As filed with the Securities and Exchange Commission on January 26, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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PEGASUS COMMUNICATIONS CORPORATION
(Exact name of registrant as specified in its charter
---------------
4833
(Primary Standard Industrial Classification Code Number)
DELAWARE 51-0374669
(State or Other Jurisdiction of (I.R.S. Employer Identification Number)
Incorporation of Organization)
c/o Pegasus Communications Management Company
Suite 454, 5 Radnor Corporate Center
100 Matsonford Road
Radnor, Pennsylvania 19087
(610) 341-1801
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
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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)
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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
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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. |__|________
CALCULATION OF REGISTRATION FEE
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Title of Proposed Proposed
Securities Amount Maximum Maximum Amount of
to be to be Offering Price Aggregate Registration
Registered Registered Per Share(1) Offering Price(1) Fee(2)
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Class A Common 5,500,000 $4.91 $27,016,618 $7,969.90
Stock
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(1) Calculated in accordance with Rule 457(f)(2) based upon the book value
of the capital stock of the company to be acquired as of September 30, 1997.
(2) Paid by wire transfer.
<PAGE>
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
January __, 1998
Dear Fellow Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
of Pegasus Communications Corporation (the "Company" or "Pegasus") on
______________, 1998, at _____ a.m., local time, at _______________________.
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 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) 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 Pegasus Class B Common Stock will enter into a voting
agreement with respect to the designation and election of directors. After
giving effect to the Merger, the DTS stockholders will own approximately 48.9%
of the issued and outstanding Class A Common Stock, which will represent
approximately 34.8% 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 Marshall W. Pagon 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.
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 ______________, 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 ____________, 1998, at ____ a.m., at _________________________.
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
adjustments, all holders of (i) DTS capital stock will have the right to receive
an aggregate of approximately 5.5 million shares of Pegasus Class A Common Stock
and (ii) DTS options and warrants will receive options and/or warrants to
purchase 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, Marshall W. Pagon, and certain affiliates
of Mr. Pagon 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 48.9% of the issued and outstanding Class A Common Stock,
which will represent approximately 34.8% 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 Marshall W. Pagon 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 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.
IV. 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.
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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, and no change in the Board of Directors.
The Board of Directors of Pegasus has fixed January __, 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. Holders of Pegasus' common stock are not entitled to appraisal rights
under Delaware law in connection with the Merger.
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: January ___, 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 JANUARY 26, 1998
PROXY STATEMENT
FOR SPECIAL MEETING OF
STOCKHOLDERS OF PEGASUS COMMUNICATIONS CORPORATION
TO BE HELD ____________, 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 ____________, 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 of
approximately 5.5 million 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 and (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 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.
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 48.9% of the outstanding shares of Class A Common
Stock after the Merger, which will represent approximately 34.8% 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.
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."
The Class A Common Stock is traded on the Nasdaq National Market under
the symbol "PGTV." On January 20, 1998, the last reported sale price of the
Class A Common Stock on the Nasdaq National Market was $20.125 per share.
<PAGE>
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" COMMENCING ON PAGE 14.
This Proxy Statement/Prospectus and the accompanying form of proxy are
first being mailed to the stockholders of Pegasus on or about ________________,
1998. Stockholders of Pegasus are also being mailed the accompanying form of
proxy.
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
AVAILABLE INFORMATION......................................................... 4
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................... 4
SUMMARY ..................................................................... 5
RISK FACTORS..................................................................14
Risks Relating to Forward-Looking Statements................................14
Risk Factors Associated With the Merger.....................................14
Risk Factors Relating to the Company's Business.............................15
Substantial Indebtedness and High Degree of Leverage......................15
Dependence on Network Affiliations........................................16
Reliance on DBS Technology and DIRECTV....................................17
Competition in the TV, DBS and Cable Businesses...........................17
Risks Attendant to Acquisition Strategy...................................18
Inability to Manage Growth Effectively....................................18
Dependence on Key Personnel...............................................18
Government Legislation, Regulation, Licenses and Franchises...............18
Dividend Policy; Restrictions on Payment of Dividends.....................20
Concentration of Share Ownership and Voting Control By Marshall W. Pagon..20
Volatility of Stock Price.................................................20
Potential Anti-Takeover Provisions; Change of Control.....................20
Dependence on Third Party Programmer........................................21
Risk of Signal Theft......................................................21
Limited Consumer Adoption of Satellite Television.........................22
Risk Factors Relating to DTS' Business......................................23
Substantial Indebtedness and High Degree of Leverage......................23
Limited Operating History, Negative Cash Flow.............................23
COMPARATIVE PER SHARE DATA....................................................24
MARKET PRICE INFORMATION AND DIVIDENDS........................................25
Pegasus...................................................................25
DTS.......................................................................25
THE SPECIAL MEETING...........................................................26
Solicitation..............................................................26
Voting Securities and Record Date.........................................26
Quorum....................................................................26
Purpose of the Special Meeting............................................26
PROPOSAL 1: APPROVAL OF MERGER................................................27
Background of the Merger..................................................27
Reasons for the Merger and Recommendations of the Pegasus Board...........28
Opinion of Merrill Lynch..................................................28
Interests of Certain Persons in the Merger................................32
Ownership of Pegasus After the Merger.....................................33
Management of Pegasus After the Merger....................................33
PROPOSAL 2: AMENDMENT TO RESTRICTED STOCK PLAN................................33
PROPOSAL 3: AMENDMENT TO STOCK OPTION PLAN....................................37
1
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PROPOSAL 4: OTHER MATTERS.....................................................39
THE MERGER....................................................................39
The Merger Agreement........................................................39
Termination.................................................................42
Voting Agreement............................................................44
Registration Rights Agreement...............................................46
Noncompetition Agreements...................................................46
Consequences Under Debt Agreements and Preferred Stock Terms..................47
Certain Federal Income Tax Consequences.....................................47
Accounting Treatment........................................................49
Federal Securities Law Consequences.........................................49
DTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.............................49
Overview ...................................................................50
Digital Television Services, LLC............................................53
Liquidity and Capital Resources.............................................56
BUSINESS OF THE COMPANY.......................................................60
Recent Developments.........................................................60
BUSINESS OF DTS...............................................................61
General.....................................................................61
DBS -- DIRECTV..............................................................61
DIRECTV Programming.........................................................61
Acquisitions by DTS.........................................................63
Sales and Distribution......................................................64
Marketing...................................................................65
Customer Service............................................................65
DBS Agreements..............................................................66
Competition.................................................................67
DBS Industry Background.....................................................69
Legislation and Regulation..................................................70
Facilities..................................................................71
Employees...................................................................71
CONPARISON OF STOCKHOLDERS' RIGHTS............................................72
Authorized Capital..........................................................72
Voting, Liquidation, and Other Rights.......................................72
Dividend Rights.............................................................73
Size and Make-up of the Board of Directors..................................74
Preemptive Rights...........................................................74
Change of Control...........................................................74
Conversion Rights and Transfer Restrictions.................................74
Rights of First Refusal.....................................................75
Rights of Co-Sale...........................................................75
Class Voting................................................................75
LEGAL MATTERS.................................................................76
EXPERTS .....................................................................76
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
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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.
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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.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, which have been filed by Pegasus with the
Commission, are incorporated herein by reference: (i) Pegasus' Annual Report on
Form 10-K for the fiscal year ended December 31, 1996; (ii) Pegasus' Quarterly
Reports on Form 10-Q for the quarterly periods ended March 31, 1997, June 30,
1997 and September 30, 1997; (iii) Pegasus' Current Reports on Form 8-K dated
January 31, 1997, April 16, 1997, September 8, 1997 (as amended by Form 8-K/A
filed October 31, 1997), November 5, 1997 and December 10, 1997; and (iv)
Pegasus' Form 8-A dated September 18, 1996. Additionally, all documents filed by
Pegasus with the Commission pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Proxy Statement/Prospectus and
prior to the date of the Closing (as defined) shall be deemed to be incorporated
by reference in this Proxy Statement/Prospectus and to be a part hereof from the
date of filing of such documents.
Any statement contained herein, or any document, all or a portion of
which is incorporated or deemed to be incorporated by reference herein, shall be
deemed to be modified or superseded for purposes of the Registration Statement
and this Proxy Statement/Prospectus to the extent that a statement contained
herein, or in any subsequently filed document that also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute part of the Registration Statement or this
Proxy Statement/Prospectus. All information appearing in this Proxy
Statement/Prospectus is qualified in its entirety by the information and
financial statements (including notes thereto) appearing in the documents
incorporated herein by reference.
This Proxy Statement/Prospectus incorporates documents by reference
which are not presented herein or delivered herewith. These documents (other
than exhibits to such documents which are not specifically incorporated by
reference into such documents) are available without charge, upon written or
oral request by any person to whom this Proxy Statement/Prospectus has been
delivered by telephone to (610) 341-1801 or in writing to Pegasus Communications
Corporation c/o Pegasus Communications Management Company, Suite 454, 5 Radnor
Corporate Center, 100 Matsonford Road, Radnor, Pennsylvania 19087, Attention:
Chief Financial Officer. In order to ensure timely delivery of the documents,
any request should be made by a date at least five business days prior to the
date on which the final investment decision must be made.
4
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SUMMARY
The following is a summary of certain information contained elsewhere
in this Proxy Statement/Prospectus or incorporated by reference herein and is
qualified in its entirety by the more detailed information set forth elsewhere
in this Proxy Statement/Prospectus and in the documents incorporated by
reference herein, 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, the DTS Transactions and the Pending DTS Acquisition (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 form 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
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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 2.4 million U.S. television
households in rural areas of 28 states serving a subscriber base, as
of December 8, 1997, of approximately 150,400 DBS customers.
The Company also provides cable service to approximately 27,600
subscribers in Puerto Rico and approximately 15,200 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. After giving effect to the
execution of a definitive agreement to acquire the rights to distribute
DIRECTV services in one rural DIRECTV service territory in
Georgia (the "Pending DTS Acquisition"), DTS will have 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 December 8, 1997, of approximately
124,100 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.
</TABLE>
5
<PAGE>
The Special Meeting
<TABLE>
<CAPTION>
<S> <C>
Date, Time and Place
of the Special Meeting...................... The Special Meeting of holders of Common Stock will be held on
_____________, 1998, at ____ a.m., local time, at ____________.
Record Date; Shares
Entitled to Vote............................ Holders of record of Common Stock at the close of business on
January __, 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 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, and (d) 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.
As of the record date, there were outstanding ______ 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 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
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Corporation, and (d) with certain exceptions and subject to
certain adjustments, (i) the shares of DTS capital stock
outstanding immediately prior to the Effective Time will be
converted into a total of approximately 5.5 million 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
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 48.9% of
the issued and outstanding Class A Common Stock, which will
represent approximately 34.8% 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 "APPROVAL OF MERGER--Opinion of
Merrill Lynch"; "APPROVAL OF MERGER--Background of the Merger";
With respect to the proposals relating to the Restricted Stock Plan
and Stock Option Plan, the Pegasus Board has determined, by
unanimous vote, that 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, and that the amendments to increase the
number of options that may be granted under the Stock Option Plan
are advisable because of the number of options that will need to be
issued under the plan to replace outstanding warrants and/or options to
purchase DTS common stock and because of the increased number
of directors who are eligible to participate in this plan.
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
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 "APPROVAL OF MERGER--Opinion of
Merrill Lynch."
Interests of Certain
Persons in the Merger....................... Pursuant to the Voting Agreement, 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 certain of
DTS' stockholders or their affiliates pursuant to the Voting
Agreement: Harry F. Hopper, III, Michael C. Brooks and Riordon
B. Smith. See "PROPOSAL 1: APPROVAL OF MERGER --
Management of Pegasus After the Merger."
Accounting Treatment........................ The Merger will be accounted for under the purchase method of
accounting in accordance with generally accepted accounting
principles. 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 Pegasus stockholders, 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 that 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' or 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.
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
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.
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."
</TABLE>
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."
9
<PAGE>
Summary Historical and Pro Forma Consolidated Financial Data of the Company
(Dollars in thousands)
The following table sets forth summary historical and pro forma
consolidated financial data for the Company. This information should 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 incorporated herein by reference.
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended September 30,
--------------------------------------------- --------------------------------
Pro Pro
Forma Forma
Income Statement Data: 1994 1995 1996 1996(a) 1996 1997 1997(a)
---- ---- ---- ------- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
TV......................... $17,808 $19,973 $ 28,488 $29,156 $18,363 $ 21,664 $ 21,664
DBS........................ 174 1,469 5,829 77,440 2,601 23,362 84,543
Cable...................... 10,148 10,606 13,496 10,089 9,073 12,399 7,678
Other...................... 61 100 116 116 83 112 112
------- ------- --------- --------- ------- -------- --------
Total net revenues....... 28,191 32,148 47,929 116,801 30,120 57,537 113,997
------- ------- --------- --------- ------- -------- --------
Location operating expenses:
TV......................... 12,380 13,933 18,726 19,220 12,753 14,574 14,574
DBS........................ 210 1,379 4,958 59,494 2,371 17,817 64,312
Cable...................... 5,545 5,791 7,192 5,561 4,915 6,598 4,149
Other...................... 18 38 28 28 17 22 22
Incentive compensation(b).... 432 528 985 1,313 605 744 1,103
Corporate expenses........... 1,506 1,364 1,429 1,858 1,074 1,409 1,832
Depreciation and amortization 6,940 8,751 12,061 49,751 8,479 18,160 40,980
------- -------- --------- --------- ------- -------- --------
Income (loss) from operations 1,160 364 2,550 (20,424) (94) (1,787) (12,975)
Other Data:
Location Cash Flow(c)........ $10,038 $11,007 $ 17,025 $32,498 $ 10,064 $ 18,526 $ 30,940
Operating Cash Flow(c)....... 8,100 9,287 15,596 30,640 8,990 17,117 29,108
Interest expense............. (5,973) (8,817) (12,455) (44,918) (8,929) (10,288) (33,688)
As of December 31, As of September 30, 1997
------------------------------- ---------------------------------
1994 1995 1996 Actual Pro Forma (a)
---- ---- ---- -------- -------------
Balance Sheet Data:
Cash and cash equivalents $ 1,380 $ 21,856 $ 8,582 $ 35,392 $ 77,599
Working capital (deficiency) (23,074) 17,566 6,430 32,165 54,868
Total assets 75,394 95,770 173,680 317,741 727,307
Total debt (including current) 61,629 82,896 115,575 157,319 405,208
Total liabilities 68,452 95,521 133,354 173,750 436,523
Redeemable preferred stock -- -- -- 108,678 108,678
Minority interest -- -- -- 3,000 3,000
Total common stockholders'
equity (d) 6,942 249 40,326 32,314 179,106
</TABLE>
10
<PAGE>
Notes to Summary Historical and Pro Forma
Consolidated Financial Data of the Company
(a) Pro forma income statement and other data for the year ended December 31,
1996 and the nine months ended September 30, 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 September
30, 1997 give effect to the Transactions that occurred after September 30,
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) 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.
11
<PAGE>
Summary Historical and Pro Forma
Consolidated Financial Data of DTS
The following table presents Summary Historical and Pro Forma
Consolidated Financial Data relating to DTS as of the dates and for the periods
indicated. In addition, the following table presents Summary Historical and Pro
Forma Consolidated Financial Data relating to DTS' unaudited pro forma balance
sheet data as of September 30, 1997 and DTS' unaudited pro forma statement of
operations data for the year ended December 31, 1996 and the nine months ended
September 30, 1997, each as adjusted to give effect to the DTS Transactions (as
defined below). The historical data for the period from January 30, 1996 (date
of formation) to December 31, 1996, has been derived from the audited financial
statements of DTS audited by Arthur Andersen LLP, independent public
accountants. The historical data for other periods presented has been derived
from unaudited information. The data set forth in this table should be read in
conjunction with DTS' Consolidated Financial Statements and Notes thereto and
its Management's Discussion and Analysis, included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
Pro Forma
January 30 January 30 Nine Months Pro Forma Nine Months
to to Ended January 1 to Ended
December 31, September September 30, December 31, September 30,
1996 30, 1996 1997 1996 1997
------------- ------------- ------------ ------------ -------------
(unaudited)
($ in thousands, except revenue per subscriber data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Programming revenue...................... $ 3,085 $ 1,269 $ 28,811 $ 34,325 $ 37,610
Equipment sales and installation revenue. 324 96 3,291 7,320 4,401
-------- -------- --------- --------- ---------
Total revenue......................... 3,409 1,365 32,102 41,645 42,011
Cost of revenue.......................... 2,270 864 20,902 26,725 27,530
-------- -------- --------- --------- ---------
Total gross profit.................... 1,139 501 11,200 14,920 14,481
Operating expenses excluding
depreciation and amortization......... 2,732 1,128 11,442 18,023 14,056
Total depreciation and amortization...... 1,148 529 10,484 18,763 15,010
-------- -------- --------- --------- ---------
Operating loss........................... (2,741) (1,156) (10,726) (21,866) (14,585)
Interest expense, net.................... (818) (94) (8,918) (24,638) (18,524)
Other income (expense)(1)................ 24 5 (124) (34) (203)
-------- -------- --------- --------- ---------
Net loss(1)(2)........................... $ (3,535) $ (1,245) $ (19,768) $ (46,538) $ (33,312)
======== ======== ========= ========= =========
Deficiency in fixed charges.............. (3,535) $ (1,245) $ (19,768) $ (46,538) $ (33,312)
Other Data:
Pro forma average monthly programming
revenue per subscriber(3)............. n/a n/a n/a n/a 39.22
Cash flows used in operating activities.. (634) (446) (4,518) (4,147) (2,207)
EBITDA(1)(4)............................. (1,593) (627) (242) (3,103) 425
Number of subscribers at beginning of
period................................ --- --- 19,659 61,114 97,128
Subscriber additions through acquisitions 16,449 10,690 66,615 -- --
Subscriber additions..................... 3,989 1,459 23,880 -- --
Subscriber disconnects................... (779) (359) (8,486) -- --
Net subscriber additions................. 3,210 1,100 15,394 36,014 18,827
Number of subscribers at end of period... 19,659 11,790 101,668 97,128 115,955
Number of households at end of period.... 382,833 218,579 1,500,262 1,789,021 1,789,021
Household penetration at end of period... 5.14% 5.40% 6.78% 5.43% 6.48%
September 30, 1997
Historical Pro Forma
(unaudited)
($ in thousands)
-----------------------
Balance Sheet Data:
Cash, cash equivalents and marketable investment securities(5)............... $ 29,971 $ 2,804
Total assets................................................................. 218,446 231,173
Total debt (including current portion)....................................... 176,220 186,620
Members' equity/stockholders' equity......................................... 27,017 25,989
</TABLE>
12
<PAGE>
Notes to Summary Historical and Pro forma Consolidated Financial Data of DTS
(1) Pro forma other income (expense) amounts do not include interest income
which will be recognized on amounts included in the placement of
approximately $36.5 million in an interest escrow account (the "Interest
Escrow Account"). If such interest income was included, the pro forma net
loss for the period from January 1 to December 31, 1996 and for the nine
months ended September 30, 1997 would be approximately $44.7 million and
$32.0 million, respectively. In addition, operating cash flow would
increase approximately $1.8 million and $1.4 million, respectively, for the
same periods.
(2) 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.
(3) Pro forma average monthly programming revenue per subscriber was calculated
by dividing total pro forma programming revenue by both (i) the average of
the ending subscribers at December 31, 1996 and September 30, 1997 and (ii)
the number of months in the period.
(4) "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 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.
(5) Excludes the Interest Escrow Account to fund, together with the proceeds
from the investment thereof, the first four semi-annual interest payments
on DTS' Series A and Series B 12 1/2% Senior Subordinated Notes due 2007
(the "DTS Notes").
13
<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 and
incorporated herein by reference, 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 change; 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; 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. Pegasus intends to arrange for a stand-by
commitment to purchase DTS Notes tendered in response to the Offer to Purchase,
or otherwise to arrange to finance the Offer to Purchase, but there is no
assurance this can be done on satisfactory economic terms, or at all. If DTS is
unable to purchase or arrange for the purchase of DTS Notes tendered in response
to the Offer to Purchase, substantially all of DTS' indebtedness will be in
default.
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
14
<PAGE>
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 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 and Book Value Per Share
On a pro forma basis, the Merger is dilutive to Pegasus' net
loss per share for the twelve months ended December 31, 1996, and the nine
months ended September 30, 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.
Risk Factors Relating to the Company's Business
Substantial Indebtedness and High Degree of Leverage
The Company is highly leveraged. As of September 30, 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 $405.2
million, total common stockholders' equity of $179.1 million, Preferred Stock of
$108.7 million and, assuming certain conditions are met, $180.0 million
available under the Credit Facility and $46.1 million available under the DTS
Credit Facility. For the year ended December 31, 1996 and the nine months ended
September 30,
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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 would have
been inadequate to cover its combined fixed charges and dividends on Series A
Preferred Stock by approximately $78.0 million and $56.2 million, respectively.
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.
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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 space debris will not occur and have a material
adverse effect on DIRECTV and the Company's DBS business. Furthermore, the
digital compression technology used by DBS providers is not standardized and is
undergoing rapid change. Since the Company serves as an intermediary for
DIRECTV, the Company would be adversely affected by material adverse changes in
DIRECTV's financial condition, programming, technological capabilities or
services, and such effect could be material to the Company's prospects. There
can also be no assurance that there will be sufficient demand for DIRECTV
services since such demand depends upon consumer acceptance of DBS, the
availability of equipment and related components required to access DIRECTV
services and the competitive pricing of such equipment.
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.
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Risks Attendant to Acquisition Strategy
The Company regularly considers the acquisition of media and
communications properties and, at any given time, is in various stages of
considering such opportunities. Since January 1, 1997, the Company has acquired
or entered into agreements or letters of intent to acquire a number of
properties, including 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
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
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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 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 recent rulemaking proposal
that LMAs entered into after November 6, 1996 will not be grandfathered. The
Company cannot predict if the Portland LMA will be grandfathered. Currently,
television LMAs are not considered attributable interests under the FCC's
multiple ownership rules. However, the FCC is considering proposals which would
make such LMAs attributable, as they generally are in the radio broadcasting
industry. If the FCC were to adopt a rule that makes such interests
attributable, without modifying its current prohibitions against the ownership
of more than one television station in a market, the Company could be prohibited
from entering into such arrangements with other stations in markets in which it
owns television stations and could be required to modify any then existing LMAs.
The LMAs entered into with respect to TV stations WFXU and WOLF could also be
barred by any new rule adopted by the FCC which makes LMAs attributable without
changing the multiple ownership rules.
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
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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' obligations 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 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 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. 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 and quarterly variations in the Company's results of
operations.
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
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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.
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.
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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 form 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.
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
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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 September
30, 1997, total consolidated long-term indebtedness of DTS, on a pro forma basis
was approximately $177.3 million, representing approximately 87% of DTS' total
capitalization. DTS also may incur up to $90.0 million of indebtedness under the
DTS Credit Facility (of which approximately $46.1 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
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. 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 plans to purchase an
additional DIRECTV service territory and 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.
23
<PAGE>
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. 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 the
beginning of each period presented, with respect to losses from operations and
cash dividends, and as of the date for which book value data are presented. 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 the beginning of each period
presented, with respect to losses from operations and cash dividends, and as of
the date for which book value data are presented. The information set forth
below should be read in conjunction with the respective audited and unaudited
financial statements of Pegasus incorporated by reference in this Proxy
Statement/Prospectus and of DTS included elsewhere herein.
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, 1996 September 30, 1997
----------------- ------------------
<S> <C> <C>
Pegasus - Historical:
Loss from operations
- fully diluted............................... $(1.58) $(1.20)
Cash dividends................................ 0 0
DTS - Historical:
Loss from operations.......................... (1.65) (9.25)
Cash dividends................................ 0 0
Pegasus - Pro Forma - Transactions:
Loss from operations
-fully diluted................................ (3.10) (2.21)
Cash dividends................................ 0 0
Pegasus - Pro Forma - Transactions and Merger:
Loss from operations
- fully diluted............................... (4.16) (2.95)
Cash dividends................................ 0 0
September 30, 1997
------------------
Pegasus - Historical:
Book value.................................... $ 3.26
DTS - Historical:
Book value.................................... 12.64
Pegasus - Pro Forma - Transactions:
Book value.................................... 6.10
Pegasus - Pro Forma - Transactions and Merger:
Book value.................................... 11.30
24
</TABLE>
<PAGE>
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
closing sale prices of the Class A Common Stock, as reported by the Nasdaq
National Market, for each fiscal quarter since the Class A Common Stock began
trading on the Nasdaq National Market on October 4, 1996.
High Low
------- -------
1996
Fourth Quarter (from October 4, 1996)................$ 16.00 $ 11.25
1997
First Quarter........................................$ 14.00 $ 10.75
Second Quarter.......................................$11.125 $ 9.25
Third Quarter........................................$ 21.50 $ 10.75
Fourth Quarter.......................................$ 24.50 $19.125
1998
First Quarter (through January 20, 1998) $ 21.50 $20.125
------- -------
On November 5, 1997, the last trading day prior to the public
announcement of the Merger, the high and low sale 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 ______ record holders of the
Class A Common Stock.
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.
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<PAGE>
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.
Voting Securities and Record Date
Only holders of Common Stock of record at the close of business on
January __, 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 __________ 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
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.
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 adjustments, (a) holders of DTS' capital stock
will receive an aggregate of approximately 5.5 million 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 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), and (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 900,000 and to increase the maximum number of Shares of Class A
Common Stock that may be issued under options granted
26
<PAGE>
to any executive officer from 275,000 to 550,000 (see Proposal 3: Amendment to
Stock Option Plan). 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.
As of the Record Date, there were __________ 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 January 2, 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 7 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 2.4 million U.S. television
households in rural areas of 28 states serving a subscriber base, as of December
8, 1997, of approximately 150,400 DBS customers. The Company believes that there
is an opportunity for additional growth through the acquisition of DIRECTV
territories held by other the 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 December 8, 1997, of approximately
124,100 DBS customers. In the weeks that followed, members of the senior
management of Pegasus and DTS, together with representatives of DTS' principal
stockholders and their respective legal and other
27
<PAGE>
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.
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 "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 Pegasus Board consulted with Pegasus'
management and its legal counsel and financial advisors and considered a number
of factors, including the consideration to be paid in the Merger and the
strategic fit between the businesses of Pegasus and DTS.
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,
28
<PAGE>
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 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,
29
<PAGE>
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 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 Opinion.
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
30
<PAGE>
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, 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
31
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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 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.
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
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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 11,239,842
shares of Class A Common Stock (assuming no additional shares are issued before
the Effective Time), of which approximately 5.5 million, or 48.9%, 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.
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."
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 94,159 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
Flows.
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
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<PAGE>
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.
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.
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Component Amount
Restricted Stock grants to general managers based
on the increase in annual Location Cash Flow
of individual business units...........................................6(cent)
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(cent)
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 vest on the following schedule: 34%
after two years of service with the Company (including years before the
Restricted Stock Plan was established), 67% after three years of service and
100% after four years of service. A grantee also becomes fully vested in his
outstanding restricted stock award(s) upon death or disability. If a grantee's
employment is terminated for a reason other than death or disability before
completing four years of service, his unvested restricted stock awards will be
forfeited. Restricted stock is held by the Company prior to becoming vested. The
grantee will, however, be entitled to vote the restricted stock and receive any
dividends of record prior to vesting.
Duration and Amendment of Restricted Stock Plan. The Restricted Stock
Plan became effective in September 1996, and will terminate in September 2006.
The 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.
Restricted Stock Awards. The following special recognition awards (for
1996) and discretionary awards were made under the Restricted Stock Plan in
1997:
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Number
of
Name and Position Shares(1)
- ----------------- ---------
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 Secretary............................................ 4,545
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
======
(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.
Number
of
Name and Position Shares(1)
- ----------------- ---------
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 Secretary.......................................... N/A(2)
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
======
(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
36
<PAGE>
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 220,000
shares of Class A Common Stock are currently outstanding.
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.
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 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.
In proposing this amendment, the Pegasus Board took into consideration the
number of options that will need to be issued under the plan to replace
outstanding warrants and/or 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 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 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.
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, 4 executive officers and 3 non-employee directors are eligible
to receive options under the Stock Option Plan. After giving effect to the
Merger, 4 executive officers and up to 7 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
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<PAGE>
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 Option and Warrants. Subject to the effectiveness of the Merger,
certain outstanding DTS options and warrants 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 and warrants of
DTS will not, however, automatically become exercisable on a Change of Control
of the Company.
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 January 20, 1998, the closing sale price of the
Class A Common Stock on the Nasdaq National Market was $20.125.
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 December 31, 1997, the following options have
been granted under the Stock Option Plan:
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Number
of
Name and Position Units(1)
- ----------------- --------
Marshall W. Pagon, President and
Chief Executive Officer.......................................... 85,000
Ted S. Lodge, Senior Vice President,
Chief Administrative
Officer, General Counsel, and Secretary 40,000
Robert N. Verdecchio, Senior Vice
President, Chief Financial Officer
and Assistant Secretary.......................................... 40,000
Howard E. Verlin, Vice President,
Cable and Satellite Television
and Assistant Secretary.......................................... 40,000
Executive Group.................................................... 205,000
Non-Executive Director Group....................................... 15,000
Non-Executive Officer Employee Group N/A(2)
-------
Total.................................................... 220,000
=======
- -------------------------
(1) Reflects the number of shares issuable upon exercise of the option grants.
(2) 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 450,000 shares of Class A Common Stock that may be issued pursuant to
the plan.
PROPOSAL 4: 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.
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
39
<PAGE>
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 issued and outstanding shares of DTS
capital stock outstanding immediately before the Effective Time, other than
treasury shares and dissenting shares, will be converted into the number of
shares of Class A Common Stock equal to (i) 5.5 million shares, minus (ii) the
number of shares of 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 Class A Common Stock underlying options
and/or warrants to be issued to senior management and a consultant to DTS to
replace certain warrants and options held by them to purchase 112,681 shares of
DTS common stock and (B) the aggregate exercise price of such replacement
warrants and/or options, minus (iii) the number of shares of 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
Class A Common Stock underlying the options that replace options held by senior
management of DTS to purchase 11,133 shares of DTS common stock and (B) the
aggregate exercise price of such replacement options, minus (iv) the number of
shares of Class A Common Stock having an aggregate Market Price on the Closing
Date equal to $75,000. The Merger Agreement defines the "Market Price" of the
Class A Common Stock on any day to be the average of its last reported sale
prices (with certain alternatives if no sale occurs on a given day) for the 30
consecutive trading days beginning 45 days before the day in question. The
number and terms of Pegasus options and/or warrants to be issued in connection
with the Merger that result in a decrease of the number of shares of Class A
Common Stock into which the DTS capital stock will be converted as a result of
the Merger, depend on the final Conversion Ratio, as described below. If the
Merger had occurred on _______, 1998, the 5.5 million shares into which the DTS
capital stock would otherwise have been converted would have been reduced to a
total of _____ shares of Class A Common Stock.
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 Ratio
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"). At present there are 2,137,049 shares of DTS Common
Stock and 1,404,056 shares of DTS Preferred Stock outstanding. Except for
adjustments on account of accumulated dividends on the DTS Preferred Stock, as
described below, both the DTS Common Stock and the DTS Preferred Stock will be
converted into Class A Common Stock by applying the same conversion ratio (the
"Conversion Ratio"), which will be equal to a fraction, the numerator of which
is the number of shares of Class A Common Stock issued in the Merger and the
denominator of which is the number of shares of DTS Common Stock and DTS
Preferred Stock outstanding on the Closing Date.
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. If there are
accumulated and unpaid dividends on the Closing Date, the Conversion Ratio
applicable to the DTS Preferred Stock will be adjusted with the result 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 such longer period as may be necessary so that the total volume
of Class A Common
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<PAGE>
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.
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 the number of shares of
Class A Common Stock equal to the Conversion Ratio times the number of shares
of DTS common stock issuable upon the exercise of such warrants and options for
an exercise price equal to the exercise price applicable to the DTS warrants
and options divided by the Conversion Ratio. If the Merger had occurred on
_______, 1998, Pegasus would have issued replacement options and/or warrants to
purchase ______ shares of Class A Common Stock at an exercise price of $_____
per share. 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 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
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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, 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.
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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 incorporated by reference in this Proxy
Statement/Prospectus, 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.
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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.
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") 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.
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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 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.
Harry F. Hopper III. Mr. Hopper has been a director of DTS since June
1996 and serves in such capacity as a designee of 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. Mr. Brooks has been a director of DTS 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. Mr. Smith has been a director of DTS 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
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manufacturing, business services and consumer products and services.
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.
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.
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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 (the "Certificate of Designation") relating
to its 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.
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, the Pegasus stockholders,
DTS and Pegasus will be as follows:
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(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 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
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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.
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 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.
DTS MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides an assessment of the historical and
pro forma consolidated results of operations and liquidity and capital resources
of DTS and its wholly-owned subsidiaries. This discussion should be read in
conjunction with the unaudited pro forma combined financial statements of DTS,
the unaudited financial statements of DTS, the audited consolidated financial
statements of DTS and the audited financial statements of certain businesses
acquired or expected to be acquired, and the related notes thereto, elsewhere in
this Proxy
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Statement/Prospectus. As a result of the growth of DTS through its 1996
acquisition of the rights to distribute DIRECTV services in eight rural DIRECTV
service territories (the "1996 Acquisitions") and its 1997 acquisition of the
rights to distribute DIRECTV services in nine rural DIRECTV service territories
in Kentucky, Kansas, Vermont, Georgia and Indiana (the "1997 Acquisitions") and
the continued growth as a result of the Pending DTS Acquisition, 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 the 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 (as defined herein), (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 dated as
of October 10, 1997 (the "Stockholders Agreement") among DTS, the holders of the
DTS Common Stock and the holders of the DTS Series A Preferred Stock, 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 were owned by the holders of the
equity interests in the LLC. Therefore, the Corporate Conversion will be treated
for accounting purposes as the acquisition of WEP by the LLC. The LLC's assets
and liabilities will be recorded at historical cost and WEP's assets and
liabilities will be recorded at fair value. However, given that WEP's only asset
consisted of its investment in the LLC, no goodwill would be 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, 1996,
DTS had acquired the rights to provide DIRECTV services to approximately 383,000
households for approximately $33.7 million or $88 per household, excluding
adjustments recorded to reflect the discount of certain of DTS' seller notes at
the 9% interest rate under its then existing credit facility (the "Old DTS
Credit Facility") at December 31, 1996. Of the total purchase price,
approximately $9.3 million was paid in cash and approximately $24.4 million was
financed through the issuance of promissory notes of DTS in favor of the
sellers. During the first half of 1997, DTS acquired the rights to provide
DIRECTV services to an additional 1.1 million households for approximately
$108.6 million or $97 per household, excluding adjustments recorded to reflect
the discount of certain of DTS seller notes at a rate of 9%. Of the total
purchase price, approximately $93.1 million was paid in cash and $15.5 million
was paid through the issuance of promissory notes of DTS in favor of certain of
the sellers. DTS also completed the Indiana Acquisition in January 1998
(effective December 31, 1997) pursuant to which it acquired the rights to
provide DIRECTV service to an additional 135,800 households for $28.3 million in
cash or approximately $208 per household. DTS has also entered into a definitive
agreement with respect to the Pending DTS Acquisition, with respect to which it
will acquire the rights to provide DIRECTV services to an aggregate of 42,100
additional households for an aggregate purchase price of approximately $9.5
million in cash or approximately $226 per household. The following table
presents information regarding these acquisitions as of December 31, 1997.
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<TABLE>
<CAPTION>
Subscribers Subscribers at
System Date Acquisition at Date September 30,
Location(1) Acquired(1) Price Acquired 1997
------------- ----------- ------------- ------------- ---------------
1996 Acquisitions -- 8
Rural DIRECTV Markets:
<S> <C> <C> <C> <C>
New Mexico(2) March 1, 1996 $ 512,000 404 952
California April 1, 1996 5,980,000 3,385 6,415
New Mexico(2) August 28, 1996 9,683,000 2,931 4,886
New York August 28, 1996 4,860,000 3,970 4,892
South Carolina November 26, 1996 12,700,000 5,759 7,804
------------ -------- -------
Subtotal -- 1996 $ 33,735,000 16,449 24,949
Acquisitions ------------ -------- -------
1997 Acquisitions -- 9
Rural DIRECTV Markets:
Kentucky January 2, 1997 $ 30,000,000 19,908 22,229
Kansas January 31, 1997 19,425,000 11,520 13,332
Vermont February 18, 1997 38,000,000 20,778 25,447
Georgia May 9, 1997 21,156,470 14,409 15,681
Indiana December 31, 1997 28,250,000 12,912 9,993
------------ -------- -------
Subtotal -- 1997 $136,831,470 79,527 86,682
Acquisitions ------------ -------- -------
Pending DTS
Acquisition -- 1 Rural
DIRECTV Market:
Georgia January 30, 1998 $ 9,500,000 4,294
------------ --------
Totals $180,066,470 115,925
============ ========
</TABLE>
(1) See "BUSINESS OF DTS -- Acquisitions by DTS." The acquisition date for
the Pending DTS Acquisition is an anticipated closing date.
(2) These systems are combined under the New Mexico cluster for purposes of
the chart in "BUSINESS OF DTS -- Acquisitions by DTS."
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
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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, 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 the first nine months of 1997, depending upon the type of
equipment sold. These sales prices were approximately $50 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 51% of programming revenues during 1996 and
for the nine months ended September 30, 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 September 30, 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 September 30,
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 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.
During May and June 1997, DTS experienced an increase in subscriber
disconnects above historical levels. DTS' average monthly disconnect rate for
May and June 1997 was approximately 1.6% as compared to approximately 1% for all
other months in the nine month period ended September 30, 1997. DTS believes
that this increase was primarily the result of two non-recurring factors, the
tightening by DTS of its account treatment policies and the disconnection of
services by DIRECTV of all subscribers who had not converted to DIRECTV's
current security protocol by replacing their system access cards. DTS has
distributed new access cards to these subscribers in order to reconnect their
DIRECTV services. Effective May 1, 1997, DTS temporarily revised its account
treatment policies by reducing the period of time for which it disconnects
subscribers due to non-payment from 60 days after the bill date to 45 days after
the bill date. DTS rescinded this change in late June 1997. Subscriber
disconnects have stabilized to historical levels during the third quarter.
DTS has yet to achieve positive operating cash flow due to cash
expended in implementing its sales and
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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.
Digital Television Services, LLC
Nine Months Ended September 30, 1997 and Inception (January 30, 1996)
to September 30, 1996
DTS completed its initial two acquisitions of the rights to provide
DIRECTV services to approximately 97,000 households during March and April 1996,
and acquired an additional 135,000 households at the end of August 1996.
Programming revenue generated during the nine month period ended September 30,
1996 consisted of DIRECTV services provided to the approximately 10,700
subscribers associated with these acquisitions for the nine month period.
Programming revenue was approximately $28.811 million for the nine month period
ended September 30, 1997 (the "1997 Period") compared to approximately $1.269
million for the period from inception (January 30, 1996) to September 30, 1996.
This increase resulted primarily from revenue generated from the approximately
72,000 subscribers acquired in conjunction with DTS' acquisitions and the
addition of approximately 17,500 net subscribers added during the twelve month
period ended September 30, 1997. During the 1997 Period, DTS added approximately
15,400 net subscribers consisting of approximately 23,900 new subscribers offset
by approximately 8,500 disconnects. Average monthly programming revenue per
subscriber ranged from approximately $38 to approximately $41 during the 1997
Period.
Equipment sales and installation revenue totaled approximately $3.291
million during the 1997 Period compared to approximately $96,000 during the
period from inception to September 30, 1996. 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 $20.902 million during the 1997
Period compared with approximately $864,000 during the period from inception to
September 30, 1996. These costs increased in direct proportion to the increase
in the number of subscribers subscribing to DIRECTV services. For the 1997
Period, the gross profit on programming revenue after recurring service fees was
approximately 41%. During the 1997 Period, DTS sold DSS equipment installed at
average prices of approximately 18% below DTS' cost. DTS expects to continue to
subsidize the cost of DSS equipment.
DTS incurred direct selling expenses of approximately $5.557 million
during the 1997 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
(other than subscribers added through acquisitions) during the 1997 Period.
General and administrative expenses totaled approximately $5.885
million during the 1997 Period or 18% of revenues. These expenses consisted
primarily of salaries and expenses associated with customer service operations,
general office expenses, and other general administrative expenses. General and
administrative expenses are expected to continue to decline as a percent of
total revenues in 1997 as the majority of these expenses are fixed in nature.
Depreciation expense totaled approximately $323,000 for the 1997 Period
and has increased in conjunction with the addition of general office assets and
the purchase of installation service vehicles. Amortization expense totaled
approximately $10.161 million for the 1997 Period. Of this amount, approximately
$9.089 million relates to the acquisition of contract rights by DTS,
approximately $166,000 relates to fees incurred in connection with the
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<PAGE>
formation of DTS and its subsidiaries and approximately $906,000 relates to
capitalized subscriber acquisition costs.
DTS generated a Consolidated Operating Cash Flow deficit pursuant to
the terms of the indenture, dated as of July 30, 1997 (the "DTS Indenture"),
among DTS, DTS Capital, Inc., a Delaware corporation ("Capital", and
collectively with DTS, the "Issuers"), certain DTS subsidiaries (the
"Guarantors") and The Bank of New York, as trustee, of approximately $242,000
for the 1997 Period. DTS expects to incur an Operating Cash Flow deficit during
the remainder of 1997 as a result of selling expenses associated with subscriber
growth and general administrative costs associated with growth of customer
service operations.
Interest expense for the 1997 Period, including amortization of debt
discount and debt issuance costs, totaled approximately $9.549 million. DTS
incurred interest costs in conjunction with seller financing and borrowing under
installment loans and the amendment and restatement of the DTS Credit Facility.
Inception (January 30, 1996) to December 31, 1996
Programming revenue was approximately $3.085 million for the period
from inception to December 31, 1996 (the "1996 Period"). The majority of this
revenue was generated from the approximately 16,450 subscribers acquired in
conjunction with DTS' acquisitions. In addition, during the 1996 Period DTS
added approximately 3,200 net subscribers subsequent to the closing of
acquisitions, consisting of approximately 4,000 new subscribers offset by
approximately 800 disconnects. Average monthly programming revenue per
subscriber was approximately $38 for the period. Programming revenue is
typically seasonal in nature with average monthly programming revenue per
subscriber ranging from $35 to $42 during the 1996 Period. Equipment sales and
installation revenue of approximately $324,000 resulted from the sale of DSS
equipment and related installations to new subscribers.
DTS incurred approximately $1.872 million of expenses during the 1996
Period directly associated with providing programming revenue, including
approximately $1.596 million of programming costs and approximately $276,000 of
service fees. These costs are directly attributable to the program revenues
generated and the number of subscribers subscribing to DIRECTV services. For the
1996 Period, the gross profit on programming revenue after recurring service
fees was approximately 39%. During the 1996 Period, DTS sold DSS equipment
installed at average prices of approximately 23% below DTS cost.
DTS incurred direct selling expenses of approximately $778,000 in
connection with the addition of approximately 4,000 new subscribers 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 $214 of selling expenses for each new subscriber added
(other than subscribers added through acquisitions) during the 1996 Period.
General and administrative expenses totaled approximately $1.954
million for the 1996 Period or 57% of total revenues. These expenses related to
the opening of DTS' general office and retail locations, the recruiting and
hiring of personnel, salaries and expenses associated with customer service
operations, and other general administrative expenses. Such expenses were
incurred as DTS implemented administrative and customer service infrastructure
to support its rapid subscriber growth. General and administrative expenses are
expected to decline as a percent of total revenues in 1997 with added systems
and additional subscribers.
Depreciation expense totaled approximately $48,000 for the 1996 Period
in connection with the addition of general office assets, leasehold improvements
associated with the build-out of office space and the purchase of installation
vehicles. Amortization expense totaled approximately $1.1 million. Of this
amount, approximately $1.022 million relates to DTS' acquired contract rights,
approximately $36,000 relates to fees incurred in connection with the formation
of DTS and its subsidiaries and approximately $42,000 relates to capitalized
subscriber acquisition costs.
DTS incurred a Consolidated Operating Cash Flow deficit pursuant to the
terms of the DTS Indenture of
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approximately $1.593 million for the 1996 Period. This operating cash loss
resulted from selling expenses associated with subscriber growth and general
administrative costs associated with implementation of customer service and
administrative infrastructure to support subscriber growth.
Interest expense for the 1996 Period, including amortization of the
debt discount and debt issuance costs, totaled approximately $818,000. DTS
incurred interest costs in conjunction with seller financing and borrowings
under installment loans and the DTS Credit Facility.
Pro Forma Results of Operations
The pro forma combined results of operations reflect the operations of
DTS as if the (i) 1996 Acquisitions, (ii) the 1997 Acquisitions, (ii) the sale
in January 1997 of 205,902 Class B Units to Columbia and senior management
raising approximately $2.059 million of equity capital and the sale by the
Company in February 1997 of 1,333,333 Class A Units to the Columbia, J.H.
Whitney & Co. and Fleet Partners (collectively, the "Equity Investors") raising
an additional $30.0 million of equity capital (collectively, the "1997 Equity"),
(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 the Old DTS 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 Pending DTS Acquisition, (vii)
the Interest Escrow Account to fund the DTS Notes, (viii) the repayment of the
$50.0 million term loans which were outstanding under the Old DTS Credit
Facility and approximately $32.2 million of the revolving credit loans which
were outstanding under the DTS Credit Facility, and (ix) the amendment and
restatement of the Old DTS Credit Facility (collectively, the "DTS
Transactions") had occurred on January 1, 1996. These pro forma combined results
of operations are not intended to be indicative of DTS' future combined results
of operations nor the combined results of operations if the Transactions had
occurred on January 1, 1996.
Consistent with DTS' operations, the acquisitions included in the pro
forma combined results generate revenues by providing DIRECTV services to their
subscribers. In addition, the major cost for the acquired companies to provide
DIRECTV services to its subscribers is the direct variable wholesale cost of
purchasing related program offerings from DIRECTV. Furthermore, the acquired
companies purchase other contract services through the NRTC from DIRECTV. These
costs consist of recurring monthly subscriber maintenance fees, including
security fees, ground services fees, system authorization fees and fees for
subscriber billing.
Pro Forma Nine Months Ended September 30, 1997
Programming revenue generated on a pro forma basis totaled
approximately $37.61 million for the nine months ended September 30, 1997. Pro
forma subscribers increased from 97,128 to 115,955, or 19.4%. Average monthly
pro forma programming revenue per subscriber was approximately $39.22. DTS also
generated approximately $4.401 million of revenues from the sale of DSS
equipment and related accessories, and from installation services.
DTS incurred approximately $41.586 million of operating expenses
(excluding depreciation and amortization) on a pro forma basis for the nine
months ended September 30, 1997. These expenses consisted largely of the cost of
wholesale programming and services. Direct costs of programming, including
service fees, totaled approximately $22.398 million, resulting in a gross margin
of approximately 40%. Selling expenses totaled approximately $6.551 million for
the pro forma period ended September 30, 1997, consisting primarily of sales
commissions, marketing salaries and benefits, advertising and promotional
expenses. DTS expects future selling expenses on a pro forma basis to increase
with the addition of direct distribution and further promotions on satellite
equipment sales in the markets acquired on a pro forma basis. General and
administrative expenses totaled $7.505 million on a pro forma basis for the nine
months ended September 30, 1997, consisting of salaries and benefits for general
administrative and subscriber service personnel, and general office expenses.
DTS believes these pro forma expenses are higher than what can be expected in
the future as a percentage of revenue due to the elimination of
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certain redundant administrative functions, personnel and related costs.
Depreciation and amortization expense totaled approximately $15.01
million on a pro forma combined basis for the nine months ended September 30,
1997. Amortization expense, totaling approximately $14.431 million, includes
approximately $13.359 million of amortization associated with DTS' purchase of
contract rights, approximately $166,000 associated with costs incurred in
connection with DTS' formation, and approximately $906,000 associated with
capitalized subscriber acquisition costs.
Interest expense for the nine months ended September 30, 1997 on a pro
forma combined basis totaled approximately $18.524 million, including
approximately $15.321 million of interest on the proceeds from DTS' note
offering and amortization of debt issuance costs and approximately $3.203
million of interest expense associated with seller financing, installment notes
and financings under the DTS Credit Facility.
Pro Forma January 1, 1996 to December 31, 1996
DTS generated revenues of approximately $41.645 million on a pro forma
basis for the year ended December 31, 1996. Of this amount, $34.325 million
resulted from programming revenue generated on 79,121 average subscribers. DTS
also generated approximately $7.32 million of revenues from the sale of DSS
equipment and related accessories, and from installation services. Pro forma
subscribers increased from 61,114 to 97,128, or 59% for the year ended December
31, 1996.
DTS incurred approximately $44.748 million of operating expenses
(excluding depreciation and amortization) on a pro forma basis for the year
ended December 31, 1996, consisting largely of the cost of wholesale programming
and services. Direct costs of programming, including service fees, totaled
approximately $21.098 million, resulting in a gross profit margin on programming
of approximately 39%. Selling expenses, totaling approximately $5.595 million
consisted primarily of advertising expenses, promotional expenses, commissions
and salaries and benefits of marketing employees. Selling expenses of the
acquisitions or pending acquisitions typically were lower in 1996 as many of the
companies did not deploy the same marketing strategy as DTS. Accordingly, DTS
expects future selling expenses on a pro forma combined basis to increase with
the addition of direct distribution and satellite equipment subsidies. General
and administrative expenses totaled approximately $12.428 million, consisting of
allocated corporate expenses, salaries and benefits for general administrative
and subscriber service personnel, and general administrative costs. DTS believes
these expenses to be higher than what can be expected in the future due to the
elimination of certain duplicative administrative infrastructure costs.
Depreciation and amortization expenses totaled approximately $18.763
million on a pro forma combined basis for the year ended December 31, 1996.
Amortization expense, totaling approximately $18.035 million includes
approximately $17.977 million of amortization associated with DTS' purchase of
contract rights, approximately $36,000 of amortization associated with costs
incurred in conjunction with DTS' formation and approximately $42,000 related to
capitalized subscriber acquisition costs.
Interest expense for the year ended December 31, 1996 on a pro forma
combined basis totaled approximately $24.638 million, including approximately
$20.466 million of interest on the proceeds from the DTS note offering and
amortization of debt issuance costs and approximately $4.172 million of interest
expense associated with seller financing, installment notes and financings under
the DTS Credit Facility.
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 and through borrowings under the DTS Credit Facility. Cash flows
from financing activities during the 1996 Period totaled approximately
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$27.873 million, including $9.4 million borrowed under the DTS Credit Facility,
approximately $32,000 from the issuance of installment notes, and approximately
$18.441 million from the sale of Class B Units. In addition, DTS issued
approximately $24.156 million 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 for the nine months
ended September 30, 1997 totaled approximately $257.834 million, including
$72.769 million borrowed under the DTS Credit Facility, approximately $345,000
from the issuance of installment notes, $31.879 million from the sale of the
1997 Equity, and $152.841 million from the issuance of the DTS Notes, net of
discounts. In addition, DTS issued approximately $15.524 million of seller notes
during the nine months ended September 30, 1997 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 the 1996 Acquisitions for approximately $33.7 million, 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
pay approximately $3.15 million in deposits toward the purchase of the 1997
Acquisitions, (iii) to pay certain fees totaling approximately $3.516 million
incurred in conjunction with DTS' formation and fees associated with the DTS
Credit Facility, (iv) to repay approximately $9.047 million 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 nine months ended September 30,
1997 (i) to consummate the 1997 Acquisitions (other than the Indiana
Acquisition) for approximately $108.081 million, (ii) to pay certain fees and
expenses totaling approximately $9.325 million associated with the procurement
of debt financing, (iii) to repay approximately $6.133 million of seller notes
and other notes payable, (iv) for capital expenditures totaling approximately
$1.339 million, (v) expenses incurred in connection with DTS' formation totaling
approximately $684,000, (vi) to repay approximately $82.169 million outstanding
under the DTS Credit Facility, and (vii) for operating cash needs totaling
approximately $4.518 million.
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
$39.68 million 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 million and $5.786 million at December 31, 1996 and September 30, 1997,
respectively.
In July 1997, in connection with the DTS note offering, DTS amended and
restated the Old DTS Credit Facility (as so 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 may be used
(i) to refinance certain existing indebtedness, (ii) prior to December 31, 1998,
to finance the acquisition of certain rural DIRECTV territories and related
costs and expenses, (iii) to finance capital expenditures of DTS and its
subsidiaries and (iv) for the general corporate purposes and working capital
needs of DTS and its subsidiaries.
The $20.0 million term loan facility must be drawn within 12 months of
the closing of the DTS Credit Facility 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 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
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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 hereof. 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 (as defined herein)
plus the Applicable Margin (as defined herein) or (ii) the Eurodollar Rate (as
defined herein) 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 also provides 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 Alternate Base Rate.
Pursuant to a recent amendment to the NRTC Member Agreements, DTS and
all other NRTC members and affiliate 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 1997 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 1997 and 1998, DTS has commitments totaling approximately $36.5 million
to acquire additional contract rights, principal repayment obligations on its
seller and installment notes totalling approximately $10.0 million, and
commitments under various operating leases for office space and equipment. DTS
expects to make capital expenditures of approximately $3.0 million during the
remainder of 1997 and 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 proceeds
from DTS' note offering, $32.1 million of proceeds from the sale of Class A and
Class B Units in January and February 1997 and cash generated from operations.
In addition, DTS has $90.0 million of borrowing availability under the DTS
Credit Facility, of which $46.1 million, on a pro forma basis after giving
effect to the offering of the DTS Notes and the DTS Transactions, is immediately
available. Such availability will be used to finance acquisitions, to cover debt
service and for operations. DTS believes that the net proceeds from DTS' note
offering, together with 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 consummate the Pending DTS Acquisition and 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. The Issuers do not have sufficient
funds to satisfy their obligations pursuant to the Offer to Purchase if more
than approximately $38.3 million in principal amount of the DTS Notes are
tendered in connection therewith. Thus, additional financing arrangements would
be required. There can be no assurance that such additional financing will be
available. 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
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 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, which do not
give effect to the Merger, the Company will have the exclusive right to provide
DIRECTV services to approximately 2.4 million U.S. television households in
rural areas of 28 states serving a subscriber base, as of December 8, 1997, of
approximately 150,400 DBS customers. The Company also provides cable service to
approximately 27,600 subscribers in Puerto Rico and approximately 15,200
subscribers in New England. The Company has entered into an agreement to sell
its New England cable operations (the "New England Cable Sale").
Recent Developments
Pending Pegasus DBS Acquisitions. As of January 2, 1998, without giving
effect to the Merger, the Company has entered into letters of intent or
definitive agreements to acquire DIRECTV distribution rights and related assets
from 7 independent providers of DIRECTV services, which have exclusive DIRECTV
service territories in certain rural areas of 6 states (the "Pending Pegasus DBS
Acquisitions") and whose territories include, in the aggregate, approximately
227,200 television households (including 17,100 seasonal residences), 23,500
business locations and 22,900 subscribers. In the aggregate, the consideration
for the Pending Pegasus DBS Acquisitions will consist of $28.7 million in cash
and $10.0 million in promissory notes. Each of the Pending Pegasus DBS
Acquisitions is subject to the negotiation of a definitive agreement, if not
already entered into, and, if not already granted, the prior approval of the
NRTC and DIRECTV. 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 NRTC and DIRECTV 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.
New England Cable Sale. On January 16, 1998, Pegasus Cable Television,
Inc., a subsidiary of Pegasus, entered into a definitive agreement with Avalon
Cable of New England, LLC ("Avalon") to sell its New England cable systems,
which consist of five headends serving 13 towns in Connecticut and
Massachusetts. As of December 31, 1997, the Company's New England cable systems
served approximately 15,200 subscribers. The consideration for the sale will be
based upon the twelve month trailing location cash flow of the systems measured
as of the month-end prior to closing, multiplied by nine, but not less than $28
million or more than $31 million. As of December 31, 1997, the Company's New
England cable systems had trailing location cash flow of approximately $3.1
million. In addition to being subject to consents from regulatory agencies,
including local franchise authorities, it is anticipated that the sale will also
be subject to conditions customary in transactions of this nature.
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BUSINESS OF DTS
General
DTS is the second largest independent provider of DIRECTV services.
After giving effect to the Pending DTS Acquisition, DTS will have 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 December
8, 1997, of approximately 124,100 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 September 21, 1997, there were over 2.9 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 has announced plans to launch a new interactive personal
computer with integrated DSS technology by the end of 1998. Consumers with
DSS-enabled personal computers will be able to subscribe to all of the video and
audio programming currently offered by DIRECTV, plus a variety of new data and
multimedia services, including specially developed multimedia magazines,
enhanced video programming, games, children's programming and World Wide Web
content.
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
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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. 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 Choice(TM) Package Options: Total Choice(TM), 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 Choice(TM) Plus
Encore, which retails for $33.99, features all the services contained
in Total Choice(TM), plus the eight movie channels in the Encore
Multiplex; Total Choice(TM) Silver, which also retails for $39.99,
features over 90 channels including multiple channels of STARZ! and
Encore, and the Independent Film Channel; Total Choice(TM) Gold, which
retails for $39.99, featuring nearly 100 channels, including 29 sports
networks from FOX Sports, Sportschannel and The Golf Channel; and Total
Choice(TM) 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
Choice(TM) 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.
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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).
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 17 acquisitions to date. Currently, DTS has a definitive agreement with
respect to the Pending DTS Acquisition.
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.
After giving effect to the Pending DTS Acquisition, DTS will own,
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
NOT PASSED
LOCATION HOUSEHOLDS(1) BY CABLE SUBSCRIBERS(2) PENETRATION(3)
- -------- ------------- ---------- -------------- --------------
Owned:
<S> <C> <C> <C> <C>
Kentucky(4).......................... 402,803 31.23% 23,954 5.95%
Kansas(5)............................ 301,952 19.17 14,466 4.79
Georgia(6)........................... 288,024 33.76 20,757 7.21
Vermont(7)........................... 257,621 34.80 27,280 10.59
South Carolina(8) 164,464 31.66 8,882 5.40
New Mexico(9)........................ 96,122 16.06 6,376 6.63
California(10) 89,062 3.84 6,868 7.71
New York(11)......................... 53,199 30.52 5,127 9.64
Indiana(12).......................... 135,774 20.00 10,373 7.64
--------- ------ ------- ----
Total........................... 1,789,021 27.16% 124,083 6.94%
========= ====== ======= =====
- ------------------------------
</TABLE>
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(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 December 8, 1997.
(3) Represents the percentage of households which subscribe to DIRECTV
Services in DTS' Rural DirecTv Markets.
(4) Cluster consists of a Rural DirecTv Market 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 Markets 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 Markets acquired in May 1997 which
include households located in the following counties in Georgia:
Baker, Baldwin, Burke, Calhoun, Colquitt, Decatur, Early, 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 a Rural DirecTv Market which the
Company expects to acquire during the first quarter of 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 a Rural DirecTv Market 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 Markets 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 Markets 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 Market acquired in April 1996 which
includes households located in San Luis Obispo County, California.
(11) Cluster consists of Rural DirecTv Markets 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 a Rural DirecTv Market 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 but one of its market clusters and
plans to establish a direct sales force in that cluster by the end of the first
quarter of 1998. The direct sales force is supported by an active lead
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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 three of its markets and has plans to open
additional stores in its other markets during 1998.
DTS has increased to approximately 340, and continues to increase, the
number of 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.
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.
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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 DTS that the NRTC Agreement
also provides the NRTC a right of first refusal to acquire comparable rights in
the event that DIRECTV elects to launch successor satellites upon the removal of
the present satellites from active service. The financial terms of any such
purchase are likely to be the subject of negotiation and it is unclear whether
substantial additional expenditures of the NRTC will be required in connection
with the exercise of such right of first refusal.
The NRTC Member Agreement terminates when the DIRECTV satellites are
removed from their orbital location. If the satellites are removed earlier than
June 2004, the tenth anniversary of the commencement of DIRECTV services, DTS
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 NRTC/DIRECTV 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 DTS its pro rata portion of any refunds
that the NRTC receives from DIRECTV, (b) if DTS 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 DTS and (c) if the NRTC/DIRECTV
Agreement is terminated because of a breach by the NRTC, DIRECTV is obligated to
continue to provide DIRECTV services to DTS (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.
DTS is not permitted under the NRTC Member Agreement to assign or
transfer, directly or indirectly, its rights under this agreement without the
prior written consent of the NRTC and Hughes, which consent cannot be
unreasonably withheld.
The NRTC has adopted a policy requiring any party acquiring DIRECTV
distribution rights from an NRTC
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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.
Pursuant to this policy, 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.
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 September 21, 1997,
EchoStar reported approximately 765,000 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.
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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 August 31, 1997, PrimeStar reported having
approximately 1.9 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 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 2.2 million
subscribers representing 31% of the total market for DTH satellite services at
May 31, 1997. 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 100,000 during 1996 and early 1997
to 2.2 million as of May 31, 1997.
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
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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.
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.
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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,
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
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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 June 21, 1997, DTS had approximately 187 employees. DTS is not a
party to any collective bargaining agreement.
Legal Proceedings
In January 1998, DTS filed a lawsuit in South Carolina seeking to
enjoin the seller of one of DTS' territories from obtaining payment under a
letter of credit securing a note given by a DTS subsidiary for the deferred
portion of the purchase price, pending resolution of an underlying dispute
between DTS and the seller. The court has entered an order prohibiting the
seller from seeking payment under the letter of credit. Pursuant to the order,
DTS has deposited approximately $1.8 million with the court.
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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, Preferences and Relative, Participating, Optional and Other Special
Rights of Preferred Stock and Qualifications, Limitations and Restrictions
thereof (the "Pegasus 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").
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
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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 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.
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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 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
74
<PAGE>
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.
75
<PAGE>
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.
EXPERTS
The Company's consolidated balance sheets as of December 31, 1995 and
1996 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, 1996 incorporated by reference in this
Registration Statement, have been incorporated 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 balance sheet of Clearvision, Inc. as of January 16, 1997, and the
related statement of operations, statement of stockholders' equity and statement
of cash flows for the fiscal year ended January 16, 1997, incorporated by
reference in this Prospectus, have been included herein in reliance on the
report of Poole Cunningham & Reitano, P.A., independent accountants.
The statement of net assets to be sold of Southeastern Communication
Systems, Inc. as of December 31, 1996, and the related statement of operations
of assets to be sold and the statement of cash flows for the year ended December
31, 1996, incorporated by reference in this Prospectus, have been included
herein in reliance on the report of Greenway, Smith & Haisten, P.C., independent
accountants.
The balance sheet of Northern Electric Service Corporation as of
December 31, 1996, and the related statement of operations and accumulated
deficit and statement of cash flows for the year ended December 31, 1996,
incorporated by reference in this Prospectus, have been included herein in
reliance on the report of Larson, Allen, Weishair & Co., LLP, independent
accountants.
The financial statements of Direct Broadcast Satellites at December 31,
1996, and for the year then ended appearing in Pegasus Communications
Corporation's Form 8-K/A dated September 8, 1997 have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report thereon included
therein and incorporated herein by reference. Such financial statements are
incorporated herein by reference in reliance upon such report given upon the
authority of such firm as experts in accounting and auditing.
The balance sheet of Suwannee Valley Satellite, Inc. as of December 31,
1996, and the related statement of income and retained earnings and statement of
cash flows for the year ended December 31, 1996, incorporated by reference in
this Prospectus, have been included herein in reliance on the report of
Bolinger, Segars, Gilbert & Moss, L.L.P., independent accountants.
The balance sheet of ViewStar Entertainment Services, Inc. as of
December 31, 1996, and the related statement of operations, statement of
stockholders' equity and statement of cash flows for the year ended December 31,
1996, incorporated by reference in this 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.
76
<PAGE>
The statement of net assets to be sold of Midwest Minnesota DBS, LLC as
of December 31, 1996, and the related statement of operations of assets to be
sold and statement of cash flows for the year ended December 31, 1996,
incorporated by reference in this Prospectus, have been included herein in
reliance on the report of Bradley R. Helmeke, Ltd., independent accountants.
The statement of net assets to be sold of the DBS Operations of
Turner-Vision, Inc. as of December 31, 1996, and the related statement of
operations and statement of cash flows for the year ended December 31, 1996,
incorporated by reference in this Prospectus, have been included herein in
reliance on the report of Grigoraci, Trainer, Wright & Paterno, independent
accountants.
The balance sheet of the DBS Operations of Pioneer Services Corporation
as of September 30, 1997, and the related statement of operations and division
deficiency and statement of cash flows for the fiscal year ended September 30,
1997, incorporated by reference in this Prospectus, have been included herein in
reliance on the report of Jackson, Thornton & Co., P.C., independent
accountants.
The (i) consolidated financial statements of DTS and its subsidiaries
for the period from inception (January 30, 1996) through December 31, 1996, (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 year ended December 31, 1996 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.
included in this Proxy Statement/Prospectus have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their report appearing herein,
and are included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
77
<PAGE>
GLOSSARY OF DEFINED TERMS
<TABLE>
<CAPTION>
<S> <C>
Class A Common Stock Pegasus' Class A Common Stock, par value $.01 per share.
Class B Common Stock Pegasus' Class B Common Stock, par value $.01 per share.
Common Stock The Class A Common Stock and the Class B Common Stock.
Company Pegasus and its direct and indirect subsidiaries.
Completed Pegasus DBS
Acquisitions The acquisition of DBS territories and related assets from 25
independent providers of DIRECTV services, which were all acquired
from January 1, 1997 to an effective date as of November 7, 1997.
Completed Pegasus Transactions The Completed DBS Acquisitions, the New Hampshire Cable Sale, the Unit
Offering and the 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
Enterprises, 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 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 management 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
</TABLE>
G-1
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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 Pending DTS
Acquisition, (vii) the placement of approximately $36.5 million in an interest
escrow account (the "Interest Escrow Account") to fund the first four
semi-annual interest 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 approximately $32.2
million of the revolving credit loans which were outstanding under the former
DTS credit facility, and (ix) the amendment and restatement of DTS' former
credit facility. Certain terms used in this definition are defined in "DTS
Management's Discussion 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
Enterprises, Inc., as applicable.
LMAs Local marketing agreements, program service agreements or time brokerage
agreements between broadcasters and television station licensees pursuant to
which broadcasters provide programming to and retain the advertising revenues of
such stations in exchange for fees paid to television station licensees.
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
Enterprises, Inc. Approximately 165 NRTC members and affiliate members
are authorized to provide DIRECTV services in exclusive territories
granted to the NRTC by DIRECTV Enterprises, Inc.
Pegasus Pegasus Communications Corporation.
Pending DTS Acquisition The acquisition of a DBS territory and related assets from an
independent provider of DIRECTV services.
</TABLE>
G-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Pending Pegasus DBS
Acquisitions The acquisition of DBS territories and related assets from 7 independent
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 Offering 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' 9 5/8% Series B Senior Notes due
2005, which are issuable upon exchange of the Series A Notes and which have terms
substantially similar to the Series A Notes, as applicable.
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 concurrently 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 Subsidiaries 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 completed
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
Digital Television Services, LLC (DTS) (a proposed
acquisition)
Report of Arthur Andersen LLP..........................F-5
Consolidated Balance Sheets as of December 31,
1996 and as of September 30, 1997 (unaudited)..........F-6
Consolidated Statements of Operations for the
Period from Inception (January 30, 1996) Through
December 31, 1996, for the Period from Inception
(January 30, 1996) Through September 30, 1996
(unaudited) and for the Nine Months Ended
September 30, 1997 (unaudited).........................F-7
Consolidated Statements of Members' Equity for the
Period from Inception (January 30, 1996) Through
December 31, 1996 and for the Nine Months Ended
September 30, 1997 (unaudited).........................F-8
Consolidated Statements of Cash Flows for the
Period from Inception (January 30, 1996) Through
December 31, 1996, for the Period from Inception
(January 30, 1996) Through September 30, 1996
(unaudited) and for the Nine Months Ended
September 30, 1997 (unaudited).........................F-9
Notes to Consolidated Financial Statements.............F-10
WEP Intermediate Corp. (a business acquired by DTS)
Report of Arthur Andersen LLP..........................F-31
Balance Sheet as of September 30, 1997.................F-32
Statement of Cash Flows for the Period from Inception
(January 28, 1997) through September 30,
1997...................................................F-33
Notes to Financial Statements..........................F-34
Direct Programming Services Limited Partnership (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-36
Balance Sheets as of December 31, 1995 and
1996...................................................F-37
Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996.......................F-38
F-1
<PAGE>
Statements of Changes in Partners' Capital for the
Years Ended December 31, 1994, 1995 and 1996...........F-39
Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996.......................F-40
Notes to Financial Statements..........................F-41
Kansas DBS, L.L.C. (a business acquired by DTS)
Report of Arthur Andersen LLP..........................F-47
Balance Sheets as of December 31, 1995 and
1996...................................................F-48
Statements of Operations and Changes in
Accumulated Deficit for the Years Ended December
31, 1995 and 1996......................................F-49
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996.............................F-50
Notes to Financial Statements..........................F-51
DBS Operations of NRTC System No. 0422 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-56
Statements of Assets and Liabilities and
Accumulated Deficit as of December 31, 1995 and
1996 and as of March 31, 1997 (unaudited)..............F-57
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-58
Statements of Cash Flows for the Years Ended
December 31, 1995 and 1996 and for the Three
Months Ended March 31, 1997 (unaudited)................F-59
Notes to Financial Statements..........................F-60
DBS Operations of NRTC System No. 0073 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-65
Statement of Assets and Liabilities and
Accumulated Earnings as of December 31, 1996 and
as of March 31, 1997 (unaudited).......................F-66
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-67
Statements of Cash Flows for the Year Ended
December 31, 1996 and for the Three Months Ended
March 31, 1997 (unaudited).............................F-68
Notes to Financial Statements..........................F-69
Northeast DBS Enterprises, L.P. (a business acquired
by DTS)
Report of Fishbein & Company, P.C......................F-74
Balance Sheets as of December 31, 1994 and
1995...................................................F-75
Statements of Operations and Partners' Equity for
the Years Ended December 31, 1994 and 1995.............F-76
F-2
<PAGE>
Statements of Cash Flows for the Years Ended
December 31, 1994 and 1995.............................F-77
Notes to Financial Statements..........................F-79
Northeast DBS Enterprises, L.P. (a business acquired
by DTS)
Report of Arthur Andersen LLP......................... F-83
Balance Sheet as of December 31, 1996..................F-84
Statement of Operations for the Year Ended
December 31, 1996......................................F-85
Statement of Changes in Partners' Capital for the
Year Ended December 31, 1996...........................F-86
Statement of Cash Flows for the Year Ended
December 31, 1996......................................F-87
Notes to Financial Statements..........................F-88
DBS Operations of NRTC System No. 0001 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-94
Statements of Assets and Liabilities and
Accumulated Deficit as of December 31, 1995 and
November 26, 1996......................................F-95
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..............................F-96
Statements of Cash Flows for the Year Ended
December 31, 1995 and the Period From January 1,
1996 Through November 26, 1996.........................F-97
Notes to Financial Statements..........................F-98
DBS Operations of NRTC System No. 1025 (a business
acquired by DTS)
Report of Arthur Andersen LLP..........................F-103
Statements of Assets and Liabilities and
Accumulated Deficit as of December 31, 1995 and
August 28, 1996........................................F-104
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-105
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-106
Notes to Financial Statements..........................F-107
Satellite Television Services, Inc. (a business
acquired by DTS)
Report of Deloitte & Touche LLP........................F-112
Balance Sheets as of September 30, 1996 and
1997...................................................F-113
Statements of Cash Flows for the Years Ended
September 30, 1995, 1996 and 1997......................F-114
F-3
<PAGE>
Statements of Operations for the Years Ended
September 30, 1995, 1996 and 1997........................F-115
Statements of Shareholder's Equity for the Years
Ended September 30, 1995, 1996 and 1997..................F-116
Notes to Financial Statements............................F-117
Ocmulgee Communications, Inc. (an acquisition proposed
by DTS)
Report of Arthur Andersen LLP............................F-121
Balance Sheets as of December 31, 1996 and as of
September 30, 1997 (unaudited)...........................F-122
Statements of Operations for the Year Ended December
31, 1996 and for the Nine Months Ended September 30,
1996 (unaudited) and September 30,
1997 (unaudited).........................................F-123
Statements of Changes in Stockholder's Deficit for the
Year Ended December 31, 1996 and for the Nine Months
Ended September 30, 1997 (unaudited).....................F-124
Statements of Cash Flows for the Year Ended
December 31, 1996 and for the Nine Months Ended
September 30, 1996 (unaudited) and September 30,
1997 (unaudited).........................................F-125
Notes to Financial Statements............................F-126
Pro Forma Consolidated Financial Information
Basis of Presentation......................F-133
Pro Forma Consolidated Balance Sheet as
of September 30, 1997......................F-134
Pro Forma Consolidated Statement of
Operations for the Year Ended December
31, 1996...................................F-136
Pro Forma Consolidated Statement of
Operations for the Nine Months Ended
September 30, 1997.........................F-138
Notes to Pro Forma Consolidated
Statements of Operations...................F-140
F-4
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Managers
of DTS Management, LLC, the sole manager of
Digital Television Services, LLC:
We have audited the accompanying consolidated balance sheet of DIGITAL
TELEVISION SERVICES, LLC (a Delaware limited liability company and formerly DBS
Holdings, L.P.) AND SUBSIDIARIES as of December 31, 1996 and the related
consolidated statements of operations, members' equity, and cash flows for the
period from inception (January 30, 1996) through December 31, 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 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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Television Services, LLC and subsidiaries as of December 31, 1996 and the
results of their operations and their cash flows for the period from inception
(January 30, 1996) through December 31, 1996 in conformity with generally
accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 28, 1997
(except with respect to the matters
discussed in Note 10
as to which the date is November 6, 1997)
F-5
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Pro Forma
December 31, September 30, September 30,
1996 1997 1997 (NOTE 10)
--------------- ---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ........................... $ 1,595,955 $ 29,971,003
Restricted cash .................................... -- 36,544,197
Accounts receivable:
Trade, net of allowance for doubtful accounts of
$6,750 and $166,075 at December 31, 1996 and
September 30, 1997, respectively .................. 893,950 3,273,629
Other ............................................. 154,840 548,844
Inventory .......................................... 244,544 1,044,596
Other (Note 2) ....................................... 234,153 829,159
------------ -------------
Total current assets .............................. 3,123,442 72,211,428
------------ -------------
PROPERTY AND EQUIPMENT, at cost:
Leasehold improvements .............................. 81,244 236,216
Furniture and equipment .............................. 397,201 1,965,485
------------ -------------
478,445 2,201,701
Less accumulated depreciation ........................ (44,339) (366,089)
------------ -------------
434,106 1,835,612
------------ -------------
CONTRACT RIGHTS AND OTHER
ASSETS, NET (Note 2) ................................. 38,604,625 144,398,793
------------ -------------
$ 42,162,173 $ 218,445,833
============ =============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................... $ 1,041,019 $ 4,047,579
Accrued liabilities ................................. 1,380,321 7,178,610
Unearned revenue .................................... 1,082,601 3,679,357
Current maturities of long-term debt ............... 6,033,732 9,323,778
Other ................................................ 92,279 256,913 295,538
------------ ------------- ----------
Total current liabilities ........................ 9,629,952 24,486,237 24,524,862
------------ ------------- ----------
LONG-TERM DEBT,
less current maturities .............................. 17,542,883 166,896,333
------------ -------------
OTHER LIABILITIES .................................... 83,615 46,645 1,035,680
------------ ------------- ----------
COMMITMENTS AND CONTINGENCIES
(Notes 5, 6, 8, and 10)
MEMBERS' EQUITY/STOCKHOLDERS' EQUITY
Class A units ....................................... 0 29,820,008 0
Class B units ....................................... 18,440,982 20,499,979 0
Class C units ....................................... 0 0 0
Class D units ....................................... 0 0 0
Preferred stock, $.01 par value; 10,000,000 shares
authorized; 1,404,056 issued and outstanding
at September 30, 1997 .............................. 0 0 14,041
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,137,049 issued and outstanding
at September 30, 1997 .............................. 0 0 21,370
Additional paid-in capital ........................... 0 0 25,953,547
Retained deficit .................................... (3,535,259) (23,303,369) 0
------------ ------------- ----------
Total members' equity/ stockholders' equity ...... 14,905,723 27,016,618 25,988,958
------------ ------------- ----------
$ 42,162,173 $ 218,445,833
============ =============
</TABLE>
The accompanying notes are an integral part
of these consolidated balance sheets.
F-6
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Inception Inception Nine Months
(January 30) To (January 30) To Ended
December 31, September 30, September 30,
1996 1996 1997
----------------- ----------------- ----------------
(Unaudited)
<S> <C> <C> <C>
REVENUE:
Programming revenue ..................... $ 3,085,146 $ 1,269,107 $ 28,811,235
Equipment and installation revenue ...... 323,663 95,798 3,291,122
------------ ------------ -------------
Total revenue. ........................ 3,408,809 1,364,905 32,102,357
------------ ------------ -------------
COST OF REVENUE:
Programming expense ..................... 1,595,963 668,881 14,117,014
Cost of equipment and installation ...... 398,144 96,306 4,026,498
Service fees ........................... 275,704 98,909 2,758,947
------------ ------------ -------------
Total cost of revenue .................. 2,269,811 864,096 20,902,459
------------ ------------ -------------
GROSS PROFIT .............................. 1,138,998 500,809 11,199,898
OPERATING EXPENSES:
Sales and marketing ..................... 778,036 297,443 5,557,260
General and administrative ............... 1,953,635 830,580 5,884,949
Depreciation and amortization ............ 1,147,963 529,265 10,483,916
------------ ------------ -------------
Total operating expenses ............... 3,879,634 1,657,288 21,926,125
------------ ------------ -------------
OPERATING LOSS ........................... (2,740,636) (1,156,479) (10,726,227)
------------ ------------ -------------
OTHER INCOME (EXPENSE):
Interest expense, net .................. (817,603) (93,717) (8,917,920)
Other income (expense) .................. 22,980 5,025 (123,963)
------------ ------------ -------------
(794,623) (88,692) (9,041,883)
NET LOSS ................................. $ (3,535,259) $ (1,245,171) $ (19,768,110)
============ ============ =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-7
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE PERIOD FROM INCEPTION (JANUARY 30, 1996) THROUGH DECEMBER 31, 1996
AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<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 (unaudited) ............ -- (2,803,390) -- (16,964,720)
--------- ------------ --------- -------------
BALANCE, September 30, 1997
(unaudited) ..................... 1,333,333 $ 27,016,618 2,050,000 $ 0
========= ============ ========= =============
<CAPTION>
Total
Class C Class D Members'
Units Amount Units Amount Equity
-------- -------- --------- -------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 30, 1996 ...... -- $ -- -- $ -- $ --
Sale of Class B Units ......... -- -- -- -- 18,440,982
Issuance of Class C Units ...... 87,049 -- -- -- --
Net loss ........................ -- -- -- -- (3,535,259)
------ ------ ------- ------ -------------
BALANCE, December 31, 1996 ...... 87,049 -- -- -- 14,905,723
Sale of Class A Units ......... -- -- -- -- 29,820,008
Sale of Class B Units ......... -- -- -- -- 2,058,997
Issuance of Class D Units ...... -- -- 124,000 -- --
Net Loss (unaudited) ............ -- -- -- -- (19,768,110)
------ ------ ------- ------ -------------
BALANCE, September 30, 1997
(unaudited) ..................... 87,049 $ -- 124,000 $ -- $ 27,016,618
====== ====== ======= ====== =============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-8
<PAGE>
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Inception Inception Nine Months
(January 30) to (January 30) to Ended
December 31, 1996 September 30, 1996 September 30, 1997
------------------- -------------------- -------------------
(Unaudited)
<S> <C> <C> <C>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ...................................................... $ (3,535,259) $ (1,245,171) $ (19,768,110)
------------- ------------ --------------
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .............................. 1,106,264 529,265 9,586,005
Amortization of capitalized debt costs and debt
discount ................................................... 313,329 -- 1,502,106
Amortization of deferred promotional costs .................. 41,699 -- 897,902
Changes in operating assets and liabilities, net of
acquisitions:
Accounts receivable, net .................................... (428,281) (221,107) 11,943
Inventory ................................................... (218,140) (28,053) (420,808)
Other current assets ....................................... (269,721) (33,389) (1,308,523)
Accounts payable .......................................... 877,630 274,461 3,005,559
Accrued liabilities and other liabilities .................. 1,099,003 159,974 2,845,516
Unearned revenue .......................................... 379,533 117,659 (869,870)
------------- ------------ --------------
Total adjustments .......................................... 2,901,316 798,810 15,249,830
------------- ------------ --------------
Net cash used in operating activities ..................... (633,943) (446,361) (4,518,280)
------------- ------------ --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment, net of acquisitions (382,175) (226,672) (1,339,466)
Disposals of property and equipment ........................... (3,930) (3,930) --
Increase in restricted cash for payment of subordinated
notes ...................................................... 0 0 (36,544,197)
Purchase of contract rights and related net assets,
net of amounts financed .................................... (12,695,488) (7,121,586) (88,745,395)
Increase in other assets .................................... (693,690) (313,305) --
------------- ------------ --------------
Net cash used in investing activities ..................... (13,775,283) (7,665,493) (126,629,058)
------------- ------------ --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from bank credit facility ........................... 9,400,000 -- 72,769,409
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) -- (6,132,908)
Capitalized financing fees .................................... (2,821,177) -- (9,325,449)
Sale of Member Units .......................................... 18,440,982 8,888,475 31,879,005
Other, net ................................................... -- 83,616 (683,529)
------------- ------------ --------------
Net cash provided by financing activities .................. 16,005,181 8,972,091 159,522,386
------------- ------------ --------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 1,595,955 860,237 28,375,048
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD ...................................................... -- -- 1,595,955
------------- ------------ --------------
CASH AND CASH EQUIVALENTS AT END
OF PERIOD ................................................... $ 1,595,955 $ 860,237 $ 29,971,003
============= ============ ==============
SUPPLEMENTAL NONCASH FINANCING ACTIVITY:
NRTC patronage capital declared .............................. $ 83,615 $ 83,616 $ --
============= ============ ==============
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest ....................................... $ 301,035 $ -- $ 5,009,366
============= ============ ==============
Issuance of seller notes in connection with acquisitions . $ 24,156,000 $ 17,300,000 $ 15,524,198
============= ============ ==============
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-9
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. Organization and Nature of Business
Digital Television Services, LLC ("DTS") is a limited liability company
organized under the Delaware Limited Liability Company Act (the "LLC Act") and
is successor to DBS Holdings, L.P., a Delaware limited partnership originally
formed on January 30, 1996 by Columbia Capital Corporation ("Columbia") and
senior management of DTS. On November 19, 1996, the limited partnership was
converted into a limited liability company under the applicable provisions of
the LLC Act and Delaware limited partnership laws. All information in the
accompanying consolidated financial statements and notes has been restated for
the conversion to a limited liability company. DTS is owned by its members
(Note 7). 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 a rural DIRECTV Services provider in March 1996 and has made a
total of 16 acquisitions through May 9, 1997 (Notes 3 and 10). 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. (Note 10).
In connection with the Company's expansion, Columbia and certain of its
affiliates increased their investment in the Company subsequent to December 31,
1996. Additional equity was raised from J.H. Whitney & Co. and Fleet Equity
Partners (together with Columbia, the "Equity Investors") and from senior
executives of the Company subsequent to year-end. The Equity Investors and
senior executives, in aggregate, have contributed $50,500,000 of equity capital
to the Company from inception through February 28, 1997 (Note 10).
DTS is a holding company which operates primarily through its wholly-owned
subsidiaries. The principal wholly-owned subsidiaries of DTS as of December 31,
1996 consist of 8 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 are
independent providers of DIRECTV Services. The sole manager of DTS 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 subsequent to
December 31, 1996 and currently has nominal assets and does not conduct any
operations. DTS Capital was formed to facilitate issuance of certain senior
notes (Note 10). 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 for the 1996 Acquisitions (Note 3) and
the 1997 Acquisitions (Note 10), the Company has the exclusive right to provide
DIRECTV Services within certain rural territories in the United States.
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 1997,
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
F-10
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
1. Organization and Nature of Business -- (Continued)
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 $100 million has been committed by a syndicate of lenders,
of which $82,169,409 was outstanding at September 30, 1997. The Company also
issued $155 million in senior subordinated notes in July 1997 (Note 10) to
refinance certain existing indebtedness and to provide additional funds for
possible future acquisitions and general operating needs.
The success of the Company is dependent on this financing and the future
ability of DTS and its subsidiaries to generate projected revenues through
successful operations. The members have no present plans to discontinue support
of the Company. In the opinion of management, capital on hand, as well as funds
provided from financings (Notes 5 and 10), will be sufficient to meet the
capital and operating needs of the Company through at least 1997. 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 Corp. ("Pegasus") providing for the acquisition of
the Company and all of its subsidiaries 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.
Interim Unaudited Financial Information
The consolidated balance sheet as of September 30, 1997 and the
consolidated statements of operations, members' equity and cash flows for the
nine months ended September 30, 1997 are unaudited and have been prepared by
management of the Company in accordance with the rules and regulations of the
Securities and Exchange Commission. In the opinion of management, the
statements contain adjustments (consisting of only normal items) necessary for
the fair presentation of the financial portion and results of operations for
the interim period. The results of operations for the nine months ended
September 30, 1997 are not necessarily indicative of the results to be expected
for the entire year.
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.
F-11
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
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 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.
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, September 30,
1996 1997
-------------- --------------
Deferred promotional costs ...... $214,939 $699,678
Other ........................... 19,214 129,481
-------- --------
$234,153 $829,159
======== ========
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
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 of the respective assets, ranging from
three to seven years. Depreciation expense was $48,269 and $322,513 for the
period from inception (January 30, 1996) through December 31, 1996 and for the
nine months ended September 30, 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.
F-12
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
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, September 30,
1996 1997
-------------- ----------------
<S> <C> <C>
Contract rights ............................................. $32,727,697 $ 141,793,076
Organization costs .......................................... 599,528 1,239,348
----------- -------------
33,327,225 143,032,424
Accumulated amortization .................................... (1,057,995) (10,309,709)
----------- -------------
32,269,230 132,722,715
Deposits on 1997 Acquisitions and Pending Acquisitions ...... 3,380,961 --
Debt issuance costs, net .................................... 2,776,658 4,263,126
Bond issuance costs, net .................................... -- 7,136,372
NRTC patronage capital ....................................... 83,615 46,645
Other ...................................................... 94,161 229,935
----------- -------------
$38,604,625 $ 144,398,793
=========== =============
</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 statement of operations, was $1,021,606 and
$9,088,690 for the period from inception (January 30, 1996) through December
31, 1996 and for the nine months ended September 30, 1997, respectively.
Accumulated amortization, included in the accompanying balance sheets, was
$1,021,606 and $10,110,299 for the period from inception (January 30, 1996)
through December 31, 1996 and for the nine months ended September 30, 1997,
respectfully.
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 statement of operations was $36,389 and $165,520, for the period
from inception (January 30, 1996) through December 31, 1996 and for the nine
months ended September 30, 1997, respectively. Accumulated amortization,
included in the accompanying balance sheets, was $36,389 and $199,410 for the
period from inception (January 30) through December 31, 1996 and for the nine
months ended September 30, 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.
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, was $44,520 and $582,493
for the period from inception (January 30, 1996) through December 31, 1996 and
for the nine months ended September 30, 1997, respectively. Accumulated
amortization, included in the accompanying balance sheets, was $44,520 and
$627,013 for the period from inception (January 30) through December 31, 1996
and for the nine months ended September 30, 1997, respectively.
Bond Issuance Costs: Bond issuance costs represent deferred costs incurred
in connection with a bond offering (Note 10) subsequent to December 31, 1996
and are capitalized over the life of the bonds. Amortization expense, included
in interest expense in the accompanying statement of operations, was $120,114
for the nine month period ended September 30, 1997. Accumulated amortization,
included in the accompanying balance sheets, was $120,114 for the same nine
month period.
F-13
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
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 balance sheet. The patronage capital will be
recognized as income when cash distributions are declared by the NRTC.
Income Taxes
The Company is considered a partnership for federal and state income tax
purposes. All taxable income or loss is allocated to the members in accordance
with the terms of the member agreement. Accordingly, no provision for income
taxes is included in the accompanying financial statements.
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 sheet
at December 31, 1996 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, 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
F-14
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
2. Summary of Significant Accounting Policies -- (Continued)
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. 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 the first nine months of 1997, the Company acquired the rights to
distribute DIRECTV Services in eight additional rural DirecTv markets. The
aggregate consideration was approximately $105.0 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 $29.7 million was paid in cash, approximately $59.8
million was financed through borrowings under the Credit Facility and
approximately $15.5 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 these
acquisitions, rights were acquired in the following markets:
F-15
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
3. Contract Rights -- (Continued)
o In January 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Kentucky from Direct Programming Services
Limited Partnership
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.
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 ...................................................... $ 3,529
Property and equipment ............................................. 385
Contract rights, net of fair value adjustments of $3.0 million ...... 108,081
Current liabilities ................................................ (6,967)
--------
Total consideration ............................................. $105,028
========
</TABLE>
4. Related-Party Transactions
Columbia, which is owned by certain members of the Company holding Class A
and Class B interests, provides financial, managerial, and other services to
the Company. Total fees and expenses paid to Columbia were approximately
$322,000 and $36,000 for the period from inception (January 30, 1996) through
December 31, 1996 and for the nine months ended September 30, 1997,
respectively. Such fees are included in general and administrative expenses in
the accompanying statement of operations.
5. Long-Term Debt
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996 September 30, 1997
-------------------------- ----------------------------
Unamortized Unamortized
Principal Discount Principal Discount
------------- ---------- -------------- -----------
<S> <C> <C> <C> <C>
Senior subordinated notes ......... $ -- $ -- $155,000,000 $2,123,164
Credit facility .................. 9,400,000 -- -- --
Seller notes and commitments ...... 15,113,250 965,011 26,120,448 3,097,446
Installment notes .................. 28,376 -- 320,273 --
----------- -------- ------------ ----------
24,541,626 965,011 181,440,721 5,220,610
Less current maturities ............ 6,130,183 96,451 9,615,622 291,844
----------- -------- ------------ ----------
$18,411,443 $868,560 $171,825,099 $4,928,766
=========== ======== ============ ==========
</TABLE>
The Seller Notes
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.
F-16
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. Long-Term Debt -- (Continued)
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
September 30, 1997, the Contingent Payment Amount is recorded as $4,223,250 and
$5,786,250, which is based on subscriber levels at December 31, 1996 and
September 30, 1997, respectively. The obligations of DTS California pursuant to
the DTS California Note are secured by a $6,000,000 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 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 is due on January 2, 1998. 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
F-17
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. Long-Term Debt -- (Continued)
(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 is payable 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 on January 2, 2001 and bears 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.
Credit Facility
The Company is party to a credit agreement (the "Credit Facility") dated
November 27, 1996 with the banks and other lenders party thereto from time to
time. The Credit Facility is a revolving credit facility in the amount of
$100.0 million, with a $25.0 million sublimit for letters of credit. Proceeds
from the Credit Facility can be used to refinance certain existing
indebtedness, to finance the acquisition of contract rights, to finance capital
expenditures and for general corporate purposes and working capital needs.
Borrowings under the Credit Facility are available until November 30,
2001; however, the commitments thereunder shall be reduced on December 31, 1998
by an amount equal to 75% of the available commitments of all lenders on such
date, provided that the reduction shall not be made unless the aggregate amount
of available commitments exceeds $5,000,000, and thereafter available
commitments shall be reduced quarterly commencing on March 31, 1999 at a rate
of 1.250% through 1999, 1.875% through 2000 and 5% through September 30, 2001.
On November 30, 2001, all of the loans outstanding will be repayable. The
making of each loan under the Credit Facility is subject to the satisfaction of
certain conditions, including (i) meeting a certain "borrowing base"
calculation based on the number of paying subscribers and households within the
rural DirecTv markets served by the Company, (ii) maintaining minimum
subscriber penetration and Annualized Contribution (as defined therein) per
paying subscriber, and (iii) maintaining defined annualized operating cash flow
levels. In addition, the Company is required to make mandatory prepayments of
the Credit Facility from, subject to certain exceptions, the net proceeds of
certain sales or other dispositions of material assets by the Company or any of
its subsidiaries. At December 31, 1996, the borrowing base, as defined, was
approximately $92.5 million and approximately $80.0 million was available under
the Credit Facility.
Borrowings under the Credit Facility are secured by (i) an equal and
ratable pledge of all of the equity interests in the Company, DTS Management
and the Operating 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 Company may elect that all or a portion of the borrowings under the
Credit Facility bear interest at a rate per annum based on the base rate of the
Canadian Imperial Bank of Commerce ("CIBC") or the Eurodollar rate, in each
case plus an applicable margin as defined in the Credit Facility.
At December 31, 1996, borrowings under the Credit Facility accrued
interest at the rate of 9%.
At any time when the Company is in default of the payment of any amount
due under the Credit Facility, the principal of all loans made under the Credit
Facility is subject to acceleration and will bear interest at 2% per annum
above the rate otherwise applicable thereto.
F-18
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
5. Long-Term Debt -- (Continued)
The Company has paid and will pay a commitment fee on the unused amounts
under the Credit Facility calculated at a rate of .375% to .50% 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.
The Credit Facility 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 to 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. In addition, the Credit Facility requires the
maintenance of certain specified financial and operating covenants, including
minimum interest coverage and leverage ratios and limits on general and
administrative expenses as a percentage of revenue.
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%.
Unamortized Discount
The Company has discounted the Senior Subordinated 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 Senior Subordinated 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 statement of operations, is
$268,544 and $799,746 for the period from inception (January 30, 1996) through
December 31, 1996 and for the nine months ended September 30, 1997,
respectively.
Future maturities of long-term debt are as follows at December 31, 1996:
1997 ...................................................... $ 6,130,183
1998 ...................................................... 9,004,332
1999 ...................................................... 7,111
2000 ...................................................... 0
2001 ...................................................... 9,400,000
-----------
$24,541,626
===========
F-19
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
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 2001.
Future minimum lease payments for noncancelable operating leases in effect at
December 31, 1996 are as follows:
1997 ....................................... $ 298,000
1998 ....................................... 297,000
1999 ....................................... 300,000
2000 ....................................... 148,000
2001 ....................................... 106,000
----------
Total future minimum lease payments ...... $1,149,000
==========
Rental expense charged to operations totaled approximately $83,000 and
$455,369 during the period from inception (January 30, 1996) through December
31, 1996 and during the nine months ended September 30, 1997, respectively, and
is included in general and administrative expense in the accompanying
consolidated statement 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 if the Company fails to obtain such
minimum number of subscribers in such Rural DirecTv Market prior to such time.
Six of the Operating Subsidiaries had achieved the minimum subscriber
requirement at December 31, 1996. Two of the Operating Subsidiaries had
achieved approximately 75% of the minimum subscriber requirement at December
31, 1996. Based on the subscriber growth rates of these two Operating
Subsidiaries to date, management anticipates that the two Operating
Subsidiaries will meet the minimum subscriber requirement prior to the fourth
year of operations of the related NRTC Member Agreements and therefore does not
expect to be required to pay such fees.
7. Members' Equity Units
There are four classes of equity interests in the Company, denominated as
"Class A Units," "Class B Units," "Class C Units," and "Class D Units." The
classes have different voting and distribution rights per the Company's Limited
Liability Company Agreement (the "LLC Agreement").
Class A Units are held by the Equity Investors. Each Class A Unit
represents the contribution by its holder of $22.50 to the Company. Class A
Units constitute approximately 37% of the units outstanding at September 30,
1997 (assuming issuance of 180,000 Class D Units pursuant to the Employee Unit
Plan). In addition to the special voting rights defined in the LLC Agreement,
the Class A Unit holders are entitled to certain preemptive rights and
protection against dilution. The Class A Units rank senior to the other classes
of Units with respect to interim and liquidating distributions. On February 10,
1997, the Company sold 1,333,333 Class A Units to the Equity Investors, raising
$30 million of equity capital. No Class A Units and 1,333,333 Class A Units
were outstanding at December 31, 1996 and September 30, 1997, respectively.
Class B Units are held by Columbia DBS, Inc. and Columbia DBS Investors,
L.P., which are affiliates of Columbia, and by certain senior executives of the
Company. Each Class B Unit represents an interest in the
F-20
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
7. Members' Equity Units -- (Continued)
Company received in exchange for the contribution of $10. Class B Units
constitute approximately 57% of the units outstanding at September 30, 1997
(assuming issuance of 180,000 Class D Units pursuant to the Employee Unit
Plan). Class B Units are entitled to certain preemptive rights and rank senior
with respect to interim and liquidating distributions to the Class C and Class
D Units and junior to the Class A Units. Columbia and senior management of the
Company purchased 205,902 Class B Units on January 2, 1997 for a total
investment of $2,059,000. At December 31, 1996 and September 30, 1997,
1,844,098 and 2,050,000 Class B Units, respectively were outstanding.
Class C Units are held by certain senior executives of the Company and are
subject to certain vesting requirements related to employment. Each Class C
Unit represents a restricted interest in the Company received in exchange for
the performance of services. Class C Units constitute approximately 2% of the
units outstanding at September 30, 1997 (assuming issuance of 180,000 Class D
Units pursuant to the Employee Unit Plan). Class C Units are entitled to
certain preemptive rights. The Class C Units rank senior to the Class D Units
with respect to interim and liquidating distributions and junior to the Class A
and Class B Units. At December 31, 1996 and September 30, 1997, 87,049 Class C
Units had been issued. Of these, a total of 34,876 Class C Units were vested at
December 31, 1996 and a total of 68,302 were vested at September 30, 1997.
Employee Unit Plan
In March 1997, DTS Management adopted an Employee Unit Plan (the "Employee
Unit Plan") pursuant to which up to 180,000 Class D Units (or such larger
number of Units as may be approved by the Company and the holders of at least
70% of the Class A Units) may 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 the Company shall determine. As of September 30, 1997,
124,000 Class D Units have been issued pursuant to the Employee Unit Plan. Such
Units will vest 25% annually commencing March 1998 through May 2001, subject to
acceleration under certain circumstances.
Distributions
Tax Distributions: The Company intends to pay cash distributions in
amounts approximately equal to the income tax liabilities of the members
resulting from the pass-through of taxable income to the members ("Tax
Distributions"). Tax Distributions will be made quarterly.
Other Interim Distributions: The holders of the Class A Units are entitled
to a cumulative compounded annual rate of return equal to 8% applied to their
Class A Capital (defined as the aggregate capital contributions of holders of
Class A Units, less aggregate distributions in return of such capital) (the
"Preferred Return").
Once the holders of Class A Units have received their Preferred Return,
the holders of the Class A and Class B Units are entitled to distributions in
proportion to such units held by them until they have received cumulative
distributions equal to $10 per such unit. Distributions are then made to the
holders of the Class A Units, Class B Units, and Class C Units in proportion to
such Units held by them until they have received cumulative distributions equal
to $12.50 per such unit. Finally, distributions are made to all members in
proportion to the number of units held.
Class A Unit Liquidation Preference and Dissolution Rights: Upon the
dissolution of the Company after distributions are made to the Company's
creditors in satisfaction of liabilities of the Company, distributions in
liquidation are made first to the holders of the Class A Units in an amount
equal to the remaining balance of their Class A capital and accumulated unpaid
Preferred Return. Any remaining amounts available for distribution to the
members are distributed in the same manner as interim distributions.
F-21
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
7. Members' Equity Units -- (Continued)
If, after February 6, 2003, $7.5 million or more of the Class A capital
remains unreturned, then upon the vote of the holders of at least a majority of
the Class A Units, the Company shall be dissolved. If such a dissolution will
result in an event of default under any existing indebtedness of the Company or
any of the Company's subsidiaries with an outstanding balance of $10 million or
more, then such a vote will not cause the dissolution of the Company but,
rather, will be considered a notice by the holders of the Class A Units to the
Company that the holders desire that the Company promptly arrange for the sale
of the Company (including its subsidiaries) or sale of substantially all of its
assets.
Allocations
Losses are first allocated (the "Initial Losses") to the members in
proportion to their units until the cumulative losses allocated equal the
cumulative prior allocations of profits, next (the "Additional Losses") to the
holders of Class B Units (and to the holders of Class C and Class D Units to
the extent that they may have positive capital accounts) in proportion to such
units until their capital account balances are reduced to zero, and finally
(the "Final Losses") to the holders of the Class A Units in proportion to such
units until their capital account balances are reduced to zero.
Profits are first allocated to the holders of Class A Units in proportion
to their units until the cumulative profits allocated equal the cumulative
prior allocations of the Final Losses, next to the holders of Class B Units
(and to the holders of Class C Units and Class D Units if they have been
allocated Additional Losses) until the cumulative profits allocated equal the
cumulative prior allocation of the Additional Losses, next to the holders of
Class A Units in proportion to such units until the cumulative profits
allocated equal the cumulative distributions of the Preferred Return, and next
to the holders of Class B Units and Class C Units in proportion to such units
until the cumulative amount allocated equals the cumulative distributions with
respect to Class B Units and Class C Units. All remaining profits are allocated
to the members in accordance with their relative total units.
Corporate Conversions
Under the Company's LLC Agreement, DTS Management, the sole manager of the
Company, has the authority to convert the Company from a Delaware limited
liability company into a Delaware corporation in connection with the
consummation of a qualified initial public offering ("Qualified IPO"). In such
a case, all of the equity interests of the Company would be converted into
common stock in amounts specified in the LLC Agreement. DTS Management also has
authority to convert the Company from a Delaware limited liability company to a
Delaware corporation other than in connection with the consummation of a
Qualified IPO. In such case, the Class A Units would be converted into
convertible payment-in-kind preferred stock and the other units would be
converted into common stock in amounts specified in the LLC Agreement.
8. Employee Benefits
Employment Agreements
DTS Management has entered into employment agreements 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 managers of DTS Management.
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,
F-22
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
8. Employee Benefits -- (Continued)
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. No value was assigned to
the Class C Units on the date of grant due to the subordinated nature of any
distributions which may be made to such units (Note 7).
The Employment Agreements also permit the executives to purchase 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 through September 30, 1997.
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.
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.
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.
F-23
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
9. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
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.
10. Subsequent Events
The Offering
Subsequent to year-end, the Company sold, in a transaction exempt from
registration under the Securities Act, $155.0 million senior subordinated notes
(the "Private Notes"). 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. 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 the Interest Escrow Account and to repay outstanding
indebtedness under the Company's Credit Facility (Note 5) as described
elsewhere in this Prospectus.
The Company plans to proceed with an offering (the "Exchange Offer") to
exchange the Private Notes with new senior subordinated notes (the "Exchange
Notes") registered under the Securities Act of 1933, as amended (the
"Securities Act"). The terms of the Exchange Notes will be 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) will bear a Series B designation, (ii) will
have been registered under the Securities Act and, therefore, will not bear
legends restricting their transfer, and (iii) will not be entitled to certain
registration rights and certain liquidated damages which were applicable to the
Private Notes in certain circumstances under the Registration Rights Agreement.
F-24
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
The Exchange Notes will be 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.
Restated Credit Facility
The Company is a party to an Amended and Restated Credit Agreement dated
as of July 30, 1997 (the "Restated 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, Morgan, as Syndication Agent, and Fleet, as Documentation Agent,
which provides 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 Restated 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 within 12 months of the
closing of the Restated Credit Facility 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 Restated Credit Facility will be 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 Restated 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 Restated Credit Facility; maintaining annualized
contribution per paying subscriber throughout the term of the Restated 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 Restated 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 Restated 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 Restated Credit
Facility. The Company is in compliance with those covenants with which it is
required to comply as of the date hereof. In addition, the Restated Credit
Facility provides that the Company will be required to make mandatory
prepayments of the Restated 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 Restated 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.
F-25
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
The Restated Credit Facility provides that the Company may elect that all
or a portion of the borrowings under the Restated 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 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 Restated
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 Restated 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.
The Restated Credit Facility will also contain 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. In addition, the Restated Credit
Facility will require the maintenance of certain specified financial and
operating covenants, including minimum interest coverage ratios and limits on
general and administrative expenses as a percentage of revenue.
The Company will pay a commitment fee on the unused amounts under the
Restated Credit Facility calculated at 0.5% per annum, payable quarterly in
arrears.
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 Restated 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%.
NRTC Member Agreements
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 initial amount of the
F-26
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
letter of credit issued at the request of the Company will be 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,
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%. This letter of credit to the
NRTC was issued pursuant to the Existing Credit Facility in May 1997 and has an
initial stated amount of approximately $6.3 million.
Corporate Conversion
Prior to October 10, 1997, DTS was a limited liability company (the "LLC")
organized under the laws of the State of Delaware. On October 10, 1997, the
Company converted to corporate form in a transaction (the "Corporate
Conversion") contemplated in the Indenture and described in the limited
liability company agreement of the LLC pursuant to which the LLC merged with
and into WEP Intermediate Corp., a Delaware corporation ("WEP"), in 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 Preferred Stock of
the Company, (iii) the member interests in the LLC evidenced by the Class A
Units (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 (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 (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 (the "Class D Units") were converted into
warrants to purchase Common Stock of the Company, (vii) all of the resulting
capital stock of the Company became subject to the Stockholders Agreement (as
defined herein), (viii) the surviving entity changed its name to "Digital
Television Services, Inc." and (ix) Digital Television Services, Inc. assumed
by operation of law and supplemental indenture all of the obligations of the
LLC under the Notes and the Indenture.
Subsequent to the Corporate Conversion, substantially all of the
outstanding shares of the resulting corporation will be owned by the holders of
the equity interests in the LLC. Therefore, the Corporate Conversion will be
treated for accounting purposes as the acquisition of WEP by the LLC. The LLC's
assets and liabilities will be recorded at historical cost and WEP's assets and
liabilities will be recorded at fair value. However, given that WEP's only
asset consisted of its investment in the LLC, no goodwill would be recognized.
Following the Corporate Conversion, the historical financial statements of the
LLC shall become the historical financial statements of WEP and shall include
the businesses of both companies. The historical audited financial statements
of the LLC and WEP before the Corporate Conversion are on pages F-10 through
F-34 and F-35 through F-39, respectively. Pro forma information giving effect
to the Corporate Conversion, as if it had occurred on January 1, 1996 (for pro
forma statement of operations purposes) or September 30, 1997 (for pro forma
balance sheet purposes) is included on pages F-4 through F-9.
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 October 15, 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 October
15, 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
F-27
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
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.
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
F-28
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
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.
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) 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
the date hereof, incentive stock options have been granted with respect to
32,500 shares of Common Stock with an exercise price of $22.50 per share.
Employment Agreements
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.
The Acquisition of the Company
On November 6, 1997, the Company entered into an agreement in principle
(the "Agreement in Principle") with Pegasus Communications Corporation
("Pegasus"), providing for the acquisition of all of the outstanding shares of
capital stock of the Company by Pegasus in exchange for approximately 5.5
million shares of Pegasus' Class A Common Stock (the "Pegasus Transaction").
Upon consummation of the Pegasus Transaction, the Company will become a wholly
owned subsidiary of Pegasus. 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 Indenture, the Company will not assume,
guarantee or otherwise have any liability for any indebtedness or other
liability of Pegasus or any of its other subsidiaries.
The Pegasus Transaction is expected to be completed in the first quarter
of 1998 and is subject, among other things, to the execution of a definitive
agreement, approval of the Boards of Directors of Pegasus and the Company and
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.
F-29
<PAGE>
DIGITAL TELEVISION SERVICES, LLC AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
10. Subsequent Events -- (Continued)
Upon the consummation of the Pegasus Transaction a Change of Control will
occur and the Issuers 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 purchase. Pegasus has covenanted in the
Agreement in Principle that upon the closing of the Pegasus Transaction and the
resulting Change of Control Pegasus shall cause the Issuers to make the Offer
to Purchase. In addition, the consummation of the Pegasus Transaction may also
constitute an event of default under the Restated 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 Restated Credit Facility and any other Senior
Indebtedness before the Issuers could distribute cash to purchase the Notes. A
condition to the closing of the Pegasus Transaction is that the Restated 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 $83 million. Accordingly, the Company's amortization
expense would be increased with respect to periods subsequent to the
consummation of the Pegasus Transaction.
Pro Forma Information (Unaudited)
See pages F-4 through F-9 elsewhere in this Prospectus for condensed pro
forma information which includes the effects of the 1996 Acquisitions, the
Restated Credit Facility, the 1997 Acquisitions, the Pending Acquisition, the
1997 Equity, the Interest Escrow Account, the Corporate Conversion and the
Offering as if each transaction had occurred on January 1, 1996 (for pro forma
statement of operations purposes) or September 30, 1997 (for pro forma balance
sheet purposes).
F-30
<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-31
<PAGE>
WEP INTERMEDIATE CORP.
BALANCE SHEET
SEPTEMBER 30, 1997
<TABLE>
<S> <C>
ASSETS
INVESTMENT IN DIGITAL TELEVISION SERVICES, LLC .................................... $13,000,000
===========
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-32
<PAGE>
WEP INTERMEDIATE CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 28, 1997)
THROUGH SEPTEMBER 30, 1997
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
=============
The accompanying notes are an integral part of these statement.
F-33
<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
F-34
<PAGE>
WEP INTERMEDIATE CORP.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
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 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-35
<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-36
<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, respectively .................. 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-37
<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-38
<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-39
<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-40
<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-41
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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-42
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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-43
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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.
F-44
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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.
F-45
<PAGE>
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
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-46
<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-47
<PAGE>
KANSAS DBS, L.L.C.
BALANCE SHEETS
DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
1995 1996
--------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
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-48
<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-49
<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-50
<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-51
<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-52
<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-53
<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:
1995 1996
------------- -------------
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
========== ==========
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-54
<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-55
<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-56
<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-57
<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-58
<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-59
<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-60
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (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:
<TABLE>
<CAPTION>
December 31, December 31, March 31,
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
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
========== ========== ==========
</TABLE>
F-61
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (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 related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the
F-62
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (Continued)
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 members acquired the exclusive rights to provide DIRECTV Services to
residential and commercial subscribers
F-63
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1995 AND 1996 -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
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-64
<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-65
<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-66
<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-67
<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-68
<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-69
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (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 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.
F-70
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies Presentation -- (Continued)
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.
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.
F-71
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
3. Related-Party Transactions -- (Continued)
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 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.
F-72
<PAGE>
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (Continued)
5. Reliance on DirecTv and the NRTC and Other Matters -- (Continued)
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-73
<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-74
<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-75
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
Year Ended December 31,
-------------------------------
1995 1994
--------------- -------------
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
============ ==========
See notes to financial statements.
F-76
<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-77
<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-78
<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-79
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (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").
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
<TABLE>
<CAPTION>
1995 1994
---------- ---------
<S> <C> <C>
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
======== ========
</TABLE>
F-80
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (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-81
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (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-82
<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-83
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
BALANCE SHEET
DECEMBER 31, 1996
<TABLE>
<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-84
<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-85
<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-86
<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-87
<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-88
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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-89
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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
F-90
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
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 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-91
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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.
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.
F-92
<PAGE>
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (Continued)
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-93
<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-94
<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-95
<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-96
<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-97
<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-98
<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-99
<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-100
<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-101
<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-102
<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-103
<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-104
<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-105
<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-106
<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-107
<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-108
<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-109
<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-110
<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-111
<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-112
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30,
------------------------------
1996 1997
-------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. ............................................. $ 457,109 $ 308,903
Certificates of deposit. ................................................ 304,325
Trade accounts receivable, net .......................................... 403,610 374,495
Refundable income taxes. ................................................ 236,031
Inventory. ............................................................... 16,278 34,160
Deferred promotional costs ............................................. 60,320 211,825
---------- ----------
Total current assets ................................................... 937,317 1,469,739
---------- ----------
PROPERTY AND EQUIPMENT:
Furniture and fixtures ................................................... 13,617 16,540
Computers and equipment. ................................................ 12,068 20,623
Vehicles ............................................................... 54,148 54,148
Leasehold improvements ................................................... 52,000
---------- ----------
79,833 143,311
Less accumulated depreciation. .......................................... (24,145) (37,056)
---------- ----------
55,688 106,255
---------- ----------
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
NRTC patronage capital ................................................... 52,756 90,943
---------- ----------
Total other assets ................................................... 1,170,930 1,099,170
---------- ----------
$2,163,935 $2,675,164
========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities ................................. $ 441,631 $ 689,347
Unearned revenue ......................................................... 307,026 511,043
---------- ----------
Total current liabilities. ............................................. 748,657 1,200,390
---------- ----------
SHAREHOLDER'S EQUITY:
Common stock -- without par value; 1,000 shares authorized, issued and
outstanding. ......................................................... 1,480,056 1,280,056
Retained earnings (deficit). ............................................. (64,778) 194,718
---------- ----------
Total shareholder's equity ............................................. 1,415,278 1,474,774
---------- ----------
$2,163,935 $2,675,164
========== ==========
</TABLE>
See notes to financial statements.
F-113
<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)
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 YEAR ............................................. 153,679 274,784 457,109
---------- ---------- ----------
END OF YEAR ................................................... $ 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 $ --
========== ========== ==========
</TABLE>
See notes to financial statements.
F-114
<PAGE>
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended September 30,
------------------------------------------------
1995 1996 1997
-------------- -------------- --------------
<S> <C> <C> <C>
REVENUE:
Programming revenue ..................... $1,136,436 $2,697,404 $4,677,992
Equipment and installation revenue ...... 499,605 337,073 262,764
---------- ---------- ----------
Total revenue ........................ 1,636,041 3,034,477 4,940,756
---------- ---------- ----------
COST OF REVENUE:
Programming expense ..................... 527,629 1,296,294 2,161,935
Cost of equipment and installation ...... 457,663 349,272 476,320
Service fees ........................... 172,737 476,208 903,211
---------- ---------- ----------
Total cost of revenue .................. 1,158,029 2,121,774 3,541,466
---------- ---------- ----------
GROSS PROFIT .............................. 478,012 912,703 1,399,290
---------- ---------- ----------
OPERATING EXPENSES:
Promotional .............................. 330,270
General and administrative ............... 388,969 498,019 566,411
Depreciation and amortization ............ 150,660 154,956 155,835
---------- ---------- ----------
Total operating expenses ............... 539,629 652,975 1,052,516
---------- ---------- ----------
OPERATING INCOME (LOSS) .................. (61,617) 259,728 346,774
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense ........................ (25,141) (27,593)
Other income ........................... 26,846 62,024 71,347
---------- ---------- ----------
1,705 34,431 71,347
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES ......... (59,912) 294,159 418,121
INCOME TAXES .............................. 23,178 (113,642) (158,625)
---------- ---------- ----------
NET INCOME (LOSS) ........................ $ (36,734) $ 180,517 $ 259,496
========== ========== ==========
</TABLE>
See notes to financial statements.
F-115
<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
========== ========== ===========
</TABLE>
See notes to financial statements.
F-116
<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 price is subject to an
adjustment for working capital at the date of closing which is anticipated to
occur in December 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-117
<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-118
<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-119
<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-120
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Ocmulgee Communications, Inc.:
We have audited the accompanying balance sheet of OCMULGEE COMMUNICATIONS,
INC. (a Georgia corporation) as of December 31, 1996 and the related statement
of operations, changes in stockholders' deficit, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ocmulgee Communications,
Inc. as of December 31, 1996 and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 11, 1997
F-121
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
December 31, September 30,
1996 1997
-------------- --------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents. ................................................... $ 110,729 $ 124,411
Trade accounts receivable, net of allowance for doubtful accounts of $9,504 and
$5,841 at December 31, 1996 and September 30, 1997, respectively. ............ 179,779 160,228
Due from related parties ...................................................... 2,026 --
Inventory. ..................................................................... 19,178 22,152
---------- ----------
Total current assets ......................................................... 311,712 306,791
---------- ----------
PROPERTY AND EQUIPMENT, at cost:
Land ........................................................................... 38,450 38,450
Building and improvements. ................................................... 128,787 128,787
Equipment. ..................................................................... 51,766 60,220
Furniture and fixtures ......................................................... 11,413 11,413
---------- ----------
230,416 238,870
---------- ----------
Less accumulated depreciation. ................................................ (43,487) (56,309)
---------- ----------
186,929 182,561
---------- ----------
CONTRACT RIGHTS AND OTHER ASSETS, NET (Note 3) ................................. 474,164 453,434
---------- ----------
$ 972,805 $ 942,786
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Current maturities of long-term debt .......................................... $ 536,551 $ 781,745
Notes payable to related parties (Note 5). .................................... 318,003 316,207
Accounts payable ............................................................... 8,649 4,469
Accrued liabilities. ......................................................... 193,870 107,073
Unearned revenue ............................................................... 192,463 140,502
Advance payments ............................................................... 21,442 22,368
---------- ----------
Total current liabilities. ................................................... 1,270,978 1,372,364
---------- ----------
LONG-TERM DEBT, less current maturities (Note 6) .............................. 308,542 3,337
---------- ----------
OTHER LIABILITIES. ............................................................ 140,448 152,783
---------- ----------
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 September 30, 1997 ..................... -- --
Additional paid-in capital ................................................... 124,787 111,840
Accumulated deficit. ......................................................... (871,950) (697,538)
---------- ----------
Total stockholders' deficit. ................................................ (747,163) (585,698)
---------- ----------
$ 972,805 $ 942,786
========== ==========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
F-122
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30
-------------- ------------------------------
1996 1996 1997
-------------- ------------- --------------
(Unaudited)
<S> <C> <C> <C>
REVENUE:
Programming revenue. ..................... $1,370,555 $ 975,665 $1,432,951
Equipment and installation revenue ......... 250,191 193,985 181,277
---------- --------- ----------
Total revenue. ........................... 1,620,746 1,169,650 1,614,228
---------- --------- ----------
COST OF REVENUE:
Programming expense and service fees ...... 841,967 576,812 731,020
Cost of equipment and installation ......... 186,601 146,340 239,500
Royalties. ................................. 162,461 107,778 97,573
---------- --------- ----------
Total cost of revenue. .................. 1,191,029 830,930 1,068,093
---------- --------- ----------
GROSS PROFIT. .............................. 429,717 338,720 546,135
---------- --------- ----------
OPERATING EXPENSES:
Sales and marketing. ..................... 126,164 103,640 38,915
General and administrative ............... 271,480 184,162 211,210
Depreciation and amortization. ............ 67,768 56,835 50,756
---------- --------- ----------
Total operating expenses ............... 465,412 344,637 300,881
---------- --------- ----------
OPERATING (LOSS) INCOME ..................... (35,695) (5,917) 245,254
OTHER (INCOME) EXPENSE:
Interest expense ........................... 103,488 66,910 75,567
Other income .............................. (59,899) (27,843) (4,725)
---------- --------- ----------
43,589 39,067 70,842
---------- --------- ----------
NET (LOSS) INCOME ........................... $ (79,284) $ (44,984) $ 174,412
========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-123
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
<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 $-- $124,787 $ (792,666) $ (667,879)
Net loss. ........................... -- -- -- (79,284) (79,284)
------ ------ -------- ----------- ----------
BALANCE, DECEMBER 31, 1996 ............ 10,000 -- 124,787 (871,950) (747,163)
Net income (unaudited). ............... -- -- -- 174,412 174,412
Capital withdrawal (unaudited). ...... -- -- (12,947) -- (12,947)
------ ------ -------- ----------- ----------
BALANCE, DECEMBER 31, 1997
(UNAUDITED) ........................... 10,000 $-- $111,840 $ (697,538) $ (585,698)
====== ====== ======== =========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-124
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND
THE NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Nine Months Ended
December 31, September 30,
1996 1996 1997
-------------- -------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income. ................................. $ (79,284) $ (44,984) $ 174,412
Adjustments to reconcile net (loss) income to net
cash provided by operating activities:
Loss on sale of fixed assets ..................... 547 547 --
Depreciation and amortization. .................. 67,768 56,835 50,756
Amortization of deferred credit. .................. (6,491) (4,869) (4,869)
Changes in operating assets and liabilities:
Accounts receivable, net ........................ (51,751) (46,618) 21,577
Inventory. ....................................... 39,513 39,061 (2,974)
Accounts payable ................................. (43,895) (41,029) (4,180)
Accrued liabilities. ........................... 34,874 (5,937) (86,797)
Unearned revenue ................................. 123,025 74,364 (51,961)
Advance payments ................................. 8,825 9,159 926
---------- ---------- ----------
Total adjustments. ................................. 172,415 81,513 (77,522)
---------- ---------- ----------
Net cash provided by operating activities. ......... 93,131 36,529 96,890
---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment. ............... -- -- (8,454)
Proceeds from sale of property and equipment. ...... 6,699 6,699 --
---------- ---------- ----------
Net cash provided by (used in) investing activities 6,699 6,699 (8,454)
---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of notes payable. ............ 35,657 35,657 397,841
Repayments of notes payable. ........................ (157,523) (137,980) (459,648)
Capital withdrawal ................................. -- -- (12,947)
---------- ---------- ----------
Net cash used in financing activities. ............ (121,866) (102,323) (74,754)
---------- ---------- ----------
NET CHANGE IN CASH AND CASH
EQUIVALENTS ....................................... (22,036) (59,095) 13,682
CASH AND CASH EQUIVALENTS,
at beginning of period .............................. 132,765 132,765 110,729
---------- ---------- ----------
CASH AND CASH EQUIVALENTS,
at end of period .................................... $ 110,729 $ 73,670 $ 124,411
========== ========== ==========
SUPPLEMENTAL NONCASH FINANCING
ACTIVITY:
NRTC patronage capital declared. .................. $ 48,919 $ 48,919 $ 17,204
========== ========== ==========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest .............................. $ 106,343 $ 73,126 $ 82,572
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
F-125
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996
(INFORMATION AS OF AND FOR THE PERIOD ENDED SEPTEMBER 30, 1997 IS UNAUDITED)
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 October 1997, the Company entered into an asset purchase agreement (the
"Agreement") with Digital Television Services, LLC ("DTS") or its affiliate.
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).
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 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
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.
F-126
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (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.
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 year ended December 31, 1996 and the nine months ended September 30, 1996
and 1997 was $17,189, $18,901, and $12,822, 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
September 30, 1997:
1996 1997
---------- ---------
Accrued programming expense ...... $149,258 $ 77,041
Other ........................... 44,612 30,032
-------- --------
$193,870 $107,073
======== ========
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,
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
F-127
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
2. Summary of Significant Accounting Policies -- (Continued)
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. Contract Rights and Other Assets, Net
Contract rights and other assets consist of the following at December 31,
1996 and September 30, 1997:
December 31, September 30,
1996 1997
-------------- --------------
Contract rights ............... $ 505,785 $ 505,785
Accumulated amortization ...... (126,446) (164,380)
---------- ----------
379,339 341,405
NRTC patronage capital ......... 94,825 112,029
---------- ----------
$ 474,164 $ 453,434
========== ==========
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 the year ended December 31, 1996 and the nine
months ended September 30, 1996 and 1997 was $50,579, $37,934, and $37,934,
respectively.
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 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, 1996 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.
F-128
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
5. Notes Payable to Related Parties
At December 31, 1996 and September 30, 1997, the Company had outstanding
notes payable to certain shareholders and related parties. The outstanding
notes payable to certain shareholders 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 shareholders and related parties
outstanding as of December 31, 1996 and September 30, 1997 are as follows:
<TABLE>
<CAPTION>
1996 1997
---------- ---------
<S> <C> <C>
Note payable to a corporation related to certain shareholders,
principal due December 1, 1997, 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 shareholder, due on
demand, payable in monthly installments through December 1,
2006, bearing interest at rates ranging from 7% to 7.6% ...... 51,300 50,504
Unsecured note payable to a minority shareholder, due on
demand, interest payable monthly at 8.5% ..................... 16,703 15,703
-------- --------
$318,003 $316,207
======== ========
</TABLE>
During 1996, the Company received advances of $27,000 from a company
related to a stockholder. The advance was repaid during 1996.
F-129
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
6. Debt
The Company's long-term debt consists of the following as of December 31,
1996 and September 30, 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 certain stockholders and a related-party
corporation, bearing interest at 8.51% ........................... $430,621 $ --
Note payable to a bank, payable in monthly installments of
$10,200, with final principal of $776,000 due April 10, 1998,
secured by certain fixed assets of the Company, guaranteed by
certain stockholders, bearing interest at 8.51% .................. -- 777,315
Notes payable to a bank, principal due May 14, 1997, secured by
accounts receivable of the Company and certain personal prop-
erty of the stockholders, bearing interest at prime plus 2%
(10.5% at December 31, 1996) .................................... 400,044 --
Notes payable to a bank, payable in monthly principal and inter-
est 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 7,767
-------- --------
845,093 785,082
Less current maturities of long-term debt ........................ 536,551 781,745
-------- --------
$308,542 $ 3,337
======== ========
</TABLE>
The aggregate maturities of long-term debt as of December 31, 1996 are as
follows:
1997 ...................................................... $536,551
1998 ...................................................... 307,230
1999 ...................................................... 1,312
--------
$845,093
========
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.
F-130
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
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-131
<PAGE>
OCMULGEE COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 -- (Continued)
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, $4,869 and $4,869 for the
year ended December 31, 1996 and for the nine months ended September 30, 1996
and 1997, respectively. The unamortized portion of the Deferred Credit included
in other liabilities in the accompanying balance sheets at December 31, 1996
and September 30, 1997 was $45,623 and $40,754, 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 cancelled 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 Events
Refinancing of Debt
On April 10, 1997, the Company entered into an amended credit agreement
with a bank allowing the Company to consolidate existing debt. Amounts
outstanding under the amended credit agreement bear interest at 8.51% and
mature on April 10, 1998. The note is collateralized by certain property of the
Company and is guaranteed by certain shareholders of the Company.
Letter of Intent
On October 22, 1997, the Company entered into the Agreement with DTS,
which was subsequently amended by an amendment dated November 14, 1997 by and
among the Company and 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 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 specified
amounts.
F-132
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Basis of Presentation
Pro forma consolidated statements of operations and other data for the year
ended December 31, 1996 and the nine months ended September 30, 1997 give effect
to (i) the Portland, Maine TV acquisition, which closed on January 29, 1996, and
the Tallahassee, Florida TV acquisition, which closed on March 8, 1996, (ii) the
acquisition of a Puerto Rico cable system, which closed on August 29, 1996,
(iii) the Completed DBS Acquisitions, (iv) the Pending DBS Acquisitions, (v) the
sale of the New England cable systems, (vi) Pegasus' initial public offering of
3,000,000 shares of Class A Common Stock (the "Initial Public Offering"), which
was consummated on October 8, 1996, and Pegasus' public offering of 100,000
shares of 12 3/4% Series A Cumulative Exchangeable Preferred Stock and warrants
to purchase 193,600 shares of Class A Common Stock (the "Unit Offering"), which
was consummated on January 27, 1997, (vii) the offering of $115.0 million
aggregate principle amount of 9 5/8% Series A Senior Notes due 2005 (the "Senior
Notes Offering"), and (viii) the DTS Acquisition, all as if such events had
occurred at the beginning of each period.
The pro forma condensed consolidated balance sheet as of September 30,
1997, gives effect to (i) the Completed DBS Acquisitions, (ii) the Pending DBS
Acquisitions which are anticipated to occur in the first quarter of 1998, (iii)
the New Credit Facility and the closing of an existing credit facility, (iv) the
Senior Notes Offering and the use of proceeds thereof, and (v) 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 prelimianry
allocation.
The pro forma adjustments are based upon available information and upon
certain assumptions that the Company believes are reasonable. The pro forma
consolidated financial information should be read in conjunction with the Notes
to Pro Forma Consolidated Statements of Operations, as well as the financial
statements and notes thereto of the acquisitions, included elsewhere in this
report. The pro forma consolidated financial information is not necessarily
indicative of the Company's future results of operations. There can be no
assurance whether or when the Pending DBS Acqusitions or the DTS Acquisition
will be consummated.
F-133
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Balance Sheet
September 30, 1997
<TABLE>
<CAPTION>
Acquisitions
------------------------
Completed Pending Cable New Credit
Actual DBS(a) DBS(b) Sale(c) Facility(d)
---------- ---------- ---------- ---------- ----------
ASSETS
<S> <C> <C> <C> <C> <C>
Cash and cash equivalents $34,211 ($9,616) ($28,475) $28,000 ($1,800)
Restricted cash 1,181
Accounts receivable, net 10,577
Inventory 760
Prepaid expenses and other
current assets 4,129
Property and equipment, net 27,423 (3,802)
Intangibles, net 237,512 48,371 38,725 (2,047) 1,800
Other assets 1,948
---------- ---------- ---------- ---------- ----------
Total assets $317,741 $38,755 $10,250 $22,151
========== ========== ========== ========== ==========
LIABILITIES AND TOTAL EQUITY
Current liabilities $9,444
Accrued interest 3,457
Current portion of long-term debt 4,895
Current portion of program rights
payable 898
Long-term debt, net 83,224 $ 5,219 $10,250
Pegasus' Senior Notes
DTS' Senior Subordinated Notes
PSH Credit Facility 69,200 25,000
Program rights payable 1,242
Other long term liabilities 1,389
Preferred Stock 108,678
Minority Interest 3,000
Class A Common Stock 53 4
Class B Common Stock 46
Additional paid in capital 57,017 8,532 $22,151
Retained earnings (24,802)
---------- ---------- ---------- ---------- ----------
Total liabilities and equity $317,741 $38,755 $10,250 $22,151
========== ========== ========== ========== ==========
</TABLE>
(a) To record 6 Completed DBS Acquisitions which occurred after September 30,
1997.
(b) To record 7 Pending DBS Acquisitions.
(c) To record the pending sale of the New England cable operations.
(d) To record costs in connection with the New Credit Facility.
(e) To record the proceeds from the Senior Notes Offering and the uses of such
proceeds.
(f) To record the pending DTS Acquisition.
F-134
<PAGE>
<TABLE>
<CAPTION>
Other(e) Sub-total DTS(f) Pro Forma
--------------------- --------- -----------
ASSETS
<S> <C> <C> <C> <C>
Cash and cash equivalents $14,750 $37,070 $2,804 $39,874
Restricted cash 1,181 36,544 37,725
Accounts receivable, net 10,577 677 11,254
Inventory 760 1,101 1,861
Prepaid expenses and other
current assets 4,129 1,892 6,021
Property and equipment, net 23,621 2,102 25,723
Intangibles, net 6,050 330,411 272,211 602,622
Other assets 1,948 279 2,227
--------- --------- --------- ---------
Total assets $20,800 $409,697 $317,610 $727,307
========= ========= ========= =========
LIABILITIES AND TOTAL EQUITY
Current liabilities $9,444 $10,620 $20,064
Accrued interest 3,457 3,229 6,686
Current portion of long-term debt 4,895 9,324 14,219
Current portion of program rights
payable 898 898
Long-term debt, net 98,693 24,419 123,112
Pegasus' Senior Notes $115,000 115,000 115,000
DTS' Senior Subordinated Notes 152,877 152,877
PSH Credit Facility (94,200)
Program rights payable 1,242 1,242
Other long term liabilities 1,389 1,036 2,425
Preferred Stock 108,678 108,678
Minority Interest 3,000 3,000
Class A Common Stock 57 55 112
Class B Common Stock 46 46
Additional paid in capital 87,700 116,050 203,750
Retained earnings (24,802) (24,802)
--------- --------- --------- ---------
Total liabilities and equity $20,800 $409,697 $317,610 $727,307
========= ========= ========= =========
</TABLE>
F-135
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations
Year Ended December 31, 1996
<TABLE>
<CAPTION>
Acquisitions
-------------------------------------------------------------
DBS DBS New England
Income Statement Data: Actual TV(a) Cable(b) Completed(c) Pending(d) Adjustments Cable Sale(e)
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
TV $28,488 $651 $17(h)
DBS 5,829 $30,633 $6,329
Cable 13,496 $4,056 ($7,463)
Other 116
--------------------------------------------------------------------------------------
Total net revenues 47,929 651 4,056 30,633 6,329 17 (7,463)
--------------------------------------------------------------------------------------
Location operating expenses:
TV 18,726 537 (43)(i)
DBS 4,958 30,311 5,217 (7,837)(j)
Cable 7,192 2,448 (249)(k) (3,830)
Other 28
Incentive compensation 985 (136)
Corporate expenses 1,429 33 88 1,458 187 (1,766)(l)
Depreciation and amortization 12,061 17 365 2,245 710 17,414 (m) (2,721)
--------------------------------------------------------------------------------------
Income (loss) from operations 2,550 64 1,155 (3,381) 215 (7,502) (776)
Interest expense (12,455) (585) (482) (1,365) (104) (16,324)(n)
Other income (expense), net 61 3 577 55 (593)(o) 3
-------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary items (9,844) (518) 673 (4,169) 166 (24,419) (773)
Provision (benefit) for income taxes (120) 35 20 (79) 60 (36) (p)
-------------------------------------------------------------------------------------
Income(loss) before extraordinary items (9,724) (553) 653 (4,090) 106 (24,383) (773)
Dividends on Series A Preferred Stock
-------------------------------------------------------------------------------------
Income (loss) applicable to common
shares before extraordinary items ($9,724) ($553) $653 ($4,090) $106 ($24,383) ($773)
======================================================================================
</TABLE>
F-136
<PAGE>
<TABLE>
<CAPTION>
Previous
Income Statement Data: Offerings(f) Sub-total DTS(g) Pro Forma
------------------------------------------------------
<S> <C> <C> <C> <C>
Net Revenues:
TV $29,156 $29,156
DBS 42,791 $34,649 77,440
Cable 10,089 10,089
Other 116 116
------------------------------------------------------
Total net revenues 82,152 34,649 116,801
------------------------------------------------------
Location operating expenses:
TV 19,220 19,220
DBS 32,649 26,845 59,494
Cable 5,561 5,561
Other 28 28
Incentive compensation 849 464 1,313
Corporate expenses 1,429 429 1,858
Depreciation and amortization $ 897 30,988 18,763 49,751
------------------------------------------------------
Income (loss) from operations (897) (8,572) (11,852) (20,424)
Interest expense 8,214 (23,101) (21,817) (44,918)
Other income (expense), net 106 (34) 72
-------------------------------------------------------
Income (loss) before income taxes
and extraordinary items 7,317 (31,567) (33,703) (65,270)
Provision (benefit) for income taxes (120) (120)
-------------------------------------------------------
Income(loss) before extraordinary items 7,317 (31,447) (65,150)
Dividends on Series A Preferred Stock (12,750) (12,750) (12,750)
-------------------------------------------------------
Income (loss) applicable to common
shares before extraordinary items ($5,433) ($44,197) ($33,703) ($77,900)
======================================================
</TABLE>
F-137
<PAGE>
Pegasus Communications Corporation
Pro Forma Consolidated Statement of Operations
Nine Months Ended September 30, 1997
<TABLE>
<CAPTION>
DBS Acquisitions New England Previous
-----------------------------------
Income Statement Data: Actual Completed(c) Pending(d) Adjustments Cable Sale(e) Offerings(f) Sub-total
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Net Revenues:
TV $21,664 $21,664
DBS 23,362 $16,758 $6,811 46,931
Cable 12,399 ($4,721) 7,678
Other 112 112
-------------------------------------------------------------------------------------
Total net revenues 57,537 16,758 6,811 (4,721) 76,385
-------------------------------------------------------------------------------------
Location operating expenses:
TV 14,574 14,574
DBS 17,817 17,234 5,228 ($5,020)(j) 35,259
Cable 6,598 (2,449) 4,149
Other 22 22
Incentive compensation 744 (47) 697
Corporate expenses 1,409 696 155 (851)(l) 1,409
Depreciation and amortization 18,160 980 607 7,160 (m) (1,337) $400 25,970
-------------------------------------------------------------------------------------
Income (loss) from operations (1,787) (2,152) 821 (1,289) (888) (400) (5,695)
Interest expense (10,288) (565) (117) (8,350)(n) 1,994 (17,326)
Other income (expense), net 374 121 30 (151)(o) 37 411
-------------------------------------------------------------------------------------
Income (loss) before income taxes
and extraordinary items (11,701) (2,596) 734 (9,790) (851) 1,594 (22,610)
Provision (benefit) for income
taxes 50 (10) 57 (47)(p) 50
-------------------------------------------------------------------------------------
Income(loss) before extraordinary
item (11,751) (2,586) 677 (9,743) (851) 1,594 (22,660)
Dividends on Series A Preferred
Stock (8,678) (1,062) (9,740)
-------------------------------------------------------------------------------------
Income (loss) applicable to common
shares before extraordinary
items ($20,429) ($2,586) $677 ($9,743) ($851) $532 ($32,400)
=====================================================================================
</TABLE>
F-138
<PAGE>
<TABLE>
<CAPTION>
Income Statement Data: DTS(g) Pro Forma
-----------------------
<S> <C> <C>
Net Revenues:
TV $21,664
DBS $37,612 84,543
Cable 7,678
Other 112
-----------------------
Total net revenues 37,612 113,997
-----------------------
Location operating expenses:
TV 14,574
DBS 29,053 64,312
Cable 4,149
Other 22
Incentive compensation 406 1,103
Corporate expenses 423 1,832
Depreciation and amortization 15,010 40,980
-----------------------
Income (loss) from operations (7,280) (12,975)
Interest expense (16,362) (33,688)
Other income (expense), net (203) 208
-----------------------
Income (loss) before income taxes
and extraordinary items (23,845) (46,455)
Provision (benefit) for income
taxes 50
-----------------------
Income(loss) before extraordinary
item (23,845) (46,505)
Dividends on Series A Preferred
Stock (9,740)
-----------------------
Income (loss) applicable to common
shares before extraordinary
items ($23,845) ($56,245)
=======================
</TABLE>
F-139
<PAGE>
Notes to Pro Forma Consolidated Statements of Operations
(a) Financial results of Portland Broadcasting, Inc. and WTLH, Inc. for the
beginning of the period to the date of acquisition by the Company.
(b) Financial results of Dom's Tele Cable, Inc. for the beginning of the period
to the date of acquisition by the Company.
(c) Represents the combined financial results of the Completed DBS Acquisitions
for the beginning of the period to the date of acquisition by the Company
or the end of the period.
(d) Represents the combined financial results of the Pending DBS Acquisitions
for the period presented.
(e) Financial results of the New England operations of Pegasus Cable
Television.
(f) To remove interest expense on the debt retired with the proceeds of the
Initial Public Offering and the Unit Offering, to eliminate amortization of
deferred costs related to an old credit facility, to record amortization of
costs incurred in connection with the Senior Notes Offering and the New
Credit Facility and to record dividends on Pegasus' Series A Preferred
Stock. Interest expense is adjusted for the Senior Notes Offering and the
use of proceeds therefrom and gives effect to the Completed DBS
Acquisitions, the New England Cable Sale, the Unit Offering, the Pending
DBS Acquisitions, the Subsidiaries Combination and the New Credit Facility.
(g) Pro forma financial results of Digital Television Services, Inc. and
Subsidiaries for the period presented.
(h) To reduce the commissions paid by WPXT and WTLH to their national
advertising sales representative to conform to the Company's contract.
(i) To eliminate payroll expenses related to staff reductions and rent expenses
incurred from prior acquisitions.
(j) Represents elimination of costs associated with 35 call centers that were
not acquired and to conform accounting policies with respect to subscriber
acquisition costs, net of the Company adding additional customer service
representatives.
(k) To reflect expense reductions, such as redundant staff, rent, professional
fees and utilities implemented in connection with acquisitions and
interconnection of its Puerto Rico cable systems.
(l) To eliminate corporate expenses charged by prior owners.
(m) To record additional depreciation and amortization resulting from the
purchase accounting treatment of the acquisitions and to conform accounting
policies with respect to subscriber acquisition costs. Such amounts are
based on a preliminary allocation of the total consideration. The actual
depreciation and amortization may change based upon the final allocation of
the total consideration to be paid to the tangible and intangible assets
acquired.
(n) To record the increase in net interest expense associated with the
borrowings incurred in connection with the acquisitions described above.
(o) To eliminate certain nonrecurring income and expenses, primarily comprised
of legal and professional expenses incurred by the prior owners of the
businesses in connection with the acquisitions.
(p) To eliminate the net tax provision in connection with the acquisitions.
F-140
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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
--------------------------------
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Table of Contents
ARTICLE I
DEFINITIONS.................................. 1
1.1 Certain Definitions................................................ 1
1.2 Other Definitions.................................................. 10
ARTICLE II
BASIC TRANSACTION............................... 11
2.1 Merger; Surviving Corporation...................................... 11
2.2 Certificate of Incorporation....................................... 11
2.3 By-Laws............................................................ 11
2.4 Directors and Officers............................................. 11
2.5 Effective Time..................................................... 12
2.6 Exchange of Certificates........................................... 12
2.7 Merger Consideration; Conversion and Cancellation of
Securities......................................................... 12
2.8 Stock Transfer Books............................................... 14
2.9 Dissenting Shares.................................................. 14
2.10 Failure to Surrender Share Certificates............................ 14
2.11 Closing............................................................ 14
2.12 Treatment of Certain Outstanding Warrants and Options of
the Company........................................................ 15
2.13 Shareholder Notes.................................................. 16
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY................. 17
3.1 Organization and Qualification..................................... 17
3.2 Capitalization..................................................... 18
3.3 Authority and Validity............................................. 19
3.4 No Breach or Violation............................................. 19
3.5 Consents and Approvals............................................. 20
3.6 Title to Assets.................................................... 20
3.7 Intellectual Property.............................................. 20
3.8 Compliance with Legal Requirements................................. 21
3.9 Financial and Other Information.................................... 21
3.10 Company Credit Facility............................................ 22
3.11 Subsequent Events.................................................. 22
3.12 Undisclosed Liabilities............................................ 22
3.13 Legal Proceedings.................................................. 22
3.14 Taxes.............................................................. 23
3.15 Employee Benefits; Employees....................................... 23
3.16 Contracts.......................................................... 25
3.17 Books and Records.................................................. 27
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3.18 Business Information................................................ 27
3.19 Insurance........................................................... 28
3.20 Disclosure.......................................................... 28
3.21 Brokers or Finders.................................................. 29
3.22 Certain Payments.................................................... 29
3.23 Subscribers......................................................... 29
3.24 Favorable Business Relationships.................................... 29
3.25 Securities Matters.................................................. 30
3.26 Billing and Authorization System.................................... 30
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF
THE PRINCIPAL COMPANY SHAREHOLDERS........................ 30
4.1 Authority and Validity.............................................. 30
4.2 Ownership........................................................... 30
4.3 Consents and Approvals.............................................. 31
4.4 Certain Information................................................. 31
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF PEGASUS
5.1 Organization and Qualification...................................... 31
5.2 Capitalization...................................................... 32
5.3 Authority and Validity.............................................. 32
5.4 No Breach or Violation.............................................. 32
5.5 Consents and Approvals.............................................. 33
5.6 Title to Assets..................................................... 33
5.7 Intellectual Property............................................... 33
5.8 Compliance with Legal Requirements.................................. 33
5.9 Legal Proceedings................................................... 34
5.10 Subsequent Events................................................... 34
5.11 Financial and Other Information..................................... 34
5.12 Undisclosed Liabilities............................................. 35
5.13 Taxes............................................................... 35
5.14 Employee Benefits; Employees........................................ 36
5.15 Contracts........................................................... 37
5.16 Business Information................................................ 38
5.17 Disclosure.......................................................... 38
5.18 Brokers or Finders.................................................. 39
5.19 Certain Payments.................................................... 39
5.20 Subscribers......................................................... 39
5.21 Favorable Business Relationships.................................... 39
5.22 Securities Matters.................................................. 39
5.23 FCC Matters......................................................... 40
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ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF MERGER SUB............ 40
6.1 Organization and Qualification............................... 40
6.2 Certificate of Incorporation and Bylaws...................... 41
6.3 Authority.................................................... 41
6.4 No Conflict; Required Filings and Consents................... 41
6.5 Vote Required................................................ 42
ARTICLE VII
PRE-CLOSING COVENANTS OF THE SELLERS................ 42
7.1 Additional Information....................................... 42
7.2 Exclusivity.................................................. 42
7.3 Continuity and Maintenance of Operations..................... 43
7.4 Consents and Approvals....................................... 45
7.5 Adoption by Shareholders..................................... 45
7.6 Securities Filings; Financial Information.................... 46
7.7 Notification of Certain Matters.............................. 46
7.8 Supplements to Company Disclosure Statement and Company
Registration Statement....................................... 46
7.9 Duty of Good Faith and Fair Dealing.......................... 47
7.10 Employee Matters............................................. 47
7.11 1997 Company Financial Statements............................ 47
7.12 1997 Tax Returns............................................. 47
7.13 Indemnity under Prior Company Acquisitions................... 47
ARTICLE VIII
PRE-CLOSING COVENANTS OF THE PEGASUS PARTIES............................... 48
8.1 Additional Information....................................... 48
8.2 Exclusivity.................................................. 48
8.3 Conduct of Business.......................................... 49
8.4 Consents and Approvals....................................... 49
8.5 Adoption by Pegasus Shareholders............................. 50
8.6 Merger Registration Statement................................ 50
8.7 Notification of Certain Matters.............................. 50
8.8 Supplements to Pegasus Disclosure Statement.................. 51
8.9 Duty of Good Faith and Fair Dealing.......................... 51
8.10 Tax Certificate.............................................. 51
ARTICLE IX
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE PEGASUS PARTIES................. 51
9.1 Accuracy of Representations.................................. 51
9.2 Covenants.................................................... 52
9.3 Consents and Approvals....................................... 52
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9.4 Dissenters' Rights............................................. 53
9.5 Delivery of Documents.......................................... 53
9.6 No Material Adverse Change..................................... 54
9.7 No Litigation.................................................. 54
9.8 NRTC Compliance Certificate.................................... 54
ARTICLE X
CONDITIONS PRECEDENT TO OBLIGATIONS OF THE SELLERS.......................... 55
10.1 Accuracy of Representations.................................... 55
10.2 Covenants...................................................... 55
10.3 Consents and Approvals......................................... 55
10.4 Delivery of Documents.......................................... 56
10.5 No Material Adverse Change..................................... 57
10.6 Litigation..................................................... 57
ARTICLE XI
POST-CLOSING COVENANTS......................... 57
11.1 Transition..................................................... 57
11.2 Indemnification of Directors, Officers and Managers of the
Company and its Predecessors; Directors' and Officers'
Insurance...................................................... 57
11.3 Certain Securities Law Matters................................. 59
11.4 Offer to Purchase.............................................. 59
ARTICLE XII
TERMINATION.............................. 59
12.1 Events of Termination.......................................... 59
12.2 Effect of Termination.......................................... 61
12.3 Procedure Upon Termination..................................... 61
ARTICLE XIII
INDEMNIFICATION............................ 61
13.1 Survival of Representations and Warranties..................... 61
13.2 Indemnification Provisions for Benefit of the Pegasus Parties.. 61
13.3 Indemnification Provisions for Benefit of the Shareholders..... 62
13.4 Matters Involving Third Parties................................ 63
13.5 Determination of Adverse Consequences.......................... 64
13.6 Payment in Shares.............................................. 65
13.7 No Indemnification for Certain Disclosed Matters............... 65
ARTICLE XIV
MISCELLANEOUS............................................................... 66
14.1 Parties Obligated and Benefited............................... 66
14.2 Notices....................................................... 66
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14.3 Attorneys' Fees............................................... 67
14.4 Headings...................................................... 67
14.5 Choice of Law................................................. 67
14.6 Rights Cumulative............................................. 67
14.7 Further Actions............................................... 67
14.8 Time of the Essence........................................... 67
14.9 Late Payments................................................. 68
14.10 Counterparts.................................................. 68
14.11 Entire Agreement.............................................. 68
14.12 Amendments and Waivers........................................ 68
14.13 Construction.................................................. 68
14.14 Expenses...................................................... 68
14.15 Disclosure.................................................... 68
14.16 Company Action................................................ 69
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
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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.
<PAGE>
"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.
"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.
2
<PAGE>
"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
3
<PAGE>
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 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,
4
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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.
"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.
"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.
5
<PAGE>
"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
6
<PAGE>
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.
"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.
7
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"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.
"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.
8
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"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.
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"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.
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
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"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
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.
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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
(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
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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
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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).
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
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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.
(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
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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
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(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 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
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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.
(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
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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
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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.
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
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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,
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.
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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,
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(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 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
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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.
(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
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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;
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(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;
(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;
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(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.
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)
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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
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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.
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
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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, 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
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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.
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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 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
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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 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.
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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
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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) 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
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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.
(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).
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(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.
(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
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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 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.
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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.
(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
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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 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.
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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
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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.
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
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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 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
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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
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(vii) make any loans other than in the Ordinary
Course.
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
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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.
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
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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.
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
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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.
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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
(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).
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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 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
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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.
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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
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).
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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.
(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.
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(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
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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.
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.
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(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 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.
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(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
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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).
(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
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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.
(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.
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(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.
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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.
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
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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,
(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
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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.
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(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 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
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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.
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.
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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 prior written 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.
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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.
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)
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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.
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IN WITNESS WHEREOF, the Parties hereto have duly executed this
Agreement as of the day and year first above written.
PEGASUS COMMUNICATIONS 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
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
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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
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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
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
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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.
<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.
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"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 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
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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.
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"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.
"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.
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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.
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,
6
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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.
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(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
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.
8
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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.
9
<PAGE>
(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.
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:
10
<PAGE>
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.
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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.
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
12
<PAGE>
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
KENNEDY PLAZA PARTNERS
By: _________________________________________
Title: General Partner
COLUMBIA CAPITAL CORPORATION
By: _________________________________________
COLUMBIA DBS CLASS A INVESTORS, LLC.
By: _________________________________________
Title: Member
13
<PAGE>
COLUMBIA DBS INVESTORS, L.P.
By: Columbia Capital Corporation
Its General Partner
By: _________________________________________
Title:
COLUMBIA DBS, INC.
By: _________________________________________
Title:
14
<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).
<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 and warrants;
NOW, THEREFORE, subject to requisite shareholder approval, and
subject to the completion of the Merger (as defined below), the Plan is amended
as follows effective at the Effective Time (as defined in the Merger Agreement
hereinafter mentioned):
1. The first sentence of Section 4 is amended to read as
follows:
4. Stock. Options may be granted under the Plan to
purchase up to a maximum of 900,000 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. Subject to the completion of the Merger (as defined below),
new Section 20 is added following Section 19, to read as follows:
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 DTS outstanding
warrants and options specified
<PAGE>
therein. Section 2.12 of the Merger Agreement also provides that such
DTS warrants and 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 warrants and options, for an exercise price equal to
the exercise price applicable to such warrants and 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.
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<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;
<PAGE>
Board of Directors
Pegasus Communications Corporation
December 31, 1997
Page -2-
(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
(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
<PAGE>
Board of Directors
Pegasus Communications Corporation
December 31, 1997
Page -3-
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
<PAGE>
Board of Directors
Pegasus Communications Corporation
December 31, 1997
Page -4-
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
<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;
<PAGE>
(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 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.
<PAGE>
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
<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 of Pegasus Communications Corporation (the
"Company") held of record by the undersigned on January __, 1998, at the Special
Meeting of Stockholders of the Company to be held on __________, 1998 and at any
adjournment or postponement thereof.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED HEREIN
BY THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE
VOTED FOR PROPOSALS 1, 2 AND 3.
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: 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.
Exhibit
Number Description of Document
- ------- -----------------------
2.1 Agreement and Plan of Merger, dated January 8, 1998, by and among
Pegasus, DTS and certain stockholders of Pegasus and DTS -- Attached as
Annex I to the Proxy Statement/Prospectus included in this Registration
Statement.
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. 333-18739)
5.1* Opinion of Drinker Biddle & Reath LLP.
8.1* Tax Opinion of Drinker Biddle & Reath LLP.
10.1 Form of Voting Agreement -- Attached as Annex II to the Proxy
Statement/Prospectus included in this Registration Statement.
10.2* Form of Registration Rights Agreement.
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 Poole Cunningham & Reitano, P.A.
23.4* Consent of Greenway, Smith & Haisten, P.C.
23.5* Consent of Larson, Allen, Weishair & Co., LLP.
23.6* Consent of Ernst & Young, LLP.
23.7* Consent of Bolinger, Segars, Gilbert & Moss, LLP.
23.8* Consent of Arthur Andersen LLP.
23.9* Consent of Bradley R. Helmeke, Ltd.
23.10* Consent of Grigoraci, Trainer, Wright & Paterno.
23.11* Consent of Jackson Thornton & Co., P.C.
23.12* Consent of Arthur Andersen LLP
II-1
<PAGE>
23.13* Consent of Fishbein & Co., P.C.
23.14* Consent of Deloitte & Touche LLP
23.15 Consent of Merrill, Lynch, Pierce, Fenner & Smith, Incorporated (to be
filed by amendment)
24.1 Powers of Attorney (included on Signatures and Powers of Attorney)
- ----------------
* Filed herewith.
Item 22. Undertakings.
The undersigned registrant hereby undertakes that:
(1) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(2) 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.
(3) 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.
(4) 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-2
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, hereunto duly authorized in the city of Radnor,
Commonwealth of Pennsylvania, on the ____ day of January, 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 January __, 1998
- ------------------------------------ and Chairman of the Board
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, Chief January __, 1998
- ------------------------------------ Financial Officer, Assistant
Robert N. Verdecchio Secretary and Director
(Principal Financial
and Accounting Officer)
/s/ James J. McEntee, III Director January __, 1998
- ------------------------------------
James J. McEntee, III
/s/ Mary C. Metzger Director January __, 1998
- ------------------------------------
Mary C. Metzger
/s/ Donald W. Weber Director January __, 1998
- ------------------------------------
Donald W. Weber
</TABLE>
II-3
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description of Document
- ------- ------------------------
2.1 Agreement and Plan of Merger, dated January 8, 1998, by and among
Pegasus, DTS and certain stockholders of Pegasus and DTS -- Attached as
Annex I to the Proxy Statement/Prospectus included in this Registration
Statement.
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. 333-18739)
5.1* Opinion of Drinker Biddle & Reath LLP.
8.1* Tax Opinion of Drinker Biddle & Reath LLP.
10.1 Form of Voting Agreement -- Attached as Annex II to the Proxy
Statement/Prospectus included in this Registration Statement.
10.2* Form of Registration Rights Agreement.
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 Poole Cunningham & Reitano, P.A.
23.4* Consent of Greenway, Smith & Haisten, P.C.
23.5* Consent of Larson, Allen, Weishair & Co., LLP.
23.6* Consent of Ernst & Young, LLP.
23.7* Consent of Bolinger, Segars, Gilbert & Moss, LLP.
23.8* Consent of Arthur Andersen LLP.
23.9* Consent of Bradley R. Helmeke, Ltd.
23.10* Consent of Grigoraci, Trainer, Wright & Paterno.
23.11* Consent of Jackson Thornton & Co., P.C.
23.12* Consent of Arthur Andersen LLP
23.13* Consent of Fishbein & Co., P.C.
23.14* Consent of Deloitte & Touche LLP
23.15 Consent of Merrill, Lynch, Pierce, Fenner & Smith, Incorporated (to be
filed by Amendment)
24.1 Powers of Attorney (included on Signatures and Powers of Attorney)
- ----------------
* Filed herewith.
<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
January 26, 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 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), relating to 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
January 23, 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
January 26, 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 (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, are accurate in all material respects.
We hereby consent to the filing of this opinion as an exhibit
to the Registration Statement, and we consent to the reference of our name under
the caption "Legal Matters" in the Proxy Statement/Prospectus.
Very truly yours,
/s/ Drinker Biddle & Reath LLP
DRINKER BIDDLE & REATH LLP
<PAGE>
REGISTRATION RIGHTS AGREEMENT dated ____________, 1998 (the
"Agreement"), among PEGASUS COMMUNICATIONS CORPORATION, a Delaware corporation
(the "Company"), and the Persons executing this Agreement as Holders.
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"). The Holders (this and certain other terms are defined in Section 1)
are shareholders of DTS.
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 the 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.
Section 1. Definitions. As used in this Agreement, the
following terms have the following meanings:
"Business Day": any day on which the New York Stock Exchange
is open for trading.
"Class A Common Stock": the Company's Class A Common Stock,
par value $0.01 per share.
"Closing Date": the date of this Agreement.
"Exchange Act": the Securities Exchange Act of 1934, as
amended, and the rules and regulations of the SEC thereunder, all as the same
shall be in effect at the relevant time.
"Holder": each Person (other than the Company) executing this
Agreement and each Permitted Transferee of a Holder, for so long as (and to the
extent that) such Person or Permitted Transferee owns any Registrable
Securities.
<PAGE>
"Merger Agreement": as defined in the recitals.
"Merger Consideration": as defined in the Merger Agreement;
any reference in this Agreement to a number or percentage of Registrable
Securities initially included in the Merger Consideration shall be appropriately
adjusted to reflect stock dividends, stock splits, reverse stock splits,
recapitalizations and similar transactions that occur after the Closing Date.
"Permitted Transferee": (a) in the case of an individual (1) a
family member of such individual, (2) a charitable organization (including a
private foundation) described in Section 501(c)(3) of the Internal Revenue Code
of 1986, as amended, to which a Holder may transfer any Registrable Securities,
(3) a trust for the benefit of any of such individual, such charitable
organizations or any family member of such individual, or (4) a Person
substantially all of the equity interests in which are owned by such individual
or by Persons described in clauses (a)(1), (2) and (3); and (b) in the case of a
Person that is not an individual, (1) any shareholder, partner, member or other
owner of equity interests in such Person, or (2) a Person all of the equity
interests in which are owned by such first Person.
"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.
"Registrable Securities": (1) the Class A Common Stock
included in the Merger Consideration and (2) any additional shares of Class A
Common Stock or other equity securities of the Company issued or issuable after
the Closing Date in respect of the Class A Common Stock included in the Merger
Consideration (or other equity securities issued in respect thereof) by way of a
stock dividend or stock split, in connection with a combination, exchange,
reorganization, recapitalization or reclassification of Company securities, or
pursuant to a merger, division, consolidation or other similar business
transaction or combination involving the Company; provided that as to any
particular Registrable Securities, such securities shall cease to constitute
Registrable Securities (a) when a registration statement with respect to the
sale of such securities shall have become effective under the Securities Act and
such securities shall have been disposed of thereunder, (b) when such securities
shall have been disposed of pursuant to Rule 144 (or any successor provision to
such Rule) under the Securities Act, (c) when such securities shall have been
disposed of to a Person other than a Permitted Transferee, or (d) when such
securities shall have ceased to be outstanding.
"Registration Expenses": all expenses incident to the
Company's performance of or compliance with the registration requirements set
forth in this Agreement including, without limitation, the following: (a) the
fees, disbursements and expenses of the Company's counsel, accountants, and
experts in connection with the registration under the Securities Act of
Registrable Securities; (b) all expenses in connection with the preparation,
printing and filing of the
-2-
<PAGE>
registration statement, any preliminary prospectus or final prospectus, any
other offering document and amendments and supplements thereto, and the mailing
and delivering of copies thereof to underwriters and dealers, if any; (c) the
cost of printing or producing any agreement(s) among underwriters, underwriting
agreement(s) and blue sky or legal investment memoranda, any selling agreements,
and any other documents in connection with the offering, sale or delivery of
Registrable Securities to be disposed of; (d) the fees and expenses incurred in
connection with the listing of Registrable Securities on each securities
exchange on which Company securities of the same class are then listed or with
the Nasdaq National Market System (including, if applicable, the reasonable fees
and expenses of any "qualified independent underwriter" and its counsel); (e)
the reasonable fees and expenses of a single counsel retained by the Holders
participating in a particular registration pursuant to this Agreement, (f) any
SEC or blue sky registration or filing fees attributable to Registrable
Securities or transfer taxes applicable to Registrable Securities, (g) any other
expenses in connection with the qualification of Registrable Securities for
offer and sale under state securities laws, including the fees and disbursements
of counsel for the underwriters in connection with such qualification and in
connection with any blue sky and legal investment surveys; and (h) the filing
fees incident to securing any required review by the National Association of
Securities Dealers, Inc. of the terms of the sale of Registrable Securities to
be disposed of; but the term "Registration Expenses" does not include (i)
underwriters' discounts or compensation, brokers' commissions or similar selling
expenses attributable to the sale of Registrable Securities.
"Registration Statement": a registration statement under the
Securities Act filed by the Company pursuant to this Agreement, including all
amendments thereto, all preliminary and final prospectuses included therein and
all exhibits thereto.
"SEC": the United States Securities and Exchange Commission,
or such other federal agency at the time having the principal responsibility for
administering the Securities Act.
"Securities Act": the Securities Act of 1933, as amended, and
the rules and regulations of the SEC thereunder, all as the same shall be in
effect at the relevant time.
Section 2. Underwritten Demand Registration.
(a) At any time on or after November 5, 1998, and before the
fifth anniversary of the Closing Date the Holder or Holders of ten percent or
more of the Registrable Securities initially included in the Merger
Consideration may (by written notice delivered to the Company) require
registration of all or any portion of such Registrable Securities for sale in an
underwritten public offering. In each such case, such notice shall specify the
number of Registrable Securities for which such underwritten offering is to be
made. Within ten Business Days after its receipt of any such notice, the Company
shall give written notice of such request to all other Holders, and all such
Holders shall have the right to have any or all Registrable Securities owned by
them included in the requested underwritten offering as they shall specify in a
written notice received by the Company within twenty Business Days after the
Company's notice is given. Within ten Business Days after the expiration of such
twenty Business Day period, the Company shall notify
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all Holders requesting inclusion of Registrable Securities in the proposed
underwriting of (1) the aggregate number of Registrable Securities proposed to
be included by all Holders in the offering, and (2) the proposed commencement
date of the offering, which shall be a date not more than thirty days after the
Company gives such notice. The managing underwriter for such offering shall be
chosen by the Holders of a majority of the Registrable Securities being included
therein and shall be satisfactory to the Company.
(b) If any request for an underwriting shall have been made
pursuant to subsection (a), the Company shall, at the request of the managing
underwriter for such offering, prepare and file a Registration Statement with
the SEC as promptly as reasonably practicable, but in any event within thirty
days after the managing underwriter's request therefor.
(c) Subject to Section 2(g) below, the Company shall not have
any obligation to permit or participate in more than two underwritten public
offerings pursuant to this Section, or to file a Registration Statement pursuant
to this Section with respect to less than ten percent of the Registrable
Securities initially included in the Merger Consideration.
(d) The Company shall have the right to defer the filing or
effectiveness of a Registration Statement relating to any registration requested
under this Section for a reasonable period of time not to exceed 90 days if (1)
the Company is, at such time, working on an underwritten public offering of its
securities for the account of the Company and is advised by its managing
underwriter that such offering would in its opinion be materially adversely
affected by such filing; or (2) the Company in good faith determines that any
such filing or the offering of any Registrable Securities would (A) materially
impede, delay or interfere with any proposed financing, offer or sale of
securities, acquisition, corporate reorganization or other significant
transaction involving the Company or (B) require the disclosure of material
non-public information, the disclosure of which would materially and adversely
affect the Company. If the Company shall exercise its deferral right under this
subsection, it may not do so again until 90 days shall have elapsed since the
expiration of such deferral.
(e) The Company shall have no obligation to file a
Registration Statement pursuant to this Section earlier than 360 days after the
effective date of a prior registration statement of the Company, if any,
covering an underwritten public offering for the account of the Company the
closing date of which is after the Closing Date if (1) the Company shall have
offered pursuant to Section 4 to include the Holders' Registrable Securities in
such Registration Statement; (2) the Holders shall not have elected to include
in such Registration Statement at least ten percent of the Registrable
Securities initially included in the Merger Consideration; (3) no Registrable
Securities requested to be included in such registration statement shall have
been excluded therefrom pursuant to Section 4(c); and (4) if such registration
statement is filed before November 5, 1998, the offering price per share of
Class A Common Stock is not less than $30.
(f) The Holders of any Registrable Securities requested to be
included in any offering pursuant to this Section may elect by written notice to
the Company not to include their Registrable Securities in the offering. If they
do so, the Company shall be obligated to proceed
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with the registration relating to the offering only if the offering continues to
include at least the number of shares of Registrable Securities specified in
Section 2(a). In any such case in which the Company is not obligated to and does
not proceed with the registration, the Holders that shall have requested
Registrable Securities to be included in the offering but that shall have
elected not to include their shares shall pay all Registration Expenses incurred
by the Company in connection with such offering.
(g) Subject to the rights, if any, of holders of registration
rights under the existing agreements identified on Exhibit A hereto (the
"Existing Registration Rights Holders"), neither the Company nor any other
Person not party to this Agreement shall be entitled to include any securities
held by it or any of them in any underwritten offering pursuant to this Section,
unless all Registrable Securities for which inclusion has been requested are
also included and unless the managing underwriter concludes that the inclusion
of other securities will not interfere with an orderly sale and distribution of
Registrable Securities being sold in such offering or adversely affect the price
of such Registrable Securities. If the managing underwriter does not so
conclude, the number of shares to be included in the registration shall be
reduced among the Holders and the Existing Registration Rights Holders pro rata
in accordance with the number of shares requested to be included by each, in
which case (1) the Company will bear all Registration Expenses relating to the
registration, whether or not the offering proceeds, and (2) the Holders shall be
entitled to one additional demand registration under this Section 2.
(h) No registration of Registrable Securities under this
Section shall relieve the Company of its obligation to effect registrations of
Registrable Securities pursuant to Sections 3 and 4.
Section 3. Shelf Registrations.
(a) At any time on or after November 5, 1998, and before the
fifth anniversary of the Closing Date, the Holder or Holders of 100,000 or more
shares of Registrable Securities may (by written notice to the Company) require
registration of all or any portion of such Registrable Securities for sale
through broker-dealers, through agents or directly to one or more purchasers in
one or more transactions in the over-the-counter market, through writing of
options or otherwise effected at market prices prevailing at the time of sale,
at prices related to such prevailing prices, at negotiated prices or at fixed
prices. Within ten Business Days after its receipt of such notice, the Company
shall give written notice of such request to all other Holders, and all such
Holders shall have the right to have any or all Registrable Securities owned by
them included in the requested registration as they shall specify in a written
notice received by the Company within ten Business Days after the Company's
notice is given. Within ten Business Days after the expiration of such ten
Business Day period, the Company shall notify all Holders requesting inclusion
of Registrable Securities in the requested registration of the aggregate number
of Registrable Securities proposed to be included by all Holders in this
registration.
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(b) If any request for registration shall have been made
pursuant to subsection (a), the Company shall prepare and file a Registration
Statement with the SEC as promptly as reasonably practicable, but in any event
within thirty days after the expiration of the ten Business Day period within
which Holders may request inclusion in the registration.
(c) The Company shall not have any obligation under this
Section to file a Registration Statement with respect to fewer than 100,000
shares of Registrable Securities.
(d) The Company shall have no obligation to file a
Registration Statement pursuant to this Section earlier than 180 days after the
effective date of any earlier Registration Statement filed pursuant to this
Section.
(e) The Holders of any of Registrable Securities requested to
be included in any registration pursuant to this Section may elect by written
notice to the Company not to include their Registrable Securities in such
registration. If they do so, the Company shall be obligated to proceed with the
registration only if it continues to include at least the number of shares of
Registrable Securities specified in Section 3(a). In any such case in which the
Company is not obligated to and does not proceed with the registration, the
Holders that shall have requested Registrable Securities to be included in the
registration but shall have elected not to include their shares shall pay all
Registration Expenses incurred by the Company in connection with such
registration.
(f) No registration of Registrable Securities under this
Section shall relieve the Company of its obligation to effect registrations of
Registrable Securities under Sections 2 and 4.
Section 4. Incidental Registration.
(a) From and after the Closing Date, if the Company proposes,
other than pursuant to Section 2 or 3, to file a Registration Statement under
the Securities Act to register any of its common equity securities for public
sale under the Securities Act (whether proposed to be offered for sale by the
Company or by any other Person), it will give prompt written notice (which
notice shall specify the intended method or methods of disposition) to the
Holders of its intention to do so, and upon the written request of any Holder
delivered to the Company within ten Business Days after any such notice (which
request shall specify the number of Registrable Securities intended to be
disposed of by such Holder), the Company shall, subject to the other provisions
of this Section 4, include in such Registration Statement all Registrable
Securities which the Company has been so requested to register by Holders.
(b) If at any time prior to the effective date of any
Registration Statement described in subsection (a), the Company shall in good
faith determine for any reason not to proceed with such registration, the
Company may, at its election, give written notice of such determination to the
Holders requesting registration and thereupon the Company shall be relieved of
its obligation to register such Registrable Securities in connection with such
registration.
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(c) The Company will not be required to effect any
registration of Registrable Securities pursuant to this Section in connection
with an offering of securities for the account of the Company if the Company
shall have been advised in writing (with a copy to the Holders requesting
registration) by a nationally recognized investment banking firm (which may be
the managing underwriter for the offering) selected by the Company that, in such
firm's opinion, registration of Registrable Securities and of any other
securities requested to be included in such registration by Persons having
rights to include securities therein at that time may interfere with an orderly
sale and distribution of the securities being sold by the Company in such
offering or adversely affect the price of such securities; but if the inclusion
of less than all of the Registrable Securities requested to be registered by the
Holders and other securities requested to be included in such registration by
such other Persons would not, in the opinion of such firm, adversely affect the
distribution or price of the securities to be sold by the Company in the
offering, the aggregate number of Registrable Securities requested to be
included in such offering by the Holders shall be reduced pro rata in accordance
with the proportion that the number of shares proposed to be included in such
registration by Holders bears to the number of shares proposed to be included in
such registration by Holders and all other such Persons.
(d) The Company shall not be required to give notice of, or
effect any registration of Registrable Securities under this Section incidental
to the registration of any of its securities on Form S-4 or S-8 or in connection
with dividend reinvestment plans.
(e) No registration of Registrable Securities effected under
this Section shall relieve the Company of its obligations to effect
registrations of Registrable Securities pursuant to Sections 2 and 3.
Section 5. Holdbacks and Other Transfer Restrictions.
(a) No Holder shall sell, transfer or otherwise dispose of any
Registrable Securities or any interest therein before November 5, 1998, except
to a Permitted Transferee or pursuant to an effective Registration Statement
described in Section 4 that includes the Registrable Securities to be disposed
of.
(b) No Holder shall, if requested by the managing underwriter
in an underwritten offering that includes such Holder's Registrable Securities,
effect any public sale or distribution of securities of the Company of the same
class as the securities included in such Registration Statement (or convertible
into such class), including a sale pursuant to Rule 144(k) under the Securities
Act (except as part of such underwritten registration), during the ten day
period prior to, and during the 90-day period (or such longer period, not to
exceed 180 days, as the managing underwriter shall request) beginning on the
closing date of each underwritten offering made pursuant to such registration
statement, to the extent timely notified in writing by the Company or the
managing underwriter. If the Company or such managing underwriter so requests,
each Holder shall enter into a holdback agreement reflecting such restrictions.
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(c) No Holder shall, during any period in which any of its
Registrable Securities are included in any effective Registration Statement, (1)
effect any stabilization transactions or engage in any stabilization activity in
connection with the Class A Common Stock or other equity securities of the
Company in contravention of Regulation M under the Exchange Act; or (2) permit
any Affiliated Purchaser (as that term is defined in Regulation M under the
Exchange Act) to bid for or purchase for any account in which such Holder has a
beneficial interest, or attempt to induce any other person to purchase, any
shares of Common Stock or Registrable Securities in contravention of Regulation
M under the Exchange Act.
(d) The Company, upon request by each Holder, shall, at the
Company's expense, in the case of a registration including Registrable
Securities to be offered by such Holder for sale through brokers transactions,
furnish each broker through whom such Holder offers Registrable Securities such
number of copies of the prospectus as the broker may require, and such Holder
shall otherwise comply with the prospectus delivery requirements under the
Securities Act, and the Company shall comply with Rule 153 under the Securities
Act.
Section 6. Registration Procedures. If and whenever the
Company is required by the provisions of this Agreement to effect a registration
of Registrable Securities:
(a) The Company shall prepare and file with the SEC, within
the time periods specified herein, a Registration Statement on Form S-3 or its
equivalent (or on such other registration form available to the Company that
permits the greatest extent of incorporation by reference of materials filed by
the Company, under the Exchange Act), and will use its best efforts to cause
such registration statement to become effective as promptly as practicable (and,
in any event, within sixty days) thereafter and to remain effective under the
Securities Act until (1) the earlier of such time as all securities covered
thereby have been disposed of pursuant to such Registration Statement or 180
days after such Registration Statement becomes effective, in the case of
registrations pursuant to Section 2, or (2) 90 days after such Registration
Statement becomes effective, in the case of registrations pursuant to Section 3,
in every case as any such period may be extended pursuant to subsection (h) or
Section 8.
(b) The Company shall prepare and file with the SEC such
amendments, post-effective amendments and supplements to such Registration
Statement and the prospectus used in connection therewith as may be necessary to
keep such Registration Statement effective for such period of time required by
subsection (a), as such period may be extended pursuant to subsection (h) or
Section 8.
(c) The Company shall comply in all material respects with the
provisions of the Securities Act with respect to the disposition of all
securities covered by such Registration Statement during the period during which
any such Registration Statement is required to be effective.
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(d) The Company shall furnish to any Holder and any
underwriter of Registrable Securities (1) such number of copies (including
manually executed and conformed copies) of such Registration Statement and of
each amendment thereof and supplement thereto (including all annexes,
appendices, schedules and exhibits), (2) such number of copies of the prospectus
used in connection with such Registration Statement (including each preliminary
prospectus, any summary prospectus and the final prospectus and including
prospectus supplements), and (3) such number of copies of other documents, in
each case as such Holder or such underwriter may reasonably request.
(e) The Company shall use its best efforts to register or
qualify all Registrable Securities covered by such Registration Statement under
the securities or "blue sky" laws of such states of the United States as any
Holder or any underwriter shall reasonably request, and do any and all other
acts and things which may be reasonably requested by such Holder or such
underwriter to consummate the offering and disposition of Registrable Securities
in such jurisdictions; but the Company shall not be required to qualify
generally to do business as a foreign corporation or as a dealer in securities,
subject itself to taxation, or consent to general service of process in any
jurisdiction wherein it is not then so qualified or subject.
(f) The Company shall use its best efforts to cause the
Registrable Securities covered by such Registration Statement to be registered
with, or approved by, such other United States public, governmental or
regulatory authorities, if any, as may be required in connection with the
disposition of such Registrable Securities.
(g) The Company shall list the Registrable Securities covered
by such Registration Statement on any securities exchange (or if applicable, the
Nasdaq National Market System) on which any securities of the Company are then
listed.
(h) The Company shall notify each Holder as promptly as
practicable and, if requested by any Holder, confirm such notification in
writing, (1) when a prospectus or any prospectus supplement has been filed with
the SEC, and when a Registration Statement or any post-effective amendment
thereto has been filed with and declared effective by the SEC, (2) of the
issuance by the SEC of any stop order or the coming to its knowledge of the
initiation of any proceedings for that purpose, (3) of the receipt by the
Company of any notification with respect to the suspension of the qualification
of any of the Registrable Securities for sale in any jurisdiction or the
initiation or threatening of any proceeding for such purpose, (4) of the
occurrence of any event which requires the making of any changes to a
Registration Statement or related prospectus so that such documents will not
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein,
in light of the circumstances under which they were made, not misleading (and
the Company shall promptly prepare and furnish to each Holder a reasonable
number of copies of a supplemented or amended prospectus such that, as
thereafter delivered to the purchasers of such Registrable Securities, such
prospectus shall not include an untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they are made, not
misleading), and (5) of the
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Company's determination that the filing of a post-effective amendment to a
Registration Statement shall be necessary or appropriate. Upon the receipt of
any notice from the Company of the occurrence of any event of the kind described
in clause (4), the Holders shall forthwith discontinue any offer and disposition
of Registrable Securities pursuant to the Registration Statement covering such
Registrable Securities until all Holders shall have received copies of a
supplemented or amended prospectus which is no longer defective and, if so
directed by the Company, shall deliver to the Company all copies (other than
permanent file copies) of the defective prospectus covering such Registrable
Securities which are then in the Holders' possession. If the Company shall
provide any notice of the type referred to in the preceding sentence, the period
during which the Registration Statement is required by subsection (a) to be
effective shall be extended by the number of days from and including the date
such notice is provided, to and including the date when Holders shall have
received copies of the corrected prospectus.
(i) The Company shall enter into such agreements and take such
other appropriate actions as are customary and reasonably necessary to expedite
or facilitate the disposition of such Registrable Securities, and in that
regard, deliver to the Holders such documents and certificates as may be
reasonably requested by the Holders of a majority of the Registrable Securities
being sold or, as applicable, the managing underwriters, to evidence the
Company's compliance with this Agreement, including, in the case of any
underwritten offering, using commercially reasonable efforts to cause its
independent accountants to deliver to the managing underwriters an accountants'
comfort letter substantially similar to that in scope delivered in an
underwritten public offering and covering audited and interim financial
statements included in the registration statement, or if such letter can not be
obtained through the exercise of commercially reasonable efforts, cause its
independent accountants to deliver to the managing underwriters a comfort letter
based on negotiated procedures providing comfort with respect to the Company's
financial statements included or incorporated by reference in the registration
statement at the highest level permitted to be given by such accountants under
the then applicable standards of the American Institute of Certified Public
Accountants with respect to such Registration Statement.
Section 7. Underwriting.
(a) If requested by the underwriters for any underwritten
offering of Registrable Securities pursuant to a registration under Section 2,
the Company will enter into and perform its obligations under an underwriting
agreement with the underwriters for such offering, such agreement to contain
such representations and warranties by the Company and such other terms and
provisions as are customarily contained in underwriting agreements with respect
to secondary distributions, including, without limitation, customary provisions
relating to indemnities and contribution and the provision of opinions of
counsel and accountants' comfort letters. If Registrable Securities are to be
distributed by such underwriters on behalf of any Holder, such Holder shall also
be a party to any such underwriting agreement.
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(b) If any registration pursuant to Section 4 shall involve an
underwritten offering, the Company may require Registrable Securities requested
to be registered pursuant to Section 4 to be included in such underwriting on
the same terms and conditions as shall be applicable to the securities being
sold through underwriters under such registration. In such case, each Holder
requesting registration shall be a party to any such underwriting agreement.
Such agreement shall contain such representations and warranties by the Holders
requesting registration and such other terms and provisions as are customarily
contained in underwriting agreements with respect to secondary distributions,
including, without limitation, provisions relating to indemnities and
contribution; provided, however, that no Holder shall be required to make
representations or warranties concerning the Company or any other Holder.
(c) In any offering of Registrable Securities pursuant to a
registration hereunder, each Holder requesting registration shall also enter
into such additional or other agreements as may be customary in such
transactions, which agreements may contain, among other provisions, such
representations and warranties as the Company or the underwriters of such
offering may reasonably request (including, without limitation, those concerning
such Holder, its Registrable Securities, such Holder's intended plan of
distribution and any other information supplied by it to the Company for use in
such registration statement), and customary provisions relating to indemnities
and contribution.
Section 8. Information Blackout.
(a) At any time when a Registration Statement is effective,
upon written notice from the Company to the Holders that the Company has
determined in good faith that sale of Registrable Securities pursuant to the
Registration Statement would require disclosure of non-public material
information, the disclosure of which would have a material adverse effect on the
Company, all Holders shall suspend sales of Registrable Securities pursuant to
such Registration Statement until the earlier of (1) 90 days after the Company
notifies the Holders of such good faith determination, and (2) such time as the
Company notifies the Holders that such material information has been disclosed
to the public or has ceased to be material or that sales pursuant to such
Registration Statement may otherwise be resumed (the number of days from such
suspension of sales by the Holders until the day when such sales may be resumed
hereunder is hereinafter called a "Sales Blackout Period").
(b) The time period set forth in Section 6(a)(1) or (2) shall
be extended for a number of days equal to the number of days in the Sales
Blackout Period.
(c) No Sales Blackout Period shall be commenced by the Company
within 60 days after the end of a Sales Blackout Period.
Section 9. Rule 144. The Company shall take all actions
reasonably necessary to comply with the filing requirements described in Rule
144(c)(1) under the Securities Act so as
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to enable the Holders to sell Registrable Securities without registration under
the Securities Act. Upon the written request of any Holder, the Company will
deliver to such Holder a written statement as to whether it has complied with
the filing requirements under such Rule 144(c)(1).
Section 10. Preparation; Reasonable Investigation;
Information. In connection with the preparation and filing of each Registration
Statement registering Registrable Securities under the Securities Act, (a) the
Company will give the Holders and the underwriters, if any, and their respective
counsel and accountants, drafts of such registration statement for their review
and comment prior to filing and (during normal business hours and subject to
such reasonable limitations as the Company may impose to prevent disruption of
its business) such reasonable and customary access to its books and records and
such opportunities to discuss the business of the Company with its officers and
the independent public accountants who have certified its financial statements
as shall be necessary, in the reasonable opinion of the Holders of a majority of
the Registrable Securities being registered and such underwriters or their
respective counsel, to conduct a reasonable investigation within the meaning of
the Securities Act and (b) as a condition precedent to including any Registrable
Securities of any Holder in any such registration, the Company may require such
Holder to furnish the Company such information regarding such Holder and the
distribution of such securities as the Company may from time to time reasonably
request in writing or as shall be required by law or the SEC in connection with
any registration.
Section 11. Indemnification and Contribution.
(a) In the case of each offering of Registrable Securities
made pursuant to this Agreement, the Company shall indemnify and hold harmless
each Holder, its officers and directors, each underwriter of Registrable
Securities so offered and each Person, if any, who controls any of the foregoing
persons within the meaning of the Securities Act ("Holder Indemnitees"), from
and against any and all claims, liabilities, losses, damages, expenses and
judgments, joint or several, to which they or any of them may become subject,
including any amount paid in settlement of any litigation commenced or
threatened, and shall promptly reimburse them, as and when incurred, for any
legal or other expenses incurred by them in connection with investigating any
claims and defending any actions, insofar as such losses, claims, damages,
liabilities or actions shall arise out of, or shall be based upon, any violation
or alleged violation by the Company of the Securities Act, any blue sky laws,
securities laws or other applicable laws of any state or county in which the
Registrable Securities are offered, and relating to action taken or action or
inaction required of the Company in connection with such offering, or shall
arise out of, or shall be based upon, any untrue statement or alleged untrue
statement of a material fact contained in the Registration Statement (or in any
preliminary or final prospectus included therein) relating to the offering and
sale of such Registrable Securities, or any amendment thereof or supplement
thereto, or in any document incorporated by reference therein, or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading; but the
Company shall not be liable to any Holder Indemnitee in any such case to the
extent that any such loss, claim, damage,
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liability or action arises out of, or is based upon, any untrue statement or
alleged untrue statement, or any omission or alleged omission, if such statement
or omission shall have been made in reliance upon and in conformity with
information furnished to the Company in writing by or on behalf of such Holder
specifically for inclusion in the Registration Statement (or in any preliminary
or final prospectus included therein), or any amendment thereof or supplement
thereto. Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of any Holder and shall survive the transfer
of such securities. The foregoing indemnity agreement is in addition to any
liability which the Company may otherwise have to any Holder Indemnitee.
(b) In the case of each offering of Registrable Securities
made pursuant to this Agreement, each Holder shall indemnify and hold harmless
the Company, its officers and directors and each person, if any, who controls
any of the foregoing within the meaning of the Securities Act (the "Company
Indemnitees"), from and against any and all claims, liabilities, losses,
damages, expenses and judgments, joint or several, to which they or any of them
may become subject, including any amount paid in settlement of any litigation
commenced or threatened, and shall promptly reimburse them, as and when
incurred, for any legal or other expenses incurred by them in connection with
investigating any claims and defending any actions, insofar as any such losses,
claims, damages, liabilities or actions shall arise out of, or shall be based
upon, any violation or alleged violation by such Holder of the Securities Act,
any blue sky laws, securities laws or other applicable laws of any state or
country in which the Registrable Securities are offered and relating to action
taken or action or inaction required of such Holder in connection with such
offering, or shall arise out of, or shall be based upon, any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (or in any preliminary or final prospectus included therein) relating
to the offering and sale of such Registrable Securities or any amendment thereof
or supplement thereto, or any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but in each case only to the extent that such untrue
statement is contained in, or such fact is omitted from, information furnished
in writing to the Company by or on behalf of such Holder specifically for
inclusion in such Registration Statement (or in any preliminary or final
prospectus included therein). Such indemnity shall remain in full force and
effect regardless of any investigation made by or on behalf of any Company
Indemnitee. The foregoing indemnity is in addition to any liability which Holder
may otherwise have to any Company Indemnitee.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to this Section 11, such person (the
"indemnified party") shall promptly notify the person against whom such
indemnity may be sought (the "indemnifying party") in writing. No
indemnification provided for in subsection (a) or (b) shall be available to any
person who shall fail to give notice as provided in this subsection (c) if the
indemnifying party to whom notice was not given was unaware of the proceeding to
which such notice would have related and was materially prejudiced by the
failure to give such notice, but the failure to give such notice shall not
relieve the indemnifying party or parties from any liability which it or they
may have to the indemnified
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party for contribution or otherwise than on account of the provisions of
subsection (a) or (b). In case any such proceeding shall be brought against any
indemnified party and it shall notify the indemnifying party of the commencement
thereof, the indemnifying party shall be entitled to participate therein and, to
the extent that it shall wish, jointly with any other indemnifying party
similarly notified, to assume the defense thereof, with counsel reasonably
satisfactory to such indemnified party and shall pay as incurred the fees and
disbursements of such counsel related to such proceeding. In any such
proceeding, any indemnified party shall have the right to retain its own counsel
at its own expense. Notwithstanding the foregoing, the indemnifying party shall
pay as incurred the fees and expenses of the counsel retained by the indemnified
party in the event (1) the indemnifying party and the indemnified party shall
have mutually agreed to the retention of such counsel or (2) the named parties
to any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel, in the written opinion of such counsel, would be
inappropriate due to actual or potential differing interests between them. The
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties (in
addition to local counsel). Such firm shall be designated in writing by the
Holders of a majority of the Registrable Securities disposed under the
applicable Registration Statements in the case of Holder Indemnitees and by the
Company in the case of Company Indemnitees. The indemnifying party shall not be
liable for any settlement of any proceeding effected without its written consent
but if settled with such consent or if there be a final judgment for the
plaintiff, the indemnifying party agrees to indemnify the indemnified party from
and against any loss or liability by reason of such settlement or judgment.
(d) If the indemnification provided for in this Section 11 is
unavailable to or insufficient to hold harmless an indemnified party under
subsection (a) or (b) in respect of any losses, claims, damages or liabilities
(or actions or proceedings in respect thereof) referred to therein, or if the
indemnified party failed to give the notice required under subsection (c), then
each indemnifying party shall contribute to the amount paid or payable by the
indemnified party as a result of such losses, claims, damages or liabilities (or
actions or proceedings in respect thereof) in such proportion as is appropriate
to reflect not only both the relative benefits received by such party (as
compared to the benefits received by all other parties) from the offering in
respect of which indemnity is sought, but also the relative fault of all parties
in connection with the statements or omissions which resulted in such losses,
claims, damages or liabilities (or actions or proceedings in respect thereof),
as well as any other relevant equitable considerations. The relative benefits
received by a party shall be deemed to be in the same proportion as the total
net proceeds from the offering (before deducting expenses) received by it bear
to the total amounts received by each other party. Relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the party and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The parties agree that it would not be just
and equitable if contributions pursuant to this subsection (d) were determined
by pro rata allocation or by any other method of allocation which does not take
account of the equitable considerations referred to above in this
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<PAGE>
subsection (d). The amount paid or payable by an indemnified party as a result
of the losses, claims, damages or liabilities (or actions or proceedings in
respect thereof) referred to above shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this subsection (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) The indemnity provided for hereunder shall not inure to
the benefit of any indemnified party to the extent that the claim is based on
such indemnified party's failure to comply with the applicable prospectus
delivery requirements of the Securities Act as then applicable to the person
asserting the loss, claim, damage or liability for which indemnity is sought.
Section 12. Expenses. In connection with any registration
under this Agreement the Company shall pay all Registration Expenses (to the
extent not borne by underwriters or others), except as provided in Section 2(f)
or 3(e), and each Holder shall pay its pro rata share of the items described in
clause (i) of the definition of "Registration Expenses" in Section 1.
Section 13. 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, delivered by the U.S. mail, delivered by overnight courier service, or
sent by telecopy, as follows: (a) if to a Holder, at the most current address
given by such Holder to the Company by means of a notice given in accordance
with the provisions of this Section 13, which address initially is, with respect
to the Holders who have executed this agreement, the addresses set forth in
Schedule A and with respect to all other holders is as set forth in the register
for the Registrable Securities; and (b) if to the Company, initially at the
Company's address set forth in the Merger Agreement and thereafter at such other
address, notice of which is given in accordance with the provisions of this
Section 13. The furnishing of any notice required hereunder may be waived in
writing by the party entitled to receive such notice. Every notice, demand,
request, consent, approval, declaration or other communication hereunder shall
be deemed to have been duly furnished or served on the party to which it is
addressed, in the case of delivery in person or by telecopy, on the date when
sent (with receipt personally acknowledged in the case of telecopied notice), in
the case of delivery by overnight courier service, on the dated delivered as
evidenced by delivery receipt, and in all other cases, five business days after
it is sent.
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<PAGE>
Section 14. 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 the Company and the Holders of a
majority of the Registrable Securities then outstanding.
Section 15. Headings. The section 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 16. Applicable Law. This Agreement shall be governed
by, construed and enforced in accordance with the laws of Pennsylvania
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 17. 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 18. 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 19. Counterparts. This Agreement may be executed in
two or more counterparts, each of which shall be deemed an original, but all of
which together shall constitute 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 or delivery of an original
executed counterpart.
-16-
<PAGE>
Section 20. Successors and Assigns. This Agreement shall inure
to the benefit of and be binding upon the successors, assigns and transferees of
each of the parties, including, without limitation and without the need for an
express assignment, subsequent Holders; but nothing herein shall be deemed to
permit any assignment, transfer or other disposition of Registrable Securities
in violation of applicable law. If any Holder shall acquire Registrable
Securities, in any manner, whether by operation of law or otherwise, such
Registerable Securities shall be held subject to all of the terms of this
Agreement, and by taking and holding such Registrable Securities such Holder
shall be conclusively deemed to have agreed to be bound by and to perform all of
the terms and provisions of this Agreement, including the restrictions on resale
set forth in this Agreement, and such Holder shall be entitled to receive the
benefits hereof.
IN WITNESS WHEREOF, this Agreement has been executed and
delivered as of the date first above written.
PEGASUS COMMUNICATIONS CORPORATION
By ________________________________________
[HOLDERS]
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<PAGE>
EXHIBIT A
to Registration Rights Agreement
Stockholders' Agreement dated as of October 8, 1996, among Pegasus, Pegasus
Communications Holdings, Inc. and Harron Communications Corp.
Stockholders Agreement dated as of October 8, 1996, among Pegasus, John W.
Bride, John H. Bride and Christopher McHenry Bride.
Stockholders' Agreement dated as of January 31, 1997, among Pegasus, and the
former shareholders of DBS of Indiana, Inc.
Stockholders' Agreement dated as of November 7, 1997, among Pegasus, Donald W.
Weber and Woodrow W. Griffin.
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement of
Pegasus Communications Corporation on Form S-4 of our report dated February 21,
1997 except as to note 14 for which the date is March 10, 1997, on our audits of
the consolidated financial statements and financial statement schedule of
Pegasus Communications Corporation. We also consent to the reference to our firm
under the caption "Experts."
/s/ Coopers & Lybrand L.L.P.
------------------------------------
COOPERS & LYBRAND L.L.P.
Philadelphia, Pennsylvania
January 22, 1998
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Pegasus Communications Corporation on Form S-4 (file no. 333-_____) of our
financial statements of ClearVision, Inc. as of January 16, 1997 and the related
statements of operations and cash flows for the year then ended which appears in
the Current Report on Form 8-K/A of Pegasus Communications Corporation dated
September 8, 1997 (and filed October 31, 1997). We also consent to the reference
to us under the heading "Experts" in the Prospectus, which is part of the
Registration Statement.
/s/ Poole Cunningham & Reitano, P.A.
--------------------------------------
POOLE CUNNINGHAM & REITANO, P.A.
Jackson, Mississippi
January 22, 1998
<PAGE>
Exhibit 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Pegasus Communications Corporation on Form S-4 (file no. 333-_____) of our
report relating to the Statement of net assets to be sold of Southeastern
Communication Systems, Inc. as of December 31, 1996 and the related statements
of operations and cash flows for the year then ended which appears in the
Current Report on Form 8-K/A of Pegasus Communications Corporation dated
September 8, 1997 (and filed October 31, 1997). We also consent to the reference
to us under the heading "Experts" in the Prospectus, which is part of the
Registration Statement.
/s/ Greenway, Smith & Haisten, P.C.
-----------------------------------------
GREENWAY, SMITH & HAISTEN, P.C.
Griffin, Georgia
January 22, 1998
<PAGE>
Exhibit 23.5
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Registration Statement
(File No. 333-_____) of Pegasus Communications Corporation on Form S-4 of our
report relating to the balance sheet of Northern Electric Service Corporation
DBA: Northern Horizons as of December 31, 1996, and the related statement of
operations and accumulated deficit and statement of cash flows for the year then
ended, which appears in the Current Report on Form 8-K/A of Pegasus
Communications Corporation dated September 8, 1997 (and filed October 31, 1997).
We also consent to the reference to us under the heading "Experts" in the
Prospectus, which is part of the Registration Statement.
/s/ Larson, Allen, Weishair & Co., LLP
-----------------------------------------
LARSON, ALLEN, WEISHAIR & CO., LLP
Brainerd, Minnesota
January 22, 1998
<PAGE>
Exhibit 23.6
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Registration Statement (Form S-4) and related Prospectus of Pegasus
Communications Corporation ("Pegasus") for the registration of 5,500,000 shares
of its Class A Common Stock and to the incorporation by reference therein of our
report dated July 16, 1997, with respect to the financial statements of Direct
Broadcast Satellites for the year ended December 31, 1996, included in Pegasus'
Current Report on Form 8-K/A dated September 8, 1997 filed with the Securities
and Exchange Commission on October 31, 1997.
/s/ Ernst & Young, LLP
------------------------
ERNST & YOUNG, LLP
San Antonio, Texas
January 22, 1998
<PAGE>
Exhibit 23.7
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Pegasus Communications Corporation on Form S-4 (file no. 333-_____) of our
report relating to the balance sheet of Suwannee Valley Satellite, Inc. as of
December 31, 1996, and the related statements of income and retained earnings
and cash flows for the year then ended, which appears in the Current Report on
Form 8-K/A of Pegasus Communications Corporation dated September 8, 1997 (and
filed on October 31, 1997). We also consent to the reference to us under the
heading "Experts" in the Prospectus, which is part of the Registration
Statement.
/s/ Bolinger, Segars, Gilbert & Moss, L.L.P.
---------------------------------------------
BOLINGER, SEGARS, GILBERT & MOSS, L.L.P.
Lubbock, Texas
January 22, 1998
<PAGE>
Exhibit 23.8
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report on the financial statements for the year ended December
31, 1996 of ViewStar Entertainment Services, Inc. dated April 18, 1997 (except
with respect to Note 10, as to which the date is September 15, 1997), which is
included in the Current Report on Form 8-K/A of Pegasus Communications
Corporation dated September 8, 1997 (and filed October 31, 1997), in this
Registration Statement (File No. 333-_____) of Pegasus Communications
Corporation on Form S-4. We also consent to the reference to us under the
heading "Experts" in the Prospectus, which is part of the Registration
Statement.
/s/ Arthur Andersen LLP
-----------------------
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 22, 1998
<PAGE>
Exhibit 23.9
INDEPENDENT AUDITOR'S CONSENT
I consent to the incorporation by reference in this Registration Statement of
Pegasus Communications Corporation on Form S-4 (file no. 333-_____) of my report
relating to the audited statement of net assets to be sold for the year ended
December 31, 1996 of Midwest Minnesota DBS, LLC for the year ended December 31,
1996, and the related statements of operations of assets to be sold and cash
flows for the year ended December 31, 1996, which appear on the Current Report
on Form 8-K/A of Pegasus Communications Corporation dated September 8, 1997 (and
filed October 31, 1997). I also consent to the reference to me under the heading
"Experts" in the Prospectus, which is part of the Registration Statement.
/s/ Bradley R. Helmeke, Ltd.
----------------------------
BRADLEY R. HELMEKE, LTD.
Perham, Minnesota
January 22, 1998
<PAGE>
Exhibit 23.10
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement
of Pegasus Communications Corporation on Form S-4 of our report relating to the
statement of net assets sold as of December 31, 1996 and the related statements
of operations and cash flows for the year ended of Turner-Vision, Inc.
(an S-corporation) DBS Operations, which appears in the Current Report on Form
8-K/A of Pegasus Communications Corporation dated September 8, 1997 (and filed
October 31, 1997). We also consent to the reference to us under the heading
"Experts" in the Prospectus, which is part of the Registration Statement.
/s/ Grigoraci, Trainer, Wright & Paterno
-----------------------------------------
GRIGORACI, TRAINER, WRIGHT & PATERNO
Charleston, West Virginia
January 22, 1998
<PAGE>
Exhibit 23.11
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Pegasus Communications Corporation on Form S-4 (file no. 333-_____) of our
report relating to the September 30, 1997 audited financial statements of the
DBS Operations of Pioneer Services Corporation, which appears in the Current
Report on Form 8-K of Pegasus Communications Corporation dated December 10, 1997
(and filed January 12, 1998). We also consent to the reference to us under the
heading "Experts" in the Prospectus, which is part of the Registration
Statement.
/s/ Jackson, Thornton & Co., P.C.
-----------------------------------
JACKSON, THORNTON & CO., P.C.
Montgomery, Alabama
January 22, 1998
<PAGE>
Exhibit 23.12
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 sheet of Digital Television
Services, LLC and Subsidiaries as of December 31, 1996 and the related
consolidated statements of operations, members equity, and cash flows for the
period from inception (January 30, 1996) through December 31, 1996 dated
February 28, 1997 (except with respect to the matters discussed in Note 10 as to
which the date is November 6, 1997), 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 sheet of Ocmulgee Communications, Inc. as
of December 31, 1996 and the related statements of operations, stockholder's
deficit, and cash flows for the year ended December 31, 1996 dated December 11,
1997. 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
January 22, 1998
<PAGE>
Exhibit 23.13
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-_____) 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
January 22, 1998
<PAGE>
Exhibit 23.14
INDEPENDENT AUDITORS' CONSENT
We consent to the inclusion in this Registration Statement of Pegasus
Communications Corporation on Form S-4 of our report dated November 10, 1997 on
the financial statements of Satellite Television Services, Inc., and to the
reference to us under the heading "Experts" in the Prospectus, which is part of
this Registration Statement.
/s/Deloitte & Touche LLP
-------------------------
DELOITTE & TOUCHE LLP
Indianapolis, Indiana
January 22, 1998
