to the references to such opinions in such Proxy Statement/Prospectus under the
captions "SUMMARY - The Special Meeting - Recommendations of Pegasus Board",
"SUMMARY - The Special Meeting - Opinion of Merrill Lynch", "PROPOSAL 1:
APPROVAL OF MERGER - Background of the Merger", PROPOSAL 1: APPROVAL OF MERGER -
Reasons for the Merger and Recommendations of the Pegasus Board"' and "PROPOSAL
1: APPROVAL OF MERGER - Opinion of Merrill Lynch". In giving such consent, we do
not admit and we hereby disclaim that we come within the category of persons
whose consent is required unde Section 7 of the Securities Act of 1933, as
amended, or the rules and regulations of the Securities and Exchange Commission
thereunder, nor do we thereby admit that we are experts with respect to any part
of such Registration Statement within the meaning of the term "experts" as used
in the Securities Act of 1933, as amended, or the rules and regulations of the
Securities and Exchange Commission thereunder.
/s/ Merrill, Lynch, Pierce, Fenner & Smith, Incorporated
-----------------------------------------------------------
MERRILL, LYNCH, PIERCE, FENNER & SMITH, INCORPORATED
March 17, 1998
<PAGE>
Exhibit 99.2
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporte Center, Suite 454
100 Matsonford Road
Radnor, PA 19087
Ladies and Gentlemen:
I hereby consent to the references to me becoming a Director of Pegasus
Communications Corporation appearing in the Registration Statement on Form S-4
(File Number 333-44929) of Pegasus Communications Corporation.
Very truly yours,
/s/ Harry F. Hopper, III
------------------------
Harry F. Hopper, III
Date: March 17, 1998
<PAGE>
Exhibit 99.3
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporte Center, Suite 454
100 Matsonford Road
Radnor, PA 19087
Ladies and Gentlemen:
I hereby consent to the references to me becoming a Director of Pegasus
Communications Corporation appearing in the Registration Statement on Form S-4
(File Number 333-44929) of Pegasus Communications Corporation.
Very truly yours,
/s/ Michael C. Brooks
------------------------
Michael C. Brooks
Date: March 17, 1998
<PAGE>
Exhibit 99.4
Pegasus Communications Corporation
c/o Pegasus Communications Management Company
5 Radnor Corporte Center, Suite 454
100 Matsonford Road
Radnor, PA 19087
Ladies and Gentlemen:
I hereby consent to the references to me becoming a Director of Pegasus
Communications Corporation appearing in the Registration Statement on Form S-4
(File Number 333-44929) of Pegasus Communications Corporation.
Very truly yours,
/s/ Riordon B. Smith
------------------------
Riordon B. Smith
Date: March 17, 1998
