<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 15, 1997
REGISTRATION NO. 333-36217
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
DIGITAL TELEVISION SERVICES, INC.
DTS CAPITAL, INC.
(Exact Name of Registrants as Specified in Their Respective Charters)
<TABLE>
<C> <C>
DELAWARE 06-1473713
DELAWARE 58-2332106
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification Number)
Organization)
</TABLE>
AND AFFILIATE GUARANTORS
<TABLE>
<S> <C> <C>
DTS MANAGEMENT, LLC GEORGIA 58-2255906
DIGITAL TELEVISION SERVICES OF CALIFORNIA, LLC DELAWARE 54-1792385
DIGITAL TELEVISION SERVICES OF COLORADO, LLC GEORGIA 58-2255909
DIGITAL TELEVISION SERVICES OF GEORGIA, LLC GEORGIA 58-2278248
DIGITAL TELEVISION SERVICES OF INDIANA, LLC GEORGIA 58-2349722
DIGITAL TELEVISION SERVICES OF KANSAS, LLC GEORGIA 58-2269693
DIGITAL TELEVISION SERVICES OF KENTUCKY, LLC GEORGIA 58-2263782
DIGITAL TELEVISION SERVICES OF NEW MEXICO, LLC GEORGIA 58-2255917
DIGITAL TELEVISION SERVICES OF NEW YORK I, LLC GEORGIA 58-2255915
DIGITAL TELEVISION SERVICES OF SOUTH CAROLINA I, LLC GEORGIA 58-2261740
DIGITAL TELEVISION SERVICES OF VERMONT, LLC GEORGIA 58-2272519
SPACENET, INC. NEW MEXICO 85-0418709
(Exact Name of Registrants as Specified in Their Respective (State or Other (I.R.S. Employer
Charters) Jurisdiction of Identification No.)
Incorporation or
Organization)
</TABLE>
4841
(Primary Standard Industrial Classification Code Number)
<TABLE>
<C> <C>
MR. DOUGLAS S. HOLLADAY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
880 HOLCOMB BRIDGE ROAD DIGITAL TELEVISION SERVICES, INC.
BUILDING C-200 880 HOLCOMB BRIDGE ROAD
ROSWELL, GEORGIA 30076 BUILDING C-200
TELEPHONE: (770) 645-4440 ROSWELL, GEORGIA 30076
(Address, Including Zip Code, and Telephone TELEPHONE: (770) 645-4440
Number, Including Area Code, of Registrants' (Name, Address, Including Zip Code, and
Principal Executive Offices) Telephone Number, Including Area Code, of
Agent for Service)
</TABLE>
---------------------
COPIES TO:
H. BRYAN IVES III, ESQ.
C. MARK KELLY, ESQ.
NELSON MULLINS RILEY & SCARBOROUGH, L.L.P.
2600 NATIONSBANK CORPORATE CENTER
100 NORTH TRYON STREET
CHARLOTTE, NC 28202-4000
TELEPHONE: (704) 417-3000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after the effective date of this Registration Statement.
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. [ ]
---------------------
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS
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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
CROSS REFERENCE SHEET
Pursuant to Item 501(b) of Regulation S-K showing location in Prospectus of
Information Required by Items of Part I of Form S-4
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM CAPTION OR
NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------- ----------------------
<S> <C> <C> <C>
A.
INFORMATION ABOUT THE TRANSACTION
1. Forepart of Registration Statement and
Outside Front Cover of Prospectus Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus Inside Front Cover Page; Outside Back
Cover Page
3. Risk Factors, Ratio of Earnings to Fixed
Charges; and Other Information Prospectus Summary; Risk Factors;
Selected Historical Financial Data;
Unaudited Pro Forma Financial Data
4. Terms of the Transaction Outside Front Cover Page; Summary;
Description of the Notes; The Exchange
Offer; Certain Federal Income Tax
Consequences
5. Pro Forma Financial Information Unaudited Pro Forma Financial Data
6. Material Contracts with the Company Being
Acquired Inapplicable
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters Inapplicable
8. Interests of Named Experts and Counsel Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities Inapplicable
B.
INFORMATION ABOUT THE REGISTRANT
10. Information with Respect to S-3
Registrants Inapplicable
11. Incorporation of Certain Information by
Reference Inapplicable
12. Information with Respect to S-2 or S-3
Registrants Inapplicable
13. Incorporation of Certain Information by
Reference Inapplicable
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants Outside Front Cover Page; Prospectus
Summary; Risk Factors; The Company; Use
of Proceeds; Capitalization; Unaudited
Pro Forma Financial Data; Selected
Historical Financial Data; Management's
Discussion and Analysis of Financial
Condition and Results of Operations;
Business; Management; Certain
Transactions; Security Ownership of
Certain Beneficial Owners and Management;
Description of Capital Stock; Description
of Certain Indebtedness; Description of
the Notes
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM CAPTION OR
NUMBER AND CAPTION LOCATION IN PROSPECTUS
--------------------------- ----------------------
<S> <C> <C> <C>
C.
INFORMATION ABOUT THE COMPANY BEING ACQUIRED
15. Information with Respect to S-3 Companies Inapplicable
16. Information with Respect to S-2 or S-3
Companies Inapplicable
17. Information with Respect to Companies
Other than S-3 or S-2 Companies Inapplicable
D.
VOTING AND MANAGEMENT INFORMATION
18. Information if Proxies, Consents or
Authorizations Are to be Solicited Inapplicable
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited or
in an Exchange Offer The Exchange Offer; Management; Security
Ownership of Certain Beneficial Owners
and Management; Certain Transactions
</TABLE>
2
<PAGE> 4
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED DECEMBER 15, 1997
PROSPECTUS
DIGITAL TELEVISION SERVICES, INC.
DTS CAPITAL, INC.
OFFER TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF THEIR
SERIES B 12 1/2% SENIOR SUBORDINATED NOTES DUE 2007 WHICH HAVE BEEN
REGISTERED UNDER THE SECURITIES ACT FOR EACH $1,000
PRINCIPAL AMOUNT OF THEIR OUTSTANDING
SERIES A 12 1/2% SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON , 1998, UNLESS EXTENDED.
Digital Television Services, Inc., a Delaware corporation (the "Company"),
and DTS Capital, Inc., a Delaware corporation ("Capital" and, together with the
Company, the "Issuers"), hereby offer to exchange (the "Exchange Offer") up to
$155,000,000 in aggregate principal amount of their new Series B 12 1/2% Senior
Subordinated Notes due 2007 (the "Exchange Notes"), registered under the
Securities Act of 1933, as amended (the "Securities Act"), for up to
$155,000,000 in aggregate principal amount of their outstanding Series A 12 1/2%
Senior Subordinated Notes due 2007 (the "Private Notes"), that were issued and
sold in a transaction exempt from registration under the Securities Act.
The terms of the Exchange Notes are identical in all material respects
(including principal amount, interest rate, maturity, security and ranking) to
the terms of the Private Notes (which they replace), except that the Exchange
Notes: (i) 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 a Registration Rights Agreement (the "Registration Rights
Agreement") among the Issuers, certain subsidiaries of the Company named therein
(the "Guarantors") and Donaldson, Lufkin & Jenrette Securities Corporation, CIBC
Wood Gundy Securities Corp. and J.P. Morgan Securities Inc. (the "Initial
Purchasers"). The Exchange Notes will evidence the same debt as the Private
Notes (which they replace) and will be issued under and be entitled to the
benefits of the Indenture, dated as of July 30, 1997 (the "Indenture"), among
the Issuers, the Guarantors and The Bank of New York, as trustee. The Private
Notes and the Exchange Notes are sometimes referred to herein collectively as
the "Notes." See "The Exchange Offer" and "Description of the Notes."
(Cover continued on following page)
SEE "RISK FACTORS" BEGINNING ON PAGE 13 FOR A DISCUSSION OF CERTAIN FACTORS
THAT INVESTORS SHOULD CONSIDER IN CONNECTION WITH THE EXCHANGE OFFER AND AN
INVESTMENT IN THE EXCHANGE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1997
<PAGE> 5
Interest on the Exchange Notes will be payable semi-annually in arrears on
each August 1 and February 1 of each year, commencing February 1, 1998. The
Exchange Notes will be redeemable at the option of the Issuers, in whole or in
part, at any time on or after August 1, 2002, at the redemption prices set forth
herein, plus accrued and unpaid interest thereon, if any, to the redemption
date. In addition, prior to August 1, 2000, the Issuers may, other than in any
circumstance resulting in a Change of Control (as defined in "Description of the
Notes -- Certain Definitions"), redeem up to 35% of the originally issued
principal amount of the Notes at a redemption price equal to 112.50% of the
principal amount thereof, plus accrued and unpaid interest thereon, if any, to
the redemption date, with net cash proceeds of (i) one or more Public Equity
Offerings (as defined in "Description of the Notes -- Certain Definitions") of
common equity of the Company or (ii) a sale or series of related sales of
Qualified Equity Interests (as defined in "Description of the Notes -- Certain
Definitions") of the Company to Strategic Equity Investors (as defined in
"Description of the Notes -- Certain Definitions"), in any such case resulting
in gross cash proceeds to the Company of at least $25.0 million in the
aggregate; provided, however, that at least 65% of the originally issued
principal amount of the Notes would remain outstanding after giving effect to
any such redemption. In the event of a Change of Control, the holders of
Exchange Notes will have the right to require the Issuers to purchase their
Exchange Notes, in whole or in part, at a price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
purchase.
The Issuers placed approximately $36.5 million of the net proceeds realized
from the sale of the Private Notes into an Interest Escrow Account (as defined
in "Description of the Notes -- Certain Definitions") to be held by the Escrow
Agent (as defined in "Description of the Notes -- Certain Definitions") for the
benefit of the holders of the Notes. Funds in the Interest Escrow Account,
together with the proceeds from the investment thereof, will secure, and will be
sufficient to pay, the first four semi-annual interest payments on the Notes.
The Exchange Notes will be unconditionally guaranteed (the "Exchange
Guaranties"), on a subordinated basis, jointly and severally, by all direct and
indirect Restricted Subsidiaries (as defined in "Description of the
Notes -- Certain Definitions") of the Company. The Exchange Notes and the
Exchange Guaranties will rank junior to, and be subordinated in right of payment
to, all existing and future Senior Indebtedness of the Company (including
Indebtedness under the Second Amended and Restated Credit Agreement dated July
30, 1997 among the Company and the lenders parties thereto (the "Restated Credit
Facility") and senior in right of payment to all subordinated Indebtedness (as
defined in "Description of the Notes -- Certain Definitions"). Borrowings under
the Restated Credit Facility are secured by substantially all of the assets of
the Company and its subsidiaries (the "Subsidiaries") and a pledge of the equity
interests in the Subsidiaries. As of September 30, 1997, the Company has
approximately $24.2 million of Senior Indebtedness (as defined in "Description
of the Notes -- Certain Definitions") outstanding, on a pro forma basis after
giving effect to the Initial Offering and the Transactions, and has $55.6
million of borrowing availability under the $90.0 million Restated Credit
Facility and is currently permitted by the Indenture to incur up to $75.0
million of indebtedness under such facility.
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Private Notes being tendered or accepted for exchange. The Issuers
will accept for exchange any and all Private Notes validly tendered and not
withdrawn prior to 5:00 p.m., New York City time on , 1998, unless
extended by the Issuers in their sole discretion (the "Expiration Date").
Tenders of Private Notes may be withdrawn at any time prior to 5:00 p.m. on the
Expiration Date; otherwise such tenders are irrevocable. The date of acceptance
for exchange (the "Exchange Date") will be the first business day following the
Expiration Date, upon surrender of the Private Notes.
The Private Notes were sold by the Issuers on July 30, 1997 to the Initial
Purchasers in a transaction not registered under the Securities Act in reliance
upon an exemption under the Securities Act (the "Initial Offering"). The Initial
Purchasers subsequently placed the Private Notes with qualified institutional
buyers in reliance upon Rule 144A under the Securities Act and with
institutional accredited investors, as defined in Rule 501(a)(1), (2), (3) or
(7) under the Securities Act. Accordingly, the Private Notes may not be
reoffered, resold or otherwise transferred in the United States unless
registered under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange Notes
are being offered hereunder in order to satisfy the obligations of the Issuers
under the Registration Rights Agreement entered into by the Issuers in
connection with the Initial Offering. See "The Exchange Offer."
ii
<PAGE> 6
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Issuers believe that the Exchange Notes issued pursuant to the
Exchange Offer in exchange for Private Notes may be offered for resale, resold
and otherwise transferred by a holder thereof (other than any such holder that
is an affiliate of the Issuers within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act; provided that the holder is acquiring the
Exchange Notes in the ordinary course of its business and is not participating,
and had no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes. Holders of Private Notes wishing to accept
the Exchange Offer must represent to the Issuers, as required by the
Registration Rights Agreement, that such conditions have been met. Each
broker-dealer (a "Participating Broker-Dealer") that receives Exchange Notes for
its own account in exchange for Private Notes, where such Private Notes were
acquired by such Participating Broker-Dealer as a result of market-making
activities or other trading activities, must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Issuers
believe that none of the registered holders of the Private Notes is an affiliate
(as such term is defined in Rule 405 under the Securities Act) of the Issuers.
The Private Notes and the Exchange Notes constitute new issues of
securities with no established public trading market. Any Private Notes not
tendered and accepted in the Exchange Offer will remain outstanding. To the
extent that Private Notes are tendered and accepted in the Exchange Offer, a
holder's ability to sell untendered and tendered, but unaccepted, Private Notes
are likely to be adversely affected. Following consummation of the Exchange
Offer, the holders of any remaining Private Notes will continue to be subject to
the existing restrictions on transfer thereof and the Issuers will have no
further obligation to such holders to provide for the registration under the
Securities Act of the Private Notes except under certain very limited
circumstances. See "Description of Exchange Notes -- Private Notes' Registration
Rights; Additional Interest."
Prior to the Exchange Offer, there has been no public market for the Notes.
The Issuers do not intend to list the Notes on any securities exchange or to
seek approval for quotation through any automated quotation system. There can be
no assurance that an active market for the Notes will develop. To the extent
that a market for the Notes does develop, the market value of the Notes will
depend on market conditions (such as yields on alternative investments), general
economic conditions and the Issuers' financial condition. Such conditions might
cause the Notes, to the extent that they are traded, to trade at a significant
discount from face value. See "Risk Factors -- Absence of Public Market for the
Notes."
Each Participating Broker-Dealer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal that is filed as an exhibit to the Registration Statement of which
this Prospectus is a part (the "Letter of Transmittal") states that by so
acknowledging and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be amended or supplemented from time
to time, may be used by a Participating Broker-Dealer in connection with resales
of Exchange Notes received in exchange for Private Notes where such Private
Notes were acquired by such Participating Broker-Dealer as a result of market-
making activities or other trading activities. The Issuers have indicated their
intention to make this Prospectus (as it may be amended or supplemented)
available to any Participating Broker-Dealer for use in connection with any such
resale for a period of 180 days after the Expiration Date. See "The Exchange
Offer -- Resale of the Exchange Notes" and "Plan of Distribution."
The Issuers will not receive any proceeds from, and have agreed to bear the
expenses of, the Exchange Offer. No underwriter is being used in connection with
this Exchange Offer. See "The Exchange Offer -- Resale of the Exchange Notes"
and "Plan of Distribution."
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE ISSUERS ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF PRIVATE NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
---------------------
NO PERSON IS AUTHORIZED IN CONNECTION WITH THE EXCHANGE OFFER TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PRO-
iii
<PAGE> 7
SPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE ISSUERS. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING
LETTER OF TRANSMITTAL, NOR ANY EXCHANGE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
Until , 1998 (90 days after the date of this Prospectus), all
dealers offering transactions in the Exchange Notes, whether or not
participating in the Exchange Offer, may be required to deliver a prospectus in
connection therewith. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
---------------------
The Private Notes initially purchased by qualified institutional buyers and
institutional accredited investors were initially represented by two Global
Notes in registered form, deposited with, or on behalf of, the Depository Trust
Company ("DTC" or the "Depositary") and registered in its name or in the name of
Cede & Co., as its nominee. The Exchange Notes exchanged for the Private Notes
represented by the Global Notes will be represented by one or more fully
registered Global Exchange Notes that will be deposited with, or on behalf of,
the Depositary. Beneficial interests in the Global Exchange Notes will be shown
on, and transfers thereof will be effected only through, records maintained by
the Depositary and its participants. After the initial issuance of such Global
Exchange Notes, Exchange Notes in certificated form will be issued in exchange
for the Global Exchange Notes only in accordance with the terms and conditions
set forth in the Indenture. See "Description of the Notes -- Book Entry,
Delivery and Form."
---------------------
THIS PROSPECTUS (THE "PROSPECTUS") DOES NOT CONSTITUTE AN OFFER TO SELL, OR
A SOLICITATION OF AN OFFER TO BUY, ANY NOTES BY ANY PERSON IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL FOR SUCH PERSON TO MAKE SUCH AN OFFERING OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION HEREIN IS
CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
---------------------
This Prospectus includes product or trade names and trademarks which are
the property of their respective owners.
iv
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including the financial statements and the notes thereto, appearing
elsewhere in this Prospectus. As used in this Prospectus, unless the context
otherwise requires, the term "Company" refers to Digital Television Services,
Inc. ("DTS"), its consolidated subsidiaries and the respective predecessors of
DTS (including Digital Television Services, LLC and WEP Intermediate Corp.) and
such subsidiaries, and the term "DirecTv" refers to DirecTv, Inc. Unless
otherwise indicated, the discussion below refers to and the information in this
Prospectus (including data on the number of subscribers of the Company) gives
effect to the Transactions (as defined), as if they were completed as of January
1, 1996. Unless otherwise indicated, all data on the number of households set
forth herein is based upon information compiled by Claritas as of April 1, 1996,
and all data on the numbers of subscribers is as of May 31, 1997.
THE COMPANY
The Company is a leading independent provider of direct broadcast satellite
("DBS") television services offered by DirecTv ("DIRECTV Services") in terms of
the number of households in the territories in which the Company has the
exclusive right to provide DIRECTV Services, the number of subscribers within
such territories and the Company's revenues from the sale of DIRECTV Services.
DirecTv is the leading provider of direct to home ("DTH") satellite television
in the United States, offering over 175 program channels to approximately 2.6
million subscribers. The Company has the exclusive right to provide DIRECTV
Services within certain rural territories in the United States encompassing
approximately 1.6 million households. The Company has approximately 103,000
subscribers representing a household penetration rate of approximately 6.3%. The
Company believes that rural territories such as those served by the Company are
the most attractive market for DTH services because such territories generally
are underserved or are not served by cable systems and offer limited access to
entertainment alternatives. The relative attractiveness of DBS in these rural
areas is evidenced by DirecTv's penetration, which is over three times its
penetration in all other areas of the United States.
The Company believes that DBS and medium power DTH satellite service
provides the lowest cost, highest quality platform for distributing television
programming to households and commercial locations. As of May 31, 1997, there
were approximately 5.0 million subscribers to such satellite services in the
United States. Paul Kagan Associates, Inc. ("Kagan") estimates that there will
be approximately 14.6 million DBS and medium power DTH subscribers by the year
2002, for a compounded annual growth rate from December 31, 1996, of
approximately 23%. A recent Nielsen Media Research ("Nielsen") survey measuring
satisfaction levels with current pay television services revealed that on a 1-5
scale (with 5 being the most satisfied), 80% of DBS and medium power DTH
satellite users responded with a 4 or 5. Only 45% of cable subscribers indicated
a similar level of satisfaction.
DBS is the fastest growing segment of DTH satellite television because,
among other factors, it offers subscribers higher channel capacity and
programming variety, superior video and audio quality and the ability to receive
transmission on an 18 inch dish as compared to a 27 inch to six foot dish
required by other DTH providers. Consumer acceptance of DBS is evidenced by the
high level of sales of the Digital Satellite System(R) ("DSS(R)") equipment used
to receive DIRECTV Services. DSS(R) equipment, which was introduced in 1994, is
widely regarded as the most successful launch of a major consumer electronics
product in United States history, eclipsing the television, the VCR and the
compact disc player. DSS(R) equipment is now produced by major manufacturers
under the brand names RCA, GE, ProScan, Sony, Hughes, Panasonic, Hitachi,
Toshiba, Uniden, Magnavox, Sanyo, Samsung, Daewoo and Memorex. DSS(R) equipment
is currently sold through over 25,000 retail outlets throughout the United
States for prices typically ranging from $199 to $599, depending upon the
generation of the equipment, the level of features and the retail outlet. Prices
for DSS(R) equipment have declined consistently since introduction and have
declined by over 50% in the last year alone, thereby further stimulating demand
for DIRECTV Services.
The Company believes that DIRECTV Services are superior to those provided
by other DTH service providers. The Company believes that DirecTv's extensive
programming, including up to 60 channels of pay per view movies and events,
various sports packages and the exclusive NFL Sunday Ticket(TM), will continue
to
1
<PAGE> 9
contribute to the growth of DirecTv's subscriber base and DirecTv's market share
for DTH services in the future. In addition, the Company believes that DirecTv's
national marketing campaign (budgeted at approximately $150 million in 1996) and
its alliances with significant strategic partners such as Microsoft provide the
Company with significant marketing advantages over other DTH competitors.
DirecTv's share of current DBS and medium power DTH subscribers was
approximately 51% as of May 31, 1997, and DirecTv obtained approximately 50% of
all new subscribers to DBS and medium power DTH services for each calendar
quarter in 1996 despite the entrance of two new competitors in the DTH
marketplace. During the first five months of 1997, DirecTv again added more new
subscribers (37%) than any other DBS or medium power DTH provider. Although
DirecTv's share of new subscribers can be expected to decline as existing and
new DTH providers aggressively compete for new subscribers, the Company expects
DirecTv to remain one of the leading providers of DBS and medium power DTH
services in an expanding market.
The Company owns the exclusive right to distribute DIRECTV Services in its
territories pursuant to agreements (the "NRTC Member Agreements") with the
National Rural Telecommunications Cooperative (the "NRTC"), an organization the
members of which (the "NRTC Members") are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The NRTC acquired in 1992 the exclusive right to provide DIRECTV
Services to residential households and business establishments located in
designated rural areas of the United States (the "Rural DirecTv Markets") under
an agreement (the "Hughes Agreement") with Hughes Communication Galaxy, Inc.
("Hughes"), the parent company of DirecTv. The Company believes that the
approximately eight million households and numerous business establishments
located in the Rural DirecTv Markets are the most attractive market for DBS
services. Generally, Rural DirecTv Markets are not served or are underserved by
cable systems and offer limited access to other entertainment alternatives,
which should enable the Company to maximize penetration levels and maintain high
customer retention.
The Company has the exclusive right to distribute DIRECTV Services in 17
Rural DirecTv Markets in the following locations (giving effect to the pending
acquisition of the Rural DirecTv Market in Indiana and excluding the effect of
the potential acquisition of an additional Rural DirecTv Market in Georgia):
<TABLE>
<CAPTION>
PERCENTAGE
OF HOMES
NOT
PASSED
LOCATION(1) HOUSEHOLDS BY CABLE SUBSCRIBERS(2) PENETRATION(3)
<S> <C> <C> <C> <C>
Kentucky....................... 368,445 31.23% 21,205 5.76%
Kansas......................... 299,423 19.17% 12,111 4.04%
Georgia........................ 240,229 28.89% 14,490 6.03%
Vermont........................ 209,332 34.80% 22,567 10.78%
South Carolina................. 164,314 31.66% 7,056 4.29%
New Mexico..................... 84,920 16.06% 4,977 5.86%
California..................... 84,006 3.84% 5,660 6.74%
New York....................... 49,593 30.52% 4,579 9.23%
Indiana........................ 131,625 20.00% 10,350 7.86%
--------- ----- ------- -----
Total................ 1,631,887 26.05% 102,995 6.31%
========= ===== ======= =====
</TABLE>
- ---------------
(1) See the chart on page 56 for the geographical areas covered by the Company's
Rural DirecTv Markets.
(2) Reflects actual subscribers at May 31, 1997.
(3) Represents the percentage of households which subscribe to DIRECTV Services
in the Company's Rural DirecTv Markets.
The Company's objective is to be the leading provider of pay television
entertainment and information services in its Rural DirecTv Markets. To achieve
this objective, the Company pursues the following strategy:
- Capitalize on DirecTv Brand Name and Programming. The Company will build
on the recognition of DirecTv and DSS(R) brand names. In addition, the
Company believes that it can continue to capitalize on
2
<PAGE> 10
DirecTv's extensive programming, unique and exclusive sports packages and
large selection of pay per view movies and events to broaden the Company's
subscriber base in its Rural DirecTv Markets. Management also believes
that competitively priced DSS(R) equipment, which is sold in more retail
outlets within its Rural DirecTv Markets than any other DTH product,
provides the Company with a competitive advantage over other DTH
providers.
- Emphasize Direct Marketing. The Company plans to complement the
extensive marketing efforts of DirecTv and its other national distribution
partners through targeted local and regional marketing. The Company has
established or is establishing a direct sales force and Company-owned full
service retail stores in each of its Rural DirecTv Markets. The Company
believes that it can increase penetration more rapidly through its direct
sales approach instead of relying, as some DTH providers have, upon the
consumer to take the initiative to purchase the product and services.
- Establish Strong Local Presence. Unlike a majority of traditional DTH
providers, the Company will continue to seek to maximize penetration and
customer satisfaction in its Rural DirecTv Markets by establishing a
strong local presence within the communities it serves. The Company
provides a full range of services at the local level, including direct
sales, Company-owned retail stores, dealer support services, equipment
installation and customer service. The Company has managers in these
communities to oversee local marketing and customer service operations.
- Operate Regional Clusters. The Company operates in regional clusters
that generate the significant economies of scale of a larger operator and
offer quality centralized customer service to complement local customer
service. The Company believes that the clustering of its Rural DirecTv
Markets results in increased operating efficiencies, including lower
administrative costs as a percentage of revenues, better trained employees
and a higher level of customer service.
- Acquire Additional Rural DirecTv Markets. The Company believes that
consolidation of the Rural DirecTv Markets will continue over the next
three to five years. Beginning with its initial acquisition in March 1996,
the Company has systematically implemented a successful acquisition and
consolidation strategy focused on the Rural DirecTv Markets. The Company
believes that it has a significant opportunity to aggressively acquire
additional rights to provide DIRECTV Services to the approximately 4.0
million households in the approximately 200 Rural DirecTv Markets
currently owned by the original NRTC Members, the majority of which are
rural electric and telephone cooperatives. Management believes that the
Company's experience in completing 16 acquisitions and in entering into a
binding agreement and a letter of intent for a Rural DirecTv Market in
Indiana and a Rural DirecTv Market in Georgia, respectively, will be
instrumental in identifying, negotiating and integrating future
acquisitions. In addition, as the Company continues to grow as a leading
independent provider of DIRECTV Services in the Rural DirecTv Markets,
"fill-in" and contiguous acquisitions should become less attractive to
other potential acquirors as their ability to create significant clusters
is reduced.
The Company believes its strategy, combined with the general
characteristics of the Company's business of marketing DIRECTV Services,
including relatively low administrative overhead and capital expenditure
requirements, strengthens the opportunity for the Company to generate operating
cash flows.
The Company has had a limited operating history during which time it has
generated negative cash flows and net losses that can be attributed to the costs
incurred to purchase Rural DirecTv Markets, to develop and implement its
business plan, to generate the subscriber base required to cover general
corporate and overhead expenses and to the payment of interest and other debt
servicing costs associated with financing activities. The Company expects
negative cash flows and net losses to continue through at least 1997 as the
Company plans to purchase additional Rural DirecTv Markets and to incur
substantial sales and marketing expenses to build its subscriber base.
The principal offices of the Issuers are located at 880 Holcomb Bridge
Road, Building C-200, Roswell, Georgia, 30076, and their telephone number is
(770) 645-4440.
3
<PAGE> 11
OWNERSHIP AND MANAGEMENT
The Company was formed in January 1996 by Columbia Capital Corporation
("Columbia") and senior management to acquire and operate the exclusive rights
to distribute DIRECTV Services in Rural DirecTv Markets. The Company completed
its first acquisition in March 1996 and has made a total of 16 acquisitions to
date (with two additional acquisitions pending). In 1997, the Company raised
additional equity from Columbia, J.H. Whitney & Co. and Fleet Equity Partners
(collectively, the "Equity Investors"). The Equity Investors and management have
contributed to date, in the aggregate, $50.5 million of equity capital to the
Company.
The Company has assembled an experienced management team to execute its
business strategy. Certain members of the senior management team have
significant experience working together at Sterling Cellular, LLC ("Sterling
Cellular"), a multi-system cellular operator serving rural markets comparable to
the Rural DirecTv Markets. The Company's executive team brings to the Company
extensive business acquisition experience in the telecommunications industry, as
well as experience in the sales and delivery of a full array of communications
services to customers in rural America.
RECENT AND PENDING TRANSACTIONS
The Company has completed the following transactions: (i) the acquisition
by the Company during 1996 of the rights to distribute DIRECTV Services in eight
Rural DirecTv Markets (the "1996 Acquisitions"), (ii) the acquisition by the
Company in the first half of 1997 of the rights to distribute DIRECTV Services
in eight Rural DirecTv Markets in Kentucky, Kansas, Vermont and Georgia (the
"1997 Acquisitions"), (iii) the sale by the Company in January 1997 of 205,902
Class B Units (as defined) to Columbia and senior management raising
approximately $2,059,000 of equity capital and the sale by the Company in
February 1997 of 1,333,333 Class A Units (as defined) to 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, (v) the amendment and restatement of its existing credit facility
(the "Existing 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 sublimit for letters of credit, (vi) the conversion of DTS
in October 1997 from a limited liability company to a corporation (the
"Corporate Conversion") and (vii) the execution of a definitive agreement to
acquire the rights to distribute DIRECTV Services in one Rural DirecTv Market in
Indiana (the "Pending Acquisition") and the execution of a letter of intent to
acquire the rights to distribute DIRECTV Services in one Rural DirecTv Market in
Georgia (the "Georgia Acquisition"). Because there can be no assurance that the
Company will be able to negotiate a definitive agreement with respect to the
Georgia Acquisition, the operations of the assets to be acquired pursuant to the
Georgia Acquisition have not been included in the Company's Unaudited Condensed
Pro Forma Financial Statements and the Notes thereto included elsewhere in this
Prospectus or in any other financial or statistical data contained in this
Prospectus.
In contemplation of and in connection with the offering (the "Initial
Offering") of the Private Notes generating gross proceeds to the Company of
$155.0 million, the Company effected the following transactions: (i) 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 Private Notes, (ii) the repayment of the $50.0 million term loans which
were outstanding under the Existing Credit Facility and approximately $32.2
million of the revolving credit loans which were outstanding under the Existing
Credit Facility, (iii) the amendment and restatement of the Existing Credit
Facility pursuant to the Second Amended and Restated Credit Agreement dated July
30, 1997 among the Company and the lenders parties thereto providing for a
revolving credit facility in the amount of up to $70.0 million, with a $50.0
million sublimit for letters of credit, and a $20.0 million term loan facility,
of which $55.6 million is immediately available thereunder (as amended, the
"Restated Credit Facility"). Such transactions (other than the Georgia
Acquisition) are collectively referred to as the "Transactions."
PEGASUS TRANSACTION
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
4
<PAGE> 12
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.
Pegasus is a diversified company that operates in growing segments of the
media and communications industries. Pegasus owns and operates five television
stations affiliated with the Fox Broadcasting Company and has or plans to enter
into local marketing agreements to operate three television stations, two of
which are to be affiliated with The WB Television Network and one affiliated
with the United Paramount Network. After giving effect to the Pegasus
Transaction and certain pending acquisitions, Pegasus (together with the
Company) will serve approximately 250,000 subscribers in Rural DirecTv Markets
in 33 states covering geographic areas containing approximately four million
television households (including approximately one million households not served
by cable). Pegasus also provides cable service to approximately 42,000
subscribers in New England and Puerto Rico.
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.
The Agreement in Principle contemplates the granting of certain
registration rights to the Company's stockholders and the execution of a Voting
Agreement among Marshall W. Pagon, the President and Chief Executive Officer of
Pegasus, certain affiliates of Mr. Pagon, and certain stockholders of the
Company. The Voting Agreement will provide for an increase in the size of
Pegasus' Board of Directors to nine members consisting of three directors
appointed by certain stockholders of the Company, three directors designated by
Mr. Pagon, and three independent directors.
The consummation of the Pegasus Transaction would constitute a Change of
Control under the Indenture. Accordingly, the Agreement in Principle provides
that upon the closing of the Pegasus Transaction, Pegasus shall cause the
Issuers to notify the holders of the Notes of such closing and shall, within the
time required by the Indenture (20 days after such closing), cause the Issuers
to make an offer to purchase all outstanding Notes at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest (including Additional Interest, if any) thereon, to the date of
purchase. See "Description of the Notes -- Offer to Purchase Upon Change of
Control."
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.
THE EXCHANGE OFFER
The Exchange Offer......... $1,000 principal amount of Exchange Notes in
exchange for each $1,000 principal amount of
Private Notes. As of the date hereof, $155,000,000
aggregate principal amount of Private Notes are
outstanding. The Issuers will issue the Exchange
Notes to holders on or promptly after the
Expiration Date.
Resale..................... Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Issuers believe that Exchange
Notes issued pursuant to the Exchange Offer in
exchange for Private Notes may be offered for
resale, resold and otherwise transferred by any
holder
5
<PAGE> 13
thereof (other than any such holder which is an
"affiliate" of the Issuers within the meaning of
Rule 405 under the Securities Act) without
compliance with the registration and prospectus
delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the
ordinary course of such holder's business and that
such holder does not intend to participate and has
no arrangement or understanding with any person to
participate in the distribution of such Exchange
Notes. Each holder accepting the Exchange Offer is
required to represent to the Issuers in the Letter
of Transmittal that, among other things, the
Exchange Notes will be acquired by the holder in
the ordinary course of business and the holder does
not intend to participate and has no arrangement or
understanding with any person to participate in the
distribution of such Exchange Notes.
Any Participating Broker-Dealer that acquired
Private Notes for its own account as a result of
market-making activities or other trading
activities may be a statutory underwriter. Each
Participating Broker-Dealer that receives Exchange
Notes for its own account pursuant to the Exchange
Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such
Exchange Notes. The Letter of Transmittal states
that by so acknowledging and by delivering a
prospectus, a Participating Broker-Dealer will not
be deemed to admit that it is an "underwriter"
within the meaning of the Securities Act. This
Prospectus, as it may be amended or supplemented
from time to time, may be used by a Participating
Broker-Dealer in connection with resales of
Exchange Notes received in exchange for Private
Notes where such Private Notes were acquired by
such Participating Broker-Dealer as a result of
market-making activities or other trading
activities. The Issuers have agreed that, for a
period of 180 days after the Expiration Date, they
will make this Prospectus available to any
Participating Broker-Dealer for use in connection
with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the Exchange
Notes can not rely on the position of the staff of
the Commission enunciated in no-action letters and,
in the absence of an exemption therefrom, must
comply with the registration and prospectus
delivery requirements of the Securities Act in
connection with any resale transaction. Failure to
comply with such requirements in such instance may
result in such holder incurring liability under the
Securities Act for which the holder is not
indemnified by the Issuers.
Minimum Condition.......... The Exchange Offer is not conditioned upon Notes
being tendered or accepted for exchange.
Expiration Date............ 5:00 p.m., New York City time, on ,
1998 unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date and time to which the Exchange Offer is
extended.
Exchange Date.............. The first date of acceptance for exchange of Notes
following the Expiration Date.
Accrued Interest on the
Exchange Notes and the
Private Notes............ Each Exchange Note will bear interest from its
issuance date. Holders of Private Notes that are
accepted for exchange will receive, in cash,
accrued interest thereon to, but not including, the
issuance date of the Exchange Notes. Such interest
will be paid with the first interest payment on the
6
<PAGE> 14
Exchange Notes. Interest on the Private Notes
accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
Conditions to the Exchange
Offer.................... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Issuers. See
"The Exchange Offer -- Conditions."
Procedures for Tendering
Private Notes............ Each holder of Private Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, or an Agent's Message in connection with
a book-entry transfer, together with the Private
Notes and any other required documentation to The
Bank of New York, as Exchange Agent (the "Exchange
Agent") at the address set forth herein. By
executing the Letter of Transmittal, each holder
will represent to the Issuers that, among other
things, the Exchange Notes acquired pursuant to the
Exchange Offer are being obtained in the ordinary
course of business of the person receiving such
Exchange Notes, whether or not such person is the
holder, that neither the holder nor any such other
person (i) has any arrangement or understanding
with any person to participate in the distribution
of such Exchange Notes, (ii) is engaging or intends
to engage in the distribution of such Exchange
Notes or (iii) is an "affiliate," as defined under
Rule 405 of the Securities Act, of the Issuers. See
"The Exchange Offer -- Purpose of the Exchange
Offer" and "-- Procedures for Tendering."
Untendered Private Notes... Following the consummation of the Exchange Offer,
holders of Private Notes eligible to participate
but who do not tender their Private Notes will not
have any further exchange rights and such Private
Notes will continue to be subject to certain
restrictions on transfer. Accordingly, the
liquidity of the market for such Private Notes
could be adversely affected.
Consequences of Failure to
Exchange................. The Private Notes that are not exchanged pursuant
to the Exchange Offer will remain restricted
securities. Accordingly, such Private Notes may be
resold only (i) to the Issuers, (ii) pursuant to
Rule 144A or Rule 144 under the Securities Act or
pursuant to some other exemption under the
Securities Act, (iii) outside the United States to
a foreign person pursuant to the requirements of
Rule 904 under the Securities Act, or (iv) pursuant
to an effective registration statement under the
Securities Act. See "The Exchange
Offer -- Consequences of Failure to Exchange."
Special Procedures for
Beneficial Owners........ Any beneficial owner whose Private Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender should contact such registered
holder promptly and instruct such registered holder
to tender on such beneficial owner's behalf. If
such beneficial owner wishes to tender on such
owner's own behalf, such owner must, prior to
completing and executing the Letter of Transmittal
and delivering its Private Notes, either make
appropriate arrangements to register ownership of
the Private Notes in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time. The Issuers will keep the
Exchange Offer open for not less than thirty days
in order to provide for the transfer of registered
ownership.
7
<PAGE> 15
Guaranteed Delivery
Procedures................. Holders of Private Notes who wish to tender their
Private Notes and whose Private Notes are not
immediately available or who cannot deliver their
Private Notes, the Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent (or comply with
the procedures for book-entry transfer) prior to
the Expiration Date must tender their Private Notes
according to the guaranteed delivery procedures set
forth in "The Exchange Offer -- Guaranteed Delivery
Procedures."
Withdrawal Rights.......... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date.
Acceptance of Private Notes
and Delivery of Exchange
Notes.................... The Issuers will accept for exchange any and all
Private Notes which are properly tendered in the
Exchange Offer prior to 5:00 p.m., New York City
time, on the Expiration Date. The Exchange Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange
Offer."
Use of Proceeds............ There will be no cash proceeds to the Issuers from
the exchange pursuant to the Exchange Offer.
Certain United States
Federal Income Tax
Considerations........... No material federal income tax consequences will
result to holders exchanging Private Notes for
Exchange Notes. See "Certain United States Federal
Income Tax Consequences."
Exchange Agent............. The Bank of New York
THE EXCHANGE NOTES
The Exchange Offer applies to $155,000,000 aggregate principal amount of
Private Notes. The form and terms of the Exchange Notes are identical in all
material respects to the form and terms of the Private Notes (which they
replace) except that: (i) the Exchange Notes bear a Series B designation, (ii)
the Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof, and (iii) the holders of
Exchange Notes will not be entitled to certain rights under the Registration
Rights Agreement, including the provisions providing for an increase in the
interest rate on the Private Notes in certain circumstances relating to the
timing of the Exchange Offer, which rights will terminate when the Exchange
Offer is consummated. See "The Exchange Offer -- Purpose of the Exchange Offer."
The Exchange Notes will evidence the same debt as the Private Notes and will be
entitled to the benefits of the Indenture. See "Description of the Notes." The
Private Notes and the Exchange Notes are referred to herein collectively as the
"Notes."
Securities Offered......... $155,000,000 aggregate principal amount of Series B
12 1/2% Senior Subordinated Notes due 2007 (the
"Exchange Notes").
Issuers.................... Digital Television Services, Inc. and DTS Capital,
Inc. ("Capital"). The Exchange Notes are the joint
and several obligations of the Issuers. In serving
as co-issuer, Capital is acting as an agent of the
Company. Capital has nominal assets, does not
conduct any operations and will not provide
additional security for the Exchange Notes.
Maturity Date.............. August 1, 2007.
Interest Payment Dates..... Interest will accrue at a rate of 12 1/2% per annum
and will be payable semi-annually in cash on each
August 1 and February 1 of each year, commencing
February 1, 1998. See "Description of the
Notes -- Maturity, Interest and Principal of the
Notes."
8
<PAGE> 16
Ranking.................... The Exchange Notes will rank junior to, and be
subordinated in right of payment to, all existing
and future Senior Indebtedness of the Company, on a
parity in right of payment with all senior
subordinated Indebtedness (as defined in
"Description of the Notes -- Certain Definitions")
of the Company and senior in right of payment to
all Subordinated Indebtedness (as defined in
"Description of the Notes -- Certain Definitions")
of the Company. At September 30, 1997, the Company
has approximately $24.2 million of Senior
Indebtedness outstanding on a pro forma basis after
giving effect to the Initial Offering and the
Transactions. The Company has $55.6 million of
availability under its $90.0 million Restated
Credit Facility and is currently permitted by the
Indenture to incur up to $75.0 million of
indebtedness thereunder. Borrowings under the
Restated Credit Facility are guaranteed on a senior
basis by all subsidiaries (the "Subsidiaries") of
the Company and are secured by a security interest
in substantially all of the assets of the Company
and its Subsidiaries. The Company will not be
permitted to incur any debt that is subordinated in
right of payment to any Senior Indebtedness of the
Company and senior in right of payment to the
Notes. See "Risk Factors -- Holding Company
Structure; Subordination" and "Description of the
Notes -- Subordination of the Notes and the
Guaranties."
Optional Redemption........ The Exchange Notes will be redeemable at the option
of the Company, in whole or in part, at any time on
or after August 1, 2002 at the redemption prices
set forth under "Description of the
Notes -- Optional Redemption," plus accrued and
unpaid interest (including Additional Interest (as
defined in 'Description of the Notes -- Certain
Definitions"), if any) thereon, if any, to the date
of redemption. In addition, prior to August 1,
2000, the Company, other than in any circumstance
resulting in a Change of Control, may redeem up to
35% of the originally issued principal amount of
the Exchange Notes at a redemption price equal to
112.50% of the principal amount thereof so
redeemed, plus accrued and unpaid interest thereon,
if any, to the date of redemption, in each case
with the net cash proceeds of (a) one or more
Public Equity Offerings of common equity of the
Company or (b) a sale or series of related sales of
Qualified Equity Interests of the Company to
Strategic Equity Investors, in any such case
resulting in gross cash proceeds to the Company of
at least $25.0 million in the aggregate; provided,
however, that at least 65% of the originally issued
principal amount of Notes would remain outstanding
immediately after giving effect to such redemption.
See "Description of the Notes -- Optional
Redemption."
Change of Control Offer.... Following the occurrence of a Change of Control,
the Company will be required to make an offer to
purchase all outstanding Exchange Notes at a
purchase price in cash equal to 101% of the
principal amount thereof, plus accrued and unpaid
interest (including Additional Interest, if any)
thereon, if any, to the date of purchase. See
"Description of the Notes -- Offer to Purchase Upon
Change of Control" and "The Company -- Pegasus
Transaction."
Asset Sale Proceeds........ The Company will, under certain circumstances, be
required to make an offer to purchase Exchange
Notes with the net cash proceeds of certain asset
sales or other dispositions of assets at a purchase
price in cash equal to 100% of the principal amount
thereof, plus accrued and unpaid interest
(including Additional Interest, if any) thereon, if
any, to the date of
9
<PAGE> 17
purchase. See "Description of the Notes -- Certain
Covenants -- Disposition of Proceeds of Asset
Sales."
Interest Escrow Account.... The Issuers placed approximately $36.5 million of
the net proceeds realized from the sale of the
Private Notes into the Interest Escrow Account to
be held by the Escrow Agent for the benefit of the
holders of the Notes. Such funds, together with the
proceeds from the investment thereof, secure, and
is sufficient to pay, the first four semi-annual
interest payments on the Notes. See "Description of
the Notes -- Security -- Interest Escrow Account."
Security................... The Exchange Notes will be secured by a first
priority security interest in the Interest Escrow
Account.
Guaranty................... 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 Restricted Subsidiaries (as defined in
"Description of the Notes -- Certain Definitions")
of the Company (the "Guarantors"). No Guarantor
will be permitted to incur any debt that is
subordinated in right of payment to its Guarantor
Senior Indebtedness (as defined in "Description of
the Notes -- Certain Definitions") and senior in
right of payment to its Guaranty. Each Guaranty
will, to the extent set forth in the Indenture, be
subordinated in right of payment in full of all
Guarantor Senior Indebtedness of the respective
Guarantor, including obligations of such Guarantor
with respect to the Restated Credit Facility
(including any guaranty thereof).
Certain Covenants.......... The Indenture contains certain covenants that,
among other things, limit the ability of the
Company and its Restricted Subsidiaries to incur
additional Indebtedness, create certain Liens (as
defined in "Description of the Notes -- Certain
Definitions"), make certain Restricted Payments (as
defined in "Description of the Notes -- Certain
Definitions"), permit dividend and other payment
restrictions to apply to such Restricted
Subsidiaries, enter into certain transactions with
Affiliates (as defined in "Description of the
Notes -- Certain Definitions") and certain other
related persons or consummate certain merger,
consolidation or similar transactions. These
covenants are subject to a number of significant
exceptions and qualifications. See "Description of
the Notes -- Certain Covenants."
RISK FACTORS
In reviewing this Prospectus, potential investors should carefully consider
the matters described under the heading "Risk Factors" beginning on page 13.
10
<PAGE> 18
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table presents summary financial data relating to the Company
as of the dates and for the periods indicated. In addition, the following table
presents summary financial data relating to the Company's unaudited pro forma
balance sheet data as of September 30, 1997, and the Company's 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
Transactions. The historical data for the period from January 30, 1996 (date of
formation) to December 31, 1996, have been derived from the audited financial
statements of the Company audited by Arthur Andersen LLP, independent public
accountants. The historical data for other periods presented have been derived
from unaudited information. The data set forth in this table should be read in
conjunction with the Company's Consolidated Financial Statements and Notes
thereto and Unaudited Condensed Pro Forma Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA PRO FORMA
JANUARY 30 TO NINE MONTHS JANUARY 1 TO NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30, DECEMBER 31, ENDED SEPTEMBER 30,
1996 1997 1996 1997
---------------------------------------------------------
------------- (UNAUDITED)
($ IN THOUSANDS, EXCEPT REVENUE PER SUBSCRIBER DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Programming revenue.................. $ 3,085 $ 28,811 $ 32,954 $ 36,177
Equipment sales and installation
revenue............................ 324 3,291 7,070 4,220
-------- ---------- ---------- ----------
Total revenue.................... 3,409 32,102 40,024 40,397
-------- ---------- ---------- ----------
Programming gross profit............. 1,213 11,935 12,860 14,607
Equipment sales and installation
gross profit (loss)................ (74) (735) 1,629 (672)
-------- ---------- ---------- ----------
Total gross profit............... 1,139 11,200 14,489 13,935
Operating expenses excluding
depreciation and amortization...... 2,732 11,442 17,625 13,806
Total depreciation and
amortization....................... 1,148 10,484 17,793 14,282
-------- ---------- ---------- ----------
Operating loss....................... (2,741) (10,726) (20,929) (14,153)
Interest expense, net................ (818) (8,918) (23,831) (18,003)
Other income (expense)(1)............ 24 (124) (94) (140)
-------- ---------- ---------- ----------
Net loss(1)(2)....................... $ (3,535) $ (19,768) $ (44,854) (32,296)
======== ========== ========== ==========
Ratio of earnings to fixed
charges(3)......................... -- -- -- --
Deficiency in fixed charges.......... (3,535) (19,768) (44,854) (32,296)
OTHER DATA:
Pro forma average monthly programming
revenue per subscriber(4).......... n/a n/a n/a $ 39.20
Cash flows used in operating
activities......................... $ (634) $ (4,518) (4,240) (2,304)
EBITDA(1)(5)......................... (1,593) (242) (3,136) 125
Number of subscribers at beginning of
period............................. -- 19,659 58,761 93,414
Subscriber additions through
acquisitions....................... 16,449 66,615 -- --
Net subscriber additions............. 3,210 15,394 34,653 18,247
Number of subscribers at end of
period............................. 19,659 101,668 93,414 111,661
Number of households at end of
period............................. 382,833 1,500,262 1,631,887 1,631,887
Household penetration at end of
period............................. 5.14% 6.78% 5.72% 6.84%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------------
HISTORICAL PRO FORMA
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment
securities(6).......................................... $ 29,971 $ 2,680
Total assets............................................ 218,446 221,046
Total debt (including current portion).................. 176,220 177,120
Members' equity/stockholders' equity.................... 27,017 25,984
</TABLE>
- ---------------
(1) Pro forma other income (expense) amounts do not include interest income
which will be recognized on amounts included in 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 $43.1 million and $30.9 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 the Corporate Conversion, the Company was a limited liability
company and was not required to pay United States federal income taxes.
(3) The ratio of earnings to fixed charges is calculated by adding (i) earnings
(loss) before income taxes plus (ii) fixed charges, with the resulting sum
divided by fixed charges. Fixed charges consist of interest on all
indebtedness, amortization of debt issuance costs (which is included in the
interest expense line above), plus that portion of operating lease rentals
representative of the interest factor.
11
<PAGE> 19
(4) 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.
(5) "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 Indenture to determine whether the Company has complied with certain
covenants and differs from cash flows from operating activities. Pursuant to
the Indenture, Consolidated Operating Cash Flow is calculated with respect
to any period by adding to the consolidated net income of the Company and
the 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, (c) all dividends on preferred equity interests to the extent
not taken into account in determining consolidated net income for such
period and (d) 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.
(6) Excludes approximately $36.5 million placed in the Interest Escrow Account
to fund, together with the proceeds from the investment thereof, the first
four semi-annual interest payments on the Notes.
12
<PAGE> 20
RISK FACTORS
Holders of the Private Notes should consider carefully all of the
information contained in this Prospectus, which may be generally applicable to
the Private Notes as well as the Exchange Notes, before deciding whether to
tender their Private Notes for the Exchange Notes offered hereby and, in
particular, the following factors:
FAILURE TO EXCHANGE PRIVATE NOTES
Exchange Notes will be issued in exchange for Private Notes only after
timely receipt by the Exchange Agent of such Private Notes, a properly completed
and duly executed Letter of Transmittal and all other required documentation.
Therefore, holders of Private Notes desiring to tender such Private Notes in
exchange for Exchange Notes should allow sufficient time to ensure timely
delivery. Neither the Exchange Agent nor the Issuers are under any duty to give
notification of defects or irregularities with respect to tenders of Private
Notes for exchange. Private Notes that are not tendered or are tendered but not
accepted will, following consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof. In addition, any
holder of Private Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes will be required to comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each Participating Broker-Dealer that
receives Exchange Notes for its own account in exchange for Private Notes, where
such Private Notes were acquired by such Participating Broker-Dealer as a result
of market-making activities or any other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such Exchange
Notes. To the extent that Private Notes are tendered and accepted in the
Exchange Offer, the trading market for untendered and tendered but unaccepted
Private Notes could be adversely affected due to the limited amount, or "float,"
of the Private Notes that are expected to remain outstanding following the
Exchange Offer. Generally, a lower "float" of a security could result in less
demand to purchase such security and could, therefore, result in lower prices
for such security. For the same reason, to the extent that a large amount of
Private Notes are not tendered or are tendered and not accepted in the Exchange
Offer, the trading market for the Exchange Notes could be adversely affected.
See "Plan of Distribution" and "The Exchange Offer."
INDEBTEDNESS OF THE COMPANY; HIGH DEGREE OF LEVERAGE
The Company has a substantial amount of indebtedness outstanding. At
September 30, 1997, total consolidated long-term indebtedness of the Company, on
a pro forma basis was approximately $167.8 million, representing approximately
87% of the Company's total capitalization. See "Capitalization." The Company
also may incur up to $90.0 million of indebtedness under the Restated Credit
Facility (of which approximately $55.6 million is available) and is currently
permitted by the Indenture to incur up to $75.0 million of indebtedness
thereunder. The ability of the Company to make payments of principal and
interest on the 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 the Company's control, such as prevailing economic
conditions. There can be no assurance that the Company 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
Restated Credit Facility become due and payable on July 31, 2003 and borrowings
under the term loan established pursuant thereto shall be repaid in 20
consecutive quarterly installments of $200,000 commencing September 30, 1998
with the remaining balance due on July 31, 2003. If the Company does not have
sufficient available resources to repay any indebtedness under the Restated
Credit Facility at such time, the Company 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 the Company's indebtedness also could have other adverse
consequences to holders of the Notes including the effect of such indebtedness
on: (i) the Company's 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) the Company's flexibility
in planning for, or reacting to, changes to its business and market conditions;
(iii) the Company's ability to compete with less highly leveraged competitors;
and (iv) the Company's financial vulnerability in the event of a downturn in its
business or the general economy.
13
<PAGE> 21
See "Use of Proceeds," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Description of Certain
Indebtedness -- Restated Credit Facility" and "Description of the Notes."
HOLDING COMPANY STRUCTURE; SUBORDINATION
The Company is a holding company and derives substantially all of its
operating income and cash flows from the operations of its Subsidiaries. The
Company's cash flow and, consequently, its ability to meet its debt service
obligations, including payment of principal, premium, if any, and interest on
the Notes, is dependent upon cash flow of its Subsidiaries and the payment of
funds by the Subsidiaries to the Company in the form of loans, dividends, fees
or otherwise. While the Guaranties are intended to afford the holders of the
Notes direct claims against the assets of Restricted Subsidiaries, substantially
all of the assets of such Restricted Subsidiaries are pledged to secure
outstanding amounts under the Restated Credit Facility and, further, such
Guaranties are subject to the possible application of fraudulent conveyance
statutes. See "-- Fraudulent Conveyance Considerations."
The Notes will be general unsecured obligations of the Issuers and will be
subordinate in right of payment to all Senior Indebtedness, including
indebtedness under the Restated Credit Facility. As of September 30, 1997, on a
pro forma basis after giving effect to the Initial Offering and the
Transactions, the Company and its Subsidiaries had $24.2 million of Senior
Indebtedness outstanding and $55.6 million of availability under its $90.0
million Restated Credit Facility. The Indenture permits the Company and its
Subsidiaries to incur additional Senior Indebtedness, including currently up to
$75.0 million under the Restated Credit Facility, subject to certain
limitations, and the Company expects from time to time to incur additional
Indebtedness, including Senior Indebtedness, subject to such limitations. By
reason of the subordination provisions of the Indenture, in the event of the
insolvency, liquidation, rearrangement, reorganization, dissolution or other
winding-up of the Issuers, the lenders under the Credit Facility and other
creditors who are holders of Senior Indebtedness must be paid in full before
payment of amounts due on the Notes. Accordingly, there may be insufficient
assets remaining after such payments to pay amounts due on the Notes. The
Guaranties are subordinated to Guarantor Senior Indebtedness of each Guarantor
to the same extent that the Notes are subordinated to Senior Indebtedness of the
Issuers, and the ability to collect under any Guaranties may therefore be
similarly limited.
In addition, the Issuers may not pay principal of, premium, if any, or
interest on, or any other amounts owing in respect of, the Notes, or purchase,
redeem or otherwise retire the Notes, or make any deposit pursuant to defeasance
provisions for the Notes, if Designated Senior Indebtedness (as defined in
"Description of the Notes -- Certain Definitions") is not paid when due, unless
such default is cured or waived or has ceased to exist or such Designated Senior
Indebtedness has been discharged or repaid in full in cash. Under certain
circumstances, no payments may be made for a specified period with respect to
the principal of, premium, if any, and interest on, and any other amounts owing
in respect of, the Notes if a default, other than a payment default, exists with
respect to Designated Senior Indebtedness, including indebtedness under the
Restated Credit Facility, unless such default is cured, waived or has ceased to
exist or such indebtedness has been repaid in full. See "Description of the
Notes -- Subordination of the Notes and the Guaranties." If any Event of Default
occurs and is continuing, The Bank of New York, as trustee under the Indenture
(the "Trustee") or the holders of at least 25% in principal amount of the then
outstanding Notes may declare all the Notes to be due and payable immediately.
However, such a continuing Event of Default also would permit the acceleration
of all outstanding obligations under the Restated Credit Facility. In such an
event, the subordination provisions of the Indenture would prohibit any payments
to holders of the Notes unless and until such obligations (and any other
accelerated Senior Indebtedness) have been repaid in full. See "Description of
the Notes -- Subordination of the Notes and the Guaranties."
In addition, the Notes will not be secured by any assets of the Issuers or
the Guarantors. The obligations of the Issuers and the Guarantors under the
Restated Credit Facility will be secured by substantially all of their assets,
including a pledge of all of the equity interests of the Subsidiaries. If the
Issuers become insolvent or are liquidated, or if payment under the Restated
Credit Facility is accelerated, the lenders under the Restated Credit Facility
would be entitled to exercise the remedies available to a secured lender under
applicable law and pursuant to the terms of the Restated Credit Facility.
Accordingly, any claims of such lenders with respect to such assets
14
<PAGE> 22
and pledged equity interests will be prior to any claim of the holders of the
Notes with respect to such assets and pledged equity interests. See "Description
of Certain Indebtedness -- Restated Credit Facility."
LIMITED OPERATING HISTORY; NEGATIVE CASH FLOW
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 Rural DirecTv Markets, to develop
and implement its business plan and to generate the subscriber base required to
cover 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 Rural DirecTv Markets 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 the Company's
services and the degree of competition encountered by the Company. There can be
no assurance when or if the Company will generate positive operating cash flow
or net income.
SUBSTANTIAL CAPITAL REQUIREMENTS; RESTRICTIONS IMPOSED BY LENDERS
Borrowings under the Restated Credit Facility and the proceeds of the
Initial Offering will be used to finance future acquisitions of Rural DirecTv
Markets, to fund capital expenditures, to fund general working capital
requirements and operating losses. The Company believes that the proceeds of the
Initial Offering and the availability under the Restated Credit Facility
together with the Company's existing cash will be sufficient to fund such
acquisitions and the Company's operations. However, no assurance can be given
that actual cash requirements will not materially exceed the Company's estimated
capital requirements and available capital. Moreover, the Company's ability to
access the total availability of the Restated Credit Facility is dependent on
maintaining certain specified financial and operating covenants. Thus, there can
be no assurance that the Company will be able to draw funds under the Restated
Credit Facility sufficient to finance the continued development of the Company's
planned acquisitions and operations. In addition, the amount of capital required
will depend upon a number of factors, including costs of future acquisitions,
capital costs, growth in the number of subscribers, technological developments,
marketing and sales expense and competitive conditions. No assurance can be
given that, in the event the Company were to require additional financing, such
additional financing would be available on terms satisfactory to the Company or
at all.
The Restated Credit Facility contains financial and operating covenants
which, among other things, require that the Company maintain certain financial
ratios and satisfy certain financial tests and limit the Company's ability to
incur other indebtedness, pay dividends, engage in transactions with affiliates,
sell assets and engage in mergers and consolidations and other acquisitions. If
the Company fails to comply with these covenants, the lenders under the Restated
Credit Facility will be able to accelerate the maturity of the indebtedness
under the Restated Credit Facility which could materially adversely affect the
Company's financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources," "Description of Certain
Indebtedness -- Restated Credit Facility" and "Description of the Notes."
RELIANCE ON DIRECTV AND NRTC
Because the Company is, through the NRTC, a distributor of DIRECTV
Services, the Company would be adversely affected by any material adverse change
in the assets, financial condition, programming, technological capabilities or
services of DirecTv or its parent corporation, Hughes, including DirecTv's
failure to retain or renew its FCC licenses to transmit radio frequency signals
from the orbital slots occupied by its satellites, at least some of which
licenses expire and are subject to renewal in December 1999.
The Company acquired the exclusive right to provide DIRECTV Services to
residential and commercial subscribers in the Rural DirecTv Markets pursuant to
the Hughes Agreement and the NRTC Member Agreements. The Company does not have a
direct contractual relationship with Hughes. In general, upon a default by the
NRTC under the Hughes Agreement the Company would have the right to acquire
DIRECTV Services directly from DirecTv. In addition, the NRTC has contracted
with third parties to provide the Company
15
<PAGE> 23
and other NRTC Members with certain services, including customer authorization,
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 of acquiring those services elsewhere would not
exceed the amounts payable to the NRTC under the NRTC Member Agreements.
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.
Such agreements may be terminated by the NRTC (i) as a result of a breach by
Hughes under the Hughes Agreement, with the NRTC remaining responsible for
paying to the Company its pro rata portion of any refunds that the NRTC receives
from Hughes under the Hughes Agreement, (ii) if the Company fails to make any
payment due to the NRTC or otherwise breaches a material obligation of the NRTC
Member Agreement and such failure or breach continues for more than 30 days
after written notice from the NRTC, or (iii) if the Company fails to keep and
maintain any letter of credit required to be provided to the NRTC in full force
and effect or to adjust the amount of the letter of credit as required by the
NRTC Member Agreement. 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 will be able to obtain similar DBS services
from other sources.
ABILITY TO ACQUIRE DBS SERVICES FROM THE NRTC AND DIRECTV AFTER EXPIRATION OF
TERM OF NRTC MEMBER AGREEMENTS
The DIRECTV Services offered by the Company to its subscribers are acquired
by the Company's Subsidiaries pursuant the NRTC Member Agreements. The NRTC, in
turn, acquires the services through the Hughes Agreement, pursuant to which
Hughes has granted to the NRTC the exclusive right to provide DIRECTV Services
in the Rural DirecTv Markets. Under the NRTC Member Agreements, each Subsidiary
has the right to provide DIRECTV Services in its Rural DirecTv Markets.
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 and United States Satellite Broadcasting Corporation
("USSB"), which owns five transponders on the first DirecTv satellite, 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.
The NRTC has advised the Company that the Hughes Agreement provides the
NRTC with a right of first refusal to obtain DBS Services (other than
programming services) in substantially the same form as such DBS Services are
provided under the existing Hughes Agreement in the event that Hughes elects to
launch one or more successor satellites upon the removal of the present
satellites from their assigned orbital locations. The NRTC Member Agreements do
not expressly provide an equivalent right of first refusal for the NRTC Members
to acquire DBS services through the NRTC should the NRTC exercise its right of
first refusal under the Hughes Agreement. The NRTC Member Agreements do provide,
however, that the Company has substantial proprietary interests in and rights to
the information and data with respect to the Company's subscribers who subscribe
to its "select" services only. DirecTv and the Company each have such interests
and rights with respect to the information and data regarding the Company's
subscribers who subscribe to both DIRECTV Services and "non-select" services.
Moreover, the Company (through the 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. Although the Company believes that if the
NRTC exercises its right of first refusal under the Hughes Agreement, such right
will be made available by the NRTC to the Company, the NRTC is not obligated to
exercise its right of first refusal or, if such right of first refusal is
exercised, to make such right available to the Company. There can be no
assurance that, upon removal of the current satellites from their orbital
locations at the end of their useful lives (estimated to be in 2008 or 2009),
the Company would continue to have access to DIRECTV Services.
The right of first refusal in the Hughes Agreement may not be available to
the NRTC if Hughes does not launch a successor satellite, which may be the case,
for example, if Hughes ceases to own the FCC licenses
16
<PAGE> 24
necessary to transmit from its existing orbital locations. The right of first
refusal also may not be available to the NRTC if the NRTC is in default under
the Hughes Agreement or if the NRTC is unable to raise sufficient funds from its
then existing members or others to purchase rights in any successor Hughes
satellite. Even if the NRTC is able to exercise its right of first refusal to
acquire such rights, the terms and conditions, including the financial terms, of
the continuing relationship between the NRTC and Hughes cannot be predicted.
Moreover, the terms and conditions, including the financial terms, under which
the NRTC may make available such rights to the Subsidiaries and other NRTC
Members is unknown. Specifically, given the rapid changes in satellite
transmission technology (including digital compression) and the expected
longevity of the existing DirecTv satellites, it is not possible to predict
Hughes' cost to launch successor satellites, a proportionate part of which would
likely be passed through to the NRTC and to the Company. In the event the
Company is unable to acquire DIRECTV Services through Hughes and the NRTC after
the expiration of the NRTC Member Agreements, the Company would be required to
acquire such DBS services from others, or to sell its subscriber base to one or
more other DBS providers and cease business operations.
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 Douglas S.
Holladay, Jr., who serves as the President of the Company, Earle A. MacKenzie,
the Company's Chief Operating Officer, William J. Dorran, the Company's Senior
Vice President, and Donald A. Doering, the Company's Vice President, Chief
Financial Officer, Treasurer and Secretary, each of whom has an employment
agreement with the Company. See "Management." Although the Company maintains
"key-man" insurance on the lives of Messrs. Holladay and Doering, the loss of
any of Messrs. Holladay, MacKenzie, Dorran or Doering or other key management
personnel or the failure to recruit and retain additional key personnel could
have a material adverse effect on the Company's financial condition and results
of operations.
RELIANCE ON SATELLITE TRANSMISSION TECHNOLOGY
There are numerous risks associated with satellite transmission technology,
in general, and DirecTv's delivery of DBS services, in particular. Satellite
transmission of video, audio and other data is highly complex and requires the
manufacture and integration of diverse and advanced components that may not
function as expected. Although according to Hughes and USSB the DirecTv
satellites used to provide the DBS services 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 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.
The loss of a satellite could have a material adverse effect on DirecTv and the
Company. Furthermore, the digital compression technology used by DBS providers
is not standardized and is undergoing rapid change. Such changes or other
technological changes or innovations may require modifications to ground station
programming uplink facilities, satellites and subscriber equipment, which
modifications could be costly. Such costs would likely be passed through by
DirecTv or the NRTC to the Company, and would be borne by the Company to the
extent it could not pass such costs through to its subscribers in the form of
higher fees.
RISK OF SIGNAL THEFT
The 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(R) equipment will remain totally
effective. If the DSS(R) 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(R) equipment encryption
systems have been compromised. There can be no assurance that continued theft of
DirecTv programming will not adversely affect the Company's operations in the
future.
DirecTv and the Company are prohibited from providing DIRECTV Services
outside the United States. Despite subscribers' assurances that they receive
programming within one of the Company's Rural DirecTv Markets, a portion of the
Company's subscribers may, in fact, be receiving DIRECTV Services outside the
17
<PAGE> 25
Company's markets. If the Company must disconnect a significant portion of its
subscribers because they receive services outside the Company's Rural DirecTv
Markets, the Company's financial condition and results of operations could be
adversely affected.
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. See "Business -- DirecTv."
Pursuant to the Cable Act and the FCC's rules, programming developed by
vertically integrated cable-affiliated programmers generally must be offered to
all multi-channel 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, and therefore the Company's ability, to
acquire programming or acquire programming on a cost-effective basis.
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(R)
equipment, currently ranging from $199 to $599 depending upon the level of
features desired and number of television sets to be connected. While the
Company believes that the suppliers of the subscriber equipment have strong
incentives to supply equipment at affordable prices as the subscriber base
expands and as competition increases among equipment vendors, there can be no
assurance that such costs will in fact remain at a level that will allow the
Company to continue to build its subscriber base. To the extent that the cost of
the equipment remains an obstacle to increased demand for satellite services
offered by the Company, the growth of the Company's subscriber base could be
delayed, adversely affecting the Company's financial condition and results of
operations.
Another potential hurdle to widespread adoption of DBS is that subscribers
do not receive local news and sports. While all of the major DBS providers,
including DirecTv, offer broadcast network channels on an a la carte or package
basis, the issue of the extent to which FCC regulations prohibit satellite
providers from selling network programming to households that can receive a
signal from that network's local affiliate station using traditional off-air
antennae remains unresolved. Certain subscribers may not be willing to purchase
DBS because of this uncertainty. See "Regulation."
REGULATION
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.
18
<PAGE> 26
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(R) dishes are only 18 inches in
diameter, the FCC's rules are expected to ease local regulatory burdens on the
use of such dishes. See "Business -- Regulation."
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 Rural DirecTv
Markets 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 Rural DirecTv Markets could adversely
affect the Company's average programming revenue per subscriber and subscriber
growth.
COMPETITION AND TECHNOLOGICAL CHANGE
The industry in which the Company operates is highly competitive, and the
Company expects to face intense competition from existing and potential
competitors. The Company's competitors include a broad range of companies
engaged in the provision of communications and entertainment services, including
cable operators, other DTH programming providers, wireless cable operators,
broadcast television networks and home video products companies, as well as
companies developing new technologies. Certain of these competitors and
potential competitors are well established companies and have significantly
greater financial and marketing resources than the Company. The Company expects
to compete primarily against providers of subscription programming, such as
cable and satellite operators. The Company also expects to encounter a number of
challenges in competing with cable television providers. Cable operators
generally have large installed customer bases, and many cable television
operators have significant investments in, and access to, programming. The
Company anticipates that many cable systems in the United States will be
upgraded to provide the quality of programming and quality signal currently
available through DBS services; the Company believes, however, that due to the
expense of upgrading less densely populated areas such as those within the Rural
DirecTv Markets, cable systems in the Rural DirecTv Markets in general will be
upgraded more slowly than those in more densely populated areas. In order to
substantially increase its subscriber base, the Company may find it necessary to
attract customers who currently subscribe to cable.
The Company competes with companies offering programming through various
satellite broadcasting systems, although DirecTv, USSB and EchoStar Satellite
Broadcasting Corporation ("EchoStar") are the only current domestic DBS
operators. All other domestic DTH operators currently transmit from low power or
medium power satellites, which generally require the use of larger and, in the
case of low power DTH broadcasting, more expensive dishes. Several companies,
including medium power DTH operators, have announced plans to broadcast from DBS
satellites. Certain regional telephone operators have also expressed an interest
in becoming subscription television providers. The entry of these competitors
into the subscription television market would increase competition substantially
and could have a material adverse effect on the financial condition and results
of operations of the Company.
A variety of other technologies are under development that could result in
increased competition for the Company. There can be no assurance that additional
competitors will not enter the markets that the Company serves or that the
Company will be able to succeed against such competition. Moreover, changes in
technology could lower the cost of competitive services to a level where the
Company's services will become less
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<PAGE> 27
competitive or where the Company will need to reduce its service prices in order
to remain competitive. See "Business -- Competition."
INABILITY TO MANAGE GROWTH EFFECTIVELY
The Company has experienced a period of rapid growth primarily as a result
of the implementation of its acquisition strategy. In order to achieve its
business objectives, the Company expects to continue to expand largely through
acquisitions of Rural DirecTv Markets, 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 will require it to
continue to improve its operational, financial and management information
systems, and to motivate and effectively manage its existing employees, and hire
and retain additional personnel as its level of operations grows. If the
Company's management is unable to manage growth effectively, the Company's
financial condition and results of operations could be materially adversely
affected.
RISKS ATTENDANT TO ACQUISITION STRATEGY
The Company's primary business objective is to build its subscriber base
and increase its revenues and achieve profitability as it acquires the right to
provide DIRECTV Services in additional Rural DirecTv Markets. Since January
1996, the Company has acquired or entered into definitive agreements or letters
of intent to acquire the right to provide DIRECTV Services in 18 Rural DirecTv
Markets. Acquisitions require the negotiation of a definitive agreement and,
among other conditions, the prior approval of Hughes and the NRTC. There can be
no assurance that the Company will be able to complete the Pending Acquisition,
with respect to which it has entered into a definitive agreement, or that it
will be able to negotiate a definitive agreement with respect to or complete the
Georgia Acquisition, with respect to which it has entered into a letter of
intent. In addition to these conditions, each such acquisition is subject to
conditions typical in acquisitions of this nature, certain of which conditions,
such as the consent of Hughes and the NRTC, may be beyond the control of the
Company. There can be no assurance that future acquisitions can be completed by
the Company at prices acceptable to the Company or at all. There can be no
assurance that the anticipated benefits of any of the acquisitions described
herein or future acquisitions will be realized. The process of integrating
acquired operations into the Company's operations may result in unforeseen
operating difficulties, could absorb significant management attention and may
require significant financial resources that would otherwise be available for
the ongoing development or expansion of the Company's existing operations. The
Company's acquisition strategy may be unsuccessful since the Company may be
unable to identify suitable acquisitions in the future or, if identified, to
arrive at favorable prices and terms. The Company's ability to continue to
pursue its acquisition strategy will also be dependent upon its ability to
obtain additional financing on favorable terms. The Company is aware that
Pegasus and at least one other company are currently pursuing a strategy of
acquiring Rural DirecTv Markets, and there can be no assurance that such
companies or others will not have greater financial resources than the Company
and that their attempts to acquire Rural DirecTv Markets will not have an
adverse effect on the Company's ability to implement its acquisition strategy.
In addition, possible future acquisitions by the Company could result in the
incurrence of additional debt and contingent liabilities which could materially
adversely affect the Company's financial condition and results of operations.
CHANGE OF CONTROL
A Change of Control, as defined in the Indenture, would require that the
Issuers offer to purchase the Notes at a purchase price of 101% of the principal
amount thereof, plus accrued and unpaid interest thereon, if any, to the date of
purchase. The Restated Credit Facility may prohibit the Issuers from
repurchasing any subordinated indebtedness of the Company, including the Notes,
the violation of which would constitute an event of default under the Restated
Credit Facility. A Change of Control may also constitute an event of default
under the Restated Credit Facility, 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
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. In addition, Pegasus has covenanted
in the
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<PAGE> 28
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 as required by the Indenture. Should the Issuers have insufficient
funds with which to close such Offer to Purchase, additional financing
arrangements would be required. There can be no assurance that the Issuers will
have sufficient funds or that additional financing will be available. Moreover,
there can be no assurance that, upon any other Change of Control, the Issuers
would have sufficient funds available at such time to satisfy their obligations
under the Indenture and the Restated Credit Facility or would have the ability
at such time to refinance outstanding amounts thereunder. See "Description of
Certain Indebtedness -- Restated Credit Facility," "Description of the Notes,"
and "The Company -- Pegasus Transaction."
RISK OF INABILITY TO REALIZE UPON SECURITY INTERESTS
The Notes are secured by amounts segregated in the Interest Escrow Account.
See "Description of the Notes -- Security." The security interests are perfected
and financing statements have been filed in jurisdictions considered
appropriate. The ability of the Trustee under the Indenture to foreclose on such
collateral upon the occurrence of an Event of Default (as defined in
"Description of the Notes -- Events of Default"), however, will be subject to
perfection and priority issues and to practical problems associated with
realization upon the security interest. If an Event of Default occurs with
respect to the Notes, the liquidation of the collateral securing the Notes would
not produce proceeds in an amount sufficient to pay the principal, premium, if
any, and accrued interest on the Notes. In addition, the ability to take
possession and dispose of the collateral securing the Notes upon acceleration is
likely to be significantly impaired or delayed by applicable bankruptcy law if a
bankruptcy action were to be commenced by or against the Issuers.
FRAUDULENT CONVEYANCE CONSIDERATIONS
The Issuers' obligations under the Notes will be guaranteed by
substantially all of the Company's Restricted Subsidiaries. If, under relevant
federal and state fraudulent conveyance statutes in a bankruptcy, reorganization
or rehabilitation case or similar proceeding or a lawsuit by or on behalf of
unpaid creditors of the Issuers or the Restricted Subsidiaries, a court were to
find that, at the time the Guaranties of the Restricted Subsidiaries were
issued, (i) the Restricted Subsidiaries issued such Guaranties with the intent
of hindering, delaying or defrauding current or future creditors or (ii) the
Restricted Subsidiaries received less than reasonably equivalent value or fair
consideration for issuing such Guaranties and a Restricted Subsidiary (A) was
insolvent or was rendered insolvent by reason of the transactions, (B) was
engaged, or about to engage, in a business or transaction for which its assets
constituted unreasonably small capital, (C) intended to incur, or believed that
it would incur, debts beyond its ability to pay as such debts matured (as all of
the foregoing terms are defined in or interpreted under such fraudulent
conveyance statutes) or (D) was a defendant in an action for money damages, or
had a judgment for money damages docketed against it (if, in either case, after
final judgement, the judgment is unsatisfied), such court could avoid or
subordinate the Guaranties of the Restricted Subsidiaries to presently existing
and future indebtedness of the Restricted Subsidiaries and take other action
detrimental to the rights of the holders of the Notes and the Guaranties of the
Restricted Subsidiaries, including, under certain circumstances, invalidating
such Guaranties. Among other things, a legal challenge of a Guaranty of a
Restricted Subsidiary on fraudulent conveyance grounds may focus on the
benefits, if any, realized by such Restricted Subsidiary as a result of the
issuance by the Issuers of the Notes. To the extent such Guaranty is voided as a
fraudulent conveyance or held unenforceable for any other reason, the holders of
the Notes would cease to have any claim in respect of such Restricted Subsidiary
and would be creditors solely of the Issuers.
The measure of insolvency for purposes of the foregoing considerations will
vary depending upon the federal or local law that is being applied in any such
proceeding. Generally, however, a Restricted Subsidiary would be considered
insolvent if, at the time it incurs the indebtedness constituting its Guaranty,
either (i) the fair market value (or fair saleable value) of its assets is less
than the amount required to pay its total existing debts and liabilities
(including the probable liability on contingent liabilities) as they become
absolute and matured or (ii) it is incurring debts beyond its ability to pay as
such debts mature.
The Company believes that at the time of issuance of the Exchange Notes by
the Issuers and the Exchange Guaranties by the Restricted Subsidiaries, which
will occur upon the consummation of the Exchange Offer, the
21
<PAGE> 29
Company and the Guarantors will (A) be neither insolvent nor rendered insolvent
thereby, (B) have sufficient capital to operate their respective businesses
effectively, (C) be incurring debts within their respective abilities to pay as
the same mature or become due and (D) have sufficient resources to satisfy any
probable money judgment against them in any pending action. There can be no
assurance, however, that such beliefs will prove to be correct or that a court
passing on such questions would reach the same conclusions.
CERTAIN CONSEQUENCES RELATED TO ISSUANCE OF THE NOTES AT A DISCOUNT
The Private Notes were issued at a discount from their principal amount. If
a bankruptcy is commenced by or against either of the Issuers or any of the
Guarantors under the United States Bankruptcy Code after the issuance of the
Notes, the claim of a holder of Notes against such Issuer or Guarantor with
respect to the principal amount thereof may be limited to an amount equal to the
sum of (i) the initial offering price for the Notes and (ii) that portion of the
discount that is not deemed to constitute "unmatured interest" for purposes of
the United States Bankruptcy Code. Any discount on the Notes that was not
amortized as of any such bankruptcy filing may constitute "unmatured interest."
ABSENCE OF PUBLIC MARKET FOR THE NOTES
As of the date hereof, the only registered holder of Private Notes is Cede
& Co., as the nominee of DTC. Prior to the offering of the Private Notes, there
had been no market for the Notes and there can be no assurance that such a
market will develop, or if such market develops, as to the liquidity of such
market. The Exchange Notes will not be listed on any securities exchange, but
the Private Notes are eligible for trading in the National Association of
Securities Dealers, Inc.'s Private Offerings, Resales and Trading through
Automatic Linkages (PORTAL) market. The Initial Purchasers have advised the
Issuers that they currently intend to make a market in the Notes, as permitted
by applicable laws and regulations; however, the Initial Purchasers are not
obligated to do so and may discontinue such market-making at any time without
notice to the holders of the Notes. In addition, such market-making activities
may be limited during the Exchange Offer and the pendency of any Shelf
Registration Statement. Accordingly, there can be no assurance that a trading
market for the Notes will develop or will provide liquidity to the holders
thereof. Historically, the market for non-investment grade debt has been subject
to disruptions that have caused substantial volatility in the prices of
securities similar to the Notes. There can be no assurance that, if a market for
the Notes were to develop, such a market would not be subject to similar
disruptions. See "The Exchange Offer" and "Plan of Distribution."
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<PAGE> 30
THE COMPANY
DTS was formed in January 1996 by Columbia and senior management to acquire
and operate the exclusive rights to distribute DIRECTV Services in Rural DirecTv
Markets. The Company completed its first acquisition in March 1996 and has made
a total of 16 acquisitions to date (with two additional acquisitions pending).
In connection with the Company's expansion, Columbia increased its investment in
the Company while raising additional equity from the other Equity Investors. The
Equity Investors and management have contributed to date, in the aggregate,
$50.5 million of equity capital to the Company.
The Company's principal executive offices are located at 880 Holcomb Bridge
Road, Building C-200, Roswell, Georgia, 30076, and its telephone number is (770)
645-4440.
CORPORATE CONVERSION
DTS is a corporation organized under the laws of the State of Delaware.
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, DTS
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 Payment-in-Kind Convertible
Preferred Stock, par value $.01 per share, of the Company (the "Series A
Preferred Stock"), (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, (iv) the member interests in the LLC evidenced by the
Class B Units (the "Class B Units") were converted into Common Stock, par value
$.01 per share, of the Company (the "Common Stock"), (v) the member interests in
the LLC evidenced by the Class C Units (the "Class C Units"), together with such
Class C Unit holder's promissory notes in the principal amount of $10.00 per
share, were exchanged for shares of 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 Common Stock, (vii) all of the resulting capital stock of
the Company became subject to the Stockholders Agreement dated as of October 10,
1997 (the "Stockholders Agreement") among the Company, the holders of the Common
Stock and the holders of the Series A Preferred Stock, (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.
SUBSIDIARIES
In connection with the reorganization of the Company in February 1997 (the
"Reorganization"), the Company contributed to the capital of DTS Management, LLC
("DTS Management") the Company's ownership interest in each of its direct
Subsidiaries (other than DTS Management). As a result thereof, each Subsidiary
became a wholly-owned direct Subsidiary of DTS Management and a wholly-owned
indirect Subsidiary of the Company. Except for one Subsidiary which is a
Delaware limited liability company and one Subsidiary which is a New Mexico
corporation, all of the wholly-owned indirect Subsidiaries of the Company are
limited liability companies organized under the laws of the State of Georgia.
Capital is a Delaware corporation and a wholly-owned subsidiary of DTS.
PEGASUS TRANSACTION
On November 6, 1997, the Company entered into the Agreement in Principle
with 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 pursuant to the Pegasus
Transaction. 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.
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<PAGE> 31
Pegasus is a diversified company that operates in growing segments of the
media and communications industries. Pegasus owns and operates five television
stations affiliated with the Fox Broadcasting Company and has or plans to enter
into local marketing agreements to operate three television stations, two of
which are to be affiliated with The WB Television Network and one affiliated
with the United Paramount Network. After giving effect to the Pegasus
Transaction and certain pending acquisitions, Pegasus (together with the
Company) will serve approximately 250,000 subscribers in Rural DirecTv Markets
in 33 states covering geographic areas containing approximately four million
television households (including approximately one million households not served
by cable). Pegasus also provides cable service to approximately 42,000
subscribers in New England and Puerto Rico.
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.
The Agreement in Principle contemplates the granting of certain
registration rights to the Company's stockholders and the execution of a Voting
Agreement among Marshall W. Pagon, the President and Chief Executive Officer of
Pegasus, certain affiliates of Mr. Pagon, and certain stockholders of the
Company. The Voting Agreement will provide for an increase in the size of
Pegasus' Board of Directors to nine members consisting of three directors
appointed by certain stockholders of the Company, three directors designated by
Mr. Pagon, and three independent directors.
The consummation of the Pegasus Transaction would constitute a Change of
Control under the Indenture. Accordingly, the Agreement in Principle provides
that upon the closing of the Pegasus Transaction, Pegasus shall cause the
Issuers to notify the holders of the Notes of such closing and shall, within the
time required by the Indenture (20 days after such closing), cause the Issuers
to make an offer to purchase all outstanding Notes at a purchase price in cash
equal to 101% of the aggregate principal amount thereof, plus accrued and unpaid
interest (including Additional Interest, if any) thereon, to the date of
purchase. See "Description of the Notes - Offer to Purchase Upon Change of
Control."
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.
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<PAGE> 32
ORGANIZATIONAL STRUCTURE
[ORGANIZATIONAL STRUCTURE CHART]
- ---------------
(1) The Notes are the joint and several obligations of the Company and Capital.
Capital has nominal assets, does not conduct any operations and will not
provide additional security for the Notes.
(2) The Restated Credit Facility is secured by a pledge of the Company's member
interest in DTS Management.
(3) The Restated Credit Facility is Senior Indebtedness to which the Notes are
subordinated in right of payment.
(4) The Guaranties by the Subsidiaries of the Notes are subordinated to the
guaranties by the Subsidiaries of the Restated Credit Facility.
(5) The Restated Credit Facility is secured by a pledge of DTS Management's
member interests in and stock of the Subsidiaries.
(6) The guaranties by the Subsidiaries of the Restated Credit Facility are
secured by a pledge of substantially all of the assets of the Subsidiaries.
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<PAGE> 33
USE OF PROCEEDS
USE OF PROCEEDS OF THE EXCHANGE NOTES
The Exchange Offer is intended to satisfy certain obligations of the
Issuers under the Registration Rights Agreement. The Issuers will not receive
any proceeds from the issuance of the Exchange Notes offered hereby. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Issuers will receive, in exchange, Private Notes in like principal amount.
The form and terms of the Exchange Notes are substantially identical in all
material respects to the form and terms of the Private Notes, except as
otherwise described herein under "The Exchange Offer -- Terms of the Exchange
Offer." The Private Notes surrendered in exchange for the Exchange Notes will be
retired and cancelled and cannot be reissued. Accordingly, issuance of the
Exchange Notes will not result in any increase in the outstanding indebtedness
of the Issuers.
USE OF PROCEEDS OF THE PRIVATE NOTES
The net proceeds to the Company from the sale of the Private Notes were
approximately $145.6 million, after deducting discounts, commissions and
offering expenses. The Company placed approximately $36.5 million of the net
proceeds in the Interest Escrow Account to fund, together with the proceeds from
the investment thereof, the first four semi-annual interest payments on the
Notes, and repaid (i) the $50.0 million term loans outstanding under the
Existing Credit Facility and (ii) approximately $32.2 million of the revolving
credit loans outstanding under the Existing Credit Facility. The balance of the
net proceeds of the Initial Offering will be used (i) to finance the acquisition
of Rural DirecTv Markets and related costs and expenses, including the Pending
Acquisition and the Georgia Acquisition, (ii) to finance capital expenditures of
the Company and its Subsidiaries and (iii) for the general corporate purposes
and working capital needs of the Company and its Subsidiaries.
The Existing Credit Facility provided for a $50.0 million term loan
facility and a $85.0 million revolving credit facility, with a $50.0 million
sublimit for letters of credit. Of the approximately $82.2 million of
indebtedness incurred under the Existing Credit Facility, approximately $66.9
million was used, together with funds from the Equity Investors, to acquire the
exclusive rights to provide DIRECTV Services in 9 of the Company's Rural DirecTv
Markets, approximately $3.6 million was used to refinance indebtedness incurred
in connection with the Company's acquisition of DBS rights in two other Rural
DirecTv Markets and approximately $11.7 million was used to cover operating
losses and for general corporate purposes. The Restated Credit Facility 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 revolving credit commitments under the Restated Credit Facility reduce
quarterly commencing in September 1999 until June 30, 2003, at which time all
loans outstanding at that date will be repayable. The term loan facility
established pursuant to the Restated Credit Facility shall be repaid in 20
consecutive quarterly installments of $200,000 each commencing September 30,
1998 with the remaining balance due on July 31, 2003. See "Description of
Certain Indebtedness -- Restated Credit Facility." Borrowings under the Restated
Credit Facility may be used (i) to refinance certain existing indebtedness, (ii)
to finance the acquisition of certain Rural DirecTv Markets and related costs
and expenses, (iii) to finance capital expenditures of the Company and its
Subsidiaries and (iv) for the general corporate purposes and working capital
needs of the Company and its Subsidiaries. See "Description of Certain
Indebtedness -- Restated Credit Facility."
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<PAGE> 34
<TABLE>
<CAPTION>
($ IN MILLIONS)
<S> <C>
SOURCES:
Net proceeds from the Private Notes(1).................... $145.6
======
USES:
Deposit to be placed in the Interest Escrow Account....... $ 36.5
Repayment of Term Loans................................... 50.0
Repayment of Revolving Credit Loans....................... 32.2
Acquisitions and general corporate purposes............... 26.9
------
Total uses........................................ $145.6
======
</TABLE>
- ---------------
(1) Net proceeds of the sale of the Private Notes are net of approximately $9.4
million of transaction expenses, including discounts and commissions.
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<PAGE> 35
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The Private Notes were originally issued and sold on July 30, 1997 (the
"Issue Date"). Such sales were not registered under the Securities Act in
reliance upon the exemption provided in Section 4(2) of the Securities Act and
Rule 144A promulgated under the Securities Act. In connection with the sale of
the Private Notes, the Issuers agreed to file with the Commission a registration
statement relating to the Exchange Offer (the "Registration Statement"),
pursuant to which the Exchange Notes, consisting of another series of senior
subordinated notes of the Issuers covered by such Registration Statement and
containing terms identical in all material respects to the Private Notes, except
as set forth in this Prospectus, would be offered in exchange for Private Notes
tendered at the option of the holders thereof.
The Issuers, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on July 30, 1997 (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, the Issuers and the
Guarantors agreed to file with the Commission the Registration Statement on the
appropriate form under the Securities Act with respect to the Exchange Notes to
be exchanged for the Private Notes. Upon the effectiveness of the Registration
Statement, the Issuers and the Guarantors will offer, pursuant to the Exchange
Offer, to the holders of Registrable Notes who are able to make certain
representations, the opportunity to exchange their Registrable Notes for
Exchange Notes. If: (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Issuers reasonably determine
in good faith, after consultation with counsel, that they are not permitted to
effect the Exchange Offer (a "Legal Prohibition"), (ii) the Exchange Offer is
not commenced on or prior to December 27, 1997, (iii) the Exchange Offer is not,
for any reason, consummated on or prior to January 26, 1998, (iv) any holder of
notes of the Issuers (the "Private Exchange Notes") issued simultaneously with
the issuance of the Exchange Notes in exchange for certain Private Notes held by
the Initial Purchasers so requests, or (v) in the case of any holder that
participates in the Exchange Offer, such holder does not receive Exchange Notes
on the Exchange Date that may be sold without restriction under state and
federal securities laws (each of the foregoing, a "Shelf Registration Event"),
the Issuers and the Guarantors will file with the Commission a registration
statement (the "Shelf Registration Statement") to cover resales of the Private
Notes by the holders thereof who satisfy certain conditions relating to the
provision of information in connection with the Shelf Registration Statement.
For purposes of the foregoing, "Registrable Notes" means each Note until: (i) a
registration statement (other than, with respect to any Exchange Note described
in clause (v) above, the Registration Statement) covering such Private Note,
Exchange Note or Private Exchange Note has been declared effective by the
Commission and such Private Note, Exchange Note or Private Exchange Note, as the
case may be, has been disposed of in accordance with such effective registration
statement, (ii) such Private Note, Exchange Note or Private Exchange Note, as
the case may be, is sold in compliance with Rule 144, (iii) such Private Note
has been exchanged for an Exchange Note and such Exchange Note is not described
in clause (v) above or (iv) such Private Note, Exchange Note or Private Exchange
Note, as the case may be, ceases to be outstanding.
The Registration Rights Agreement provides that the Issuers and the
Guarantors will: (i) file the Registration Statement with the Commission on or
prior to November 27, 1997; (ii) use their commercially reasonable best efforts
to (x) cause the Registration Statement to be declared effective and to commence
the Exchange Offer on or prior to December 27, 1997, (y) keep the Exchange Offer
open for 30 days (or longer if required by applicable law) and (z) exchange
Exchange Notes for all Private Notes validly tendered and not withdrawn pursuant
to the Exchange Offer on or prior to the fifth day following the date on which
the Exchange Offer expires and (iii) if obligated to file the Shelf Registration
Statement, file the Shelf Registration Statement with the Commission on or prior
to (x) the 30th day after the Shelf Registration Event occurs, if the Shelf
Registration Event occurs fewer than 30 days prior to November 27, 1997 or (y)
the 45th day after the Shelf Registration Event occurs, if the Shelf
Registration Event occurs after the filing of the Registration Statement (in
either case, the "Filing Date") with the Commission and use their commercially
reasonable best efforts to cause the Shelf Registration Statement to become
effective on or prior to, if the Filing Date in respect thereof is fewer than 60
days prior to December 27, 1997, the 60th day after such Filing Date and, if the
Filing Date if after the filing of the Registration Statement, the 60th day
after such Filing Date. If: (a) the Issuers and the Guarantors fail to file any
of the Registration
28
<PAGE> 36
Statements on or before the date specified for such filing (other than due to a
Legal Prohibition), (b) any of such Registration Statements is not declared
effective by the Commission on or prior to the date specified for such
effectiveness (other than due to a Legal Prohibition), (c) the Issuers have not
exchanged Exchange Notes for all Registrable Notes validly tendered and not
withdrawn on or prior to the fifth day after the expiration of the Exchange
Offer, (d) the Registration Statement ceases to be effective at any time prior
to the date on which the Exchange Offer is to expire or (e) the Shelf
Registration Statement is declared effective but ceases to be effective at any
time during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (a) through (e) above, a "Registration
Default"), then the Issuers agree to pay to each holder of Registrable
Securities, with respect to the first 90-day period immediately following the
occurrence of such Registration Default, an amount equal to $.05 per week per
$1,000 principal amount of Registrable Securities held by such holder. Such
interest, together with interest accrued by the Issuers pursuant to the next
succeeding sentence, is collectively referred to herein as "Additional
Interest." The amount of the Additional Interest will increase by an additional
$.05 per week per $1,000 principal amount of Registrable Securities with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Additional Interest of $.40 per week per $1,000
principal amount of Registrable Securities. All Additional Interest will be
payable to holders of the Registrable Securities in cash on each August 1 and
February 1, commencing with the first such date occurring after any such
Additional Interest commences to accrue, until such Registration Default is
cured. After the date on which such Registration Default is cured, the interest
rate on the Registrable Securities will revert to 12 1/2% per annum.
Holders of Private Notes will be required to make certain representations
to the Issuers in order to participate in the Exchange Offer and will be
required to deliver information to be used in connection with the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement in order to have their Private Notes included in the Shelf
Registration Statement and benefit from the provisions regarding Additional
Interest set forth above.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by, all the provisions of the Registration Rights Agreement, a copy
of which is filed as an exhibit to the Registration Statement of which this
Prospectus is a part.
Following the consummation of the Exchange Offer, holders of the Private
Notes who were eligible to participate in the Exchange Offer but who did not
tender their Private Notes will not have any further registration rights and
such Private Notes will continue to be subject to certain restrictions on
transfer. Accordingly, the liquidity of the market for such Private Notes could
be adversely affected.
TERMS OF THE EXCHANGE OFFER
General. Upon the terms and subject to the conditions set forth in this
Prospectus and in the Letter of Transmittal, the Issuers will accept any and all
Private Notes validly tendered and not withdrawn prior to 5:00 p.m., New York
City time, on the Expiration Date. The Issuers will issue $1,000 principal
amount of Exchange Notes in exchange for each $1,000 principal amount of
outstanding Private Notes accepted in the Exchange Offer. Holders may tender
some or all of their Private Notes pursuant to the Exchange Offer. However,
Private Notes may be tendered only in integral multiples of $1,000.
The form and terms of the Exchange Notes are identical in all material
respects to the form and terms of the Private Notes except that (i) the Exchange
Notes bear a Series B designation and different CUSIP Numbers from the Private
Notes, (ii) the Exchange Notes have been registered under the Securities Act and
hence will not bear legends restricting the transfer thereof and (iii) the
holders of the Exchange Notes (as well as any remaining holders of Private
Notes) will not be entitled to certain rights under the Registration Rights
Agreement, including the provisions providing for an increase in the interest
rate on the Private Notes in certain circumstances relating to the timing of the
Exchange Offer, all of which rights will terminate when the Exchange Offer is
terminated. The Exchange Notes will evidence the same debt as the Private Notes
and will be entitled to the benefits of the Indenture.
As of the date of this Prospectus, $155,000,000 aggregate principal amount
of Private Notes were outstanding. The Issuers have fixed the close of business
on , 1997 as the record date for the
29
<PAGE> 37
Exchange Offer for purposes of determining the persons to whom this Prospectus
and the Letter of Transmittal will be mailed initially.
Holders of Private Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Issuers intend to conduct the Exchange Offer in
accordance with the applicable requirements of the Exchange Act and the rules
and regulations of the Commission thereunder.
The Issuers shall be deemed to have accepted validly tendered Private Notes
when, as and if the Issuers have given oral or written notice thereof to the
Exchange Agent. The Exchange Agent will act as agent for the tendering holders
for the purpose of receiving the Exchange Notes from the Issuers.
If any tendered Private Notes are not accepted for exchange because of an
invalid tender, the occurrence of certain other events set forth herein or
otherwise, the certificates for any such unaccepted Private Notes will be
returned, without expense, to the tendering holder thereof as promptly as
practicable after the Expiration Date.
Holders who tender Private Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Private
Notes pursuant to the Exchange Offer. The Issuers will pay all charges and
expenses, other than transfer taxes in certain circumstances, in connection with
the Exchange Offer.
Expiration Date; Extensions; Amendments. The term "Expiration Date" shall
mean 5:00 p.m., New York City time, on , 1998, unless the Issuers,
in their sole discretion, extend the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date and time to which the Exchange
Offer is extended.
In order to extend the Exchange Offer, the Issuers will notify the Exchange
Agent of any extension by oral or written notice and will mail to the registered
holders an announcement thereof, each prior to 9:00 a.m., New York City time, on
the next business day after the previously scheduled expiration date.
The Issuers reserve the right, in their sole discretion, prior to the
Expiration Date (i) to delay accepting any Private Notes, to extend the Exchange
Offer or to terminate the Exchange Offer if any of the conditions set forth
below under "Conditions" shall not have been satisfied, by giving oral or
written notice of such delay, extension or termination to the Exchange Agent or
(ii) to amend the terms of the Exchange Offer in any manner. Any such delay in
acceptance extension, termination or amendment will be followed promptly as
practicable by oral or written notice thereof to the registered holders.
Interest on the New Notes. The Exchange Notes will bear interest from
their date of issuance. Holders of Private Notes that are accepted for exchange
will receive, in cash, accrued interest thereon to, but not including, the date
of issuance of the Exchange Notes. Such interest will be paid with the first
interest payment on the Exchange Notes on February 1, 1998. Interest on the
Private Notes accepted for exchange will cease to accrue upon issuance of the
Exchange Notes.
Interest on the Exchange Notes is payable semi annually on each August 1
and February 1, commencing on February 1, 1998.
Procedures for Tendering. Only a holder of Private Notes may tender such
Private Notes in the Exchange Offer. To tender in the Exchange Offer, a holder
must complete, sign and date the Letter of Transmittal, or a facsimile thereof,
have the signatures thereon guaranteed if required by the Letter of Transmittal,
and mail or otherwise deliver such Letter of Transmittal or such facsimile,
together with the Private Notes and any other required documents, to the
Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration Date.
To be tendered effectively, the Private Notes, Letter of Transmittal or an
Agent's Message in connection with a book-entry transfer and other required
documents must be completed and received by the Exchange Agent at the address
set forth below under "Exchange Agent" prior to 5:00 p.m., New York City time,
on the Expiration Date. Delivery of the Private Notes may be made by book-entry
transfer in accordance with the procedures described below. Confirmation of such
book-entry transfer must be received by the Exchange Agent prior to the
Expiration Date.
30
<PAGE> 38
The term "Agent's Message" means a message, transmitted by a book-entry
transfer facility to, and received by, the Exchange Agent forming a part of a
confirmation of a book-entry transfer, which states that such Book-Entry
Transfer Facility has received an express acknowledgment from the participant in
such Book-Entry Transfer Facility tendering the Notes that such participant has
received and agrees to be bound by the terms of the Letter of Transmittal and
that the Company may enforce such agreement against such participant.
By executing the Letter of Transmittal, each holder will make to the
Issuers the representation set forth below under the heading "-- Resale of the
Exchange Notes."
The tender by a holder and the acceptance thereof by the Issuers will
constitute agreement between such holder and the Issuers in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF PRIVATE NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND SOLE
RISK OF THE HOLDER. AS AN ALTERNATIVE TO DELIVERY BY MAIL, HOLDERS MAY WISH TO
CONSIDER OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME
SHOULD BE ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION
DATE. NO LETTER OF TRANSMITTAL OR PRIVATE NOTES SHOULD BE SENT TO THE ISSUERS.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Private Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from
Beneficial Owner" included with the Letter of Transmittal.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by a member firm of the Medallion System (an
"Eligible Institution") unless the Private Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Registration Instructions" or "Special Delivery Instructions" on the
Letter of Transmittal or (ii) for the account of an Eligible Institution. In the
event that signatures on a Letter of Transmittal or a notice of withdrawal, as
the case may be, are required to be guaranteed, such guarantee must be by an
Eligible Institution.
If the Letter of Transmittal is signed by a person other than the
registered holder of any Private Notes listed therein, such Private Notes must
be endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Private Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Private Notes or bond powers are signed
by trustees, executors, administrators, guardians, attorneys-in-fact, officers
of corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and evidence satisfactory to the
Issuers of their authority to so act must be submitted with the Letter of
Transmittal.
Book-Entry Transfer. The Issuers understand that the Exchange Agent will
make a request promptly after the date of this Prospectus to establish accounts
with respect to the Private Notes at the Book-Entry Transfer Facility for the
purpose of facilitating the Exchange Offer, and subject to the establishment
thereof, any financial institution that is a participant in the Book-Entry
Transfer Facility's system may make book-entry delivery of Private Notes by
causing such Book-Entry Transfer Facility to transfer such Private Notes into
the Exchange Agent's account with respect to the Private Notes in accordance
with the Book-Entry Transfer Facility's procedures for such transfer. Although
delivery of the Private Notes may be effected through book-entry transfer into
the Exchange Agent's account at the Book-Entry Transfer Facility, an appropriate
Letter of Transmittal properly completed and duly executed with any required
signature guarantee and all other required documents must in each case be
transmitted to and received or confirmed by the Exchange Agent at its address
set forth below on or prior to the Expiration Date, or, if the guaranteed
delivery procedures described below are complied
31
<PAGE> 39
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Private Notes and withdrawal of tendered
Private Notes will be determined by the Issuers in their sole discretion, which
determination will be final and binding. The Issuers reserve the absolute right
to reject any and all Private Notes not properly tendered or any Private Notes
the Issuers' acceptance of which would, in the opinion of counsel for the
Issuers, be unlawful. The Issuers also reserve the right in their sole
discretion to waive any defects, irregularities or conditions of tender as to
particular Private Notes. The Issuers' interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Private Notes must be
cured within such time as the Issuers shall determine. Although the Issuers
intend to notify holders of defects or irregularities with respect to tenders of
Private Notes, neither the Issuers, the Exchange Agent nor any other person
shall incur any liability for failure to give such notification. Tender of
Private Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Private Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
Guaranteed Delivery Procedures. Holders who wish to tender their Private
Notes and (i) whose Private Notes are not immediately available, (ii) who cannot
deliver their Private Notes, the Letter of Transmittal or any other required
documents to the Exchange Agent or (iii) cannot complete the procedures for
book-entry transfer, prior to the Expiration Date, may effect a tender if:
(a) the tender is made through an Eligible Institution,
(b) prior to the Expiration Date, the Exchange Agent receives from
such Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the holder, the certificate number(s)
of such Private Notes and the principal amount of Private Notes tendered,
stating that the tender is being made thereby and guaranteeing that, within
five New York Stock Exchange trading days after the Expiration Date, the
Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Private Notes (or a confirmation of
book-entry transfer of such Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with
the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (of
facsimile thereof), as well as the certificate(s) representing all tendered
Private Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Private Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility), and all other documents required by the
Letter of Transmittal are received by the Exchange Agent upon five New York
Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to holders who wish to tender their Private Notes according to the
guaranteed delivery procedures set forth above.
Withdrawal of Tenders. Except as otherwise provided herein, tenders of
Private Notes may be withdrawn at any time prior to 5:00 p.m, New York City
time, on the Expiration Date.
To withdraw a tender of Private Notes in the Exchange Offer, a telegram,
telex, letter or facsimile transmission notice of withdrawal must be received by
the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York
City time, on the Expiration Date. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Private Notes to be
withdrawn (the "Depositor"); (ii) identify the Private Notes to be withdrawn
(including the certificate numbers) and principal amount of such Private Notes,
or, in the case of Private Notes transferred by book-entry transfer, the name
and number of the account at the Book-Entry Transfer Facility to be credited;
(iii) be signed by the holder in the same manner as the original signature on
the Letter of Transmittal by which such Private Note were tendered (including
any required signature guarantees) or be accompanied by documents of transfer of
such Private Notes into the name of the person withdrawing the
32
<PAGE> 40
tender and (iv) specify the name in which any such Private Notes are to be
registered, if different from that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such notices will
be determined by the Issuers, whose determination shall be final and binding on
all parties. Any Private Notes so withdrawn will be deemed not to have been
validly tendered for purposes of the Exchange Offer and no Exchange Notes will
be issued with respect thereto unless the Private Notes so withdrawn are validly
retendered. Any Private Notes which have been tendered but which are not
accepted for exchange will be returned to the holder thereof without cost to
such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Private Notes may be
retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Issuers shall not
be required to accept for exchange, or exchange Exchange Notes for, any Private
Notes, and may terminate or amend the Exchange Offer as provided herein before
the acceptance of such Private Notes, if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer
which, in the reasonable judgment of the Issuers, might materially impair
the ability of the Issuers to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Issuers or any of their subsidiaries; or
(b) any law, statute, rule, regulation or interpretation by the staff
of the Commission is proposed, adopted or enacted which, in the reasonable
judgment of the Issuers, might materially impair the ability of the Issuers
to proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Issuers; or
(c) any governmental approval has not been obtained, which approval
the Issuers shall, in their reasonable discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Issuers determine in their reasonable discretion that any of the
conditions are not satisfied, the Issuers may (i) refuse to accept any Private
Notes and return all tendered Private Notes to the tendering holders, (ii)
extend the Exchange Offer and retain all Private Notes tendered prior to the
expiration of the Exchange Offer, subject, however, to the rights of holders to
withdraw such Private Notes (see "-- Withdrawal of Tenders") or (iii) waive such
unsatisfied conditions with respect to the Exchange Offer and accept all
properly tendered Private Notes which have not been withdrawn.
EXCHANGE AGENT
The Bank of New York has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
<TABLE>
<S> <C>
By Registered or Certified Mail: By Hand or Overnight Courier:
The Bank of New York The Bank of New York
101 Barclay Street, 7E 101 Barclay Street
New York, New York 10286 Corporate Trust Services Window
Attn: Reorganization Section Ground Level
New York, New York 10286
Attn: Reorganization Section
Facsimile Transmission: (212) 571-3080
Confirm by Telephone: (212) 815-6333 For Information Call: (212) 815-6333
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN SET FORTH ABOVE WILL NOT CONSTITUTE A VALID
DELIVERY.
33
<PAGE> 41
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Issuers. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telecopy, telephone or in person by officers and
regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer will
be paid by the Issuers. Such expenses include fees and expenses of the Exchange
Agent and Trustee, accounting and legal fees and printing costs, among others.
ACCOUNTING TREATMENT
The Exchange Notes will be recorded at the same carrying value as the
Private Notes as reflected in the Company's accounting records on the date of
exchange (see Pro Forma Financial Statements). Accordingly, no gain or loss for
accounting purposes will be recognized by the Company. The expenses of the
Exchange Offer will be expensed over the term of the Exchange Notes.
CONSEQUENCES OF FAILURE TO EXCHANGE
The Private Notes that are not exchanged for Exchange Notes pursuant to the
Exchange Offer will remain restricted securities. Accordingly, such Private
Notes may be resold only (i) to the Issuers (upon redemption thereof or
otherwise), (ii) so long as the Private Notes are eligible for resale pursuant
to Rule 144A, to a person inside the United States whom the seller reasonably
believes is a qualified institutional buyer within the meaning of Rule 144A
under the Securities Act in a transaction meeting the requirements of Rule 144A,
in accordance with Rule 144 under the Securities Act, or pursuant to another
exemption from the registration requirements of the Securities Act (and based
upon an opinion of counsel reasonably acceptable to the Issuers), (iii) outside
the United States to a foreign person in a transaction meeting the requirements
of Rule 904 under the Securities Act, or (iv) pursuant to an effective
registration statement under the Securities Act, in each case in accordance with
any applicable securities laws of any state of the United States.
RESALE OF THE EXCHANGE NOTES
With respect to resales of Exchange Notes, based on interpretations by the
staff of the Commission set forth in no-action letters issued to third parties,
the Issuers believe that a holder or other person who receives Exchange Notes,
whether or not such person is the holder (other than a person that is an
"affiliate" of the Issuers within the meaning of Rule 405 under the Securities
Act) who receives Exchange Notes in exchange for Private Notes in the ordinary
course of business and who is not participating, does not intend to participate,
and has no arrangement or understanding with any person to participate, in the
distribution of the Exchange Notes, will be allowed to resell the Exchange Notes
to the public without further registration under the Securities Act and without
delivering to the purchasers of the Exchange Notes a prospectus that satisfies
the requirements of Section 10 of the Securities Act. However, if any holder
acquires Exchange Notes in the Exchange Offer for the purpose of distributing or
participating in a distribution of the Exchange Notes, such holder cannot rely
on the position of the staff of the Commission enunciated in such no-action
letters or any similar interpretive letters, and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction, unless an exemption from registration is
otherwise available. Further, each Participating Broker-Dealer that receives
Exchange Notes for its own account in exchange for Private Notes, where such
Private Notes were acquired by such Participating Broker-Dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such Exchange Notes.
As contemplated by these no-action letters and the Registration Rights
Agreement, each holder accepting the Exchange Offer is required to represent to
the Company in the Letter of Transmittal that (i) the Exchange Notes are to be
acquired by the holder or the person receiving such Exchange Notes, whether or
not such person is the
34
<PAGE> 42
holder, in the ordinary course of business, (ii) the holder or any such other
person (other than a broker-dealer referred to in the next sentence) is not
engaging and does not intend to engage in the distribution of the Exchange
Notes, (iii) the holder or any such other person has no arrangement or
understanding with any person to participate in the distribution of the Exchange
Notes, (iv) neither the holder nor any such other person is an "affiliate" of
the Issuers within the meaning of Rule 405 under the Securities Act, and (v) the
holder or any such other person acknowledges that if such holder or other person
participates in the Exchange Offer for the purposes of distributing the Exchange
Notes it must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any resale of the Exchange Notes and
cannot rely on those no-action letters. As indicated above, each Participating
Broker-Dealer that receives an Exchange Note for its own account in exchange for
Private Notes must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. For a description of the procedures for
such resales by Participating Broker-Dealers, see "Plan of Distribution."
35
<PAGE> 43
CAPITALIZATION
The following table sets forth as of September 30, 1997 the cash, cash
equivalents and actual capitalization of the Company, and the cash, cash
equivalents and capitalization of the Company as adjusted to reflect the effects
of the Transactions. The historical information in this table is derived from
the Consolidated Financial Statements of the Company and should be read in
conjunction with "Management's Discussion and Analysis of Financial Conditions
and Results of Operations," the Consolidated Financial Statements and the Notes
thereto and the Condensed Pro Forma Financial Statements and Notes thereto
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
-------------------------
ACTUAL PRO FORMA
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
Cash, cash equivalents and marketable securities(1)......... $ 29,971 $ 2,680
======== ========
Current maturities of long-term debt(2)..................... $ 9,324 $ 9,324
======== ========
Long-term debt:
Private Notes(3).......................................... $152,877 $152,877
Restated Credit Facility(4)............................... -- 900
Seller notes(2)........................................... 13,699 13,699
Other..................................................... 320 320
-------- --------
Total long-term debt.............................. 166,896 167,796
-------- --------
Members' equity/stockholders' equity:
Total members' equity/stockholders' equity........ 27,017 25,984
-------- --------
Total capitalization........................................ $193,913 $193,785
======== ========
</TABLE>
- ---------------
(1) Excludes approximately $36.5 million placed in the Interest Escrow Account
to fund, together with the proceeds from the investment thereof, the first
four semi-annual interest payments on the Notes.
(2) The long-term portion of seller notes are recorded net of original issue
discount of approximately $2,806,000 at September 30, 1997 on both an actual
basis and a pro forma basis to yield 9%. The current portion of the original
issue discount on the seller notes of approximately $292,000 is included in
current maturities of long-term debt.
(3) The Private Notes are recorded net of original issue discount of
approximately $2,123,000 at September 30, 1997.
(4) The Restated Credit Facility 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, of which $55.6 million is
available. The Company is currently permitted by the Indenture to incur up
to $75.0 million of indebtedness under the Restated Credit Facility.
36
<PAGE> 44
SELECTED FINANCIAL DATA
The following table presents selected financial data relating to the
Company as of the dates and for the periods indicated. In addition, the
following table presents selected financial data relating to the Company's
unaudited pro forma balance sheet data as of September 30, 1997 and the
Company's unaudited pro forma statement of operations data for the year ended
December 31, 1996 and the nine months ended September 30, 1997, each as adjusted
to give effect to the Transactions. The historical data for the period from
January 30, 1996 (date of formation) to December 31, 1996, has been derived from
the audited financial statements of the Company audited by Arthur Andersen LLP,
independent public accountants. The historical data for other periods presented
has been derived from unaudited information. The data set forth in this table
should be read in conjunction with the Company's Consolidated Financial
Statements and Notes thereto and Unaudited Condensed Pro Forma Financial
Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
NINE MONTHS PRO FORMA NINE MONTHS
JANUARY 30 TO JANUARY 30 TO ENDED JANUARY 1 TO ENDED
DECEMBER 31, SEPTEMBER SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1996 30, 1996 1997 1996 1997
-------------
-------------------------------------------------------
(UNAUDITED)
($ 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 $ 32,954 $ 36,177
Equipment sales and installation
revenue.......................... 324 96 3,291 7,070 4,220
-------- -------- ---------- ----------- ----------
Total revenue.................... 3,409 1,365 32,102 40,024 40,397
Cost of revenue.................... 2,270 864 20,902 25,535 26,462
-------- -------- ---------- ----------- ----------
Total gross profit............... 1,139 501 11,200 14,489 13,935
Operating expenses excluding
depreciation and amortization.... 2,732 1,128 11,442 17,625 13,806
Total depreciation and
amortization..................... 1,148 529 10,484 17,793 14,282
-------- -------- ---------- ----------- ----------
Operating loss..................... (2,741) (1,156) (10,726) (20,929) (14,153)
Interest expense, net.............. (818) (94) (8,918) (23,831) (18,003)
Other income (expense)(1).......... 24 5 (124) (94) (140)
-------- -------- ---------- ----------- ----------
Net loss(1)(2)..................... $ (3,535) $ (1,245) $ (19,768) $ (44,854) $ (32,296)
======== ======== ========== =========== ==========
Ratio of earnings to fixed
charges(3)....................... -- -- -- -- --
Deficiency in fixed charges........ (3,535) $ (1,245) $ (19,768) $ (44,854) $ (32,296)
OTHER DATA:
Pro forma average monthly
programming revenue per
subscriber(4).................... n/a n/a n/a n/a 39.20
Cash flows used in operating
activities....................... (634) (446) (4,518) (4,240) (2,304)
EBITDA(1)(5)....................... (1,593) (627) (242) (3,136) 125
Number of subscribers at beginning
of period........................ -- -- 19,659 58,761 93,414
Subscriber additions through
acquisitions..................... 16,449 10,690 66,615 -- --
Net subscriber additions........... 3,210 1,100 15,394 34,653 18,247
Number of subscribers at end of
period........................... 19,659 11,790 101,668 93,414 111,661
Number of households at end of
period........................... 382,833 218,579 1,500,262 1,631,887 1,631,887
Household penetration at end of
period........................... 5.14% 5.40% 6.78% 5.72% 6.84%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
----------------------
HISTORICAL PRO FORMA
(UNAUDITED)
($ IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable investment
securities(6).......................................... $ 29,971 $ 2,680
Total assets............................................ 218,446 221,046
Total debt (including current portion).................. 176,220 177,120
Members' equity/stockholders' equity.................... 27,017 25,984
</TABLE>
37
<PAGE> 45
- ---------------
(1) Pro forma other income (expense) amounts do not include interest income
which will be recognized on amounts included in 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 $43.1 million and $30.9 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 the Corporate Conversion, the Company was a limited liability
company and was not required to pay United States federal income taxes.
(3) The ratio of earnings to fixed charges is calculated by adding (i) earnings
(loss) before income taxes plus (ii) fixed charges, with the resulting sum
divided by fixed charges. Fixed charges consist of interest on all
indebtedness, amortization of debt issuance costs (which is included in the
interest expense line above), plus that portion of operating lease rentals
representative of the interest factor.
(4) 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.
(5) "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 Indenture to determine whether the Company has complied with certain
covenants and differs from cash flows from operating activities. Pursuant to
the Indenture, Consolidated Operating Cash Flow is calculated with respect
to any period by adding to the consolidated net income of the Company and
the 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.
(6) Excludes approximately $36.5 million placed in the Interest Escrow Account
to fund, together with the proceeds from the investment thereof, the first
four semi-annual interest payments on the Notes.
38
<PAGE> 46
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
the Company and its wholly-owned subsidiaries. This discussion should be read in
conjunction with the unaudited pro forma combined financial statements of the
Company, the unaudited financial statements of the Company, the audited
consolidated financial statements of the Company and the audited financial
statements of certain businesses acquired or expected to be acquired, and the
related notes thereto, appearing elsewhere in this Prospectus. As a result of
the growth of the Company through the 1996 Acquisitions and the 1997
Acquisitions and the continued growth as a result of the Pending Acquisition,
the Georgia Acquisition and possible future acquisitions, the historical audited
financial information of the Company may not be indicative of the financial
position or results of operations to be reported in the future.
On October 10, 1997, DTS effected the Corporate Conversion pursuant to
which the Company was converted from the LLC to a corporation. The LLC merged
with and into 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 Preferred Stock, (iii) the member interests in the LLC
evidenced by the Class A Units were converted into Series A Preferred Stock,
(iv) the member interests in the LLC evidenced by the Class B Units were
converted into Common Stock, (v) the member interests in the LLC evidenced by
the Class C Units were converted into the right to purchase shares of Common
Stock, (vi) the member interests in the LLC evidenced by the Class D Units were
converted into warrants to purchase Common Stock, (vii) all of the resulting
capital stock of the Company became subject to the Stockholders Agreement and
(viii) the surviving entity changed its name to "Digital Television Services,
Inc."
Subsequent to the Corporate Conversion, substantially all of the
outstanding shares of the resulting corporation 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.
OVERVIEW
The Company was formed on January 30, 1996, to acquire, own and manage
rights to distribute DIRECTV Services to residential households and commercial
establishments in the Rural DirecTv Markets. As of December 31, 1996, the
Company 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 the
Company's seller notes at the 9% interest rate under the Existing Credit
Facility at December 31, 1996. Of the total purchase price, approximately $9.3
million was paid in cash and approximately $24.2 million was financed through
the issuance of promissory notes of the Company in favor of the sellers. During
the first half of 1997, the Company acquired the rights to provide DIRECTV
Services to an additional 1,117,000 households for approximately $108.1 million
or $97 per household, excluding adjustments recorded to reflect the discount of
certain of the Company's 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 the Company in favor of certain of
the sellers. The Company has also entered into a definitive agreement with
respect to the Pending Acquisition and a letter of intent with respect to the
Georgia Acquisition, with respect to which it will acquire the rights to provide
DIRECTV Services to an aggregate of 171,805 additional households for an
aggregate purchase price for the two acquisitions of approximately $36.5 million
in cash or approximately $212 per household. See "Business -- Acquisitions by
the Company." The following table presents information regarding completed and
certain acquisitions as of October 15, 1997.
39
<PAGE> 47
<TABLE>
<CAPTION>
SUBSCRIBERS AT
ACQUISITION ACQUISITION SUBSCRIBERS AT
SYSTEM LOCATION(1) DATE ACQUIRED(1) PRICE DATE SEPTEMBER 30, 1997
<S> <C> <C> <C> <C>
1996 Acquisitions -- 8 Rural DirecTv
Markets:
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 Acquisitions... $ 33,735,000 16,449 24,949
------------ ------ --------
1997 Acquisitions -- 8 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 25,477
Georgia................................ May 9, 1997 21,156,470 14,409 15,681
------------ ------ --------
Subtotal -- 1997 Acquisitions... $108,581,470 66,615 76,719
------------ ------ --------
Pending Acquisition -- 1 Rural DirecTv
Market:
Indiana................................ December, 1997 $ 27,000,000 9,993
------------ --------
Subtotal -- Pending
Acquisition................... $ 27,000,000 9,993
------------ --------
Totals................................... $169,316,470 111,661
============ ========
</TABLE>
- ---------------
(1) See "Business -- Acquisitions by the Company."The acquisition date for the
Pending Acquisition is an anticipated closing date.
(2) These systems are combined under the New Mexico cluster for purposes of the
chart on page 56 of this Prospectus.
The Company generates revenues by providing DIRECTV Services to its
subscribers. DIRECTV Services consist of programming purchased in a monthly or
annual subscription, additional premium programming available on an a la carte
basis, sports programming available under a monthly, yearly or seasonal
subscription, and movies and events programming available on a pay per view
basis.
Although the majority of DSS(R) equipment is sold to subscribers through
independent dealers, the Company also generates revenue from the direct sale,
rental and installation of satellite receivers and related equipment. During
1996, the Company offered price subsidies on DSS(R) equipment to further
stimulate the demand for DIRECTV Services. The retail sales price of DSS(R)
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 the Company's cost for such equipment. The
Company records revenue from the sale of DSS(R) equipment and related
accessories based on the amount paid by the customer, and recognizes a loss on
the sale for the Company's cost in excess of the amount collected. The Company
offers installation services at prices ranging from $99 to $199.
The Company's 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, the Company 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, the Company 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 the
Company's operating expenses. These expenses include variable commission
expenses, fixed and variable promotional expenses and marketing salaries and
benefits. As discussed above, the Company also subsidizes the cost of DSS(R)
equipment to the subscriber, thereby incurring a loss on the sale of satellite
receivers and related equipment sold. The Company's policy is to expense all
subscriber acquisition costs at the time the sale is made or, in the case of
cash
40
<PAGE> 48
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(R) 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, the
Company will recover its subscriber acquisition costs in approximately 20
months. The Company 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 the Company.
General and administrative costs include administrative costs associated
with the Company's sales and subscriber service operations, as well as
accounting and general administration. Although these expenses will continue to
increase as the Company's scope of operations increases, such expenses are
primarily fixed in nature and, accordingly, should not increase directly in
proportion to the future increase to the Company's subscriber base.
During May and June 1997, the Company experienced an increase in subscriber
disconnects above historical levels. The Company's 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. The
Company believes that this increase was primarily the result of two
non-recurring factors, the tightening by the Company 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. The Company has distributed new access cards to these subscribers
in order to reconnect their DIRECTV Services. Effective May 1, 1997, the Company
temporarily revised its account treatment policies by reducing the period of
time for which its disconnects subscribers due to non-payment from 60 days after
the bill date to 45 days after the bill date. The Company rescinded this change
in late June 1997. Subscriber disconnects have stabilized to historical levels
during the third quarter.
The Company has yet to achieve positive operating cash flow due to cash
expended in implementing its sales and administrative infrastructure, marketing
expenses associated with adding new subscribers and interest and other debt
servicing costs associated with financing activities. The Company 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. See "Risk Factors -- Competition and Technological
Change." There can be no assurance that the Company's subscriber base and
revenues will continue to increase or that the Company 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
The Company 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 $28,811,000 for the nine month period
ended September 30, 1997 (the "1997 Period") compared to approximately
$1,269,000 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 the Company's
acquisitions and the addition of approximately 17,500 net subscribers added
during the twelve month period ended September 30, 1997. During the 1997 Period,
the Company 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.
41
<PAGE> 49
Equipment sales and installation revenue totaled approximately $3,291,000
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(R)
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 $20,902,000 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, the Company sold DSS(R) equipment
installed at average prices of approximately 18% below the Company's cost. The
Company expects to continue to subsidize the cost of DSS(R) equipment.
The Company incurred direct selling expenses of approximately $5,557,000
during the 1997 Period. These costs included advertising and promotion expenses,
sales commissions to both the Company's employee and dealer distribution
channels, and marketing salaries and benefits. Including subsidies on DSS(R)
equipment sales, the Company 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 $5,885,000 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 $10,161,000 for the 1997 Period. Of this amount, approximately
$9,089,000 relates to the acquisition of contract rights by the Company,
approximately $166,000 relates to fees incurred in connection with the formation
of the Company and Subsidiaries and approximately $906,000 relates to
capitalized subscriber acquisition costs.
The Company generated a Consolidated Operating Cash Flow deficit pursuant
to the terms of the Indenture of approximately $242,000 for the 1997 Period. The
Company 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 $9,549,000. The Company
incurred interest costs in conjunction with seller financing and borrowing under
installment loans and the Amended and Restated Credit Facility.
Inception (January 30, 1996) to December 31, 1996
Programming revenue was approximately $3,085,000 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 the Company's acquisitions. In addition, during the 1996 Period the Company
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(R)
equipment and related installations to new subscribers.
The Company incurred approximately $1,872,000 of expenses during the 1996
Period directly associated with providing programming revenue, including
approximately $1,596,000 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
42
<PAGE> 50
revenue after recurring service fees was approximately 39%. During the 1996
Period, the Company sold DSS(R) equipment installed at average prices of
approximately 23% below the Company's cost.
The Company 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 the Company's employee and dealer distribution channels, and
marketing salaries and benefits. Including subsidies on DSS(R)equipment sales,
the Company 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 $1,954,000 for
the 1996 Period or 57% of total revenues. These expenses related to the opening
of the Company's 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 the
Company 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 $1,100,000. Of this amount,
approximately $1,022,000 relates to the Company's acquired contract rights,
approximately $36,000 relates to fees incurred in connection with the formation
of the Company and Subsidiaries and approximately $42,000 relates to capitalized
subscriber acquisition costs.
The Company incurred a Consolidated Operating Cash Flow deficit pursuant to
the terms of the Indenture of approximately $1,593,000 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. The Company
incurred interest costs in conjunction with seller financing and borrowings
under installment loans and the Existing Credit Facility.
Pro Forma Results of Operations
The pro forma combined results of operations reflect the operations of the
Company as if the Transactions had occurred on January 1, 1996. These pro forma
combined results of operations are not intended to be indicative of the
Company's future combined results of operations nor the combined results of
operations if the Transactions had occurred on January 1, 1996.
Consistent with the Company's 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
$36,177,000 for the nine months ended September 30, 1997. Pro forma subscribers
increased from 93,414 to 111,661, or 19.5%. Average monthly pro forma
programming revenue per subscriber was approximately $39.20. The Company also
generated approximately $4,220,000 of revenues from the sale of DSS(R) equipment
and related accessories, and from installation services.
43
<PAGE> 51
The Company incurred approximately $40,268,000 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 $21,570,000, resulting in a gross margin of
approximately 40%. Selling expenses totaled approximately $6,513,000 for the pro
forma period ended September 30, 1997, consisting primarily of sales
commissions, marketing salaries and benefits, advertising and promotional
expenses. The Company 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 $7,293,000 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.
The Company 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
certain redundant administrative functions, personnel and related costs.
Depreciation and amortization expense totaled approximately $14,282,000 on
a pro forma combined basis for the nine months ended September 30, 1997.
Amortization expense, totaling approximately $13,716,000, includes approximately
$12,644,000 of amortization associated with the Company's purchase of contract
rights, approximately $166,000 associated with costs incurred in connection with
the Company's 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 $18,003,000, including approximately
$15,321,000 of interest on the proceeds from the Offering and amortization of
debt issuance costs and approximately $2,682,000 of interest expense associated
with seller financing, installment notes and financings under the Existing
Credit Facility.
Pro Forma January 1, 1996 to December 31, 1996
The Company generated revenues of approximately $40,024,000 on a pro forma
basis for the year ended December 31, 1996. Of this amount, $32,954,000 resulted
from programming revenue generated on 76,088 average subscribers. The Company
also generated approximately $7,070,000 of revenues from the sale of DSS(R)
equipment and related accessories, and from installation services. Pro forma
subscribers increased from 58,761 to 93,414, or 59% for the year ended December
31, 1996.
The Company incurred approximately $43,160,000 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 $20,094,000, resulting in a gross profit margin on programming of
approximately 39%. Selling expenses, totaling approximately $5,469,000 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 of the Company.
Accordingly, the Company 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
$12,156,000, consisting of allocated corporate expenses, salaries and benefits
for general administrative and subscriber service personnel, and general
administrative costs. The Company 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 $17,793,000 on
a pro forma combined basis for the year ended December 31, 1996. Amortization
expense, totaling approximately $17,102,000 includes approximately $17,024,000
of amortization associated with the Company's purchase of contract rights,
approximately $36,000 of amortization associated with costs incurred in
conjunction with the Company's 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 $23,831,000, including approximately
$20,466,000 of interest on the proceeds from the Offering and amortization of
debt issuance costs and approximately $3,365,000 of interest expense associated
with seller financing, installment notes and financings under the Existing
Credit Facility.
44
<PAGE> 52
LIQUIDITY AND CAPITAL RESOURCES
The Company 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. The Company 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 Existing Credit
Facility. Cash flows from financing activities during the 1996 Period totaled
approximately $27,873,000, including $9,400,000 borrowed under the Existing
Credit Facility, approximately $32,000 from the issuance of installment notes,
and approximately $18,441,000 from the sale of Class B Units. In addition, the
Company issued approximately $24,156,000 of seller notes during the 1996 Period
to finance a portion of the purchase price for certain Rural DirecTv Markets
which the Company acquired. Cash flows from financing activities for the nine
months ended September 30, 1997 totaled approximately $257,834,000, including
$72,769,000 borrowed under the Existing Credit Facility, approximately $345,000
from the issuance of installment notes, $31,879,000 from the sale of the 1997
Equity, and $152,841,000 from the issuance of the Subordinated Notes, net of
discounts. In addition, the Company issued approximately $15,524,000 of seller
notes during the nine months ended September 30, 1997 to finance a portion of
the purchase price for certain Rural DirecTv Markets which the Company acquired.
The Company used proceeds from the financings during the 1996 Period (i) to
consummate the 1996 Acquisitions for approximately $33,700,000, excluding
adjustments recorded to reflect the discount of certain of the Company's seller
notes at the 9% interest rate under the Existing Credit Facility at December 31,
1996, (ii) to pay approximately $3,150,000 in deposits toward the purchase of
the 1997 Acquisitions, (iii) to pay certain fees totaling approximately
$3,516,000 incurred in conjunction with the Company's formation and fees
associated with the Existing Credit Facility, (iv) to repay approximately
$9,047,000 of seller notes and other notes payable, (v) for capital expenditures
totaling approximately $386,000, and (vi) for operating cash needs totaling
approximately $634,000. The Company used proceeds from the financings during the
nine months ended September 30, 1997 (i) to consummate the 1997 Acquisitions for
approximately $108,081,000, (ii) to pay certain fees and expenses totaling
approximately $9,325,000 associated with the procurement of debt financing,
(iii) to repay approximately $6,133,000 of seller notes and other notes payable,
(iv) for capital expenditures totaling approximately $1,339,000, (v) expenses
incurred in connection with the Company's formation totaling approximately
$684,000, (vi) to repay approximately $82,169,000 outstanding under the Existing
Credit Facility, and (vii) for operating cash needs totaling approximately
$4,518,000.
In conjunction with the acquisitions of the exclusive rights to provide
DIRECTV Services in certain areas of California, New Mexico, Colorado, New York,
South Carolina and Georgia, the Company issued promissory notes totaling
approximately $39,680,000 in favor of the sellers. The promissory notes accrue
interest at per annum rates ranging from 3% to 15%. Notes with interest rates
below 9% have been discounted to reflect the 9% interest rate under the Existing
Credit Facility. One of the promissory notes carries a contingent payment
amount, which is dependent upon the number of subscribers in the Company's
California system at October 1, 1998. The amounts due under the terms of the
contingent note were approximately $4,223,000 and $5,786,000 at December 31,
1996 and September 30, 1997, respectively.
In July 1997, in connection with the Initial Offering, the Company amended
and restated its Existing 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
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 on July 30, 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
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<PAGE> 53
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 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 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.
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, 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 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. See "Description of Certain
Indebtedness -- Restated Credit Facility."
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
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<PAGE> 54
single largest monthly invoice from the NRTC, exclusive of amounts payable for
DSS(R) equipment purchased by the Company from the NRTC, or $6.28 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%.
The Company's cash and financing needs for 1997 and beyond will be
dependent on the Company's 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, the Company has commitments totaling
approximately $27 million to acquire additional contract rights, principal
repayment obligations on its seller and installment notes totalling
approximately $10 million, and commitments under various operating leases for
office space and equipment. The Company expects to make capital expenditures of
approximately $3 million during the remainder of 1997 and 1998. Capital
expenditures will be primarily for leasehold improvements, furniture and
equipment and software enhancements associated with the Company's centralized
customer call center and the opening of retail stores. The Company plans to fund
these obligations and operating cash requirements using proceeds from the
Initial 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, the Company has $90.0 million of borrowing availability under the
Restated Credit Facility, of which $55.6 million is immediately available. Such
availability will be used to finance acquisitions, to cover debt service and for
operations. The Company believes that the net proceeds from the Initial
Offering, together with available borrowings under the Restated Credit Facility
will provide sufficient funds to enable the Company to consummate the Pending
Acquisition and the Georgia Acquisition, make additional acquisitions and fund
debt service and operations through the maturity date of the Restated Credit
Facility in 2003. The Company believes that consummation of the Pegasus
Transaction will not adversely affect the ability of the Company to consummate
the Pending Acquisition and the Georgia Acquisition and fund debt service and
operations through such period, provided the Restated Credit Facility is amended
to permit the Pegasus Transaction to be consummated without an event of default
(due to a change in control of the Company). Such an amendment is a condition to
the closing of the Pegasus Transaction. Other future acquisitions by the Company
may become less likely as a result of the Pegasus Transaction especially if such
amendment to the Restated Credit Facility is conditioned upon a reduction in
amounts available thereunder. The consummation of the Pegasus Transaction will
also cause a Change of Control to occur under the Indenture, 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. The Issuers do not have sufficient funds to satisfy their obligations
pursuant to the Offer to Purchase if more than approximately $ million in
principal amount of the 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. The Company's business
strategy contemplates additional acquisitions of Rural DirecTv Markets which
will require additional capital. The Company's operations do not currently
generate positive cash flow. While the Company anticipates funding any
additional acquisitions through borrowings under the Restated 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.
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BUSINESS
GENERAL
The Company is a leading independent provider of DBS television services
offered by DirecTv. In terms of the number of households within its Rural
DirecTv Markets, the number of subscribers within such Rural DirecTv Markets and
the Company's revenues from the sale of DIRECTV Services, DirecTv is the leading
provider of DTH satellite television in the United States, offering over 175
program channels to approximately 2.6 million subscribers. The Company has the
exclusive right to provide DIRECTV Services within certain rural territories in
the United States encompassing approximately 1.6 million households. The Company
has approximately 103,000 subscribers representing a household penetration rate
of approximately 6.3%. The Company believes that rural territories such as those
served by the Company are the most attractive market for DTH services because
such territories generally are underserved or are not served by cable systems
and offer limited access to entertainment alternatives. The relative
attractiveness of DBS in these rural areas is evidenced by DirecTv's
penetration, which is over three times its penetration in all other areas of the
United States.
The Company believes that DBS and medium power DTH satellite service
provides the lowest cost, highest quality platform for distributing television
programming to households and commercial locations. As of May 31, 1997, there
were approximately 5.0 million subscribers to such satellite services in the
United States. Kagan estimates that there will be approximately 14.6 million DBS
and medium power DTH subscribers by the year 2002, for a compounded annual
growth rate from December 31, 1996, of approximately 23%. A December 1996
Nielsen survey of 17,000 households measuring satisfaction levels with current
pay television services revealed that on a 1-5 scale (with 5 being the most
satisfied), 80% of DBS and medium power DTH satellite users responded with a 4
or 5. Only 45% of cable subscribers indicated a similar level of satisfaction.
DBS is the fastest growing segment of DTH satellite television because,
among other factors, it offers subscribers higher channel capacity and
programming variety, superior video and audio quality and the ability to receive
transmission on an 18 inch dish as compared to a 27 inch to six foot dish
required by other DTH providers. Consumer acceptance of DBS is evidenced by the
high level of sales of DSS(R) equipment which is used to receive DIRECTV
Services. DSS(R) equipment, which was introduced in 1994, is widely regarded as
the most successful launch of a major consumer electronics product in United
States history, eclipsing the television, the VCR and the compact disc player.
DSS(R) equipment is now produced by major manufacturers under the brand names
RCA, GE, ProScan, Sony, Hughes, Panasonic, Hitachi, Toshiba, Uniden, Magnavox,
Sanyo, Samsung, Daewoo and Memorex. DSS(R) equipment is currently sold through
over 25,000 retail outlets throughout the United States for prices typically
ranging from $199 to $599, depending upon the generation of the equipment, the
level of features and the retail outlet. Prices for DSS(R) equipment have
declined consistently since introduction and have declined by over 50% in the
last year alone, thereby further stimulating demand for DIRECTV Services.
The Company believes that DIRECTV Services are superior to those provided
by other DTH service providers. The Company believes that DirecTv's extensive
programming, including up to 60 channels of pay per view movies and events,
various sports packages and the exclusive NFL Sunday Ticket(TM), will continue
to contribute to the growth of DirecTv's subscriber base and DirecTv's market
share for DTH services in the future. In addition, the Company believes that
DirecTv's national marketing campaign (budgeted at approximately $150 million in
1996) and its alliances with significant strategic partners such as Microsoft
provide the Company with significant marketing advantages over other DTH
competitors. DirecTv's share of current DBS and medium power DTH subscribers was
approximately 51% as of May 31, 1997, and DirecTv obtained approximately 50% of
all new subscribers to DBS and medium power DTH services for each calendar
quarter in 1996, despite the entrance of two new competitors in the DTH
marketplace. During the first five months of 1997, DirecTv again added more new
subscribers (37%) than any other DBS or medium power DTH provider. Although
DirecTv's share of new subscribers can be expected to decline as existing and
new DTH providers aggressively compete for new subscribers, the Company expects
DirecTv to remain one of the leading providers of DBS and medium power DTH
services in an expanding market.
The Company owns the exclusive right to distribute DIRECTV Services in its
territories pursuant to the NRTC Member Agreements with the NRTC, an
organization the members of which are engaged in the
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<PAGE> 56
distribution of telecommunications and other services in predominantly rural
areas of the United States. The NRTC acquired in 1992 the exclusive right to
provide DIRECTV Services to residential households and business establishments
located in the Rural DirecTv Markets under the Hughes Agreement. The Company
believes that the approximately eight million households and numerous business
establishments located in the Rural DirecTv Markets are the most attractive
market for DBS services. Generally, Rural DirecTv Markets are not served or are
underserved by cable systems and offer limited access to other entertainment
alternatives, which should enable the Company to maximize penetration levels and
maintain high customer retention.
The Company's objective is to be the leading provider of pay television
entertainment and information services in its Rural DirecTv Markets. To achieve
this objective, the Company pursues the following strategy:
- Capitalize on DirecTv Brand Name and Programming. The Company will build
on the recognition of DirecTv and DSS(R) brand names. In addition, the
Company believes that it can continue to capitalize on DirecTv's extensive
programming, unique and exclusive sports packages and large selection of
pay per view movies and events to broaden the Company's subscriber base in
its Rural DirecTv Markets. Management also believes that competitively
priced DSS(R) equipment, which is sold in more retail outlets within its
Rural DirecTv Markets than any other DTH product, provides the Company
with a competitive advantage over other DTH providers.
- Emphasize Direct Marketing. The Company plans to complement the
extensive marketing efforts of DirecTv and its other national distribution
partners through targeted local and regional marketing. The Company has
established or is establishing a direct sales force and Company-owned full
service retail stores in each of its Rural DirecTv Markets. The Company
believes that it can increase penetration more rapidly through its direct
sales approach instead of relying, as some DTH providers have, upon the
consumer to take the initiative to purchase the product and services.
- Establish Strong Local Presence. Unlike a majority of traditional DTH
providers, the Company will continue to seek to maximize penetration and
customer satisfaction in its Rural DirecTv markets by establishing a
strong local presence within the communities it serves. The Company
provides a full range of services at the local level, including direct
sales, Company-owned retail stores, dealer support services, equipment
installation and customer service. The Company has managers in these
communities to oversee local marketing and customer service operations.
- Operate Regional Clusters. The Company operates in regional clusters
that generate the significant economies of scale of a larger operator and
offer quality centralized customer service to complement local customer
service. The Company believes that the clustering of its Rural DirecTv
Markets results in increased operating efficiencies, including lower
administrative costs as a percentage of revenues, better trained employees
and a higher level of customer service.
- Acquire Additional Rural DirecTv Markets. The Company believes that
consolidation of the Rural DirecTv Markets will continue over the next
three to five years. Beginning with its initial acquisition in March 1996,
the Company has systematically implemented a successful acquisition and
consolidation strategy focused on the Rural DirecTv Markets. The Company
believes that it has a significant opportunity to aggressively acquire
additional rights to provide DIRECTV Services to the approximately 4.0
million households in the approximately 200 Rural DirecTv Markets
currently owned by the original NRTC Members, the majority of which are
rural electric and telephone cooperatives. Management believes that the
Company's experience in completing 16 acquisitions and in entering into a
binding agreement and letter of intent for a Rural DirecTv Market in
Indiana and a Rural DirecTv Market in Georgia, respectively, will be
instrumental in identifying, negotiating, and integrating future
acquisitions. In addition, as the Company continues to grow as a leading
independent provider of DIRECTV Services in the Rural DirecTv Markets,
"fill-in" and contiguous acquisitions should become less attractive to
other potential acquirors as their ability to create significant clusters
is reduced.
The Company believes its strategy, combined with the general
characteristics of the Company's business of marketing DIRECTV Services,
including relatively low administrative overhead and capital expenditure
requirements, strengthens the opportunity for the Company to generate operating
cash flows.
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OVERVIEW OF THE DTH INDUSTRY
DTH services encompass all types of television transmission from satellites
directly to the home. The FCC has authorized two types of satellite services for
transmission of television programming: Broadcast Satellite Services ("BSS,"
more commonly referred to as "DBS"), which operates at high power (120 to 240
watts per frequency channel) in the Ku-band, and Fixed Satellite Service ("FSS,"
more commonly referred to as low power and medium power DTH), which includes low
power services transmitting in the C-band, as well as medium power (20 to 100
watts per frequency channel) services transmitting in the Ku-band. Both DBS and
medium power DTH satellites are used for digital satellite television services.
DBS provides high quality video and audio signals and can be received by an
18-inch dish. Medium and low power DTH signals require home satellite dishes of
27 inches to six feet in diameter (depending on the geographical location of the
dish and wattage per frequency channel). Of the eight orbital positions
allocated for DBS service in the United States, only the 101 degrees W.L., 110
degrees W.L. and 119 degrees W.L. positions provide complete coverage throughout
the continental United States ("CONUS"). See "-- DirecTv." DirecTv, USSB and
EchoStar are the only current domestic providers of DBS services. All other DTH
domestic satellite television providers currently provide medium or low power
DTH services. See "-- Competition."
A DBS system consists of an uplink center, one or more orbiting satellites
and the subscribers' receiving equipment. The uplink center collects programming
from on-site video equipment and from the direct feeds of programmers. Through
antennae located at the uplink center, the operator transmits, or uplinks, the
programming to transponders located on its geostationary satellite. The
transponders receive and amplify the digital signal and transmit it to receiving
dishes within the area covered by the satellite. The digital signal is then
transmitted via coaxial cable to the subscribers' receiver, where it is
converted into an analog signal which allows it to be received by the
subscribers' televisions. System security is maintained through the use of
reprogrammable access cards that must be inserted into each subscriber's decoder
box to unscramble programming signals.
DBS providers are afforded technological and regulatory advantages over
medium and low power DTH services. The FCC requires the satellites used to
provide DBS services to be spaced at greater intervals than medium and low power
DTH satellites (nine degree orbital spacing over North America compared to two
degree orbital spacing). The greater orbital spacing is intended to ensure that
the signals transmitted by DBS providers can be received by a small dish, free
of interference from adjacent satellites. The closer medium and low power DTH
satellite orbital spacing requires the use of a larger, 27-inch to six foot dish
to eliminate interference from nearby satellites. See "-- Competition -- Medium
Power DTH Providers." In addition, DBS satellites are allowed to broadcast with
much higher power levels than medium and low power DTH satellites. The
combination of greater orbital spacing and higher power enables providers of DBS
services to obtain an optimal balance of small dish size, signal quality in
adverse weather conditions and increased channel capacity.
DIRECTV
DirecTv is the leading DBS provider in the United States, with
approximately 2.6 million subscribers. DirecTv's share of the current DBS and
medium power DTH subscribers was approximately 51% as of May 31, 1996 and
approximately 50% of the new subscribers to DBS and medium power DTH services
during each of the four calendar quarters of 1996 subscribed to DirecTv despite
the entrance of new competitors in the DTH marketplace. During the first five
months of 1997, DirecTv again added more new subscribers (37%) than any other
DBS or medium power DTH provider. Although DirecTv's share of new subscribers
can be expected to decline as existing and new DTH providers aggressively
compete for new subscribers, the Company expects DirecTv to remain one of the
leading providers of DBS and medium power DTH services in an expanding market.
Of the eight orbital positions allocated for DBS service, only the 101
degrees W.L., 110 degrees W.L. and 119 degrees W.L. positions provide full CONUS
coverage. DirecTv has 27 licensed channel frequencies in operation in the 101
degrees W.L. full CONUS orbital position. DirecTv's over 175 program channels
are transmitted via three satellites in this orbital position. DirecTv's
satellites also provide full redundancy on all critical components, including
additional transponders with a sophisticated switching system. The Company
believes that such redundancy substantially lowers the risk of interruption in
service to its subscribers.
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In January 1996, DirecTv entered into a strategic relationship with AT&T
pursuant to which AT&T was granted the right to market DIRECTV Services directly
to all of its residential customers. AT&T invested $137.5 million for a 2.5%
equity interest in DirecTv with rights to purchase up to a 30% equity interest
in DirecTv based on subscriber acquisition performance. In May 1996, AT&T began
to offer DIRECTV Services to its customers via a nationwide marketing campaign
meant to complement the existing DirecTv distribution channels. AT&T recently
announced its intention to terminate this strategic relationship and to sell its
equity interest in DirecTv to Hughes, in connection with which such nationwide
marketing campaign, the one benefit to the Company from this relationship, can
be expected to be discontinued. Additionally, DirecTv has recently announced
plans to launch a joint venture with Microsoft by the end of 1997 to offer a new
interactive personal computer with integrated DSS(R) technology. Consumers with
the DSS(R)-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 includes (i) cable networks, broadcast networks and
audio services available for purchase in tiers for a monthly subscription fee,
(ii) premium services available a la carte or in tiers for a monthly
subscription fee, (iii) sports programming (major professional league sports
packages, including the exclusive NFL Sunday Ticket(TM) , regional sports
networks and seasonal college sports packages) available for a yearly, seasonal
or monthly subscription fee and (iv) movies from all major Hollywood studios and
special events available for purchase on a pay-per-view basis. Satellite and
premium services available a la carte or for a monthly subscription are priced
comparably to cable. Pay per view movies are generally $2.99 per movie. Pay per
view movies are generally available for viewing on multiple channels at
staggered starting times so that a viewer does not have to wait more than 30
minutes to view a particular pay-per-view movie. DirecTv is constantly adjusting
its programming packages to provide the best channel mix possible at various
price points. The following is a summary of some of the more popular DirecTv
programming packages currently available from the Company:
Total Choice(TM): Package of 45 video channels, 31 CD audio channels,
two Disney channels, an in-market regional sports network and access to up
to 60 channels of pay per view movies and events, which retails for $29.99
per month. Total Choice(TM) is DirecTv's most popular offering. Total
Choice(TM) Platinum, Gold, Silver and Plus Encore offer additional
programming at greater retail prices.
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 between $16.95 and $19.99 per month. The Economy service is available
only in the Rural DirecTv Markets.
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.
NFL Sunday Ticket(TM): All out-of-market NFL Sunday games for $159.00
per season. NFL Sunday Ticket(TM) is exclusive to DirecTv through at least
the end of the 1997-1998 football season.
Encore Multiplex: Seven theme movie services (Love Stories, Westerns,
Mystery, Action, True Stories, WAM! and Encore) for $4.00 per month.
STARZ! Package: Package including STARZ! (East and West) and the
Independent Film Channel for $5.00 per month.
Playboy: Adult service available monthly for $12.99.
Prime Time 24 Network Package: ABC (East and West), NBC (East and
West), CBS (East and West), Fox and PBS available individually for $1.00
per month or collectively 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).
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Sports Choice: Package of 24 channels (including over 18 regional
sports networks) and five general sports networks (the Golf channel,
NewSport, Speedvision, Classic Sports Network and Outdoor Life) for $12.00
per month on a stand alone basis.
NBA League Pass(SM): Approximately 800 out-of-market NBA games for
$149.00 per season.
NHL Center Ice(SM): Approximately 500 out-of-market NHL games for
$129.00 per season.
MLB Extra Innings: Approximately 800 out-of-market major league
baseball games for $139.00 per season.
Some of the channels provided in the Total Choice package include:
<TABLE>
<S> <C>
A&E....................................... Cultural and entertainment programming
AMC....................................... American Movie Classics
BET....................................... Black Entertainment Television
Cartoon Network........................... Programming from the Hanna Barbera
cartoon library
CNBC...................................... Late breaking market news and personal
finance information
CNN....................................... In-depth news and commentary
CNN International......................... International news, sports and weather
CNN fn.................................... Comprehensive business and financial
news
CMT (Country Music Television)............ Contemporary country music hits
Court TV.................................. News from courtrooms around the world
C-SPAN.................................... Coverage of U.S. congressional events
and public affairs
Discovery Channel......................... Non-fiction entertainment and
documentaries
The Disney Channel (East & West).......... Animated Disney classics, original
series, entertainment specials and
movies
E! Entertainment Television............... Programming from the world of
celebrities and entertainment
ESPN...................................... Wide variety of sports programming
including the NFL, NHL and MLB
ESPN 2.................................... Differentiated sports programming
targeting younger viewers, including the
NHL
The Family Channel........................ Family-oriented entertainment
Headline News............................. Concise, fast-paced 30 minute news
updates
HGTV...................................... Home and Garden Television
TLC (The Learning Channel)................ Diverse mix of how-to, cooking, science,
history and educational shows
Music Choice.............................. 31 channels
Sci-Fi Channel............................ Science fiction, fantasy, classic horror
and factual science programming
Superstation TBS.......................... Movies, documentaries, comedies,
children's shows and sports, including
the NBA and Atlanta Braves baseball
TNT (Turner Network Television)........... Classic and original movies, NFL and
comprehensive NBA schedule
The Travel Channel........................ Video visits and travel information and
advice
TCM (Turner Classic Movies)............... Movies, special features and
entertainment
USA Network............................... Original series, movies, high profile
sports and animated children's
programming
The Weather Channel....................... Local, national and international
weather
</TABLE>
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USSB owns 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 HBO(R), Showtime
Network(R), MTV(R) and Comedy Central(R). USSB's selection of programming
services (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 programming to DirecTv. The
Company is a dealer of USSB and receives a one-time commission for each
activation of a subscriber to USSB programming. As of March 31, 1997,
approximately 56% of DirecTv's 2.5 million subscribers receive USSB programming.
DirecTv does not generally provide local broadcast programming via
satellite. However, seamless switching between satellite and broadcast
programming provided by other sources is possible with all DSS(R) 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.
To receive DIRECTV Services, subscribers must purchase DSS(R) equipment,
which consists of an 18 inch satellite dish, an integrated DSS(R) receiver unit
(similar in size and appearance to a VCR) and a remote control, all of which are
used with standard television sets. Each DSS(R) receiver includes an access card
which is uniquely addressed to it. The access card, which can be removed from
the receiver, prevents unauthorized reception of DIRECTV Services and retains
billing information on pay-per-view usage. The small size of the dish makes it
more acceptable to housing communities and organizations that prohibit the
installation of larger dishes due to their appearance. The DSS(R) receiver
captures and translates the signal and interfaces with an easy to use on-screen
electronic program guide with a parental locking/ratings control function.
DSS(R) equipment is currently sold through over 25,000 retail outlets
throughout the United States for prices typically ranging from $199 to $599,
depending upon the generation of the equipment, the level of features and the
retail outlet. Prices for DSS(R) equipment have declined consistently since
introduction and have declined by over 50% in the last year alone thereby
further stimulating demand for DIRECTV Services. Typically, consumers can
purchase home installation kits for approximately $75 or receive professional
installation for approximately $150.
The DSS(R) equipment used to receive DIRECTV Services is manufactured by
several large manufacturers under the brand names RCA, GE, ProScan, Sony,
Hughes, Panasonic, Hitachi, Toshiba, Uniden, Magnavox, Sanyo, Samsung, Daewoo
and Memorex. The Company believes that the brand names and reputations of the
DSS(R) manufacturers in the consumer electronics industry offers DirecTv and the
Company a significant competitive advantage relative to other DTH providers
because consumers value the quality and service reputation of these brand names
when purchasing home electronics and television products.
MARKET POTENTIAL FOR DBS AND MEDIUM POWER DTH SERVICES
The Company believes that DBS and medium power DTH satellite service
provides the lowest cost, highest quality platform for distributing television
programming to households and commercial locations. As of May 31, 1997, there
were approximately 5.0 million subscribers to such satellite services in the
United States. Kagan estimates that there will be approximately 14.6 million DBS
and medium power DTH subscribers by the year 2002, for a compounded annual
growth rate from December 31, 1996 of approximately 23%. A December 1996 Nielsen
survey of 17,000 households measuring satisfaction levels with current pay
television services revealed that on a 1-5 scale (with 5 being the most
satisfied), 80% of DBS and medium power DTH satellite users responded with a 4
or 5. Only 45% of cable subscribers indicated a similar level of satisfaction.
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The following chart illustrates historical and projected growth of the
number of subscribers to DBS and medium power DTH services.
[BAR CHART]
PROJECTED GROWTH OF DBS AND MEDIUM POWER DTH SUBSCRIBERS
- ---------------
Source: Paul Kagan Associates, Inc.
The Company believes that the following factors will contribute to the
market growth of the DSS(R) system:
DOMINANCE OF NATIONAL MARKET BY DIRECTV
DirecTv's commercial service was launched approximately two years prior to
the launch of the next DBS service. Estimates by Kagan indicate that DirecTv
subscribers accounted for over 51% of the subscribers to DBS and medium power
DTH services as of May 31, 1997. Kagan also estimates that approximately 50% of
the new subscribers to DBS and medium power DTH services during each of the four
calendar quarters of 1996 subscribed to DirecTv, despite the entrance of other
DTH providers into the market. During the first five months of 1997, DirectTv
again added more new subscribers (37%) than any other DBS or medium power DTH
provider. The Company expects DirecTv to remain one of the leading providers of
DBS and medium power DTH services in an expanding market, even though DirecTv's
share of new subscribers can be expected to decline as existing and new DBS
providers aggressively compete for new subscribers.
DEMAND FOR INCREASED TELEVISION PROGRAMMING AND BETTER QUALITY PICTURE AND
SOUND
Prior to the growth of cable television services, television viewers were
offered a relatively limited number of channels. As the number of channels
increased, consumer demand for more programming choices also increased. The
Company expects that, as this trend continues, consumers will desire higher
quality programming choices than are available through cable. In addition to its
wide array of programming packages, DirecTv offers subscribers access to up to
60 channels of pay-per-view movies, sports and live special events, which is
significantly greater than that offered by other pay television providers. In
addition, DirecTv's comprehensive major league sports packages, such as NFL
Sunday Ticket(TM), NBA League Pass(SM) and MLB Extra Innings, offer subscribers
viewing options currently available only through DirecTv. The Company believes
consumers are also increasingly demanding improved signal quality compared to
what has historically been offered by over-the-air VHF and UHF broadcasters and
by cable. The Company believes that the DSS(R) system is well-positioned to
benefit from these growing demands.
DISSATISFIED CABLE SUBSCRIBERS
Research by Nielsen shows that a substantial number of current cable
subscribers are dissatisfied with the level of service and value generally
provided by cable operators. The DSS(R) system provides greater choice and, the
Company believes, more reliable broadcast service at prices competitive with
cable for an improved level of programming. A December 1996 Nielsen survey of
17,000 households measuring satisfaction levels with current
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<PAGE> 62
pay television services revealed that on a 1-5 scale (with 5 being the most
satisfied), 80% of DBS and medium power DTH satellite users responded with 4 or
5. Only 45% of cable subscribers indicated a similar level of satisfaction.
MARKET POTENTIAL IN RURAL DIRECTV MARKETS
The Company believes the approximately eight million households and
numerous business establishments the NRTC estimates to be located in the Rural
DirecTv Markets are the most attractive markets for DBS services because they
generally are not served or are underserved by cable systems and offer limited
access to other entertainment alternatives. The relative attractiveness of DBS
in rural areas is evidenced by DirecTv's penetration, which is over three times
its penetration in all other areas of the United States. The Company also
believes that as the cost of DSS(R) equipment continues to decline, consumers in
the Rural DirecTv Markets will increasingly be willing to incur the cost of
purchasing such equipment to obtain programming which is unavailable to them
through other sources.
Approximately 35 to 40 million households in the United States are not
served or are underserved by cable systems. An area is considered to be
"underserved" based on to the number of channels provided, the quality of the
programming, the quality of the signal and the number of households within the
area which are passed by the cable system. There are approximately 11,000 cable
systems in the United States, many of which are located in areas where the cost
to upgrade these systems on a per subscriber basis would be greater than in more
densely populated areas. Even in areas where it is economically feasible, cable
system upgrades may not occur in the near future. Areas unserved or underserved
by cable are an important target market for the Company. Compared to 8% of the
households in the United States that are not passed by cable, approximately 26%
of the households in the Company's Rural DirecTv Markets are not passed by
cable.
ACQUISITIONS BY THE COMPANY
The Company has acquired the exclusive right to provide DIRECTV Services in
16 Rural DirecTv Markets (with two additional acquisitions pending) since it
began implementing its acquisition strategy. When the Company purchases the
exclusive right to provide DIRECTV Services in a Rural DirecTv Market, it
acquires the NRTC Member Agreement and related agreements providing for the
exclusive right to provide DIRECTV Services within such Rural DirecTv Market,
all 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 Rural DirecTv Market after the termination or expiration of the NRTC Member
Agreement.
Management believes that the Company's experience in completing 16
acquisitions and in entering into a binding agreement and letter of intent for a
Rural DirecTv Market in Indiana and a Rural DirecTv Market in Georgia,
respectively, will be instrumental in identifying, negotiating and integrating
future acquisitions. In addition, the Company has created operating efficiencies
in its Rural DirecTv Markets since they were acquired, including lower
administrative costs as a percentage of revenues, better trained employees and a
higher level of customer care. The Company has also opened its own full service
retail outlets in three markets and has recruited direct sales forces and
independent dealer networks. As markets are consolidated, the Company plans to
implement in all of its Rural DirecTv Markets direct sales forces to expand its
subscriber base.
The Company completed its first two acquisitions of the exclusive right to
provide DIRECTV Services in Rural DirecTv Markets from NRTC Members in the first
half of 1996. In the second half of 1996, the Company completed the six
additional acquisitions of such rights in Rural DirecTv Markets in New York,
Colorado, New Mexico and South Carolina. In the first quarter of 1997, the
Company completed four acquisitions in Kentucky, Kansas and Vermont. In May
1997, the Company completed four acquisitions in Georgia and, as a result
thereof, became a leading NRTC Member based on the number of households within
its Rural DirecTv Markets with approximately 1.5 million households and
approximately 93,000 subscribers. Upon consummation of the Pending Acquisition,
which is expected to be completed during the last quarter of 1997, the Company
will have completed 17 acquisitions and will have a total of approximately 1.6
million households within its Rural DirecTv Markets
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<PAGE> 63
and approximately 103,000 subscribers. The Company has the exclusive right to
distribute DIRECTV Services in 17 Rural DirecTv Markets in the following
locations (excluding the effects of the Georgia Acquisition):
<TABLE>
<CAPTION>
PERCENTAGE
OF HOMES
NOT PASSED
LOCATION HOUSEHOLDS BY CABLE SUBSCRIBERS(1) PENETRATION(2)
<S> <C> <C> <C> <C>
Kentucky(3)....................... 368,445 31.23% 21,205 5.76%
Kansas(4)......................... 299,423 19.17 12,111 4.04
Georgia(5)........................ 240,229 28.89 14,490 6.03
Vermont(6)........................ 209,332 34.80 22,567 10.78
South Carolina(7)................. 164,314 31.66 7,056 4.29
New Mexico(8)..................... 84,920 16.06 4,977 5.86
California(9)..................... 84,006 3.84 5,660 6.74
New York(10)...................... 49,593 30.52 4,579 9.23
Indiana(11)....................... 131,625 20.00 10,350 7.86
--------- ----- ------- -----
Total................... 1,631,887 26.05% 102,995 6.31%
========= ===== ======= =====
</TABLE>
- ---------------
(1) Reflects actual subscribers at May 31, 1997.
(2) Represents the percentage of households which subscribe to DIRECTV Services
in the Company's Rural DirecTv Markets.
(3) 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.
(4) 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.
(5) 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.
(6) 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.
(7) 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.
(8) 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.
(9) Cluster consists of Rural DirecTv Market acquired in April 1996 which
includes households located in San Luis Obispo County, California.
(10) 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.
(11) Cluster consists of a Rural DirecTv Market which the Company expects to
acquire during the last quarter of 1997 and which includes households
located in the following counties in Indiana: Clay, Hamilton, Hendricks,
Morgan, Owen, Parke, Putnam and Tipton.
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CONSOLIDATION OF RURAL DIRECTV MARKETS
The Company believes that consolidation of the Rural DirecTv Markets will
continue over the next three to five years. The following chart illustrates the
current ownership of the households in the Rural Direct Markets:
[PIE CHART]
OWNERSHIP OF HOUSEHOLDS IN RURAL DIRECTV MARKETS
- ---------------
Source: National Rural Telecommunications Cooperative
SALES AND DISTRIBUTION
The Company offers DIRECTV Services to consumer and business segments in
its Rural DirecTv Markets through two separate but complementary sales and
distribution channels.
COMPANY CONTROLLED CHANNELS
The Company 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 Markets.
The Company 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 Company's direct sales force is supported by an
active lead generation call center which sets appointments during which outside
sales agents provide in-home demonstrations of DIRECTV Services. The Company
also has Company-owned full service retail stores located in three of its Rural
DirecTv Markets and has plans to open additional stores in its other markets
during 1998.
The Company has increased to approximately 340, and continues to increase,
the number of quality independent dealers in its Rural DirecTv Markets. The
Company 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, the
Company 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(R) unit and a subscription to DIRECTV Services
offered by the Company, a dealer retains the proceeds from the sale of the
equipment and earns a one-time commission paid by the Company. The Company
retains the ongoing monthly subscription revenue from the subscriber. For
certain equipment sold through the indirect dealer network, the Company provides
a subsidy, thus lowering the price of the equipment for the consumer.
NON-COMPANY CONTROLLED CHANNELS
DIRECTV Services are also offered to potential subscribers in the Company's
Rural DirecTv Markets by sources which the Company 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 the Company's
indirect dealer network, the Company pays a one-time commission to these
distribution channels for the sale of DIRECTV Services to a subscriber located
in the Company's Rural DirecTv Markets and the Company receives all monthly
programming revenues associated therewith.
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<PAGE> 65
MARKETING
In its marketing efforts, the Company emphasizes the DirecTv and DSS(R)
brand names, promoting the superior DirecTv programming as the new standard in
television. The Company 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 1996, DirecTv budgeted
to spend approximately $150 million on its national advertising campaigns. In
addition, the Company implements support advertising programs for its indirect
distribution channels. The Company's 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 to motivate customers to purchase such
plans, and the Company has incentive-based sales compensation for both the
direct and dealer sales forces to promote and sell premium subscription plans.
The Company has established or plans to establish a direct sales force and
Company-owned full service retail stores in each of its Rural DirecTv Markets.
The Company believes that it can increase penetration more rapidly through its
direct sales approach instead of relying as some DTH providers have upon the
consumer to take the initiative to purchase the product and services.
A key element of the Company's marketing strategy is to offer value-priced
DSS(R) equipment and installation through the use of subsidies on direct sales
of equipment and installations. The Company offers various types of DSS(R)
equipment and accessories through its direct sales force and retail locations.
The Company 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(R) equipment and installation by the Company's volume-
based commission structure.
CUSTOMER SERVICE
Quality installations and ongoing customer care are critical elements to
customer satisfaction and low customer churn. The Company 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, assisting the customers through the
installation and initial service period and handling 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. The Company,
through its customer care department, currently provides customer service from
8:00 a.m. EST to 1:00 a.m. EST each day, seven days a week. The staff is highly
trained with on-line access to the DirecTv billing and authorization system.
RELATIONSHIP WITH THE NRTC AND DIRECTV
In 1992, the NRTC acquired pursuant to the Hughes Agreement the exclusive
right to provide DIRECTV Services to residential households and commercial
establishments located in the Rural DirecTv Markets. The NRTC subdivided its
rights to provide such services into approximately 250 geographically based
Rural DirecTv Markets, with the smallest Rural DirecTv Market consisting of
approximately 150 households and the largest (which is owned by the Company)
consisting of approximately 370,000 households. The NRTC then sold individual
Rural DirecTv Markets to NRTC Members pursuant to the NRTC Member Agreements.
The DIRECTV Services offered by the Company to its subscribers in its Rural
DirecTv Markets are acquired pursuant to NRTC Member Agreements, which were
assigned to the Company with the consent of the NRTC and DirecTv when the
Company acquired such Rural DirecTv Markets.
Both the Hughes Agreement and the NRTC Member Agreements expire when Hughes
removes its current satellites from their assigned orbital locations. According
to Hughes and USSB, the DirecTv satellites have estimated orbital lives of at
least 15 years from their respective launches in December 1993 and 1994. The
NRTC has advised the Company that the Hughes Agreement provides the NRTC with a
right of first refusal to obtain
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<PAGE> 66
DBS Services (other than programming services) in substantially the same form as
such DBS Services are provided under the existing Hughes Agreement in the event
that Hughes elects to launch one or more successor satellites upon the removal
of the present satellites from their assigned orbital locations. The NRTC Member
Agreements do not expressly provide an equivalent right of first refusal for the
NRTC Members to acquire DBS Services through the NRTC should the NRTC exercise
its right of first refusal under the Hughes Agreement. The NRTC Member
Agreements do provide, however, that the Company has substantial proprietary
interests in and rights to information other than with respect to subscribers to
"non-select" services with respect to the Company's subscribers. The Company
shares with DirecTv such interests and rights with respect to subscribers to
both DIRECTV Services and "non-select" services. Moreover, the Company (through
the 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.
Thus, given the Company's rights in the subscriber information and its interest
in the NRTC, the Company believes that if the NRTC exercises its rights of first
refusal under the Hughes Agreement, such rights will be made available by the
NRTC to the Company. See "Risk Factors -- Ability to Acquire DBS Services from
the NRTC and DirecTv after Expiration of Term of NRTC Member Agreements."
Pursuant to the NRTC Member Agreements, the Company has the exclusive right
in its Rural DirecTv Markets to market, sell and retain all of the revenues from
subscribers derived from the sale of programming (other than that designated as
"non-select" programming) transmitted by the DirecTv satellites over the 27
frequencies owned by Hughes. The Company pays the NRTC for the wholesale cost of
the programming and a fee to DirecTv based upon 5% of the programming revenue.
Programming is designated as "non-select" if the provider of such programming to
DirecTv requires payment of minimum subscriber guarantees, advance payments or
other similar commitments and the NRTC determines not to make such payments.
Currently, such "non-select" services include, for example, NFL Sunday
Ticket(TM). The NRTC and the Company have the right to select these services as
new agreements are entered into between DirecTv and the content provider. The
Company retains 5% of the revenues from "non-select" services purchased by its
subscribers and remits the balance to DirecTv.
Pursuant to the NRTC Member Agreements, the Company is obligated to
promote, market and sell DIRECTV Services, to authorize new subscribers through
DirecTv's "Conditional Access Management Center" and to take all reasonable
steps to ensure that DIRECTV Services are not received at any unauthorized
locations or in any unauthorized manner. The Company also purchases customer
authorization, billing services and centralized remittance processing services
from the NRTC pursuant to the NRTC Member Agreements. The NRTC Member Agreements
also contain customary provisions regarding payment terms, compliance with laws
and indemnification and provide that both the NRTC and DirecTv must consent
prior to the assignment or transfer by the NRTC Member party thereto of its
rights or obligations under the NRTC Member Agreements, which consent shall not
be unreasonably withheld. The NRTC Member Agreements also contain termination
provisions which allow the NRTC to terminate such agreements (i) as a result of
a breach by Hughes, with the NRTC remaining responsible for paying to the
Company its pro rata portion of any refunds that the NRTC receives from Hughes
under the Hughes Agreement, (ii) if the Company fails to make any payment due to
the NRTC or otherwise breaches a material obligation of the NRTC Member
Agreement and such failure or breach continues for more than 30 days after
written notice from the NRTC, or (iii) if the Company fails to keep and maintain
any letter of credit required to be provided to the NRTC in full force and
effect or to adjust the amount of the letter of credit as required by the NRTC
Member Agreement.
COMPETITION
The Company 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 the Company's
competitors have greater financial and marketing resources than the Company, and
the business of providing subscription and pay television programming is highly
competitive. The Company believes that quality and variety of programming,
signal quality and service and cost will be the key bases of competition. See
"Risk Factors -- Competition and Technological Change."
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CABLE TELEVISION
Cable operators in the United States serve approximately 64 million
subscribers, representing over 65% penetration of television households passed
by cable systems. Cable operators typically offer 25 to 78 channels of
programming at an average monthly subscription price of approximately $35. While
cable companies currently serve a majority of the U.S. television market, the
Company believes many 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, the Company
believes that other cable systems that have limited channel capacity like those
in most of the Rural DirecTv Markets will have to be upgraded to add bandwidth
in order to provide digital service. The Company believes that such upgrades
will require substantial investments of capital and time to complete
industry-wide. As a result, the Company believes that there will be a
substantial delay before cable systems in the Rural DirecTv Markets can offer
programming services equivalent to digital DBS providers and that some cable
systems in those markets may never be upgraded, subject to advances in digital
compression technology currently under development.
The Company expects to encounter a number of challenges in competing with
cable television providers. First, cable operators have an entrenched position
in the marketplace. The Company believes that its current strategy of targeting
for acquisition Rural DirecTv Markets which are not served by cable or are
underserved by cable partially offsets the cable industry's position in the
consumer marketplace. Second, the upfront costs to the consumer associated with
purchasing and installing DSS(R) equipment are higher than the upfront costs for
installation of cable television. However, as a result of the lowering of the
price of the DSS(R) unit in 1996, the Company realized a substantial growth in
its subscriber base. 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(R) 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. The Company believes that the
significant capital costs of upgrading cable systems to provide similar
services, combined with the marketing strength of DBS providers such as DirecTv,
presents DBS providers with an opportunity to take substantial market share for
pay television services from cable in the Rural DirecTv Markets.
OTHER DBS PROVIDERS
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.
EchoStar reported approximately 545,000 subscribers at May 31, 1997,
representing a 10% market share of high and medium power DTH subscribers. The
Company believes that it can successfully compete with EchoStar in the DBS
market because of DirecTv's brand name and its significantly larger distribution
networks and greater number of manufacturers of the equipment used to receive
DTH services.
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
HBO(R), Showtime Network(R), MTV(R) and Comedy Central(R). 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. As of March 31, 1997,
approximately 56% of DirecTv's 2.6 million subscribers received USSB
programming. In addition, USSB has three licensed channel frequencies at the 110
degrees W.L. full CONUS orbital position and eight at the 148 degrees W.L.
partial CONUS position.
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MEDIUM POWER DTH PROVIDERS
PrimeStar, owned primarily by a consortium of cable companies including
TCI, 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 May 31, 1997, PrimeStar had 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.
Tee-Comm Electronics, Inc., a supplier of C-band hardware in North America,
entered the medium power DTH marketplace in mid-1996 with its AlphaStar Digital
Network ("AlphaStar"). AlphaStar offers approximately 150 digital video and
audio channels. The AlphaStar service generally utilizes 36-inch dishes, rather
than the 18-inch dish utilized by DirecTv subscribers. AlphaStar reported
approximately 51,000 subscribers at May 31, 1997, representing less than 1% of
the market for DBS and medium power DTH satellite subscribers. On May 27, 1997,
AlphaStar filed for bankruptcy protection under Chapter 11.
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/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. The
Company 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.
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As more telephone companies begin to provide subscription programming and
other information and communications services to their customers, additional
significant competition for subscribers will develop. Among other things,
telephone companies have an existing relationship with substantially every
household in their service area, substantial financial resources, and an
existing infrastructure and may be able to subsidize the delivery of programming
through their position as the sole source of telephone service to the home.
Most areas of the U.S. are covered by traditional territorial over-the-air
VHF/UHF broadcasters. Consumers can receive from three to ten channels of
over-the-air programming in most markets. These stations provide local, network
and syndicated programming free of charge, but each major market is generally
limited in the number of programming channels. Congress is expected to consider
the release of additional digital spectrum for use by VHF/UHF broadcasters later
this year.
REGULATION
Unlike a common carrier, such as a telephone company, or a cable operator,
DBS operators such as DirecTv are free to set prices and serve customers
according to their business judgment, without rate of return or other regulation
or the obligation not to discriminate among customers. However, there are laws
and regulations that affect DirecTv and, therefore, affect the Company. As an
operator of a privately owned United States satellite system, DirecTV is subject
to the regulatory jurisdiction of the FCC, primarily with respect to (i) the
licensing of individual satellites (i.e., the requirement that DirecTv meet
minimum financial, legal and technical standards), (ii) avoidance of
interference with radio stations and (iii) compliance with rules that the FCC
has established specifically for DBS satellite licenses. As a distributor of
television programming, DirecTv is also affected by numerous other laws and
regulations. The Telecommunications Act of 1996 (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 the Company
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
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programming) could adversely affect DirecTv's ability to acquire programming on
a cost-effective basis, which would have an adverse impact on the Company.
Certain of the restrictions on cable-affiliated programmers will expire in 2002
unless the FCC extends such restrictions.
The Cable Act also requires the FCC to conduct a rulemaking that will
impose public interest requirements for providing video programming on DTH
licensees, including, at a minimum, reasonable and non-discriminatory access by
qualified candidates for office and the obligation to set aside four to seven
percent of the licensee's channel capacity for non-commercial programming of an
educational or informational nature. Within this set-aside requirement, DTH
providers must make capacity available to "national educational programming
suppliers" at below-cost rates. The FCC is conducting a rulemaking to implement
this statutory provision.
While DTH operators like DirecTv currently are not subject to the "must
carry" requirements of the Cable Act, the cable industry has argued that DTH
operators should be subject to these requirements. In the event the "must carry"
requirements of the Cable Act are revised to include DTH operators, or to the
extent that new legislation of a similar nature is enacted, DirecTv's future
plans to provide local programming will be adversely affected, and such
must-carry requirements could cause the displacement of possibly more attractive
programming.
The Satellite Home Viewer Act (the "SHVA") establishes a "compulsory"
copyright license that allows a DTH operator, for a statutorily-established fee,
to retransmit network programming to subscribers for private home viewing so
long as that retransmission is limited to those persons in unserved households.
In general, an "unserved household" is one that cannot receive, through the use
of a conventional outdoor rooftop antenna, a sufficient over-the-air network
signal, and has not, within 90 days prior to subscribing to the DTH service,
subscribed to a cable service that provides that network signal. Although
DirecTv and the Company have implemented guidelines to safeguard against
violations of the SHVA, certain subscribers within the Company's Rural DirecTv
Markets receive network programming despite 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 Rural DirecTv Markets could adversely
affect the Company's average programming revenue per subscriber and subscriber
growth.
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 Rural DirecTv Markets, a portion of the
Company's subscribers may, in fact, be receiving DirecTv Services outside the
Company's markets. Canadian authorities have identified some subscribers outside
of the United States that may be receiving DIRECTV Services. Although the
Company is not required to take any actions to determine whether any subscribers
are receiving DirecTv Services outside of the Company's Rural DirecTv Markets,
the Company's policy is to disconnect any subscribers which it discovers reside
outside the United States. Subscribers to DIRECTV Services in the Company's New
York and Vermont Rural DirecTv Markets, the Company's only Rural DirecTv Markets
where subscribers outside the United States would be able to unlawfully receive
DIRECTV Services from the Company, are required to represent to the Company that
they reside in the United States.
FACILITIES
The Company is headquartered in approximately 6,400 square feet of leased
space in Roswell, Georgia and maintains offices in Louisville, Kentucky; Hays,
Kansas; Sante Fe, New Mexico; Burlington, Vermont; Cortland, New York; Florence,
South Carolina; San Luis Obispo, California; and Albany, Georgia. The Company
expects these facilities to be adequate for its needs in the foreseeable future.
The Company also maintains full-service retail stores in Florence, South
Carolina; Sante Fe, New Mexico and San Luis Obispo, California. Management
believes that the Company will be able to lease office and retail space in its
Rural DirecTv Markets as needed on acceptable terms.
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MANAGEMENT AND EMPLOYEES
The Company has assembled an experienced management team to execute its
business strategy. Certain members of the senior management team have
significant experience working together at Sterling Cellular, a multi-system
cellular operator serving rural markets comparable to the Rural DirecTv Markets.
The Company's executive team brings to the Company extensive business
acquisition experience in the telecommunications industry, as well as experience
in the sales and delivery of a full array of communications services to
customers in rural America. As of June 21, 1997, the Company had approximately
187 employees. The Company is not a party to any collective bargaining agreement
and considers its relations with its employees to be good.
LEGAL PROCEEDINGS
The Company is not currently party to any legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Prior to the Corporate Conversion, the LLC was managed by its manager, DTS
Management, which in turn was managed by a board of managers. As a result of the
Corporate Conversion, the Company is now managed by a board of directors (the
"Board"), which consists of the same persons who serve as the managers of DTS
Management. DTS Management, in its capacity as sole member of such subsidiaries,
continues to serve as the manager of the Company's indirect subsidiaries (other
than Spacenet, Inc., which has its own board of directors). The dates of service
as an executive officer with the Company reflected below include service with
the Company's predecessors and DTS Management, and dates of service as a
director of the Company include service on the board of managers of DTS
Management. The Company's executive officers and directors and their positions
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Douglas S. Holladay, Jr.............. 50 President, Chief Executive Officer and
Director
Earle A. MacKenzie................... 45 Vice President and Chief Operating Officer
William J. Dorran.................... 41 Senior Vice President
Donald A. Doering.................... 40 Vice President, Treasurer, Secretary and Chief
Financial Officer
Michael C. Brooks.................... 52 Director
Harry F. Hopper III.................. 44 Director
William Laverack, Jr................. 40 Director
David P. Mixer....................... 45 Director
James B. Murray...................... 50 Director
Riordon B. Smith..................... 36 Director
</TABLE>
BACKGROUND OF DIRECTORS AND EXECUTIVE OFFICERS
Douglas S. Holladay, Jr. Mr. Holladay has been President and Chief
Executive Officer of the Company since April 1996 and a director since June
1996; the Stockholders Agreement provides that the Chief Executive Officer shall
serve as a director. From 1990 to April 1996, Mr. Holladay was President and
Chief Operating Officer of Sterling Cellular, a multi-system rural cellular
operator formed in 1989.
Earle A. MacKenzie. Mr. MacKenzie has been Vice President and Chief
Operating Officer of the Company since March 1997. From June 1991 to March 1997,
Mr. MacKenzie was President of Essex Communications Consulting and its
predecessor, which are providers of consulting services to the wireless
telecommunications industry. Prior to June 1991, he held various executive
positions with Contel Cellular, a leading wireless provider in rural and midsize
markets.
William J. Dorran. Mr. Dorran has been Senior Vice President of the
Company since April 1996. From 1990 to April 1996, Mr. Dorran served in various
positions with the NRTC, most recently as its Chief Operating Officer. He was
involved in negotiating and structuring the NRTC's investment in DirecTv
licenses and in developing and launching the NRTC's DirecTv operations.
Donald A. Doering. Mr. Doering has been Vice President and Chief Financial
Officer of the Company since April 1996 and Treasurer and Secretary of the
Company since October 1997. From May 1995 to April 1996 Mr. Doering served as a
consultant to the wireless communications industry. From 1989 to May 1995 Mr.
Doering served in various capacities with Sterling Cellular, most recently as
Vice President and Chief Financial Officer.
Michael C. Brooks. Mr. Brooks has been a director of the Company since
February 1997 and serves in such capacity as a designee of Whitney pursuant to
the 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.
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Harry F. Hopper III. Mr. Hopper has been a director of the Company since
June 1996 and serves in such capacity as a designee of the holders of the Common
Stock pursuant to the 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.
William Laverack, Jr. Mr. Laverack has been a director of the Company
since February 1997 and serves in such capacity as a designee of Whitney
pursuant to the Stockholders Agreement. Mr. Laverack has been a general partner
of Whitney since joining the firm in May 1993. From 1991 to 1993, he was a
Managing Director of Gleacher & Co., Inc., a mergers and acquisitions advisory
firm. From 1985 to 1991 he was employed by Morgan Stanley & Co. Incorporated in
its Merchant Banking Group. Mr. Laverack is also a director of Steel Dynamics,
Inc. and several private companies.
David P. Mixer. Mr. Mixer has been a director of the Company since June
1996 and serves in such capacity as a designee of the holders of the Common
Stock pursuant to the Stockholders Agreement. Since Columbia's inception in
March 1989, Mr. Mixer has been a Managing Director of Columbia. Since 1988, Mr.
Mixer has also been the President of Bay Cellular, a cellular communications
company. Mr. Mixer is a member of the Board of Directors of each of Saville
Systems PLC ("Saville Systems"), a producer of customized billing systems for
service providers in the telecommunications industry, Telular Corporation and
NETCOM On Line Communications Services, Inc.
James B. Murray, Jr. Mr. Murray has been a director of the Company since
June 1996 and serves in such capacity as a designee of the holders of the Common
Stock pursuant to the Stockholders Agreement. Since Columbia's inception in
March 1989, Mr. Murray has been a Managing Director of Columbia. From January
1990 to January 1993, Mr. Murray was also the President of Randolph Cellular
Corp., a cellular communications company. Mr. Murray is a member of the Board of
Directors of Saville Systems, Advanced Radio Telecom Corp., a wireless broadband
telecommunications company, and of several privately-held telecommunications
companies, including Merrick Tower Corporation, and Contact New Mexico, Inc.
Riordon B. Smith. Mr. Smith has been a director of the Company since
February 1997 and serves in such capacity as the designee of Chisholm Partners
III, L.P. pursuant to the Stockholders Agreement. Mr. Smith is a Senior Vice
President of Fleet Venture Resources, Inc., which he joined in 1990. Fleet
Venture Resources, Inc. is a private equity fund with an investment focus in
media and information, telecommunications services, healthcare services,
industrial manufacturing, business services and consumer products and services.
BOARD OF DIRECTORS
All directors hold office by virtue of their designation by certain holders
of capital stock of the Company pursuant to the terms of the Stockholders
Agreement. There are no family relationships between any of the directors or
executive officers of the Company. See "Description of Capital
Stock -- Stockholders Agreement -- Board of Directors."
DIRECTOR COMPENSATION
Directors do not receive compensation in their capacity as directors, but
are entitled to reimbursement of expenses incurred in connection with their
attendance at Board meetings.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's compensation committee consists of Mr. Brooks (chairman), Mr.
Smith and Mr. Mixer.
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EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the
compensation of the Company's Chief Executive Officer and the Company's other
employees whose total salary and bonus exceeded $100,000 during the year ended
December 31, 1996 (the "Named Executives"), as well as the total compensation
earned by the Named Executives during 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM ALL OTHER
ANNUAL COMPENSATION COMPENSATION(1) COMPENSATION
---------------------------- ---------------- ------------
NAME AND PRINCIPAL POSITION SALARY BONUS OTHER CLASS C UNITS(#)
<S> <C> <C> <C> <C> <C>
Douglas S. Holladay, Jr......... $120,171 $50,000 $0 40,111(2) $1,932(3)
President and Chief Executive
Officer
William J. Dorran............... $113,531(4) $25,000 $0 26,882(5) $ 0
Senior Vice President
Donald A. Doering............... $ 83,139 $40,000 $0 20,056(6) $ 792(3)
Vice President, Treasurer,
Secretary and Chief
Financial Officer
</TABLE>
- ---------------
(1) No market exists for the Class C Units. The Company estimates that the
dollar value of the Class C Units at date of grant and as of December 31,
1996 was zero.
(2) In connection with the Corporate Conversion, Holladay Family LP exchanged
(i) 40,111 Class C Units issued as of November 19, 1996 pursuant to the
Holladay Employment Agreement (as defined below) and the Limited Liability
Company Agreement of the LLC (the "LLC Agreement") and (ii) a nonrecourse
noninterest bearing promissory note in the principal amount of $401,110 for
40,111 shares of Common Stock. Such promissory note is secured by a pledge
of such shares of Common Stock. The Company estimates that the dollar value
of the shares issued at the time of the Corporate Conversion did not exceed
the market value of the Class C Units and promissory note exchanged for such
shares. The 40,111 Class C Units vested according to the following schedule:
one-third on the date on which the number of households served by the
Company first reached 250,000; two-thirds on the date on which such number
first reached 500,000; and the remainder on the date on which such number
first reached 750,000. As of the date of the Corporate Conversion, all such
Class C Units were fully vested and, as of the date hereof, the shares of
Common Stock received in exchange for such Class C Units are fully vested.
All of Mr. Holladay's shares of Common Stock are owned by the Holladay
Family Limited Partnership, a Georgia limited partnership (the "Holladay
Family LP"), of which Mr. Holladay is the sole general partner and Mr.
Holladay, his wife, and their children are the limited partners.
(3) Represents the premiums paid during 1996 by the Company with respect to term
life insurance for the benefit of such Named Executive Officers.
(4) The Company paid Mr. Dorran approximately $25,000 of his total 1996 salary
and reimbursed Columbia for the balance.
(5) In connection with the Corporate Conversion, Mr. Dorran exchanged (i) 26,882
Class C Units issued as of November 19, 1996 pursuant to the Dorran
Employment Agreement (as defined below) and the LLC Agreement and (ii) a
nonrecourse noninterest bearing promissory note in the principal amount of
$268,820 for 26,882 shares of Common Stock. Such promissory note is secured
by a pledge of such shares of Common Stock. The Company estimates that the
dollar value of the shares issued at the time of the Corporate Conversion
did not exceed the market value of the Class C Units and promissory note
exchanged for such shares. Mr. Dorran's 26,882 shares of Common Stock vested
according to the following schedule: 40% on the date on which the number of
households served by Company first reached 200,000; 40% on September 1,
1996; and 20% on September 1, 1997. As of the date of the Corporate
Conversion, all such Class C Units were fully vested and, as of the date
hereof, the shares of Common Stock received in exchange for such Class C
Units are fully vested.
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(6) In connection with the Corporate Conversion, Mr. Doering exchanged (i)
20,056 Class C Units issued as of November 19, 1996 pursuant to the Doering
Employment Agreement (as defined below) and the LLC Agreement and (ii) a
nonrecourse noninterest bearing promissory note in the principal amount of
$200,560 for 20,056 shares of Common Stock. Such promissory note is secured
by a pledge of such shares of Common Stock. The Company estimates that the
dollar value of the shares issued at the time of the Corporate Conversion
did not exceed the market value of the Class C Units and promissory note
exchanged for such shares. Mr. Doering's 20,056 shares of Common Stock will
vest according to the following schedule: one-third on March 31, 1997;
one-third on March 31, 1998; and one-third on March 31, 1999. As of the date
hereof, 6,685.33 of such shares of Common Stock were vested. Shares of
Common Stock received by Mr. Doering in exchange for Class C Units in
connection with the Corporate Conversion that have not vested will be
forfeited upon the earlier to occur of (i) termination of Mr. Doering's
employment with cause and (ii) Mr. Doering's voluntary resignation
(including notice by Mr. Doering of nonrenewal of the Doering Employment
Agreement). All of such unvested shares of Common Stock shall vest
immediately upon the earlier to occur of (i) termination of Mr. Doering's
employment without cause (including notice by the Company of nonrenewal of
the Doering Employment Agreement) and (ii) resignation by Mr. Doering with
good reason (defined as resignation following a material reduction in his
responsibilities or authority with respect to the Company's business from
such responsibilities and authority existing as of October 2, 1997 or the
requirement that he perform material duties and responsibilities from a
location outside the metropolitan Atlanta area). One-half of any unvested
shares of Common Stock shall vest immediately upon Mr. Doering's voluntary
resignation within one year of a change of control of the Company unless
such resignation was prompted by the fact that cause for termination
existed.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each of Mr.
Holladay (the "Holladay Employment Agreement") and Mr. Dorran (the "Dorran
Employment Agreement"), which became effective on April 1, 1996, an employment
agreement with Mr. Doering (the "Doering Employment Agreement"), which became
effective on April 15, 1996, and an employment agreement with Mr. MacKenzie (the
"MacKenzie Employment Agreement"), which became effective on March 24, 1997
(collectively, as amended, the "Employment Agreements"). The Employment
Agreements (other than the Dorran Employment Agreement) were amended effective
October 10, 1997, the date of the Corporate Conversion, which amendments are
subject to stockholder approval. The Holladay, Dorran and Doering Employment
Agreements expire on March 31 of each year and are automatically renewed for
successive one-year terms unless the Company gives notice of nonrenewal or the
employee gives notice of resignation on or prior to January 31 preceding the
expiration date. The MacKenzie Employment Agreement expires on March 23 of each
year and is automatically renewed for successive one-year terms unless
terminated by either Mr. MacKenzie or the Company. The Company may terminate any
of the Employment Agreements prior to the end of their terms with or without
cause.
The Holladay Employment Agreement provides that Mr. Holladay will be paid a
salary of $15,000 per month from January 1, 1997 through March 31, 1998. The
Board will determine by January 31, 1998 whether to increase such salary
effective April 1, 1998. The Employment Agreements provide that each of Mr.
Dorran and Mr. Doering will be paid a salary not less than $120,000 per year,
which salary shall be reviewed not less often than annually by the Board to
determine whether such salary should be increased. Mr. Doering's compensation is
currently $130,000 per year. The MacKenzie Employment Agreement provides that
Mr. MacKenzie will be paid a salary of $6,731 bi-weekly, which salary shall be
reviewed on each successive March 24 by the Chief Executive Officer of the
Company and the Board to determine whether such salary should be increased.
During the term of the applicable Employment Agreement, each of Messrs.
Holladay, Dorran and Doering will also be paid a bonus on or before January 31
in an amount determined by the Board in its sole discretion in light of his
performance during the prior fiscal year. Under the MacKenzie Employment
Agreement, Mr. MacKenzie will be paid a bonus of $50,000 per year, if the
financial and operating objectives of the Company are met as of the end of the
applicable calendar year, which amount may be increased in the sole discretion
of the Company if such objectives are materially exceeded. The Holladay
Employment Agreement, the MacKenzie Employment Agreement and the Doering
Employment Agreement provide that in the event that Mr. Holladay, Mr. MacKenzie
or Mr. Doering,
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respectively, (i) is terminated without cause, (ii) resigns for good reason
(defined as resignation following a material reduction in his responsibilities
or authority with respect to the Company's business from such responsibilities
and authority existing as of October 2, 1997 or the requirement that he perform
material duties and responsibilities from a location outside the metropolitan
Atlanta area), (iii) resigns for any reason within one year following a change
of control of the Company, or (iv) is notified of nonrenewal of his Employment
Agreement, then he shall receive severance payments from the Company equal to 12
to 24 months' base salary, depending upon the timing and circumstances of their
termination.
Pursuant to their respective Employment Agreements and the LLC Agreement,
the Company issued 40,111, 26,882 and 20,056 Class C Units to Messrs. Holladay,
Dorran and Doering, respectively which Class C Units, together with certain
noninterest bearing promissory notes, were exchanged for shares of Common Stock
in connection with the Corporate Conversion. See "-- Executive Compensation."
Their Employment Agreements also permitted Messrs. Holladay, Dorran and Doering
to purchase Class B Units at a price of $10.00 per Unit. Pursuant to these
rights, Mr. Holladay purchased 46,000 Class B Units, Mr. Dorran purchased 37,000
Class B Units and Mr. Doering purchased 17,500 Class B Units. In connection with
the Corporate Conversion, each such Class B Unit was converted into one share of
Common Stock. All of Mr. Holladay's shares of Common Stock are held by the
Holladay Family LP. Although no market has ever existed for the Class B Units,
the Company believes that the $10.00 per Class B Unit purchase price was no less
than the fair market value of such Units on the dates they were purchased. To
enable Messrs. Holladay, Dorran and Doering to purchase a portion of these Class
B Units, Columbia DBS Investors, L.P. loaned them $160,000, $190,000 and
$80,000, respectively. Each such loan is secured by a pledge of 20,000 shares of
Common Stock in the case of Mr. Holladay and Mr. Dorran, and 10,000 shares of
Common Stock in the case of Mr. Doering, and is evidenced by a promissory note
bearing interest at a rate of 10% per annum, payable in full at maturity and
maturing upon the earlier to occur of (i) April 1, 2001 and (ii) receipt by Mr.
Holladay, Mr. Dorran or Mr. Doering, as the case may be, of the proceeds from
the sale of all of the shares of Common Stock received upon conversion of his
Class B Units (including, in the case of Mr. Holladay, the shares of Common
Stock received upon conversion of the Class B Units held by the Holladay Family
LP). The notes are subject to mandatory prepayment equal to (i) 100% of all cash
distributions, other than distributions to pay taxes, received by Mr. Holladay,
Mr. Dorran or Mr. Doering, as the case may be, from the Company with respect to
the shares of Common Stock received upon conversion of Class B Units, plus (ii)
60% of the cash proceeds received from Mr. Holladay, Mr. Dorran or Mr. Doering,
as the case may be, from a sale of less than all of the shares of Common Stock
received upon conversion of Class B Units.
Their Employment Agreements and Subscription Agreements with respect to
shares of Common Stock received upon conversion of the Class C Units provide
that the Company has the option to repurchase all of the shares of Common Stock
received upon conversion of Class C Units held by Mr. Holladay (or by the
Holladay Family LP), Mr. Dorran or Mr. Doering, as the case may be, that have
vested and all of such executive's shares of Common Stock received upon
conversion of Class B Units at fair market value if such executive's employment
with the Company is terminated for cause by the Company or if such executive
resigns prior to April 1, 1998 with respect to Mr. Holladay and Mr. Dorran or
April 1, 1999 with respect to Mr. Doering. After April 1, 1998 with respect to
Mr. Holladay and Mr. Dorran or April 1, 1999 with respect to Mr. Doering, none
of their shares of Common Stock is subject to repurchase under the Employment
Agreements or Subscription Agreements. At such time as employment is terminated,
all unvested shares of Common Stock received upon conversion of Class C Units
held by Mr. Doering shall be forfeited, except that if Mr. Dorran's employment
is terminated by the Company other than for cause, Mr. Dorran's shares of Common
Stock received upon conversion of Class C Units will become fully vested. Mr.
Doering's Class C Units that have not vested will be forfeited or their
acceleration vested upon certain conditions. See " -- Executive Compensation."
Messrs. Holladay, MacKenzie and Doering received 15,000, 45,000 and 5,000
Class D Units, respectively, pursuant to the Employee Unit Plan. See
"-- Employee Unit Plan." As a result of the Corporation Conversion, each of
Messrs. Holladay, MacKenzie and Doering received a warrant to purchase that
number of shares of Common Stock equal to the number of Class D Units held by
such holder. Pursuant to the amendments to their respective Employment
Agreements, Mr. Holladay's and Mr. Doering's warrants will vest one-fourth on
September 12, 1998; one-fourth on September 12, 1999; one-fourth on September
12, 2000; and one-fourth on September 12, 2001. Mr. MacKenzie's 45,000 Warrants
will vest one-fourth on March 24, 1998; one fourth on
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March 24, 1999; one-fourth on March 24, 2000; and one-fourth on March 24, 2001.
Any shares of Common Stock as to which the warrant has not yet vested will be
forfeited upon the earlier to occur of (i) termination of such holder's
employment with cause and (ii) such holder's voluntary resignation (including
notice by the holder of nonrenewal of the applicable Employment Agreement). The
warrants held by Messrs. Holladay, Doering and MacKenzie shall vest immediately
with respect to all shares of Common Stock upon the earlier to occur of (i)
termination of such holder's employment without cause (including notice by the
Company of nonrenewal of the applicable Employment Agreement) and (ii)
resignation by such holder with good reason (defined as resignation following a
material reduction in his responsibilities or authority with respect to the
Company's business from such responsibilities and authority existing as of
October 10, 1997 or the requirement that he perform material duties and
responsibilities from a location outside the metropolitan Atlanta area). In the
case of the warrants held by Messrs. Holladay, Doering and MacKenzie, one-half
of any shares of Common Stock with respect to which the warrant has not yet
vested shall vest immediately upon such holder's voluntary resignation within
one year of a change of control of the Company unless such resignation was
prompted by the fact that cause for termination existed.
EMPLOYEE UNIT PLAN
In March 1997 DTS Management adopted an Employee Unit Plan (the "Employee
Unit Plan") providing for the issuance of up to 180,000 Class D Units 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 terms and conditions (including vesting) determined by DTS Management. As of
October 9, 1997 (the date immediately prior to the Corporate Conversion),
124,000 Class D Units had been issued pursuant to the Employee Unit Plan, of
which 15,000 Class D Units were issued to Mr. Holladay, 45,000 Class D Units
were issued to Mr. MacKenzie and 5,000 Class D Units were issued to Mr. Doering.
In connection with the Corporate Conversion, each holder's Class D Units were
converted into a warrant to purchase at $22.50 per share a number of shares of
Common Stock equal to the number of Class D Units held by such holder and are
subject to certain vesting requirements.
STOCK OPTION PLAN
In October 1997, the Board adopted and the stockholders approved 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 granted 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. Messrs. Holladay, MacKenzie and Doering each received
incentive stock options exercisable with respect to 10,000 shares of Common
Stock effective October 10, 1997, which options vest 25% per year through
October 10, 2001. Forfeiture and accelerated vesting provisions substantially
identical to those applicable to their warrants also apply to incentive stock
options held by Messrs. Holladay, MacKenzie and Doering.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
RELATIONSHIP WITH COLUMBIA
Columbia provides financial, managerial and other services to the Company.
The Company has formulated its business plan in reliance upon market research,
financial analysis and recommendations, some of which have been provided by
Columbia. The Company paid Columbia approximately $322,000 in 1996 for such
services. Columbia formed the Company in 1996. See "Offering Memorandum Summary"
and "Business -- General." Columbia and its affiliates own 327,613 shares of
Series A Preferred Stock and 1,949,500 shares of Common Stock, representing
approximately 64% of all classes of the Company's capital stock. Messrs. Hopper,
Mixer and Murray are principals of Columbia and directors of the Company.
RELATIONSHIP WITH FLEET
Fleet National Bank ("Fleet") is the documentation agent and a lender under
the Restated Credit Facility. Fleet is an affiliate of Fleet Venture Resources,
Inc. and Fleet Equity Partners VI, L.P., which in the aggregate own 367,960
shares of Series A Preferred Stock, representing approximately 13% of all
classes of the Company's capital stock.
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SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of October 15, 1997,
regarding beneficial ownership of (i) the Company's capital stock by all
directors of the Company and all Named Executives, and all directors and
executive officers of the Company as a group, and (ii) the Company's voting
securities by persons or entities known to the Company to be the beneficial
owner of more than five percent of any class of such securities.
<TABLE>
<CAPTION>
SERIES A PREFERRED PERCENT OF ALL
COMMON STOCK STOCK CAPITAL STOCK
----------------------- ----------------------- CONSIDERED AS A
NAME AND ADDRESS NUMBER OF PERCENTAGE NUMBER OF PERCENTAGE SINGLE
OF BENEFICIAL OWNER SHARES OF CLASS SHARES OF CLASS CLASS(19)
<S> <C> <C> <C> <C> <C>
Whitney Equity Partners, L.P.(1)................... -- -- 608,424 43.34% 17.18%
Fleet Venture Resources, Inc.(2)................... -- -- 468,019 33.33% 13.22%
Fleet Equity Partners VI, L.P.(2).................. -- -- 468,019 33.33% 13.22%
Chisholm Partners III, L.P.(2)..................... -- -- 468,019 33.33% 13.22%
Kennedy Plaza Partners(2).......................... -- -- 468,019 33.33% 13.22%
Columbia Capital Corporation(3)(4)................. 1,949,500 91.22% 327,613 23.33% 64.31%
Columbia DBS Class A Investors, LLC(3)(5).......... -- -- 327,613 23.33% 9.25%
Columbia DBS Investors, L.P.(3)(6)................. 1,937,579 90.67% -- -- 54.72%
Harry F. Hopper III(3)(7).......................... -- -- -- -- --
David P. Mixer(8)(9)............................... -- -- -- -- --
James B. Murray, Jr.(8)(10)........................ -- -- -- -- --
William Laverack, Jr.(11).......................... -- -- 608,424 43.34% 17.18%
Michael C. Brooks(12).............................. -- -- 608,424 43.34% 17.18%
Riordon B. Smith(13)............................... -- -- 468,019 33.33% 13.22%
Douglas S. Holladay, Jr.(14)(15)................... 86,111 4.03% -- -- 2.43%
Earle A. MacKenzie(14)(16)......................... -- -- -- -- --
William J. Dorran(17).............................. 63,882 2.99% -- -- 1.80%
Donald A. Doering(14)(18).......................... 37,556 1.76% -- -- 1.06%
All managers and executive officers as a group (10
Persons)......................................... 187,549 8.78% 1,076,443 76.67% 35.69%
</TABLE>
- ---------------------------
(1) The address of this person is 177 Broad Street, Stamford, Connecticut
06901.
(2) Includes 257,572 shares of Series A Preferred Stock held by Fleet Venture
Resources, Inc. and Fleet Equity Partners VI, L.P. (together, the "Fleet
Entities") and 93,604 shares of Series A Preferred Stock held by Chisholm
Partners III, L.P., and 6,455 shares of Series A Preferred Stock held by
Kennedy Plaza Partners. The address of this person is 50 Kennedy Plaza, RI
MO F12C, Providence, Rhode Island 02903.
(3) The address of this person is 201 N. Union Street, Suite 300, Alexandria,
Virginia 22314-2642.
(4) Includes 327,613 shares of Series A Preferred Stock held by Columbia DBS
Class A Investors, LLC, 1,937,579 shares of Common Stock held by Columbia
DBS Investors, L.P. and 11,921 shares of Common Stock held by Columbia DBS,
Inc. Columbia Capital Corporation is the sole general partner of Columbia
DBS Investors, L.P. and as such has sole investment and voting power over
the shares of Common Stock held by Columbia DBS Investors, L.P. The same
persons who serve as directors of Columbia Capital Corporation also serve
as directors of Columbia DBS, Inc. and have a majority of the voting power
of Columbia DBS Class A Investors, LLC. Columbia Capital Corporation
disclaims beneficial ownership of such shares of capital stock, except the
shares of capital stock held by Columbia DBS Investors, L.P.
(5) Excludes 1,937,579 shares of Common Stock held by Columbia DBS Investors,
L.P., and 11,921 shares of Common Stock held by Columbia DBS, Inc. The same
persons who have a majority of the voting power of Columbia DBS Class A
Investors, LLC also serve as directors of each of Columbia Capital
Corporation and Columbia DBS, Inc. Columbia Capital Corporation is the sole
general partner of Columbia DBS Investors, L.P. and as such has sole
investment and voting power over the shares of capital stock held by
Columbia DBS Investors, L.P. Columbia DBS Class A Investors, LLC disclaims
beneficial ownership of all shares of capital stock except those shares of
capital stock held directly by it.
(6) Excludes 327,613 shares of Series A Preferred Stock held by Columbia DBS
Class A Investors, LLC and 11,921 shares of Common Stock held by Columbia
DBS, Inc. Columbia Capital Corporation is the sole general partner of
Columbia DBS Investors, L.P. and as such has sole investment and voting
power over the shares of Common Stock held by Columbia DBS Investors, L.P.
The same persons who serve as directors of Columbia Capital Corporation
also serve as directors of Columbia DBS, Inc. and have a majority of the
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voting power of Columbia DBS Class A Investors, LLC. Columbia DBS
Investors, L.P. disclaims beneficial ownership of all shares of capital
stock except those shares of capital stock held directly by it.
(7) Excludes 1,937,579 shares of common stock held by Columbia DBS Investors,
L.P. and 11,921 shares of capital stock held by Columbia DBS, Inc. Mr.
Hopper is a shareholder of Columbia Capital Corporation and Columbia DBS,
Inc. and a limited partner of Columbia DBS Investors, L.P. Mr. Hopper
disclaims beneficial ownership of the shares of Common Stock held by
Columbia DBS Investors, L.P. and Columbia DBS, Inc.
(8) Excludes 327,613 shares of Series A Preferred Stock held by Columbia DBS
Class A Investors, LLC, 1,937,579 shares of Common Stock held by Columbia
DBS Investors, L.P. and 11,921 shares of Common Stock held by Columbia DBS,
Inc. Messrs. Mixer and Murray are members of Columbia DBS Class A
Investors, LLC, limited partners of Columbia DBS Investors, L.P., and
shareholders of Columbia Capital Corporation (the sole general partner of
Columbia DBS Investors, L.P.) and Columbia DBS, Inc. Messrs. Mixer and
Murray disclaim beneficial ownership of the shares of capital stock held by
Columbia DBS Class A Investors, LLC, Columbia DBS Investors, L.P., and
Columbia DBS, Inc.
(9) The address of this person is 5586 Post Road, Suite 110, East Greenwich,
Rhode Island 02818.
(10) The address of this person is 0 Court Square, P.O. Box 1465,
Charlottesville, Virginia 22901.
(11) Includes 608,424 shares of Series A Preferred Stock held by Whitney Equity
Partners L.P. Mr. Laverack has shared voting and investment power over such
shares of Series A Preferred Stock with the managing members of the general
partner of Whitney Equity Partners, L.P. and disclaims beneficial ownership
of such shares of Series A Preferred Stock. The address of this person is
177 Broad Street, Stamford, CT 06901.
(12) Includes 608,424 shares of Series A Preferred Stock held by Whitney Equity
Partners, L.P. Mr. Brooks has shared voting and investment power over such
shares of Series A Preferred Stock with the managing members of the general
partner of Whitney Equity Partners, L.P. and disclaims beneficial ownership
of such shares of Series A Preferred Stock. The address of this person is
177 Broad Street, Stamford, CT 06901.
(13) Includes 367,960 shares of Series A Preferred Stock held by the Fleet
Entities and 93,604 shares of Series A Preferred Stock held by Chisholm
Partners III, L.P., and 6,455 shares of Series A Preferred Stock held by
Kennedy Plaza Partners. Mr. Smith, a member of the Board, is a Senior Vice
President of each of the managing general partners of Fleet Equity Partners
VI, L.P., is a Senior Vice President of Fleet Venture Resources, Inc., is a
Senior Vice President of the corporation that is the general partner of the
partnership that is the general partner of Chisholm Partners III, L.P., and
a partner of Kennedy Plaza Partners. As Senior Vice President of Fleet
Growth Resources II, Inc. and Silverado IV Corp. (the two general partners
of Fleet Equity Partners VI, L.P.) and as a Senior Vice President of Fleet
Venture Resources, Inc. and Silverado III Corp. (the general partner of the
partnership (Silverado III, L.P.) which is the general partner of Chisholm
Partners III, L.P.), Mr. Smith may be considered to share investment and
voting power with Robert M. Van Degna and Habib Y. Gorgi, the Chairman and
CEO, and President, respectively, of the aforementioned entities. As a
partner of Kennedy Plaza Partners, Mr. Smith may be considered to share
investment and voting power with Mr. Van Degna and Mr. Gorgi, the Managing
General Partners of Kennedy Plaza Partners. Mr. Smith disclaims beneficial
ownership of all shares held directly by Fleet Venture Resources, Inc. and
all shares held directly by Fleet Equity Partners VI, L.P., Chisholm
Partners III, L.P. and Kennedy Plaza Partners, except for his pecuniary
interest therein. The address of this person is 50 Kennedy Plaza, RI MO
F12C, Providence, Rhode Island 02903.
(14) The address of this person is Building C-200, 880 Holcomb Bridge Road,
Roswell, Georgia 30076.
(15) All of Mr. Holladay's shares of Common Stock are held by the Holladay
Family LP. Mr. Holladay was issued 15,000 Class D Units on September 12,
1997 pursuant to the Employee Unit Plan. Mr. Holladay's Class D Units were
converted into a warrant to purchase 15,000 shares of Common Stock in
connection with the Corporate Conversion. Mr. Holladay was granted
incentive stock options to acquire 10,000 shares of Common Stock under the
Employee Stock Plan effective October 10, 1997. Upon full exercise of such
warrant and stock options, Mr. Holladay would beneficially own 3.12% of the
capital stock of the Company (including the shares of Common Stock owned by
the Holladay Family LP).
(16) Mr. MacKenzie was issued 45,000 Class D Units on March 24, 1997 pursuant to
the Employee Unit Plan. Mr. MacKenzie's Class D Units were converted into a
warrant to purchase 45,000 shares of Common Stock in connection with the
Corporate Conversion. Mr. MacKenzie was granted incentive stock options to
acquire 10,000 shares of Common Stock under the Employee Stock Plan
effective October 10, 1997. Upon
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full exercise of such warrant and stock options, Mr. MacKenzie would
beneficially own 1.53% of the capital stock of the Company.
(17) The address of this person is 2808 Octavia Street, San Francisco,
California 94123.
(18) Mr. Doering was issued 5,000 Class D Units on September 12, 1997 pursuant
to the Employee Unit Plan. Mr. Doering's Class D Units were converted into
a warrant to purchase 5,000 shares of Common Stock in connection with the
Corporate Conversion. Mr. Doering was granted incentive stock options to
acquire 10,000 shares of Common Stock under the Employee Stock Plan
effective October 10, 1997. Upon full exercise of such warrant and stock
options, Mr. Doering would beneficially own 1.48% of the capital stock of
the Company.
(19) Excludes 124,000 shares of Common Stock issuable to employees and
consultants upon the exercise of certain warrants.
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DESCRIPTION OF CERTAIN INDEBTEDNESS
RESTATED CREDIT FACILITY
The Company is a party to the Second 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 and Annualized
Contribution (as defined therein) per paying subscriber, and maintaining maximum
ratio of total debt to equity and a maximum ratio of total debt to annualized
operating cash flow and a ratio of senior debt to annualized operating cash
flow. 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.
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 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
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provides 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 also contains a number of significant
covenants that, among other things, limit the ability of the Company and its
subsidiaries to incur additional indebtedness and guaranty obligations, create
liens and other encumbrances, make certain payments, investments, loans and
advances, pay dividends or make other distributions in respect of its equity
interests (other than among the Company and its subsidiaries), 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 requires 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. A change of control of the Company constitutes an event
of default under the Restated Credit Facility. Because the Pegasus Transaction
will constitute such a change of control, a condition to the closing of the
Pegasus Transaction is that the Restated Credit Facility be amended to permit
such closing.
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 $6.28 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%.
THE SELLER NOTES
In connection with the acquisition of the Company's California Rural
DirecTv Market, one of the Subsidiaries, Digital Television Services of
California, LLC ("DTS California"), issued a promissory note dated April 1,
1996, as modified as of December 31, 1996 (as so modified, the "DTS California
Note"), in favor of Pacific Coast DBS, Inc. ("Pacific"). Pursuant to the DTS
California Note, DTS California is obligated to pay to Pacific the sum of (i)
$480,000, payable in 24 equal monthly installments commencing May 1, 1996, and
(ii) an amount payable on October 1, 1998 equal to the greater of $4.0 million
or the Contingent Payment Amount. The Contingent Payment Amount is determined by
multiplying the number of subscribers to DIRECTV Services in DTS California's
Rural DirecTv Market as of October 1, 1998 by the following amount: $0, if there
are less than 1,000 subscribers to DIRECTV Services in the Company's California
Rural DirecTv Market; plus $1,500 per subscriber for each subscriber in excess
of 1,000 and up to 3,300; plus $750 per subscriber for each subscriber in excess
of 3,300 and up to 6,600; plus $600 per subscriber for each subscriber in excess
of 6,600 and up to 9,900; plus $550 per subscriber for each subscriber in excess
of 9,900 and up to 13,200; plus $400 per subscriber for each subscriber in
excess of 13,200. The obligations of DTS California pursuant to the DTS
California Note are secured by a $7,000,000 irrevocable letter of credit (the
"DTS California Letter of Credit") issued in favor of Pacific pursuant to the
Restated Credit Facility. 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. As of September 30, 1997, the aggregate principal
amount outstanding with respect to the DTS California Note was $5.9 million. The
DTS California Note contains certain covenants which will remain in effect so
long as the DTS California Note remains due and payable, including affirmative
covenants requiring the delivery of financial statements by DTS California, the
use of good faith efforts to maximize the number of subscribers prior to the
payment of the Contingent Payment Amount, and the maintenance of insurance on
the property, business and assets of DTS California, and negative covenants
prohibiting, with certain exceptions, the payment of dividends
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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 Subsidiaries, Digital Television Services of South Carolina I, LLC ("DTS
South Carolina I"), issued a promissory note dated as of November 26, 1996 (the
"South Carolina Note") payable to Pee Dee Electricom, Inc. ("Pee Dee") in the
amount of $7.955 million. As of September 30, 1997, the aggregate principal
amount outstanding with respect to the South Carolina Note was $4.7 million. The
principal amount of the South Carolina Note is payable on January 2, 1998 and
bears interest at a rate of 4% per annum. The obligations of DTS South Carolina
I with respect to the South Carolina Note are secured by an irrevocable letter
of credit issued pursuant to the Restated Credit Facility (the "South Carolina
Letter of Credit") issued in favor of Pee Dee. The South Carolina Note does not
contain any affirmative or negative covenants regarding the Company, DTS South
Carolina I or the operation of the South Carolina Rural DirecTv Markets;
however, a failure to make any payment due under the South Carolina Note will
allow Pee Dee to draw under the South Carolina Letter of Credit.
In connection with the acquisition of the Company's Rural DirecTv Markets
in Georgia (the "Georgia Rural DirecTv Markets"), one of the Subsidiaries,
Digital Television Services of Georgia, LLC ("DTS Georgia"), issued three
promissory notes, each of which represents a portion of the purchase price for
one of the Georgia Rural DirecTv Markets. DTS Georgia issued (i) a promissory
note dated May 9, 1997 (the "Planters Notes") payable to Planters Electric
Membership Corporation ("Planters") in the amount of approximately $850,000,
(ii) a promissory note dated May 9, 1997 (the "Mitchell Note") payable to
Mitchell Electric Membership Corporation ("Mitchell") in the amount of
approximately $9.4 million and (iii) a promissory note dated May 9, 1997 (the
"Washington Note") payable to Washington Electric Membership Corporation
("Washington") in the amount of approximately $5.2 million. As of September 30,
1997, the principal amount outstanding with respect to the Planters Note, the
Mitchell Note and the Washington Note was $850,000, $9.4 million and $5.2
million, respectively. 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 Restated
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.
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DESCRIPTION OF CAPITAL STOCK
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
General
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 Company's Amended and Restated Certificate
of Incorporation (the "Certificate of Incorporation") to issue one or more
additional series of preferred stock from time to time, without further
stockholder action, in one or more series and, with respect to such series, to
fix the designation and number of shares to be issued, the voting rights of the
shares, the dividend rights, if any, the redemption rights, if any, sinking fund
requirements, if any, rights upon the liquidation, dissolution or winding up of
the Company or upon the distribution of the assets of the Company, the terms of
the conversion or exchange into any other class or series of shares, if provided
for, and other powers, preferences, rights, qualifications, limitations or
restrictions thereof. Under the Stockholders Agreement (as defined below in
"-- Stockholders Agreement"), stockholder approval may be required in order to
take certain of these actions. See "-- Stockholders Agreement -- Voting
Requirements."
Series A Preferred Stock
Conversion into Common Stock. 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.
Liquidation Preference. 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
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Stock, plus any accrued and unpaid dividends up to the date for such
distribution, whether or not declared. If, upon any liquidation of the Company,
the assets distributable among the holders of the Series A Preferred Stock are
insufficient to permit the payment in full to the holders of the Series A
Preferred Stock and all other classes of preferred stock ranking (as to any such
distribution) senior to or on a parity with the Series A Preferred Stock, of all
preferential amounts payable to all such holders, then the entire assets of the
Company thus distributable will be distributed ratably among the holders of the
Series A Preferred Stock and all classes and series of capital stock ranking (as
to any such distribution) senior to or on a parity with the Series A Preferred
Stock in order of relative priority and, as to classes and series ranking on a
parity with one another, in proportion to the full preferential amount that
would be payable per share if such assets were sufficient to permit payment in
full. If, after payment of the Liquidation Preference to the holders of the
Series A Preferred Stock and the payment of the liquidation preference with
respect to any capital stock ranking (as to any such distribution) senior to or
on a parity with the Series A Preferred Stock, assets remain in the Company, all
such remaining funds shall be distributed first to the holders of the Common
Stock, until such holders have received an amount per share equal to the
Liquidation Preference, subject to certain adjustments, and then on an equal per
share basis to holders of all capital stock of the Company on a pro rata,
as-if-converted to Common Stock basis.
Dividends. 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 that 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 multiplied by the
Permitted Portion. The "Permitted Portion" means the percentage of the dividends
payable on each share of Series A Preferred Stock that may, at the option of the
Company, be paid through the issuance of additional shares of the Series A
Preferred Stock, which percentage shall equal 100% prior to a Preferred Stock
Determination (as defined below), and thereafter shall equal the lesser of (i)
50% and (ii) (A) 100% less (B) the Combined Effective Marginal Tax Rate. A
"Preferred Stock Determination" means the receipt by a beneficial owner of the
Series A Preferred Stock that is a citizen or resident of the United States or a
corporation, partnership or other entity organized under the laws of the United
States or a political subdivision thereof (a "Series A Beneficial Owner") of
advice from its tax advisors that there is a substantial risk that such Series A
Beneficial Owner will be required to recognize federal income taxes as a result
of the receipt of a dividend on the Series A Preferred Stock in additional
shares of Series A Preferred Stock, and such Series A Beneficial Owner so
notifies the Corporation of such occurrence; provided that no Preferred Stock
Determination shall occur if such Series A Beneficial Owner receives an opinion
of counsel to the effect that such Series A Beneficial Owner will not be
required under the Internal Revenue Code of 1986, as amended, or of any
successor internal revenue laws of the United States (the "Code"), or similar
provisions of the Code, to recognize income for federal income tax purposes in
respect of any dividends payable in additional shares of Series A Preferred
Stock as a result of either (x) the application of the Code or interpretations
thereof that constitute "substantial authority" under Code Section 6662 or (y)
that given the facts and circumstances then existing there is a reasonable basis
for the conclusion that the Series A Preferred Stock is not properly
characterized as "preferred stock" for purposes of Code Section 305. The
"Combined Effective Marginal Tax Rate" means the highest single effective rate
of United States federal, state and local income taxation applicable to holders
of 5% or more of the Series A Preferred Stock whose principal residence or
commercial domicile is within the United States, giving effect to any
limitations on the deductibility of state and local income taxes in computing
United States federal taxable income, and assuming that such holders of Series A
Preferred Stock are individuals and subject to the highest United Stated federal
and highest state and local marginal income tax rates then applicable in the
jurisdictions in which they have their principal residence or commercial
domicile.
Voting Rights. 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.
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STOCKHOLDERS AGREEMENT
Certain of the rights and obligations of the holders of the Common Stock
and the Series A Preferred Stock are governed by the Stockholders Agreement
dated as of October 10, 1997 (the "Stockholders Agreement") among the Company,
the holders of the Common Stock and the holders of the Series A Preferred Stock.
The following summary of the Stockholders Agreement is qualified in its entirety
by reference to the complete text of the Stockholders Agreement.
Stock Transfer Restrictions
A holder (a "Stockholder") of Common Stock or Series A Preferred Stock
("Stock") may transfer his, her or its Common Stock only if the transfer
complies with the provisions of the Stockholders Agreement. If the proposed
transferee is a Permitted Transferee (as defined below), then the following
requirements apply: (i) the Stockholder proposing to make the transfer must give
written notice (a "Transfer Notice") to the Company and all other Stockholders
of the proposed transfer, identifying the proposed transferee and the
consideration, if any, to be received by such Stockholder; (ii) such Stockholder
must agree to reimburse the Company for any expenses reasonably incurred by the
Company in connection with the consummation of such proposed transfer; (iii)
such Stockholder and its transferee must execute instruments of transfer in form
and substance reasonably acceptable to the Company, including the written
agreement of such transferee to be bound by the obligations of such Stockholder
under the Stockholders Agreement; (iv) either (x) the transfer is to the heirs,
devisees or legatees of a deceased Stockholder, (y) the Stock to be transferred
is registered under the Securities Act and applicable state securities laws, or
(z) the Company determines that such transfer qualifies for an exemption from
registration under the Securities Act and any applicable state securities laws;
and (v) if required by the Company in its discretion, such Stockholder must
deliver to the Company an opinion of counsel to the effect that the proposed
transfer satisfies the requirements of the conditions described in the preceding
clauses (iii) and (iv).
If the proposed transferee is not a Permitted Transferee, then in addition
to the above requirements, the rights of first refusal and co-sale rights
described below will apply.
A "Permitted Transferee" is, (i) in the case of Whitney, its affiliates and
Family Members (as defined below) of those affiliates who are individuals, (ii)
in the case of any of Fleet Venture Resources, Inc., Fleet Equity Partners VI,
L.P., Chisholm Partners III, L.P. and Kennedy Plaza Partners (collectively, the
"Fleet Entities"), its affiliates and Family Members of those affiliates who are
individuals, (iii) in the case of Columbia DBS Class A Investors, LLC or
Columbia DBS Investors, L.P., (x) Columbia and (y) affiliates of any of Columbia
DBS Class A Investors, LLC, Columbia DBS Investors, L.P. or Columbia, and Family
Members of those affiliates who are individuals, and (iv) in the case of any
other Stockholder, any Family Member of such Stockholder. A "Family Member" is
(i) with respect to any individual, such individual's spouse, any descendants
(whether natural, adopted or in the process of adoption), any trust the
beneficial interests of which are owned by any of such individuals or by any of
such individuals together with any organization described in Code Section
501(c)(3), the estate of any such individual and any corporation, association,
partnership or limited liability company all of the equity interests of which
are owned by those above-described individuals, trusts or organizations and (ii)
with respect to any trust, the owners of the beneficial interests of such trust.
Rights of First Refusal
Upon the occurrence of an Optional Purchase Event (as defined below), the
Company, followed by all Stockholders holding 10% or more of the capital stock
of the Company (the "10% Stockholders"), will have successive options to
purchase all, but not less than all, of the shares of Common Stock or Series A
Preferred Stock proposed to be transferred. If the Optional Purchase Event is
the delivery of a Transfer Notice or an Indirect Transfer (as defined below) and
such transfer is for consideration, the successive options of the Company and
the 10% Stockholders shall be to purchase the Stock proposed to be transferred
for the fair market value to be received in such transfer and shall be pursuant
to all other terms and conditions of the proposed transfer. With respect to all
other Optional Purchase Events, such options shall be to purchase such shares at
a price equal to the fair market value of such shares on the last day of the
calendar month immediately prior to the occurrence of the
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Optional Purchase Event, plus interest at the prime rate from such date, less
any distributions made with respect to such shares from such date until the
closing of the purchase.
The Company will have 30 days to determine whether to exercise its option.
If the Company does not exercise its option, each 10% Stockholder may (i)
purchase such shares on the same terms as the Company in proportion to the
relative number of shares of capital stock owned by all 10% Stockholders, (ii)
exercise its rights of co-sale described below, or (iii) neither (i) or (ii).
The 10% Stockholders shall have 30 days to determine whether to exercise their
options. If any 10% Stockholder does not exercise its option, the 10%
Stockholders who do exercise their options will have 15 days to determine
whether to acquire the shares that could have been acquired by the
non-exercising 10% Stockholders in proportion to the relative number of shares
of capital stock of the Company held by the exercising 10% Stockholders. With
respect to an Optional Purchase Event that is the giving of a Transfer Notice,
if the Company and the 10% Stockholders fail to exercise their options or fail
to make payment for such shares as required, the transferring Stockholder may
transfer such shares within 90 days of the expiration of the last option period
upon the terms and price set forth in the notice of proposed transfer, subject
to the rights of co-sale described below.
An "Optional Purchase Event" is (i) the delivery of a Transfer Notice with
respect to a transfer to other than a Permitted Transferee, (ii) in the case of
a Stockholder who is an individual, the entry by a court of an order that the
current or former spouse of such Stockholder has acquired rights in any of such
Stockholder's shares of capital stock of the Company as a result of a divorce,
equitable distribution or community property partition proceeding, (iii) in the
case of any Stockholder who received such shares of capital stock of the Company
(or an equity interest in the LLC) when such Stockholder was an officer,
director, employee, manager or independent contractor of the Company or any
subsidiary of the Company, such stockholder is no longer an officer, director,
employee, manager or independent contractor of the Company or any subsidiary of
the Company or (iv) subject to certain exceptions, in the case of Columbia DBS
Class A Investors, LLC, Columbia DBS Investors, L.P. and Columbia DBS, Inc. (the
"Columbia Entities"), or any other Stockholder substantially all of the assets
of which consist of such Stockholder's capital stock of the Company, any
transfer of its capital stock or other equity interests, or the sale or issuance
of any capital stock or equity interests in such Stockholder, unless such
transfer, sale or issuance is to a person who was an owner of such Stockholder
on February 10, 1997 or a Permitted Transferee of such Stockholder (an "Indirect
Transfer").
Rights of Co-Sale
If Common Stock or Series A Preferred Stock is to be transferred to a
person other than a Permitted Transferee, and such stock is not purchased by the
Company pursuant to its right of first refusal described above, each other
Stockholder shall have 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
Stockholders exercising their co-sale rights. The Stockholders may exercise
their options to participate in such transfer by giving notice to the Company
and the transferring Stockholder within 30 days after receipt of notice from the
Company of such proposed transfer. Insofar as possible, the rights of co-sale
will apply to capital stock of the same class proposed to be transferred;
provided, that if any Stockholder electing to exercise such rights does not have
a sufficient number of shares of Stock of the same class, such Stockholder may
substitute shares of another class so long as such class ranks senior in
liquidation to the class proposed to be transferred. A holder of Series A
Preferred Stock may convert a sufficient number of shares into Common Stock in
accordance with the procedures for conversion described above.
Voting Requirements
For so long as any shares of Series A Preferred Stock are outstanding,
without the vote of the holders of at least 70% of the Series A Preferred Stock,
and, if there has been a Vote Shift (as defined below) as a result of a "change
of control" of Columbia DBS Class A Investors, LLC, 70% of those shares of the
then outstanding Common Stock which were issued in exchange for Class B Units of
the LLC, the Company shall not take any action that: (i) alters or changes the
rights, preferences or privileges with respect to the Series A Preferred Stock
(or, if there has been a Vote Shift, the Common Stock); (ii) creates any new
class or series of capital stock having rights, preferences or privileges senior
to or on a parity with the Series A Preferred Stock (or, if there has been a
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Vote Shift, the Common Stock); (iii) results in any merger, reorganization or
"change of control" of the Company or any transaction or a series of related
transactions in which all or substantially all of the assets of the Company and
its subsidiaries taken as a whole are sold or otherwise transferred to persons
other than the Company or its Subsidiaries, unless such transaction would result
in cash proceeds to the holders of the Series A Preferred Stock with respect to
the Series A Preferred Stock of an amount per share equal to or greater than the
Liquidation Preference; (iv) results in an initial public offering that is not a
Qualified IPO, subject to the rights of the Stockholders under the Stockholders
Registration Rights Agreement (as defined below); (v) results in the redemption
or repurchase of any capital stock of the Company, whether in the form of cash
or promissory notes or otherwise (except in connection with the redemption or
acquisition of capital stock of the Company held by employees, directors or
consultants of the Company or any subsidiary, or Permitted Transferees of such
persons, in connection with or in furtherance of the termination of such
relationship); (vi) results in the issuance of any equity interest in the
Company or in any subsidiary, or rights to acquire such equity interests, other
than under the Employee Stock Plan or in connection with a certain permitted
financings; (vii) results in any distribution with respect to any equity
interests in the Company (other than as permitted in (v) above); (viii) results
in any contract, agreement, loan, transaction or other relationship with the
Company or any subsidiary or any of the Columbia Entities, Whitney or the Fleet
Entities, or an affiliate of any of them, other than certain permitted
reimbursements; (ix) results in a change in the size, voting or composition of
the Board; (x) results in an increase in the number of shares of Common Stock
authorized to be issued under the Employee Stock Plan; or (xi) results in the
Company being engaged in any business other than the distribution of, or the
indirect holding of rights to distribute, DirecTv Services, programming and
products.
In addition, until February 10, 1999, for so long as any shares of Series A
Preferred Stock are outstanding, without the consent of holders of at least 50%
of the shares of Series A Preferred Stock, neither the Company nor any
subsidiary may acquire any Rural DirecTv Market, or more than one Rural DirecTv
Market in the same or a series of related transactions from a single seller or
group of affiliated sellers, if the acquisition price per household is greater
than $120 or the aggregate purchase price exceeds $25 million.
Board of Directors
The Stockholders Agreement provides that the Board shall consist of seven
members and requires the Stockholders to elect the following individuals as
directors: (i) two individuals designed by Whitney, (ii) one individual
designated by Chisholm Partners III, L.P. ("Chisholm"), (iii) the Chief
Executive Officer of the Company, (iv) two individuals elected by a vote of the
holders of the Common Stock issued in exchange for the Class B Units of the LLC,
each of which individuals shall be entitled to two votes each on all matters
before the Board until such time as the size of the Board is increased to nine
members as described below or until there is a Vote Shift and (v) one individual
elected by the holders of the Common Stock. Upon the affirmative vote of
Columbia DBS Class A Investors, LLC, Whitney and Chisholm, the size of the Board
shall be increased to nine members, each of which shall have one vote with
respect to all matters before the Board. The two additional seats shall be
filled by individuals approved by Columbia DBS Class A Investors, LLC, Whitney
and Chisholm, elected by holders of a majority of the stock of the Company, and
who are not otherwise affiliates of any of the Columbia Entities, Whitney or
Fleet.
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" shall mean (i) in the event
there is a seven member Board, (x) the elimination of the extra vote held by
each of the two directors entitled to two votes, and (y) the increase in the
number of votes held by the designee of Chisholm and one of the Whitney
designees from one vote to two votes each, with the result that the Chisholm
designee and the Whitney designees shall have, in the aggregate, five of the
nine votes on the seven-member board and (ii) in the event there is a nine
member Board, (x) the increase in the number of votes held by the designee of
Chisholm and one of the Whitney designees from one vote to two votes each and
(y) the increase in the number of votes held by the other Whitney designee to
three votes, with the result that the Chisholm designee and the Whitney
designees shall have, in the aggregate seven of the thirteen votes on the
nine-member board.
At least one member of the executive committee, audit committee and
compensation committee shall be designated by each of Columbia DBS Class A
Investors, LLC, Whitney and the Fleet Entities.
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Participation Rights
The Stockholders Agreement provides that prior to the issuance of any
additional shares of capital stock of the Company each Stockholder (other than
any Stockholders who own shares of Common Stock solely through participation in
the 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. Any shares of capital stock
not initially subscribed for by such Stockholders shall be reoffered to those
Stockholders initially electing to purchase their proportionate share.
Stockholders shall not have any participation rights with respect to the
issuance of shares of capital stock of the Company (i) pursuant to the Employee
Stock Plan, (ii) in connection with certain permitted financing, (iii) in
exchange for capital contributions consisting of property other than cash, or
(iv) in connection with an adjustment in the conversion rate with respect to the
Series A Preferred Stock.
Termination
The Stockholders Agreement will terminate upon the consummation of a
Qualified IPO.
Application to Future Share Issuances
The provisions of the Stockholders Agreement relating to restrictions on
transfer, rights of first refusal, co-sale rights and participation rights apply
to Common Stock and Series A Preferred Stock that may be acquired in the future
by existing Stockholders and their Permitted Transferees, including Common Stock
and Series A Preferred Stock acquired by existing Stockholders and their
Permitted Transferees through the exercise of their participation rights
described above. The Stockholders Agreement will not apply in any event to
additional shares of Common Stock and Series A Preferred Stock issued by the
Company to persons other than existing Stockholders and their Permitted
Transferees.
Dissolution of the Company
The Company shall dissolve at any time after February 10, 2003, if at such
time the aggregate Liquidation Preference is at least $7.5 million (excluding
the Liquidation Preference on any Series A Preferred Stock distributed as a
dividend) and holders of at least a majority of Series A Preferred Stock then
outstanding vote to dissolve the Company; provided, however, that in the event
that such a vote and resulting dissolution of the Company would result in an
event of default or an incipient default under any then existing indebtedness of
the Company or any Subsidiary with an outstanding balance of $10 million or
more, then such majority vote shall not cause the dissolution of the Company,
but rather shall constitute notice by the holders of the Series A Preferred
Stock to the Board that such holders desire that the Board promptly arrange the
sale of the Company (including its subsidiaries) or a sale of all or
substantially all of its assets.
THE STOCKHOLDERS REGISTRATION RIGHTS AGREEMENT
The following is a summary of certain provisions of the Registration Rights
Agreement dated as of February 10, 1997 (the "Stockholders Registration Rights
Agreement") between the Company, 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"). Such
summary is qualified in its entirety by reference to the complete text of the
Stockholders Registration Rights Agreement, a copy of which is available upon
request from the Company.
The Stockholders Registration Rights Agreement provides that, at any time
after six months after the consummation of an initial public offering, Investors
who own in the aggregate no less than 10% of the total outstanding equity
securities of the Company may, subject to certain restrictions, make up to two
demands to the Company for registration under the Securities Act of all or a
portion of those shares of Common Stock and Preferred Stock received by such
Investor in exchange for such Investor's Units in the LLC (the "Restricted
Securities"). In addition, at any time after August 10, 1998, if (i) an initial
public offering has not occurred or (ii) an initial public offering has occurred
but the securities sold in such offering are not then publicly traded, Whitney
and the Fleet Entities may require the Company to register all of their
Restricted Securities (or any portion thereof in excess of $1,000,000) for sale.
Upon becoming qualified to use Form S-3 under the Securities
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Act, any Investor may also make written requests to the Company for registration
of the Restricted Securities on Form S-3, which requests must be honored by the
Company if the aggregate offering price of the Restricted Securities proposed to
be sold is expected to be at least $1,000,000. The Investors also have certain
"piggyback" registration rights to include the Restricted Securities, subject to
certain limitations, in other registration statements filed by the Company.
Whenever the Company effects a registration pursuant to the registration
rights provisions of the Stockholders Registration Rights Agreement, the Company
(i) has agreed, and the Investors have agreed, not to effect any public sale or
distribution of equity securities of the Company for a specified period of time
prior to and after such registration statement becomes effective and (ii) will
be required to pay the cost of such registration of securities, except that each
selling Investor will bear its proportionate share of customary underwriting
discounts and commissions. The Stockholders Registration Rights Agreement
contains customary indemnification and contribution provisions relating to the
exercise by the Investors of their registration rights thereunder.
LIMITATION ON DIRECTORS' LIABILITY
The Certificate of Incorporation provides that to the fullest extent
permitted by Delaware Law a director of the Company shall not be liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty as
a director. Under current Delaware law, liability of a director may not be
limited (i) for any breach of the director's duty of loyalty to the Company or
its Stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) in respect of
certain unlawful dividend payments or stock redemptions or repurchases and (iv)
for any transaction from which the director derives an improper personal
benefit. The effect of this provision of the Certificate of Incorporation is to
limit or eliminate the rights of the Company and its stockholders (through
stockholders' derivative suits on behalf of the Company) to recover monetary
damages against a director for breach of the fiduciary duty of care as a
director (including breaches resulting from negligent or grossly negligent
behavior) except in those circumstances described in clauses (i) through (iv)
above. This provision does not limit or eliminate the rights of the Company or
any stockholder to seek nonmonetary relief such as an injunction or rescission
in the event of a breach of a director's duty of care. In addition, the
Certificate of Incorporation and Bylaws provide that the Company shall indemnify
its directors, officers, employees and agents to the fullest extent permitted by
Delaware law.
DELAWARE TAKEOVER STATUTE
Section 203 of the Delaware Law, as amended ("Section 203"), provides that,
subject to certain exceptions specified therein, an "interested stockholder" of
a Delaware corporation shall not engage in any business combination, including
mergers or consolidations or acquisitions of additional shares of the
corporation, with the corporation for a three-year period following the date at
which the stockholder becomes an "interested stockholder" unless (i) prior to
such date, the board of directors of the corporation approved either the
business combination or the transaction which resulted in the stockholder
becoming an "interested stockholder," (ii) upon consummation of the transaction
which resulted in the stockholder becoming an "interested stockholder," the
interested stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding certain shares), or
(iii) or subsequent to such date, the business combination is approved by the
board of directors of the corporation and authorized at an annual or special
meeting of stockholders by the affirmative vote of at least 66% of the
outstanding voting stock which is not owned by the "interested stockholder."
Except as otherwise specified in Section 203, an "interested stockholder" is
defined to include (x) any person which is the owner of 15% or more of the
outstanding voting stock of the corporation, or is an affiliate or associate of
the corporation and was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within three years immediately prior to the
relevant date and (y) the affiliates and associates of any such person.
These provisions could have the effect of delaying, deferring or preventing
a change of control of the Company. The Company's stockholders, by adopting an
amendment to its Certificate of Incorporation or Bylaws, may elect not to be
governed by Section 203, effective twelve months after adoption. Neither the
Certificate of Incorporation nor the Bylaws presently exclude the Company from
the restrictions imposed by Section 203.
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DESCRIPTION OF THE NOTES
The Exchange Notes will be issued under an Indenture dated as of July 30,
1997 (the "Indenture") among the Issuers, the Guarantors and The Bank of New
York, as trustee (the "Trustee"). The terms of the Exchange Notes include those
stated in the Indenture and those made a part of the Indenture by reference to
the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act") as in
effect on the date of the Indenture. In connection with the Corporate
Conversion, the Company assumed all obligations of the LLC under the Indenture,
including the payment of the Notes. The form and terms of the Exchange Notes are
identical in all material respects to the form and terms of the Private Notes
(which they replace) except that (i) the Exchange Notes bear a Series B
designation, (ii) the Exchange Notes have been registered under the Securities
Act and, therefore, will not bear legends restricting the transfer thereof, and
(iii) the holders of Exchange Notes will not be entitled to certain rights under
the Registration Rights Agreement, including the provisions providing for an
increase in the interest rate on the Private Notes in certain circumstances
relating to the timing of the Exchange Offer, which rights will terminate when
the Exchange Offer is consummated. The Exchange Notes are subject to all such
terms, and holders of the Exchange Notes are referred to the Indenture and the
Trust Indenture Act for a statement of them. The following is a summary of the
material terms and provisions of the Exchange Notes, the Indenture, the
Registration Rights Agreement dated July 30, 1997 (the "Registration Rights
Agreement") among the Issuers, the Guarantors and the Initial Purchasers and the
Security Agreement (the "Security Agreement") dated July 30, 1997 among the
Issuers and the Trustee, for the benefit of the holders of the Notes. Such
summary is qualified in its entirety by reference to the complete text of such
agreements, copies of which have been filed as exhibits to the Registration
Statement of which this Prospectus forms a part. See "Available Information."
Definitions relating to certain capitalized terms used above or in the following
summary are set forth below under "-- Certain Definitions." Capitalized terms
that are used but not otherwise defined herein have the meanings assigned to
them in the Indenture and such definitions are incorporated herein by reference.
The Private Notes and the Exchange Notes are sometimes referred to herein
collectively as the "Notes." References in this "Description of the Notes"
section to "the Company" mean only DTS and not any of its Subsidiaries.
GENERAL
The Notes will be issued only in registered form, without coupons, in
denominations of $1,000 and integral multiples of $1,000. The Issuers will
appoint The Bank of New York to serve as registrar and paying agent under the
Indenture at its offices at New York, New York. No service charge will be made
for any registration of transfer or exchange of the Notes, except for any tax or
other governmental charge that may be imposed in connection therewith.
RANKING
The Notes are joint and several obligations of the Company and Capital and
will be unsecured except for a first priority security interest to be granted by
the Issuers in the Interest Escrow Account. In serving as a co-issuer of the
Notes, Capital is acting as an agent of the Company. Capital has nominal assets,
does not conduct any operations, and will not provide additional security for
the Notes. The Notes will rank junior to, and be subordinated in right of
payment to, all existing and future Senior Indebtedness of the Issuers, on a
parity in right of payment with all senior subordinated Indebtedness of the
Company and senior in right of payment to all Subordinated Indebtedness. As of
September 30, 1997, the Company had approximately $24.2 million of Senior
Indebtedness outstanding on a pro forma basis after giving effect to the Initial
Offering and the Transactions. The Company has up to $90.0 million of borrowing
availability under the Credit Facility, of which $55.6 million is immediately
available, and is currently permitted by the Indenture to incur up to $75.0
million of indebtedness thereunder. The Credit Facility is guaranteed by all of
the Subsidiaries of the Company and is secured by a security interest in
substantially all of the assets of the Company and the Subsidiaries of the
Company. Secured creditors of the Company and its Subsidiaries will have a claim
on the assets which secure such obligations prior to claims of the holders of
the Notes against those assets. Pursuant to the Indenture, the Company will not
be permitted to incur any debt that is both subordinated in right of payment to
any Senior Indebtedness of the Company and senior in right of payment to the
Notes.
The 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 Restricted Subsidiaries of the Company (the
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"Guarantors"). No Guarantor will be permitted to incur any debt that is both
subordinated in right of payment to its Guarantor Senior Indebtedness and senior
in right of payment to its Guaranty.
MATURITY, INTEREST AND PRINCIPAL OF THE NOTES
The Notes were issued in an aggregate principal amount of $155.0 million
and will mature on August 1, 2007. Interest on the Notes will accrue at the rate
per annum set forth on the cover page of this Offering Memorandum and will be
payable semi-annually in cash on each August 1 and February 1, commencing on
February 1, 1998, to the holders of record of the Notes at the close of business
on July 15 and January 15, respectively, immediately preceding such interest
payment date. Interest will accrue from the most recent date to which interest
has been paid or, if no interest has been paid, from the date of issuance.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months.
OPTIONAL REDEMPTION
The Notes will be redeemable at the option of the Issuers, in whole or in
part, at any time on or after August 1, 2002, at the redemption prices
(expressed as a percentage of principal amount) set forth below, plus accrued
and unpaid interest (including Additional Interest, if any) thereon, if any, to
the redemption date, if redeemed during the 12-month period beginning on August
1 of the years indicated below:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
<S> <C>
2002........................................................ 106.250%
2003........................................................ 104.167%
2004........................................................ 102.083%
2005 and thereafter......................................... 100.000%
</TABLE>
In addition, prior to August 1, 2000, the Company may, other than in any
circumstance resulting in a Change of Control, redeem up to 35% of the
originally issued principal amount of the Notes at a redemption price equal to
112.50% of the principal amount of the Notes so redeemed, plus accrued and
unpaid interest (including Additional Interest, if any) thereon, if any, to the
redemption date, with the net cash proceeds of (a) one or more Public Equity
Offerings of common equity of the Company or (b) a sale or series of related
sales of Qualified Equity Interests of the Company to Strategic Equity
Investors, in any such case resulting in gross cash proceeds to the Company of
at least $25.0 million in the aggregate; provided, however, that at least 65% of
the originally issued principal amount of the Notes would remain outstanding
immediately after giving effect to any such redemption (excluding any Notes
owned by the Company or any of its Affiliates). Notice of any such redemption
must be given within 90 days after the date of the consummation of such Public
Equity Offering or such sale of Qualified Equity Interests.
MANDATORY REDEMPTION; SINKING FUND
Except as set forth under "-- Certain Covenants -- Disposition of Proceeds
of Asset Sales" and "-- Offer to Purchase Upon Change of Control" below, neither
the Company nor Capital is required to purchase or make mandatory redemption
payments or sinking fund payments with respect to the Notes.
SELECTION AND NOTICE OF REDEMPTION
In the event that less than all of the Notes are to be redeemed at any time
pursuant to an optional redemption, selection of such Notes for redemption will
be made by the Trustee in compliance with the requirements of the national
securities exchange, if any, on which such Notes are listed or, if such Notes
are not then listed on a national securities exchange, on a pro rata basis, by
lot or by such method as the Trustee shall deem fair and appropriate; provided,
however, that no Notes of a principal amount of $1,000 or less shall be redeemed
in part; provided further, however, that if a partial redemption is made with
the proceeds of a Public Equity Offering or sale or series of related sales of
Qualified Equity Interests of the Company to Strategic Equity Investors,
selection of the Notes or portions thereof for redemption shall be made by the
Trustee only on a pro rata basis or on as nearly a pro rata basis as is
practicable (subject to the procedures of The Depository Trust Company), unless
such method is otherwise prohibited. Notice of redemption shall be mailed by
first-class mail at least 30 but not more
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than 60 days before the redemption date to each Holder of Notes at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on Notes or portions thereof called for redemption as long
as the Issuers have deposited with the paying agent for the Notes funds in
satisfaction of the redemption price pursuant to the Indenture.
SECURITY -- INTEREST ESCROW ACCOUNT
On the Closing Date, the Company deposited in an Interest Escrow Account a
portion of the net proceeds received from the sale of the Notes to be held by
the Escrow Agent and the Company has granted a first priority security interest
to the Trustee as security for the benefit of the holders of the Notes. Such
amount has been invested by the Escrow Agent in Marketable Securities and is
sufficient upon receipt of scheduled interest and principal payments of such
Marketable Securities to provide for payment in full of the first four scheduled
interest payments due on the Notes. The Company used approximately $36.5 million
of the net proceeds of the Initial Offering to fund the Interest Escrow Account.
The Company granted a first priority security interest in the Interest
Escrow Account to the Trustee for the benefit of the Holders of the Notes
pursuant to the Security Agreement. Pursuant to the Security Agreement,
immediately prior to an Interest Payment Date, the Company may either deposit
with the Escrow Agent from funds otherwise available to the Company cash
sufficient to pay the interest scheduled to be paid on such date or the Company
may direct the Escrow Agent to release from the Interest Escrow Account proceeds
sufficient to pay interest then due on the Notes. In the event the Company
exercises the former option, the Company may direct the Escrow Agent to release
a like amount of proceeds from the Interest Escrow Account. A failure to pay
interest on the Notes in a timely manner through the first four scheduled
interest payment dates will constitute an immediate Event of Default under the
Indenture, with no grace or cure period. The Interest Escrow Account also
secures the repayment of the principal amount and premium on the Notes.
Under the Security Agreement, once the Company makes the first four
scheduled interest payments on the Notes, the remaining assets held in the
Interest Escrow Account, if any, will be released and thereafter the Notes will
be unsecured.
SUBORDINATION OF THE NOTES AND THE GUARANTIES
The payment of the principal of, premium, if any, and interest on the Notes
(other than payments from the Interest Escrow Account) is subordinated in right
of payment, to the extent and in the manner provided in the Indenture, to the
prior payment and satisfaction in full in cash of all Senior Indebtedness of the
Company.
Upon any payment or distribution of assets or securities of either of the
Issuers of any kind or character, whether in cash, property or securities
(excluding any payment or distribution of Permitted Junior Securities and
payments from the Interest Escrow Account), upon any dissolution or other
winding-up or liquidation, rearrangement or reorganization of either of the
Issuers, whether voluntary or involuntary or in bankruptcy, insolvency,
receivership or other proceedings or any general assignment for the benefit of
creditors or other marshalling of assets or liabilities of either Issuer (except
in connection with the merger or consolidation of either Issuer or liquidation
or dissolution following the transfer of substantially all of its assets, upon
the terms and conditions permitted under the circumstances described under
"Merger, Sale of Assets, Etc."), all Senior Indebtedness shall first be paid and
satisfied in full in cash before the Holders of the Notes or the Trustee on
behalf of such Holders shall be entitled to receive any payment by the Issuers
of the principal of, premium, if any, or interest on the Notes (other than
payments from the Interest Escrow Account), or any payment by the Issuers to
acquire any of the Notes for cash, property or securities, or any distribution
by the Issuers with respect to the Notes of any cash, property or securities
(excluding any payment or distribution of Permitted Junior Securities and
excluding payments from the Interest Escrow Account). Before any payment may be
made by, or on behalf of, the Issuers of the principal of, premium, if any, or
interest on the Notes (other than payments from the Interest Escrow Account)
upon any such dissolution or winding-up or liquidation, rearrangement or
reorganization, any
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payment or distribution of assets or securities of the Issuers of any kind or
character, whether in cash, property or securities (excluding any payment or
distribution of Permitted Junior Securities and excluding payments from the
Interest Escrow Account) to which the Holders of the Notes or the Trustee on
their behalf would be entitled, but for the subordination provisions of the
Indenture, shall be made by the Issuers or by any receiver, trustee in
bankruptcy, liquidation trustee, agent or other Person making such payment or
distribution, directly to the holders of the Senior Indebtedness (pro rata to
such holders on the basis of the respective amounts of Senior Indebtedness held
by such holders) or their representatives or to the trustee or trustees or agent
or agents under any agreement or indenture pursuant to which any of such Senior
Indebtedness might have been issued, as their respective interests may appear,
to the extent necessary to pay all such Senior Indebtedness in full in cash
after giving effect to any prior or concurrent payment, distribution or
provision therefor to or for the holders of such Senior Indebtedness. In the
event that, notwithstanding the foregoing, the Trustee or any Holder of Notes
receives any payment or distribution of assets of either of the Issuers of any
kind, whether in cash, property or securities (excluding any payment or
distribution of Permitted Junior Securities and excluding payments from the
Interest Escrow Account), including, without limitation, by way of set-off or
otherwise, in respect of the Notes before all Senior Indebtedness of the Company
is paid and satisfied in full in cash, then such payment or distribution will be
held by the recipient in trust for the benefit of holders of Senior Indebtedness
and will be immediately paid over or delivered to the trustee in bankruptcy or
such other Person making payment or distribution of assets of the Company to the
extent necessary to make payment in full in cash of all Senior Indebtedness
remaining unpaid, after giving effect to any current payment or distribution, or
provision therefor, to or for the holders of Senior Indebtedness. By reason of
such subordination, in the event of liquidation or insolvency, creditors of the
Company who are holders of Senior Indebtedness may recover more, ratably, than
other creditors of the Company, and creditors of the Company who are not holders
of Senior Indebtedness or of the Notes may recover more, ratably, than the
holders of the Notes.
No payment or distribution of any assets or securities of either of the
Issuers or any Restricted Subsidiary of any kind or character (including,
without limitation, cash, property and any payment or distribution which may be
payable or deliverable by reason of the payment of any other Indebtedness of the
Company being subordinated to the payment of the Notes by the Company, but
excluding any payment or distribution of Permitted Junior Securities and
excluding payments from the Interest Escrow Account) may be made by or on behalf
of either of the Issuers or any Restricted Subsidiary, including, without
limitation, by way of set-off or otherwise, for or on account of the Notes,
except from those funds held in trust for the benefit of Holders of any Notes
pursuant to the procedures set forth under "-- Satisfaction and Discharge of
Indenture; Legal Defeasance and Covenant Defeasance" below, or for or on account
of the purchase, redemption, defeasance or other acquisition of the Notes, and
neither the Trustee nor any Holder or owner of any Notes shall take or receive
from either of the Issuers or any Restricted Subsidiary, directly or indirectly
in any manner, payment in respect of all or any portion of the Notes following
the delivery by the representative of the holders of Designated Senior
Indebtedness under or in respect of the Credit Facility, for so long as there
shall exist any Designated Senior Indebtedness under or in respect of the Credit
Facility, and thereafter, the holders of Designated Senior Indebtedness (in
either such case, the "Representative") to the Trustee of written notice of (i)
the occurrence of a Payment Default on Designated Senior Indebtedness or (ii)
the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness and the acceleration of the maturity of Designated Senior
Indebtedness in accordance with its terms and in any such event, such
prohibition shall continue until such Payment Default is cured, waived in
writing or ceases to exist or such acceleration has been rescinded or otherwise
cured. At such time as the prohibition set forth in the preceding sentence shall
no longer be in effect, subject to the provisions of the following paragraph,
the Issuers shall resume making any and all required payments in respect of the
Notes, including any missed payments.
Upon the occurrence of a Non-Payment Event of Default on Designated Senior
Indebtedness, no payment or distribution of any assets or securities of either
of the Issuers of any kind or character (including, without limitation, cash,
property and any payment or distribution which may be payable or deliverable by
reason of the payment of any other Indebtedness of either of the Issuers being
subordinated to the payment of the Notes by either of the Issuers, but excluding
any payment or distribution of Permitted Junior Securities and excluding
payments from the Interest Escrow Account) may be made by or on behalf of the
Company, including, without limitation, by way of set-off or otherwise, for or
on account of the Notes, or for or on account of the purchase, redemption,
defeasance or other acquisition of Notes, and neither the Trustee nor any Holder
or owner of any
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Notes shall take or receive from either of the Issuers, directly or indirectly
in any manner, payment in respect of all or any portion of the Notes, for a
period (a "Payment Blockage Period") commencing on the date of receipt by the
Trustee of written notice from the Representative of such Non-Payment Event of
Default unless and until (subject to any blockage of payments that may then be
in effect under the preceding paragraph) the earliest of (x) the date on which
more than 179 days shall have elapsed since receipt of such written notice by
the Trustee, (y) such Non-Payment Event of Default shall have been cured or
waived in writing or shall have ceased to exist or such Designated Senior
Indebtedness shall have been paid in full or (z) such Payment Blockage Period
shall have been terminated by written notice to the Company or the Trustee from
the Representative, after which, in the case of clause (x), (y) or (z), the
Issuers shall resume making any and all required payments in respect of the
Notes, including any missed payments. Notwithstanding any other provision of the
Indenture, (x) in no event shall a Payment Blockage Period commenced in
accordance with the provisions of the Indenture described in this paragraph
extend beyond 179 days from the date of the receipt by the Trustee of the notice
referred to above, (y) there shall be a period of at least 181 consecutive days
in each 360-day period when no Payment Blockage Period is in effect and (z) not
more than one Payment Blockage Period may be commenced with respect to the Notes
during any period of 360 consecutive days. Notwithstanding any other provision
of the Indenture, no event of default with respect to Designated Senior
Indebtedness which existed or was continuing on the date of the commencement of
any Payment Blockage Period initiated by the Representative shall be, or be
made, the basis for the commencement of any other Payment Blockage Period
initiated by the Representative, whether or not within a period of 360
consecutive days, unless such event of default shall have been cured or waived
for a period of not less than 90 consecutive days.
The failure to make any payment or distribution for or on account of the
Notes by reason of the provisions of the Indenture described under this
"Subordination of the Notes and the Guaranties" heading will not be construed as
preventing the occurrence of any Event of Default in respect of the Notes. See
"-- Events of Default" below.
By reason of the subordination provisions described above, in the event of
insolvency of either of the Issuers, funds that would otherwise be payable to
Holders of the Notes will be paid to the holders of Senior Indebtedness to the
extent necessary to pay the Senior Indebtedness in full in cash, and the Issuers
may be unable to fully meet their obligations with respect to the Notes.
As of September 30, 1997, the Company had approximately $24.2 million of
Senior Indebtedness outstanding on a pro forma basis after giving effect to the
Initial Offering and the Transactions. In addition, the Company has up to $90.0
million of borrowing availability under the Credit Facility, of which
approximately $55.6 million is immediately available, and is currently permitted
by the Indenture to incur up to $75.0 million of indebtedness thereunder.
Subject to the restrictions set forth in the Indenture, in the future the
Issuers and the Guarantors may issue additional Senior Indebtedness or Guarantor
Senior Indebtedness to refinance existing Indebtedness or for other corporate
purposes.
Each Guaranty will, to the extent set forth in the Indenture, be
subordinated in right of payment to the prior payment in full of all Guarantor
Senior Indebtedness of the respective Guarantor, including obligations of such
Guarantor with respect to the Credit Facility (including any guaranty thereof),
and will be subject to the rights of holders of Designated Senior Indebtedness
of such Guarantor to initiate blockage periods, upon terms substantially
comparable to the subordination of the Notes to all Senior Indebtedness of the
Issuers.
If the Issuers or any Guarantor fail to make any payment on the Notes or
any Guaranty, as the case may be, when due or within any applicable grace
period, whether or not on account of payment blockage provisions, such failure
would constitute an Event of Default under the Indenture and would enable the
holders of the Notes to accelerate the maturity thereof. See "-- Events of
Default."
A holder of Notes by its acceptance of Notes agrees to be bound by the
provisions in the Indenture as described above and authorizes and expressly
directs the Trustee, on its behalf to take such action as may be necessary or
appropriate to effectuate the subordination provided for in the Indenture and
appoints the Trustee its attorney-in-fact for such purpose.
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OFFER TO PURCHASE UPON CHANGE OF CONTROL
Following the occurrence of a Change of Control (the date of such
occurrence being the "Change of Control Date"), the Issuers shall notify the
Holders of the Notes of such occurrence in the manner prescribed by the
Indenture and shall, within 20 days after the Change of Control Date, jointly
and severally make an Offer to Purchase all Notes then outstanding at a purchase
price in cash equal to 101% of the aggregate principal amount thereof, plus
accrued and unpaid interest (including Additional Interest, if any) thereon, if
any, to the Purchase Date. The Issuers' obligations may be satisfied if a third
party makes the Offer to Purchase in the manner, at the times and otherwise in
compliance with the requirements of the Indenture applicable to an Offer to
Purchase made by the Issuers and purchases all Notes validly tendered and not
withdrawn under such Offer to Purchase.
The consummation of the Pegasus Transaction would constitute a Change of
Control. If such consummation occurs, the Issuers will be required to make an
Offer to Purchase. See "The Company -- Pegasus Transaction."
If a Change of Control occurs that also constitutes an event of default
under the Credit Facility, the lenders under the Credit Facility will be
entitled to exercise the remedies available to a secured lender under applicable
law and pursuant to the terms of the Credit Facility. Accordingly, any claims of
such lenders with respect to the assets of the Company will be prior to any
claim of the Holders of the Notes with respect to such assets. A condition to
the closing of the Pegasus Transaction is that the Restated Credit Facility be
amended to permit such closing.
If an Offer to Purchase is made following the occurrence of a Change of
Control, there can be no assurance that the Company will have available funds
sufficient to pay for all of the Notes that may be tendered by Holders of Notes
seeking to accept such Offer to Purchase. If the Company fails to repurchase all
of the Notes tendered for purchase upon the occurrence of a Change of Control,
such failure will constitute an Event of Default under the Indenture. See
"-- Events of Default" below.
If the Issuers make an Offer to Purchase, the Issuers will comply with all
applicable tender offer laws and regulations, including, to the extent
applicable, Section 14(e) and Rule 14e-1 under the Exchange Act, and any other
applicable federal or state securities laws and regulations and any applicable
requirements of any securities exchange on which the Notes are listed, and any
violation of the provisions of the Indenture relating to such Offer to Purchase
occurring as a result of such compliance shall not be deemed an Event of Default
or an event that, with the passing of time or giving of notice, or both, would
constitute an Event of Default.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
CERTAIN COVENANTS
Limitation on Senior Subordinated Indebtedness. The Indenture will provide
that (i) the Issuers will not, directly or indirectly, Incur any Indebtedness
that by its terms would expressly rank senior in right of payment to the Notes
and expressly rank subordinate in right of payment to any Senior Indebtedness
and (ii) the Company will not permit any Guarantor to and no Guarantor will,
directly or indirectly, Incur any Indebtedness that by its terms would expressly
rank senior in right of payment to the Guaranty of such Guarantor and expressly
rank subordinate in right of payment to any Guarantor Senior Indebtedness of
such Guarantor.
Limitation on Restricted Payments. The Company shall not, and shall not
cause or permit any Restricted Subsidiary to, directly or indirectly,
(i) declare or pay any dividend or any other distribution on any
Equity Interests of the Company or any Restricted Subsidiary or make any
payment or distribution to the direct or indirect holders (in their
capacities as such) of Equity Interests of the Company or any Restricted
Subsidiary (other than any dividends, distributions and payments made to
the Company or any Wholly Owned Restricted Subsidiary and dividends or
distributions payable to any Person solely in Qualified Equity Interests of
the Company or in options, warrants or other rights to purchase Qualified
Equity Interests of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value any
Equity Interests of the Company or any Restricted Subsidiary (other than
any such Equity Interests owned by the Company or any Wholly Owned
Restricted Subsidiary);
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(iii) purchase, redeem, defease or retire for value, or make any
principal payment on, prior to any scheduled maturity, scheduled repayment
or scheduled sinking fund payment, any Subordinated Indebtedness (other
than any Subordinated Indebtedness held by any Wholly Owned Restricted
Subsidiary); or
(iv) make any Investment (other than Permitted Investments or
Permitted Acquisition Deposits) in any Person (other than in the Company,
any Restricted Subsidiary or a Person that becomes a Restricted Subsidiary,
or is merged with or into or consolidated with the Company or a Restricted
Subsidiary (provided the Company or a Restricted Subsidiary is the
survivor) as a result of or in connection with such Investment);
(such payments or any other actions (other than the exceptions thereto)
described in (i), (ii), (iii) and (iv) collectively, "Restricted Payments"),
unless
(a) no Default or Event of Default shall have occurred and be
continuing at the time or after giving effect to such Restricted Payment;
(b) immediately after giving effect to such Restricted Payment, the
Company would be able to Incur $1.00 of Indebtedness (other than Permitted
Indebtedness) under the Debt to Operating Cash Flow Ratio of the first
paragraph of "-- Limitation on Indebtedness" below; and
(c) immediately after giving effect to such Restricted Payment, the
aggregate amount of all Restricted Payments declared or made on or after
the Issue Date does not exceed an amount equal to the sum of (1) the
difference between (x) the Cumulative Operating Cash Flow determined at the
time of such Restricted Payment and (y) 150% of cumulative Consolidated
Interest Expense of the Company determined for the period commencing on the
Issue Date and ending on the last day of the most recent fiscal quarter
immediately preceding the date of such Restricted Payment for which
consolidated financial information of the Company is available, plus (2)
the aggregate net cash proceeds received by the Company either (x) as
capital contributions to the Company after the Issue Date or (y) from the
issue and sale (other than to a Restricted Subsidiary) of its Qualified
Equity Interests after the Issue Date (excluding (i) the net proceeds from
any issuance and sale of Qualified Equity Interests financed, directly or
indirectly, using funds borrowed from the Company or any Restricted
Subsidiary until and to the extent such borrowing is repaid and (ii) any
such proceeds to the extent that such proceeds were included at any time in
subparagraph (k) of "Limitation on Indebtedness"), plus (3) the principal
amount (or accrued or accreted amount, if less) of any Indebtedness of the
Company or any Restricted Subsidiary Incurred after the Issue Date that has
been converted into or exchanged for Qualified Equity Interests of the
Company, plus (4) in the case of the disposition or repayment of any
Investment constituting a Restricted Payment made after the Issue Date, an
amount (to the extent not included in the computation of Cumulative
Operating Cash Flow) equal to the lesser of: (i) the return of capital with
respect to such Investment, (ii) the amount of such Investment that was
treated as a Restricted Payment, and (iii) the amount of cash received by
the Company or a Wholly Owned Restricted Subsidiary for such disposition or
in such repayment, less in any case, the cost of the disposition of such
Investment and net of taxes, plus (5) so long as the Designation thereof
was treated as a Restricted Payment made after the Issue Date, with respect
to any Unrestricted Subsidiary that has been redesignated as a Restricted
Subsidiary after the Issue Date in accordance with "-- Designation of
Unrestricted Subsidiaries" below, the Company's proportionate interest in
the lesser of the Fair Market Value and the net worth of any Unrestricted
Subsidiary that has been redesignated as a Restricted Subsidiary after the
Issue Date in accordance with "-- Designation of Unrestricted Subsidiaries"
below not to exceed in any case the Designation Amount with respect to such
Restricted Subsidiary upon its Designation, plus (6) (to the extent not
included in the computation of Cumulative Operating Cash Flow) the amount
of cash dividends or cash distributions (other than to pay taxes) received
from any Unrestricted Subsidiary since the Issue Date, minus (7) the
greater of (i) $0 and (ii) the Designation Amount (measured as of the date
of Designation) with respect to any Subsidiary of the Company that has been
designated as an Unrestricted Subsidiary after the Issue Date in accordance
with "-- Designation of Unrestricted Subsidiaries" below.
The foregoing provisions will not prevent (i) the payment of any dividend
or distribution on, or redemption of, Equity Interests within 60 days after the
date of declaration of such dividend or distribution or the giving of formal
notice of such redemption, if at the date of such declaration or giving of
formal notice such payment or redemption would comply with the provisions of the
Indenture; (ii) the purchase, redemption, retirement or other
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acquisition of any Equity Interests of the Company in exchange for, or out of
the net cash proceeds of the substantially concurrent issue and sale (other than
to a Restricted Subsidiary) of, Qualified Equity Interests of the Company;
provided, however, that any such net cash proceeds and the value of any Equity
Interests issued in exchange for such retired Equity Interests are excluded from
clause (c)(2) of the preceding paragraph and subparagraph (k) of "Limitation on
Indebtedness" (and were not included therein at any time); (iii) the purchase,
redemption, retirement, defeasance or other acquisition of Subordinated
Indebtedness, or any other payment thereon, made in exchange for, or out of the
net cash proceeds of, a substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of (x) Qualified Equity Interests of the Company;
provided, however, that any such net cash proceeds and the value of any Equity
Interests issued in exchange for Subordinated Indebtedness are excluded from
clauses (c)(2) and (c)(3) of the preceding paragraph and subparagraph (k) of
"Limitation on Indebtedness" (and were not included therein at any time) or (y)
other Subordinated Indebtedness having no stated maturity for the payment of
principal thereof prior to the final stated maturity of the Notes; (iv) any
Investment to the extent that the consideration therefor consists of the net
cash proceeds of the substantially concurrent issue and sale (other than to a
Restricted Subsidiary) of Qualified Equity Interests of the Company; provided,
however, that any such net cash proceeds are excluded from clause (c)(2) of the
preceding paragraph and subparagraph (k) of "Limitation on Indebtedness" (and
were not included therein at any time); (v) the purchase, redemption or other
acquisition, cancellation or retirement for value of Equity Interests, or
options, warrants, equity appreciation rights or other rights to purchase or
acquire Equity Interests (or distributions by any Restricted Subsidiary to the
Company to permit such purchase, redemption or other acquisition, cancellation
or retirement for value), of the Company or any Restricted Subsidiary, or
similar securities, held by officers or employees or former officers or
employees of the Company or any Restricted Subsidiary (or their estates or
beneficiaries under their estates), upon death, disability, retirement or
termination of employment, not to exceed $1.0 million in any calendar year; and
(vi) the payment of any dividend or distribution on Equity Interests of the
Company or any Restricted Subsidiary to the extent necessary to permit the
direct or indirect beneficial owners of such Equity Interests to pay federal,
state and local income tax liabilities arising from income of the Company or
such Restricted Subsidiary and attributable to them solely as a result of the
Company or such Restricted Subsidiary (and any intermediate entity through which
such holder owns such Equity Interests) being a partnership or a similar
pass-through entity, or ignored as an entity separate from its owner, for
federal, state or local income tax purposes; provided, however, that in the case
of each of clauses (ii), (iii) and (iv), no Default or Event of Default (and, in
the case of clause (v), no Default or Event of Default under clause (a), (b) or
(c) of "Events of Default") shall have occurred and be continuing or would arise
therefrom. For purposes of this paragraph, any Investment made in any Person
that subsequently becomes a Restricted Subsidiary shall be deemed not to be
outstanding so long as such Person is a Restricted Subsidiary.
In determining the amount of Restricted Payments permissible under this
covenant, amounts expended pursuant to clauses (i) and (v) of the immediately
preceding paragraph shall be included as Restricted Payments and amounts
expended pursuant to clauses (ii), (iii), (iv) and (vi) shall be excluded. The
amount of any non-cash Restricted Payment shall be deemed to be equal to the
Fair Market Value thereof at the date of the making of such Restricted Payment.
Limitation on Indebtedness. The Company shall not, and shall not cause or
permit any Restricted Subsidiary to, directly or indirectly, Incur any
Indebtedness (including Acquired Indebtedness) or issue any Disqualified Equity
Interests except for Permitted Indebtedness; provided, however, that the Company
or any Restricted Subsidiary may Incur Indebtedness and the Company or any
Restricted Subsidiary may issue Disqualified Equity Interests if, at the time of
and immediately after giving pro forma effect to such Incurrence of Indebtedness
or issuance of Disqualified Equity Interests and the application of the proceeds
therefrom, the Debt to Operating Cash Flow Ratio would be less than or equal to
6.5 to 1.0.
The foregoing limitations will not apply to the Incurrence by the Company
(or any Restricted Subsidiary with respect to clauses (a), (b), (d), (e), (f),
(g), (i), (j), (l) and, to the extent provided therein, clauses (h) and (k)
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below of this paragraph) of any of the following (collectively, "Permitted
Indebtedness"), each of which shall be given independent effect:
(a) Indebtedness under the Notes, the Guaranties and the Indenture;
(b) Existing Indebtedness;
(c) Indebtedness of the Company under the Credit Facility in an
aggregate principal amount at any one time outstanding not to exceed the
sum of (A) $75.0 million, which amount shall be reduced by (x) any
permanent reduction of commitments thereunder and (y) any other repayment
accompanied by a permanent reduction of commitments thereunder (other than
in connection with any refinancing thereof where the aggregate principal
amount outstanding and commitments thereunder immediately prior thereto are
not greater than such amounts immediately thereafter), plus (B) any amounts
outstanding under the Credit Facility that utilize subparagraph (l) of this
paragraph of this covenant;
(d) (x) Indebtedness of any Restricted Subsidiary owed to and held by
the Company or any Restricted Subsidiary and (y) Indebtedness of the
Company owed to and held by any Restricted Subsidiary that is unsecured and
subordinated in right of payment to the payment and performance of the
Company's obligations under any Senior Indebtedness, the Indenture and the
Notes (or pledged to secure any Senior Indebtedness); provided, however,
that an Incurrence of Indebtedness that is not permitted by this clause (d)
shall be deemed to have occurred upon (i) any sale or other disposition of
any Indebtedness of the Company or any Restricted Subsidiary referred to in
this clause (d) to a Person (other than the Company or any Restricted
Subsidiary), (ii) any sale or other disposition of Equity Interests of any
Restricted Subsidiary that holds Indebtedness of the Company or another
Restricted Subsidiary such that such Restricted Subsidiary ceases to be a
Restricted Subsidiary, or (iii) the designation of a Restricted Subsidiary
that holds Indebtedness of the Company or any other Restricted Subsidiary
as an Unrestricted Subsidiary;
(e) guarantees by any Restricted Subsidiary of Senior Indebtedness of
the Company or of Guarantor Senior Indebtedness of any Guarantor;
(f) Interest Rate Protection Obligations of the Company or any
Restricted Subsidiary relating to Indebtedness of the Company or such
Restricted Subsidiary (which Indebtedness (i) bears interest at fluctuating
interest rates and (ii) is otherwise permitted to be Incurred under this
covenant) and guarantees by the Company or any Restricted Subsidiary of
such Interest Rate Protection Obligations; provided, however, that the
notional principal amount of such Interest Rate Protection Obligations does
not exceed the principal amount of the Indebtedness to which such Interest
Rate Protection Obligations relate;
(g) Purchase Money Indebtedness and Capital Lease Obligations of the
Company or any Restricted Subsidiary that do not exceed $2.0 million in the
aggregate for the Company and all of its Restricted Subsidiaries at any one
time outstanding;
(h) Indebtedness or Disqualified Equity Interests to the extent
representing a replacement, renewal, refinancing or extension
(collectively, a "refinancing") of outstanding Indebtedness or Disqualified
Equity Interests Incurred in compliance with the Debt to Operating Cash
Flow Ratio of the first paragraph of this covenant or subparagraph (a),
(b), (i) or (k) of this paragraph of this covenant; provided, however, that
(i) any such refinancing shall not exceed the sum of the principal amount
(or, if such Indebtedness or Disqualified Equity Interests provide for a
lesser amount to be due and payable upon a declaration of acceleration
thereof at the time of such refinancing, an amount no greater than such
lesser amount) of the Indebtedness or Disqualified Equity Interests being
refinanced, plus the amount of accrued interest or dividends thereon, plus
the amount of any reasonably determined prepayment premium necessary to
accomplish such refinancing and such reasonable fees and expenses incurred
in connection therewith, (ii) Indebtedness representing a refinancing of
Indebtedness (other than Senior Indebtedness and Guarantor Senior
Indebtedness) shall have a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of the Indebtedness
being refinanced, (iii) Indebtedness that is pari passu with the Notes or a
Guaranty may only be refinanced with Indebtedness that is made pari passu
with or subordinate in right of payment to the Notes or such Guaranty, as
applicable, and Subordinated Indebtedness or Disqualified Equity Interests
may only be refinanced with Subordinated Indebtedness or Disqualified
Equity
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Interests, (iv) with respect to any refinancing of Indebtedness Incurred
pursuant to subparagraph (i) or (k) of this paragraph, such refinancing
pursuant to this subparagraph (h) shall also be deemed to be Incurred
pursuant to subparagraph (i) or (k), as the case may be, of this paragraph
(for the avoidance of doubt, the result of which is that a refinancing does
not create new debt Incurrence capacity under such subparagraphs) and (v)
Indebtedness of the Company Incurred under subparagraph (b) or (k) of this
paragraph may only be refinanced with Indebtedness of the Company;
(i) Indebtedness of the Company or any Restricted Subsidiary Incurred
to finance the acquisition of the exclusive right to distribute DirecTv(R)
Services within designated Rural DirecTv Markets; provided, however, that
such Indebtedness shall be Permitted Indebtedness under this subparagraph
(i) in an amount not greater than the face amount of any letter of credit
issued under the Credit Facility to support such Indebtedness, it being
understood that the issuance of such letter of credit constitutes a
reduction in the amount of Permitted Indebtedness available to be Incurred
under subparagraph (c) of this covenant description;
(j) indemnification obligations of the Company or any Restricted
Subsidiary and guarantees thereof under agreements providing for the
disposition of assets or one or more businesses or Restricted Subsidiaries;
provided, however, that such obligations do not exceed at any time the Fair
Market Value of the gross proceeds received by the Company and its
Restricted Subsidiaries for such disposition;
(k) Acquired Indebtedness of any Restricted Subsidiary Incurred upon
the Acquisition of such Restricted Subsidiary or substantially all of its
assets (other than Acquired Indebtedness incurred in connection with or in
anticipation of such Acquisition) and Indebtedness of the Company not to
exceed, in the aggregate, an amount equal to the product of two multiplied
by the sum of the aggregate net proceeds received in cash by the Company
(x) as capital contributions to the Company for which no Equity Interests
were issued after the Issue Date and (y) from the issue and sale (other
than to a Restricted Subsidiary) of its Qualified Equity Interests after
the Issue Date (excluding (i) the net proceeds from any issuance and sale
of Qualified Equity Interests financed, directly or indirectly, using funds
borrowed from the Company or any Restricted Subsidiary until and to the
extent such borrowing is repaid, (ii) any of such net proceeds to the
extent that such proceeds were at any time included in subparagraph (c)(2)
of the first paragraph or clause (ii), (iii) or (iv) of the second
paragraph of "Limitation on Restricted Payments" above based upon such
proceeds and (iii) the net proceeds from any issuance or sale of Qualified
Equity Interests to a seller or its Affiliates in connection with such
Acquisition); and
(l) in addition to the items referred to in subparagraphs (a) through
(k) above, Indebtedness of the Company or any of the Restricted
Subsidiaries (including any Indebtedness under the Credit Facility that
utilizes this subparagraph (l)) or any Restricted Subsidiaries having an
aggregate principal amount for the Company and all of its Restricted
Subsidiaries not to exceed $5.0 million at any time outstanding.
Indebtedness of any Person or any of its Subsidiaries existing at the time
such Person becomes a Restricted Subsidiary (or is merged into or consolidated
with the Company or any Restricted Subsidiary), whether or not such Indebtedness
was incurred in connection with, or in contemplation of, such Person becoming a
Restricted Subsidiary (or being merged into or consolidated with the Company or
any Restricted Subsidiary), shall be deemed Incurred at the time any such Person
becomes a Restricted Subsidiary or merges into or consolidates with the Company
or any Restricted Subsidiary.
Limitations on Dividend and Other Payment Restrictions Affecting Restricted
Subsidiaries. The Company shall not, and shall not cause or permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any encumbrance or restriction on the
ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions to the Company or any other Restricted Subsidiary on its Equity
Interests or with respect to any other interest or participation in, or measured
by, its profits, or pay any Indebtedness owed to the Company or any other
Restricted Subsidiary, (b) make loans or advances to, or guarantee any
Indebtedness or other obligations of, the Company or any other Restricted
Subsidiary, or (c) transfer any of its properties or assets to the Company or
any other Restricted Subsidiary, except for such encumbrances or restrictions
existing under or by reason of (i) the Credit Facility or any other agreement of
the Company or the Restricted Subsidiaries outstanding on the Issue Date, in
each case as in effect
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on the Issue Date, and any amendments, restatements, renewals, replacements or
refinancings thereof; provided, however, that any such amendment, restatement,
renewal, replacement or refinancing is no more restrictive in the aggregate with
respect to such encumbrances or restrictions than those contained in the Credit
Facility on the Issue Date; (ii) applicable law; (iii) any instrument governing
Indebtedness or Equity Interests of an Acquired Person acquired by the Company
or any Restricted Subsidiary as in effect at the time of such acquisition
(except to the extent such Indebtedness was incurred by such Acquired Person in
connection with, as a result of or in contemplation of such acquisition);
provided, however, that such encumbrances and restrictions are not applicable to
the Company or any Restricted Subsidiary, or the properties or assets of the
Company or any Restricted Subsidiary, other than the Acquired Person; (iv)
customary non-assignment provisions in leases entered into in the ordinary
course of business and consistent with past practices and non-assignment
provisions in agreements between the Company or any Restricted Subsidiary and
the NRTC with respect to DBS services; (v) Purchase Money Indebtedness for
property acquired in the ordinary course of business that only imposes
encumbrances and restrictions on the property so acquired; (vi) any agreement
for the sale or disposition of the Equity Interests or assets of any Restricted
Subsidiary; provided, however, that such encumbrances and restrictions described
in this clause (vi) are only applicable to such Restricted Subsidiary or assets,
as applicable, and any such sale or disposition is made in compliance with
"-- Disposition of Proceeds of Asset Sales" below to the extent applicable
thereto; (vii) refinancing Indebtedness permitted under subparagraph (h) of the
second paragraph of "-- Limitation on Indebtedness" above; provided, however,
that the encumbrances and restrictions contained in the agreements governing
such Indebtedness are no more restrictive in the aggregate than those contained
in the agreements governing the Indebtedness being refinanced immediately prior
to such refinancing; (viii) the Indenture; or (ix) any such customary
encumbrance or restriction existing under any other security agreement,
instrument or document hereafter in effect; provided, however, that the terms
and conditions of any such encumbrance or restriction are not more restrictive
than those contained in the Credit Facility as in effect on the Issue Date.
Designation of Unrestricted Subsidiaries. (a) The Company may designate
after the Issue Date any Subsidiary of the Company as an "Unrestricted
Subsidiary" under the Indenture (a "Designation") only if:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of or after giving effect to such Designation;
(ii) at the time of and after giving effect to such Designation, the
Company could Incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) under the Debt to Operating Cash Flow Ratio of the first
paragraph of "-- Limitation on Indebtedness" above; and
(iii) the Company would be permitted to make an Investment (other than
a Permitted Investment) at the time of Designation (assuming the
effectiveness of such Designation) pursuant to the first paragraph of
"-- Limitation on Restricted Payments" above in an amount (the "Designation
Amount") equal to the Fair Market Value of the Company's proportionate
interest in the net worth of such Subsidiary on such date calculated in
accordance with GAAP.
Notwithstanding the above, no Subsidiary of the Company shall be designated
an Unrestricted Subsidiary if such Subsidiary (i) distributes, directly or
indirectly, DirecTv(R) Services or has any right, title or interest in the
revenue or profits in, or holds any Lien in respect of, such distribution or
(ii) conducts, directly or indirectly, the High Power Satellite Transmission
Business or the business of distributing high power DBS services to subscribers,
or has any interest in any such business or the right to receive the income or
profits therefrom.
Neither the Company nor any Restricted Subsidiary shall at any time (x)
provide credit support for, subject any of its property or assets (other than
the Equity Interests of any Unrestricted Subsidiary) to the satisfaction of, or
guarantee, any Indebtedness of any Unrestricted Subsidiary (including any
undertaking, agreement or instrument evidencing such Indebtedness), (y) be
directly or indirectly liable for any Indebtedness of any Unrestricted
Subsidiary, or (z) be directly or indirectly liable for any Indebtedness that
provides that the holder thereof may (upon notice, lapse of time or both)
declare a default thereon or cause the payment thereof to be accelerated or
payable prior to its final scheduled maturity upon the occurrence of a default
with respect to any Indebtedness of any Unrestricted Subsidiary, except, in the
case of clause (x) or (y), to the extent otherwise permitted under the terms of
the Indenture, including, without limitation, pursuant to "-- Limitation on
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Restricted Payments" above and "-- Disposition of Proceeds of Asset Sales"
below, and except for any non-recourse guarantee given solely to support the
pledge by the Company or any Restricted Subsidiary of the Equity Interests of
any Unrestricted Subsidiary.
(b) The Company may revoke any Designation of a Subsidiary as an
Unrestricted Subsidiary (a "Revocation") if:
(i) no Default or Event of Default shall have occurred and be
continuing at the time of and after giving effect to such Revocation; and
(ii) all Liens and Indebtedness of such Unrestricted Subsidiary
outstanding immediately following such Revocation would, if Incurred at
such time, have been permitted to be Incurred for all purposes of the
Indenture.
All Designations and Revocations must be evidenced by resolutions of the
Board of Directors of the Company, delivered to the Trustee certifying
compliance with the foregoing provisions.
Limitation on Liens. The Company shall not, and shall not cause or permit
any Restricted Subsidiary to, directly or indirectly, Incur any Liens of any
kind against or upon any of their respective properties or assets now owned or
hereafter acquired, or any proceeds therefrom or any income or profits
therefrom, to secure any Indebtedness unless contemporaneously therewith
effective provision is made to secure the Notes equally and ratably with such
Indebtedness with a Lien on the same properties and assets securing Indebtedness
for so long as such Indebtedness is secured by such Lien, except for (i) Liens
securing any Senior Indebtedness or any guarantee of Senior Indebtedness by any
Restricted Subsidiary and (ii) Permitted Liens.
Disposition of Proceeds of Asset Sales. (a) The Company shall not, and
shall not cause or permit any Restricted Subsidiary to, directly or indirectly,
make any Asset Sale, unless (i) the Company or such Restricted Subsidiary, as
the case may be, receives consideration at the time of such Asset Sale at least
equal to the Fair Market Value of the assets sold or otherwise disposed of and
(ii) at least 80% of such consideration consists of (A) cash or Cash
Equivalents, (B) properties and capital assets to be used in distributing
DirecTv(R) Services, other services provided by DirecTv or other high-powered
DBS services, or (C) Equity Interests in one or more Persons that thereby become
Restricted Subsidiaries whose assets consist primarily of properties and capital
assets used in distributing DirecTv(R) Services, other services provided by
DirecTv or other high-powered DBS services; provided, however, that if the Fair
Market Value of the assets sold or otherwise disposed of exceeds $25.0 million,
the Company shall be required to obtain the written opinion from an Independent
Financial Advisor (and file such opinion with the Trustee) stating that the
terms of such Asset Sale are fair, from a financial point of view, to the
Company or the Restricted Subsidiary involved in such Asset Sale. The amount of
any (i) Indebtedness (other than any Subordinated Indebtedness) of the Company
or any Restricted Subsidiary that is actually assumed by the transferee in such
Asset Sale and from which the Company and the Restricted Subsidiaries are fully
released shall be deemed to be cash for purposes of determining the percentage
of cash consideration received by the Company or the Restricted Subsidiaries and
(ii) notes or other similar obligations received by the Company or the
Restricted Subsidiaries from such transferee that are immediately converted,
sold or exchanged (or are converted, sold or exchanged within thirty days of the
related Asset Sale) by the Company or the Restricted Subsidiaries into cash
shall be deemed to be cash, in an amount equal to the net cash proceeds realized
upon such conversion, sale or exchange for purposes of determining the
percentage of cash consideration received by the Company or the Restricted
Subsidiaries.
The Company or such Restricted Subsidiary, as the case may be, may (i)
apply the Net Cash Proceeds of any Asset Sale within 365 days of receipt thereof
to repay Senior Indebtedness and permanently reduce any related commitment, (ii)
commit in writing to acquire, construct or improve properties and capital assets
to be used in distributing DirecTv(R) Services, other services provided by
DirecTv or other high-powered DBS services at such time and so apply such Net
Cash Proceeds within 365 days after the receipt thereof, or (iii) apply the Net
Cash Proceeds of any Asset Sale within 365 days after receipt thereof to the
making of any Investment that is permitted to be made under "-- Limitation on
Restricted Payments" above.
To the extent that all or part of the Net Cash Proceeds of any Asset Sale
are not applied within 365 days of such Asset Sale as described in clause (i),
(ii) or (iii) of the immediately preceding paragraph (such Net Cash
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Proceeds, the "Unutilized Net Cash Proceeds"), the Company shall, within 20 days
after such 365th day, make an Offer to Purchase all outstanding Notes up to a
maximum principal amount of Notes equal to the Securities Portion of Unutilized
Net Cash Proceeds, at a purchase price in cash equal to 100% of the principal
amount of Notes, plus accrued and unpaid interest (including Additional
Interest, if any) thereon, if any, to the Purchase Date; provided, however, that
the Offer to Purchase may be deferred until there are aggregate Unutilized Net
Cash Proceeds equal to or in excess of $5.0 million, at which time the entire
amount of such Unutilized Net Cash Proceeds, and not just the amount in excess
of $5.0 million, shall be applied as required pursuant to this paragraph.
In the event that any other Indebtedness of the Company or any Restricted
Subsidiary that ranks pari passu with the Notes or any Guaranty requires that an
offer to purchase be made to repurchase such Indebtedness upon the consummation
of any Asset Sale (the "Other Indebtedness"), the Company may apply the
Unutilized Net Cash Proceeds otherwise required to be applied to an Offer to
Purchase to an offer to purchase such Other Indebtedness and to an Offer to
Purchase so long as the amount of such Unutilized Net Cash Proceeds applied to
repurchase the Notes is not less than the Securities Portion of Unutilized Net
Cash Proceeds. With respect to any Unutilized Net Cash Proceeds, the Company
shall make the Offer to Purchase in respect thereof at the same time as the
analogous offer to purchase is made under any Other Indebtedness and the
Purchase Date in respect thereof shall be the same under the Indenture as the
purchase date in respect thereof pursuant to any Other Indebtedness.
For purposes of this covenant, "Securities Portion of Unutilized Net Cash
Proceeds" means the amount of the Unutilized Net Cash Proceeds equal to the
product of (x) the Unutilized Net Cash Proceeds and (y) a fraction the numerator
of which is the principal amount of all Notes tendered pursuant to the Offer to
Purchase related to such Unutilized Net Cash Proceeds (the "Securities Amount")
and the denominator of which is the sum of the Securities Amount and the lesser
of the aggregate principal face amount or accreted value as of the relevant
purchase date of all Other Indebtedness tendered pursuant to a concurrent offer
to purchase such Other Indebtedness made at the time of such Offer to Purchase.
With respect to any Offer to Purchase effected pursuant to this covenant,
to the extent that the principal amount of the Notes tendered pursuant to such
Offer to Purchase exceeds the Securities Portion of Unutilized Net Cash Proceeds
to be applied to the repurchase thereof, such Notes shall be purchased pro rata
based on the principal amount of such Notes tendered by each Holder.
In the event that the Issuers make an Offer to Purchase the Notes, the
Issuers shall comply with any applicable securities laws and regulations,
including any applicable requirements of Section 14(e) of, and Rule 14e-1 under,
the Exchange Act, and any violation of the provisions of the Indenture relating
to such Offer to Purchase occurring as a result of such compliance shall not be
deemed an Event of Default or an event that with the passing of time or giving
of notice, or both, would constitute an Event of Default.
(b) Each Holder shall be entitled to tender all or any portion of the Notes
owned by such Holder pursuant to the Offer to Purchase, subject to the
requirement that any portion of a Note tendered must be tendered in an integral
multiple of $1,000 principal face amount and subject to any proration among
tendering Holders as described above.
Limitations on Conduct of Business of Capital and the Company. Capital
will not hold any operating assets or other properties or conduct any business
other than to serve as an Issuer and co-obligor with respect to the Notes and
will not own any Equity Interests of any Person to the extent that such
ownership would cause such Person to be deemed a Subsidiary of Capital.
The Company shall not, and shall not permit any of its Restricted
Subsidiaries to, enter into any business, either directly or through any
Subsidiary, except for those businesses in which the Company and its Restricted
Subsidiaries were engaged on the Issue Date or businesses reasonably related
thereto.
Merger, Sale of Assets, Etc. No Issuer shall consolidate with or merge
with or into (whether or not such Issuer is the Surviving Person) any other
entity and the Company shall not and shall not cause or permit any Restricted
Subsidiary to, sell, convey, assign, transfer, lease or otherwise dispose of all
or substantially all of the Company's properties and assets (determined on a
consolidated basis for the Company and the Restricted Subsidiaries) to any
entity in a single transaction or series of related transactions, unless: (i)
either (x) such Issuer
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shall be the Surviving Person or (y) the Surviving Person (if other than such
Issuer) shall be, in the case of Capital, a corporation, or in any other case, a
corporation, partnership or limited liability company organized and validly
existing under the laws of the United States of America or any State thereof or
the District of Columbia, and shall, in any such case, expressly assume by a
supplemental indenture, the due and punctual payment of the principal of,
premium, if any, and interest on all the Notes and the performance and
observance of every covenant of the Indenture, the Interest Escrow Agreement,
the Security Agreement and the Registration Rights Agreement to be performed or
observed on the part of the Issuers; (ii) immediately thereafter, no Default or
Event of Default shall have occurred and be continuing; and (iii) immediately
after giving effect to any such transaction involving the Incurrence by the
Company or any Restricted Subsidiary, directly or indirectly, of additional
Indebtedness (and treating any Indebtedness not previously an obligation of the
Company or any Restricted Subsidiary in connection with or as a result of such
transaction as having been Incurred at the time of such transaction), the
Surviving Person could Incur, on a pro forma basis after giving effect to such
transaction as if it had occurred at the beginning of the latest fiscal quarter
for which consolidated financial statements of the Company are available, at
least $1.00 of additional Indebtedness (other than Permitted Indebtedness) under
the Debt to Operating Cash Flow Ratio of the first paragraph of "-- Limitation
on Indebtedness" above; (iv) the Issuers have delivered to the Trustee an
opinion of counsel to the effect that the holders of the Notes will not
recognize gain or loss for federal income tax purposes as a result of such
transaction; and (v) immediately thereafter the Surviving Person shall have a
Consolidated Net Worth equal to or greater than the Consolidated Net Worth of
such Issuer immediately prior to such transaction.
Notwithstanding the foregoing, Capital may merge into the Company upon or
at any time following a Corporate Conversion, and clauses (iii), (iv) and (v) in
the preceding paragraph shall not apply in the case of a merger by the Company
if (a) the Company is the Surviving Person, (b) the consideration issued or paid
by the Company in such merger consists solely of Qualified Equity Interests of
the Company, and (c) immediately after giving effect to such merger, (i) if the
Debt to Operating Cash Flow Ratio immediately before such merger is positive,
the Debt to Operating Cash Flow Ratio immediately after such merger does not
exceed such ratio immediately prior to such merger (giving pro forma effect to
the merger as described in clause (iii) of the preceding paragraph) or (ii) if
the Debt to Operating Cash Flow Ratio immediately before such merger is
negative, the Company shall have Consolidated Net Worth immediately after such
merger equal to or greater than the Consolidated Net Worth of the Company
immediately prior to such merger.
For purposes of the foregoing, the transfer (by lease, assignment, sale or
otherwise, in a single transaction or series of transactions) of all or
substantially all the properties and assets of one or more Restricted
Subsidiaries the Equity Interest of which constitutes all or substantially all
the properties and assets of the Company shall be deemed to be the transfer of
all or substantially all the properties and assets of the Company.
Subject to the requirements of the immediately preceding paragraph, in the
event of a sale of all or substantially all of the assets of any Guarantor or
all of the Equity Interests of any Guarantor, by way of merger, consolidation or
otherwise, then the Surviving Person of any such merger or consolidation, or
such Guarantor, if all of its Equity Interests are sold, shall be released and
relieved of any and all obligations under the Guaranty of such Guarantor if (i)
the Person or entity surviving such merger or consolidation or acquiring the
Equity Interests of such Guarantor is not a Restricted Subsidiary, and (ii) the
Net Cash Proceeds from such sale are used after such sale in a manner that
complies with the provisions of "-- Covenants -- Disposition of Proceeds of
Asset Sales" above. Except as provided in the preceding sentence, no Guarantor
shall consolidate with or merge with or into another Person, whether or not such
Person is affiliated with such Guarantor and whether or not such Guarantor is
the Surviving Person, unless (i) the Surviving Person is a corporation,
partnership or limited liability company organized and validly existing under
the laws of the United States, any State thereof or the District of Columbia,
(ii) the Surviving Person (if other than such Guarantor) assumes all the
Obligations of such Guarantor under the Notes, the Indenture and the
Registration Rights Agreement pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee, (iii) at the time of and immediately
after such Disposition, no Default or Event of Default shall have occurred and
be continuing, and (iv) the Surviving Person will have Consolidated Net Worth
(immediately after giving pro forma effect to the Disposition) equal to or
greater than the Consolidated Net Worth of such Guarantor immediately preceding
the transaction; provided, however, that clause (iv) of this
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paragraph shall not be a condition to a merger or consolidation of a Guarantor
if such merger or consolidation only involves the Company and/or one or more
Wholly Owned Restricted Subsidiaries.
In the event of any transaction (other than a lease) described in and
complying with the conditions listed above in which an Issuer, or any Guarantor,
that is a party to such transaction is not the Surviving Person and the
Surviving Person is to assume all of the Obligations of such Issuer or any such
Guarantor under the Notes, the Indenture and the Registration Rights Agreement
pursuant to a supplemental indenture, such Surviving Person shall succeed to,
and be substituted for, and may exercise every right and power of, such Issuer
or any such Guarantor, as applicable, and such Issuer or such Guarantor, as
applicable, shall be discharged from its Obligations under the Indenture, the
Notes and the Guaranty, as applicable.
The meaning of the phrase "all or substantially all" as used above varies
according to the facts and circumstances of the subject transaction, has no
clearly established meaning under relevant law and is subject to judicial
interpretation. Accordingly, in certain circumstances, there may be a degree of
uncertainty in ascertaining whether a particular transaction would involve a
disposition of "all or substantially all" of the assets of the Company, and
therefore it may be unclear whether the foregoing provisions are applicable.
Transactions With Affiliates. The Company shall not, and shall not cause
or permit any Restricted Subsidiary to, directly or indirectly, conduct any
business or enter into any transaction (or series of related transactions) with
or for the benefit of any of their respective Affiliates or any direct or
indirect beneficial holder of 10% or more of the Equity Interests of the Company
or any officer, director or employee of the Company or any Restricted Subsidiary
(each an "Affiliate Transaction"), unless such Affiliate Transaction is on terms
that are no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than would be available in a comparable transaction with an
unaffiliated third party. If such Affiliate Transaction (or series of related
Affiliate Transactions) involves aggregate payments or other consideration
having a Fair Market Value in excess of $5.0 million, the Company shall not, and
shall not cause or permit any Restricted Subsidiary to, enter into such
Affiliate Transaction, unless a majority of the disinterested members of the
Board of Directors of the Company shall have approved such Affiliate Transaction
and determined that such Affiliate Transaction complies with the foregoing
provisions; provided, however, that if such Affiliate Transaction is in the
ordinary course of business consistent with the past practice of any business of
the Company or a Restricted Subsidiary, then there shall be no need to comply
with this sentence. In the event that the Company obtains a written opinion from
an Independent Financial Advisor (and files the same with the Trustee) stating
that the terms of an Affiliate Transaction are fair, from a financial point of
view, to the Company or the Restricted Subsidiary involved in such Affiliate
Transaction, as the case may be, such opinion will conclusively meet the
requirements of the first sentence of this paragraph and there shall be no need
to comply with the second sentence of this paragraph.
Notwithstanding the foregoing, the restrictions set forth in this covenant
shall not apply to (i) transactions with or among the Company and any Restricted
Subsidiary or between or among Restricted Subsidiaries; (ii) customary
directors' fees, indemnification and similar arrangements, consulting fees,
employee salaries, bonuses or employment agreements, compensation or employee
benefit arrangements and incentive arrangements with any officer, director or
employee of the Company entered into in the ordinary course of business
(including customary benefits thereunder) and payments under any indemnification
arrangements permitted by applicable law; (iii) any transactions undertaken
pursuant to any other contractual obligations in existence on the Issue Date (as
in effect on the Issue Date); (iv) any Restricted Payments made in compliance
with "-- Limitation on Restricted Payments" above; (v) loans and advances to
officers, directors and employees of the Company and the Restricted Subsidiaries
for travel, entertainment, moving and other relocation expenses, in each case
made in the ordinary course of business and consistent with past business
practices; (vi) the Incurrence of intercompany Indebtedness permitted pursuant
to clause (d) of the second paragraph of "-- Limitation on Indebtedness" above;
(vii) the pledge of Equity Interests of Unrestricted Subsidiaries to support the
Indebtedness thereof; and (viii) the issuance and sale by the Company of
Qualified Equity Interests.
Provision of Financial Information. Whether or not the Company is subject
to Section 13(a) or 15(d) of the Exchange Act, or any successor provision
thereto, the Company shall file with the SEC (if permitted by SEC practice and
applicable law and regulations) the annual reports, quarterly reports and other
documents that the Company would have been required to file with the SEC
pursuant to such Section 13(a) or 15(d) or any successor
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provision thereto if the Company were so subject, such documents to be filed
with the SEC on or prior to the respective dates (the "Required Filing Dates")
by which the Company would have been required so to file such documents if the
Company were so subject. The Company shall also in any event (a) within 15 days
of each Required Filing Date (whether or not permitted or required to be filed
with the SEC) (i) transmit (or cause to be transmitted) by mail to all Holders,
as their names and addresses appear in the Note Register, without cost to such
Holders, and (ii) file with the Trustee, copies of the annual reports, quarterly
reports and other documents that the Company is required to file with the SEC
pursuant to the preceding sentence, or, if such filing is not so permitted,
information and data of a similar nature, and (b) if, notwithstanding the
preceding sentence, filing such documents by the Company with the SEC is not
permitted by SEC practice or applicable law or regulations, promptly upon
written request supply copies of such documents to any Holder. In addition, for
so long as any Notes remain outstanding, the Company will furnish to the Holders
and to securities analysts and prospective investors, upon their request, the
information required to be delivered pursuant to Rule 144A(d)(4) under the
Securities Act, and, to any beneficial holder of Notes, if not obtainable from
the SEC, information of the type that would be filed with the SEC pursuant to
the foregoing provisions, upon the request of any such holder.
Payments for Consent. None of the Issuers or any of the Company's
Subsidiaries shall, directly or indirectly, pay or cause to be paid any
consideration, whether by way of interest, fee, or otherwise, to any Holder of a
Note for or as an inducement to any consent, waiver, or amendment of any of the
terms or provisions of the Indenture or the Notes unless such consideration is
offered to be paid or agreed to be paid to all Holders of the Notes that
consent, waive, or agree to amend in the time frame set forth in the
solicitation documents relating to such consent, waiver, or agreement.
EVENTS OF DEFAULT
The occurrence of any of the following will be defined as an "Event of
Default" under the Indenture: (a) failure to pay principal of (or premium, if
any, on) any Note when due (whether or not prohibited by the provisions of the
Indenture described under "-- Subordination of the Notes and the Guaranties"
above); (b) failure to pay any interest on any Note when due, continued for 30
days or more (whether or not prohibited by the provisions of the Indenture
described under "-- Subordination of the Notes and the Guaranties" above); (c)
default in the payment of principal of or interest on Notes required to be
purchased pursuant to any Offer to Purchase required by the Indenture when due
and payable or failure to pay on the Purchase Date the Purchase Price for any
Note validly tendered pursuant to any Offer to Purchase (whether or not
prohibited by the provisions of the Indenture described under "-- Subordination
of the Notes and the Guaranties" above); (d) failure to perform or comply with
any of the provisions described under "-- Certain Covenants -- Merger, Sale of
Assets, Etc." above, failure to comply with certain obligations with respect to
the Interest Escrow Account, including failure to deposit the funds required to
be deposited therein, or failure to comply with any of the provisions of the
Interest Escrow Agreement or the Security Agreement; (e) failure to perform any
other covenant, warranty or agreement of an Issuer or the Guarantors under the
Indenture or in the Notes continued for 30 days or more after written notice to
the Issuers by the Trustee or Holders of at least 25% of the aggregate principal
amount of the Notes under the Indenture; (f) default or defaults under the terms
of one or more instruments evidencing or securing Indebtedness of an Issuer or
any of the Company's Significant Restricted Subsidiaries having an outstanding
principal amount of $5.0 million or more individually or in the aggregate that
has resulted in the acceleration of the payment of such Indebtedness; provided,
however, that it shall not be an Event of Default if such Indebtedness shall
have been repaid in full or such acceleration shall have been rescinded within
20 days; (g) the rendering of a final judgment or judgments (not subject to
appeal) against an Issuer or any of the Company's Significant Restricted
Subsidiaries in an amount of $2.0 million or more (net of any amounts covered by
reputable and creditworthy insurance companies) that remains undischarged or
unstayed for a period of 60 days after the date on which the right to appeal has
expired; (h) certain events of bankruptcy, insolvency or reorganization
affecting an Issuer or any of the Company's Significant Restricted Subsidiaries;
and (i) any Guaranty of a Guarantor shall be held in a judicial proceeding to be
unenforceable or invalid or shall cease for any reason to be in full force and
effect, or any Guarantor, or any Person acting on behalf of any Guarantor, shall
deny or disaffirm its obligations under its Guaranty. Subject to the provisions
of the Indenture relating to the duties of the Trustee, in case an Event of
Default shall occur and be continuing, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request or
direction of any of the
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Holders of Notes, unless such Holders shall have offered to the Trustee
reasonable indemnity. Subject to such provisions for the indemnification of the
Trustee, the Holders of a majority in aggregate principal amount of the Notes
will have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee or exercising any trust or
power conferred on the Trustee.
If an Event of Default with respect to the Notes (other than an Event of
Default with respect to the Company described in clause (h) of the preceding
paragraph) occurs and is continuing, the Trustee or the Holders of at least 25%
in aggregate principal amount of the outstanding Notes by notice in writing to
the Company may declare the unpaid principal of (and premium, if any) and
accrued interest to the date of acceleration on all the outstanding Notes to be
due and payable immediately and, upon any such declaration, such principal
amount (and premium, if any) and accrued interest, notwithstanding anything
contained in the Indenture or the Notes to the contrary, but subject to the
provisions limiting payment described above under "-- Subordination of the Notes
and the Guaranties," will become immediately due and payable; provided, however,
that so long as the Credit Facility shall be in full force and effect, if an
Event of Default shall have occurred and be continuing (other than an Event of
Default with respect to the Company described in clause (h) of the preceding
paragraph), the Notes shall not become due and payable until the earlier to
occur of (x) five Business Days following delivery of written notice of such
acceleration of the Notes to the agent under the Credit Facility and (y) the
acceleration (as a result thereof or otherwise) of any Indebtedness under the
Credit Facility. If an Event or Default specified in clause (h) of the preceding
paragraph with respect to an Issuer occurs under the Indenture, the outstanding
Notes will as a result become immediately due and payable without any
declaration or other act on the part of the Trustee or any Holder of the Notes.
Any such declaration with respect to the Notes may be annulled as to past
Events of Default and Defaults (except, unless theretofore cured, an Event of
Default or a Default in payment of principal of (and premium, if any) or
interest on the Notes) upon the conditions provided in the Indenture. For
information as to waiver of defaults, see "-- Modification and Waiver" below.
The Indenture provides that the Trustee shall, within 30 days after the
occurrence of any Default or Event of Default with respect to the outstanding
Notes, give the Holders of the Notes notice of all uncured Defaults or Events of
Default known to it; provided, however, that, except in the case of an Event of
Default in payment with respect to such Notes or a Default or Event of Default
in complying with "-- Certain Covenants -- Merger, Sale of Assets, Etc." above,
the Trustee shall be protected in withholding such notice if and so long as a
committee of its trust officers in good faith determines that the withholding of
such notice is in the interest of the Holders of the Notes.
No Holder of any Note will have any right to institute any proceeding with
respect to the Indenture or for any remedy thereunder, unless such Holder shall
have previously given to the Trustee written notice of a continuing Event of
Default thereunder and unless the Holders of at least 25% of the aggregate
principal amount of the outstanding Notes under the Indenture shall have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee, and the Trustee shall have not received from the
Holders of a majority in aggregate principal amount of outstanding Notes a
direction inconsistent with such request and shall have failed to institute such
proceeding within 60 days. However, such limitations do not apply to a suit
instituted by a Holder of a Note for enforcement of payment of the principal of
and premium, if any, or interest on such Note on or after the respective due
dates expressed in such Note.
The Company will be required to furnish to the Trustee annually a statement
as to the performance by it of certain of its obligations under the Indenture
and as to any default in such performance.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES, INCORPORATOR AND
STOCKHOLDERS
No director, officer, employee, incorporator, manager or stockholder of the
Issuers or any of their Affiliates, as such, shall have any liability for any
obligations of the Issuers or any of their Affiliates under the Notes or the
Indenture or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder
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of Notes by accepting a Note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the Notes.
SATISFACTION AND DISCHARGE OF INDENTURE; LEGAL DEFEASANCE AND COVENANT
DEFEASANCE
The Issuers may terminate their and the Guarantors' substantive obligations
in respect of the Notes by delivering all outstanding Notes to the Trustee for
cancellation and paying all sums payable by them on account of principal of,
premium, if any, and interest on all Notes or otherwise. In addition to the
foregoing, the Issuers may, at their option and at any time, elect to have all
obligations discharged with respect to the outstanding Notes ("Legal
Defeasance"). Such Legal Defeasance means that the Issuers will be deemed to
have paid and discharged the entire indebtedness represented by the outstanding
Notes, except for: (a) the rights of holders of outstanding Notes to receive
payments in respect of the principal of, premium, if any, and interest on the
Notes when such payments are due, or on the redemption date, as the case may be;
(b) the Issuers' obligations with respect to the Notes concerning issuing
temporary Notes, registration of Notes, mutilated, destroyed, lost or stolen
Notes and the maintenance of an office or agency for payment and money for
security payments held in trust; (c) the rights, powers, trust, duties and
immunities of the Trustee, and the Issuers' obligations in connection therewith;
and (d) the Legal Defeasance provisions of the Indenture. In addition, the
Issuer may, at its option and at any time, elect to have all obligations
released with respect to certain covenants that are described in the Indenture
("Covenant Defeasance") and thereafter any omission to comply with such
obligations shall not constitute a Default or Event of Default with respect to
the Notes. In the event Covenant Defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) described under "-- Events of Default" will no longer constitute an
Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance: (i)
the Issuers must irrevocably deposit with the Trustee, in trust, for the benefit
of the holders of the Notes, cash in U.S. dollars, non-callable Government
Obligations, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants
selected by the Trustee, to pay the principal of, premium, if any, and interest
on the outstanding Notes on the stated maturity or on the applicable optional
redemption date, as the case may be; (ii) in the case of Legal Defeasance, the
Issuers shall have delivered to the Trustee an Opinion of Counsel confirming
that (A) the Issuers have received from, or there has been published by the
Internal Revenue Service, a ruling or (B) since the date of the Indenture, there
has been a change in the applicable Federal income tax law, in each case to the
effect that, and based thereon such opinion of counsel shall confirm that, the
holders of such Notes will not recognize income, gain or loss for Federal income
tax purposes as a result of such Legal Defeasance, and will be subject to
Federal income tax in the same amount, in the same manner and at the same times
as would have been the case if such Legal Defeasance had not occurred; (iii) in
the case of Covenant Defeasance, the Issuers shall have delivered to the Trustee
an Opinion of Counsel confirming that the holders of such Notes will not
recognize income, gain or loss for Federal income tax purposes as a result of
such Covenant Defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (iv) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (v) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other material
agreement or instrument to which the Issuers or any Restricted Subsidiary is a
party; (vi) the Issuers shall have delivered to the Trustee an Officers'
Certificate stating that the deposit was not made by the Issuers with the intent
of preferring the holders of such Notes over any other creditors of the Issuers
or with the intent of defeating, hindering, delaying or defrauding any other
creditors of the Issuers or others; and (vii) the Issuers shall have delivered
to the Trustee an Officers' Certificate stating that all conditions precedent
provided for or relating to the Legal Defeasance or the Covenant Defeasance have
been complied with.
The Issuers may make an irrevocable deposit pursuant to this provision
pursuant to the Indenture only if at such time they are not prohibited from
doing so under the subordination provisions of the Indenture or certain
covenants in the Senior Indebtedness and the Issuers have delivered to the
Trustee and any Paying Agent an Officers' Certificate to that effect.
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GOVERNING LAW
The Indenture and the Notes will be governed by the laws of the State of
New York without regard to principles of conflicts of laws.
MODIFICATION AND WAIVER
From time to time the Issuers, when authorized by resolutions of the
Company's Board, and the Trustee, without the consent of the holders of the
Notes, may amend, waive or supplement the Indenture, Notes or Security Agreement
for certain specified purposes, including among other things, curing
ambiguities, defects or inconsistencies, maintaining the qualification of the
Indenture under the TIA or making any change that does not adversely affect the
rights of any holder. Modifications and amendments of the Indenture, Notes or
Security Agreement may be made by the Issuers, the Guarantors and the Trustee
with the consent of the Holders of a majority in aggregate principal amount of
the outstanding Notes (including consents obtained in connection with a tender
offer or exchange offer for the Notes); provided, however, that no such
modification or amendment to the Indenture may, without the consent of the
Holder of each Note affected thereby, (a) change the maturity of the principal
of or any installment of interest on any such Note or alter the optional
redemption or repurchase provisions of any such Note or the Indenture in a
manner adverse to the Holders of such Notes; (b) reduce the principal amount of
(or the premium) of any such Note; (c) reduce the rate of or extend the time for
payment of interest on any such Note; (d) change the place or currency of
payment of principal of (or premium, if any) or interest on any such Note; (e)
modify any provisions of the Indenture relating to the waiver of past defaults
(other than to add sections of the Indenture or such Notes) or the right of the
Holders of outstanding Notes to institute suit for the enforcement of any
payment on or with respect to any Note in respect thereof or the modification
and amendment provisions of the Indenture and the Notes (other than to add
sections of the Indenture or the Notes which may not be amended, supplemented or
waived without the consent of each Holder herein affected); (f) reduce the
percentage of the principal amount of outstanding Notes necessary for amendment
to or waiver of compliance with any provision of the Indenture or the
outstanding Notes or for waiver of any Default; (g) waive a default in the
payment of principal of, interest on, or redemption payment with respect to,
such Note (except a rescission of acceleration of the Notes by the Holders as
provided in the Indenture and a waiver of the payment default that resulted from
such acceleration); (h) modify the ranking or priority of any Note or the
Guaranty of any Guarantor or modify the definition of Senior Indebtedness or
Guarantor Senior Indebtedness or amend or modify the subordination provisions of
the Indenture in any manner adverse to the Holders of the Notes; (i) release any
Guarantor from any of its obligations under its Guaranty or the Indenture
otherwise than in accordance with the Indenture; (j) modify the provisions of
any covenant (or the related definitions) in the Indenture requiring the Issuers
to make an Offer to Purchase in a manner materially adverse to the Holders of
Notes affected thereby; or (k) release any of the Collateral from the lien
created by the Security Agreement prior to the time specified therein.
The Holders of a majority in aggregate principal amount of the outstanding
Notes, on behalf of all Holders of Notes, may waive compliance by the Issuers
with certain restrictive provisions of the Indenture. Subject to certain rights
of the Trustee, as provided in the Indenture, the Holders of a majority in
aggregate principal amount of the Notes, on behalf of all Holders of Notes, may
waive any past default under the Indenture (including any such waiver obtained
in connection with a tender offer or exchange offer for the Notes), except a
default in the payment of principal, premium or interest or a default arising
from failure to purchase any Notes tendered pursuant to an Offer to Purchase
pursuant thereto, or a default in respect of a provision that under the
Indenture cannot be modified or amended without the consent of the Holder of
each outstanding Note that is affected.
THE TRUSTEE
Except during the continuance of a Default, the Trustee will perform only
such duties as are specifically set forth in the Indenture. During the existence
of a Default under the Indenture, the Trustee will exercise such rights and
powers vested in it under the Indenture and use the same degree of care and
skill in such exercise as a prudent person would exercise under the
circumstances in the conduct of such person's own affairs.
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The Indenture and provisions of the Trust Indenture Act incorporated by
reference therein contain limitations on the rights of the Trustee, if it
becomes a creditor of the Issuers, any Guarantor or any other obligor upon the
Notes, to obtain payment of claims in certain cases or to realize on certain
property received by it in respect of any such claim as security or otherwise.
The Trustee is permitted to engage in other transactions with the Company or an
Affiliate of the Issuers; provided, however, that if it acquires any interest
which would be deemed to be a conflicting interest under the terms of the
Indenture or the Trust Indenture Act, it must eliminate such conflict or resign.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Acquisition from such Person or (b) existing at the time such
Person becomes a Restricted Subsidiary or is merged or consolidated with or into
the Company or any Restricted Subsidiary.
"Acquired Person" means, with respect to any specified Person, any other
Person that merges with or into or becomes a Subsidiary of such specified
Person.
"Acquisition" means (i) any capital contribution (by means of transfers of
cash or other property to others or payments for property or services for the
account or use of others, or otherwise) by the Company or any Restricted
Subsidiary to any other Person, or any acquisition or purchase of Equity
Interests of any other Person by the Company or any Restricted Subsidiary, in
either case pursuant to which such Person shall become a Restricted Subsidiary
or shall be consolidated or merged with or into the Company or any Restricted
Subsidiary or (ii) any acquisition by the Company or any Restricted Subsidiary
of the assets of any Person which constitute substantially all of an operating
unit or line of business of such Person or which is otherwise outside of the
ordinary course of business.
"Additional Interest" has the meaning provided in Section 4(a) of the
Registration Rights Agreement.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided, however,
that (i) beneficial ownership of 10.0% or more of the voting power of the then
outstanding voting securities of a Person shall be deemed to be control; and
(ii) no individual, other than a manager or director of the Company or an
officer of the Company with a policy making function, shall be deemed an
Affiliate of the Company or any of the Company's Subsidiaries, solely by reason
of such individual's employment, position or responsibilities by or with respect
to the Company or any of the Company's Subsidiaries.
"Asset Sale" means any direct or indirect sale, conveyance, transfer, lease
(that has the effect of a disposition) or other disposition (including, without
limitation, any merger, consolidation or sale-leaseback transaction) to any
Person other than the Company or a Wholly Owned Restricted Subsidiary, in one
transaction or a series of related transactions, of (i) any Equity Interest of
any Restricted Subsidiary; (ii) any material license, franchise or other
authorization of the Company or any Restricted Subsidiary; (iii) any assets of
the Company or any Restricted Subsidiary that constitute substantially all of an
operating unit or line of business of the Company or any Restricted Subsidiary;
or (iv) any other property or asset of the Company or any Restricted Subsidiary
outside of the ordinary course of business (including the receipt of proceeds
paid on account of the loss of or damage to any property or asset and awards of
compensation for any asset taken by condemnation, eminent domain or similar
proceedings). The term "Asset Sale" shall not include (a) any transaction
consummated in compliance with "-- Certain Covenants -- Merger, Sale of Assets,
Etc." above and the creation of any Lien not prohibited by "-- Certain
Covenants -- Limitation on Liens" above; provided, however, that any transaction
consummated in compliance with "-- Certain Covenants -- Merger, Sale of Assets,
Etc.", above involving a
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sale, conveyance, assignment, transfer, lease or other disposal of less than all
of the properties or assets of the Company and the Restricted Subsidiaries shall
be deemed to be an Asset Sale with respect to the properties or assets of the
Company and Restricted Subsidiaries that are not so sold, conveyed, assigned,
transferred, leased or otherwise disposed of in such transaction; (b) sales of
property or equipment that has become worn out, obsolete or damaged or otherwise
unsuitable for use in connection with the business of the Company or any
Restricted Subsidiary, as the case may be; (c) any transaction consummated in
compliance with "-- Certain Covenants -- Limitation on Restricted Payments"
above; and (d) sales of accounts receivable for cash at fair market value. In
addition, solely for purposes of "-- Certain Covenants -- Disposition of
Proceeds of Asset Sales" above, any sale, conveyance, transfer, lease or other
disposition of any property or asset, whether in one transaction or a series of
related transactions, involving assets with a Fair Market Value not in excess of
$500,000, and not in the aggregate, together with all other such sales,
conveyances, transfers, leases or dispositions after the Issue Date, exceeding
$2.0 million shall be deemed not to be an Asset Sale.
"Board of Directors" means (i) in the case of a Person that is a
corporation, the board of directors of such Person and (ii) in the case of any
other Person, the board of directors, board of managers, management committee or
similar governing body of such Person (or in the case of a limited partnership,
of such Person's general partner, or in the case of a limited liability company,
of such Person's manager), or any authorized committee thereof responsible for
the management of the business and affairs of such Person.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be so required to be capitalized on the balance sheet in accordance
with GAAP.
"Cash Equivalents" means: (a) U.S. dollars; (b) securities issued or
directly and fully guaranteed or insured by the U.S. government or any agency or
instrumentality thereof having maturities of not more than six months from the
date of acquisition; (c) certificates of deposit and eurodollar time deposits
with maturities of six months or less from the date of acquisition, bankers'
acceptances with maturities not exceeding six months and overnight bank
deposits, in each case with any domestic commercial bank having capital and
surplus in excess of $500 million; (d) repurchase obligations with a term of not
more than seven days for underlying securities of the types described in clauses
(b) and (c) entered into with any financial institution meeting the
qualifications specified in clause (c) above; and (e) commercial paper rated
P-1, A-1 or the equivalent thereof by Moody's Investors Service, Inc. or
Standard & Poor's, respectively, and in each case maturing within six months
after the date of acquisition.
"Change of Control" shall mean the occurrence of any of the following
events (whether or not approved by the Board of Directors of the Company): (a)
any "person" or "group" (as such terms are used in Section 13(d) and 14(d) of
the Exchange Act or any successor provision to either of the foregoing,
including any group acting for the purpose of acquiring, holding or disposing of
securities within the meaning of Rule 13d-5(b)(1) under the Exchange Act),
excluding Permitted Holders, is or becomes the "beneficial owner" (as defined in
Rules 13d-3 and 13d-5 under the Exchange Act, except that a Person shall be
deemed to have "beneficial ownership" of all securities that such Person has the
right to acquire, whether such right is exercisable immediately or only after
the passage of time upon the happening of an event or otherwise), directly or
indirectly, of more than 45% of the total voting power of the then outstanding
Equity Interests of the Company; (b) during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new members of the Board of
Directors whose election by the Board of Directors of the Company or whose
nomination for election by the members or stockholders of the Company was
approved by a vote of at least a majority of the members of the Board of
Directors then still in office who were either such members at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason (other than by action of the Permitted Holders)
to constitute a majority of the Board of Directors of the Company then in
office; or (c) the liquidation or dissolution of the Company; provided, however,
that a Corporate Conversion shall not be a Change of Control except that, in
such case, the surviving corporation in such Corporate Conversion shall be
substituted for the Company for purposes of clauses (a) and (b) of this
paragraph; provided further, that a Change of Control will be deemed not to
occur pursuant to clauses (a) or (b) above if either (x) the acquiring "person"
is a corporation engaged in the telecommunications business with outstanding
senior, unsecured corporate debt securities having a maturity at original
issuance of at least one
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year and such debt securities are rated Investment Grade (without giving effect
to any third-party credit support or enhancement) by Standard & Poor's or
Moody's Investors Service, Inc. for a period of at least 90 consecutive days,
beginning on the date of such event (which period will be extended up to 90
additional days for as long as the rating of such debt securities is under
publicly announced consideration for possible downgrading by the applicable
rating agency), or (y) in the event that the acquiring "person" is a corporation
that either (1) does not have any outstanding senior, unsecured corporate debt
securities that are rated by Standard & Poor's or Moody's Investors Service,
Inc. at any time during a period of 90 consecutive days beginning on the date of
such event (which period will be extended up to an additional 90 days for as
long as any such rating agency has publicly announced that such debt securities
will be rated), or (2) after the date of such event but during such 90 day
period, has outstanding senior, unsecured corporate debt securities having a
maturity at original issuance of at least one year that have been rated
Investment Grade (without giving effect to any third-party credit support or
enhancement) by Standard & Poor's or Moody's Investors Service, Inc. which
rating continues in effect for the remainder of the period specified in clause
(x) above, the Notes shall be rated Investment Grade immediately upon such
Change of Control.
"Change of Control Date" has the meaning set forth under "-- Offer to
Purchase Upon Change of Control" above.
"Collateral" means all of the assets in which the Issuers have granted a
security interest pursuant to the Security Agreement.
"Consolidated Income Tax Expense" means, with respect to the Company for
any period, the provision for federal, state, local and foreign income taxes
payable by the Company and the Restricted Subsidiaries for such period as
determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, with respect to the Company for any
period, without duplication, the sum of (i) the interest expense of the Company
and the Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP, including, without limitation, (a) any
amortization of debt discount; (b) the net cost under Interest Rate Protection
Obligations (including any amortization of discounts); (c) the interest portion
of any deferred payment obligation; (d) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing; and (e) all capitalized interest and all accrued interest; (ii) the
interest component of Capital Lease Obligations paid, accrued and/or scheduled
to be paid or accrued by the Company and the Restricted Subsidiaries during such
period as determined on a consolidated basis in accordance with GAAP; and (iii)
dividends and distributions in respect of Disqualified Equity Interests actually
paid in cash by the Company during such period as determined on a consolidated
basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to any period, the net income
of the Company and the Restricted Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, adjusted, to the extent included in
calculating such net income, by excluding, without duplication, (a) all
extraordinary gains or losses and all gains and losses from the sales or other
dispositions of assets out of the ordinary course of business (net of taxes,
fees and expenses relating to the transaction giving rise thereto) for such
period; (b) that portion of such net income derived from or in respect of
investments in Persons other than Restricted Subsidiaries, except to the extent
actually received in cash by the Company or any Restricted Subsidiary (subject,
in the case of any Restricted Subsidiary, to the provisions of clause (e) of
this definition); (c) the portion of such net income (or loss) allocable to
minority interests in any Person (other than a Restricted Subsidiary) for such
period, except to the extent actually received in cash by the Company or any
Restricted Subsidiary (subject, in the case of any Restricted Subsidiary, to the
provisions of clause (e) of this definition); (d) net income (or loss) of any
other Person combined with the Company or any Restricted Subsidiary on a
"pooling of interests" basis attributable to any period prior to the date of
combination; and (e) the net income of any Restricted Subsidiary to the extent
that the declaration of dividends or similar distributions by that Restricted
Subsidiary of that income is not at the time (regardless of any waiver)
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulations applicable to that Restricted Subsidiary or its Equity
Interest holders.
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"Consolidated Net Worth" with respect to any Person means the equity of the
holders of Qualified Equity Interests of such Person and its Restricted
Subsidiaries, as reflected on a balance sheet of such Person determined on a
consolidated basis and in accordance with GAAP.
"Consolidated Operating Cash Flow" means, with respect to any period,
Consolidated Net Income for such period increased (without duplication) by the
sum of (a) Consolidated Income Tax Expense for such period to the extent
deducted in determining Consolidated Net Income for such period; (b)
Consolidated Interest Expense for such period to the extent deducted in
determining Consolidated Net Income for such period; (c) all dividends on
Preferred Equity Interests to the extent not taken into account for computing
Consolidated Net Income for that period; and (d) depreciation, amortization and
any other non cash items for such period to the extent deducted in determining
Consolidated Net Income for such period (other than any non cash item that
requires the accrual of, or a reserve for, cash charges for any future period)
of the Company and the Restricted Subsidiaries, including, without limitation,
amortization of capitalized debt issuance costs for such period, all of the
foregoing determined on a consolidated basis in accordance with GAAP minus non
cash items to the extent they increase Consolidated Net Income (including the
partial or entire reversal of reserves taken in prior periods) for such period.
"Corporate Conversion" shall mean the conversion of the Company to a
corporation, whether pursuant to a merger, consolidation, conversion by filing,
assignment of assets, or similar transaction or series of transactions, in each
case resulting in a corporation substantially all of the assets of which consist
of substantially all of the assets that were held directly or indirectly by the
Company immediately prior to such transaction and substantially all of the
capital stock of which corporation is held by Persons who were members of the
Company immediately prior to such transaction or Permitted Transferees of such
Persons in substantially the same proportions.
"Credit Facility" means the Second Amended and Restated Credit Agreement,
dated as of July 30, 1997, between Digital Television Services, Inc., the
lenders named therein, CIBC Wood Gundy Securities Corp., as Arranger, Morgan
Guaranty Trust Company of New York, as Syndication Agent, Fleet National Bank,
as Documentation Agent, and Canadian Imperial Bank of Commerce, as
Administrative Agent, including any deferrals, renewals, waivers, extensions,
replacements, refinancings or refundings thereof, or amendments, modifications
or supplements thereto and any agreement providing therefor, whether by or with
the same or any other lender, creditor, group of lenders or group of creditors,
and including related notes, guarantees, security agreements, pledge agreements,
mortgages, other collateral documents (including all Loan Documents (as defined
in the Credit Facility)) and note agreements and other instruments and
agreements executed in connection therewith.
"Cumulative Operating Cash Flow" means, as at any date of determination,
the positive cumulative Consolidated Operating Cash Flow realized during the
period commencing on the Issue Date and ending on the last day of the most
recent fiscal quarter immediately preceding the date of determination for which
consolidated financial information of the Company is available or, if such
cumulative Consolidated Operating Cash Flow for such period is negative, the
negative amount by which cumulative Consolidated Operating Cash Flow is less
than zero.
"DBS" means direct broadcast satellite.
"Debt to Operating Cash Flow Ratio" means the ratio of (a) an amount equal
to the Total Consolidated Indebtedness as of the date of calculation (the
"Determination Date") minus the amount of funds on deposit in the Interest
Escrow Account as of the Determination Date to (b) four times the Consolidated
Operating Cash Flow for the latest fiscal quarter for which financial
information is available immediately preceding such Determination Date (the
"Measurement Period"). For purposes of calculating Consolidated Operating Cash
Flow for the Measurement Period immediately prior to the relevant Determination
Date, (I) any Person that is a Restricted Subsidiary on the Determination Date
(or would become a Restricted Subsidiary on such Determination Date in
connection with the transaction that requires the determination of such
Consolidated Operating Cash Flow) will be deemed to have been a Restricted
Subsidiary at all times during such Measurement Period, (II) any Person that is
not a Restricted Subsidiary on such Determination Date (or would cease to be a
Restricted Subsidiary on such Determination Date in connection with the
transaction that requires the determination of such Consolidated Operating Cash
Flow) will be deemed not to have been a Restricted Subsidiary at any time during
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such Measurement Period, and (III) if the Company or any Restricted Subsidiary
shall have in any manner (x) acquired (including through an Acquisition or the
commencement of activities constituting such operating business) or (y) disposed
of (including by way of an Asset Sale or the termination or discontinuance of
activities constituting such operating business) any operating business during
such Measurement Period or after the end of such period and on or prior to such
Determination Date, such calculation will be made on a pro forma basis in
accordance with GAAP as if, in the case of an Acquisition or the commencement of
activities constituting such operating business, all such transactions had been
consummated on the first day of such Measurement Period and, in the case of an
Asset Sale or termination or discontinuance of activities constituting such
operating business, all such transactions had been consummated prior to the
first day of such Measurement Period; provided, however, that such pro forma
adjustment shall not give effect to the Operating Cash Flow of any Acquired
Person to the extent that such Person's net income would be excluded pursuant to
clause (e) of the definition of Consolidated Net Income. For purposes of
determining Total Consolidated Indebtedness as of any Determination Date, the
sum of all Indebtedness outstanding under the Credit Facility on such
Determination Date and all amounts that the Company or any Restricted Subsidiary
could borrow under the Credit Facility on such Determination Date (assuming the
satisfaction of all conditions precedent under the Credit Facility other than
conditions relating solely to incremental amounts being available under the
Credit Facility) shall be deemed to be outstanding and added to Total
Consolidated Indebtedness on such Determination Date (but without duplication).
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Indebtedness" means (a) any Indebtedness of the Company
and any Guarantor outstanding under the Credit Facility (including guarantees)
and (b) any other Senior Indebtedness or Guarantor Senior Indebtedness that, at
the time of determination, has an aggregate principal amount outstanding,
together with any commitments to lend additional amounts, of at least $10.0
million, if (in the case of Senior Indebtedness or Guarantor Senior Indebtedness
described in this clause (b)) the instrument governing such Senior Indebtedness
or Guarantor Senior Indebtedness expressly states that such Indebtedness is
"Designated Senior Indebtedness" for purposes of the Indenture, a Board
Resolution setting forth such designation by the Company has been filed with the
Trustee and such designation is not prohibited by the Credit Facility.
"Designation" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"Designation Amount" has the meaning set forth in "-- Certain
Covenants -- Designation of Unrestricted Subsidiaries" above.
"DirecTv(R) Services" means DBS television services and all other video,
audio, data packages, "a la carte" programming services and other services
offered by DirecTv, Inc., a subsidiary of Hughes Communications Galaxy, Inc.
"Disposition" means, with respect to any Person, any merger, consolidation
or other business combination involving such Person (whether or not such Person
is the Surviving Person) or the sale, assignment, transfer, lease, conveyance or
other disposition of all or substantially all of such Person's assets.
"Disqualified Equity Interest" means any Equity Interest which, by its
terms (or by the terms of any security into which it is convertible or for which
it is exchangeable at the option of the holder thereof), or upon the happening
of any event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or redeemable, at the option of the holder thereof, in
whole or in part, or exchangeable into Indebtedness on or prior to the earlier
of the maturity date of the Notes or the date on which no Notes remain
outstanding.
"DTS" means Digital Television Services, Inc., a Delaware corporation.
"Eligible Institution" means a commercial banking institution that has
combined capital and surplus of not less than $500 million or its equivalent in
foreign currency, whose debt is rated Investment Grade at the time as of which
any investment or rollover therein is made.
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"Equity Interest" in any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) corporate stock or other equity
participations, including partnership interests, whether general or limited, or
member interests in such Person, including any Preferred Equity Interests.
"Escrow Agent" means the Trustee.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations promulgated by the SEC thereunder.
"Existing Indebtedness" means any Indebtedness of the Company and its
Subsidiaries in existence on the Issue Date until such amounts are repaid.
"Expiration Date" has the meaning set forth in the definition of "Offer to
Purchase" below.
"Fair Market Value" means, with respect to any asset, the price (after
taking into account any liabilities relating to such assets) that could be
negotiated in an arm's-length free market transaction, for cash, between a
willing seller and a willing and able buyer, neither of which is under any
compulsion to complete the transaction; provided, however, that the Fair Market
Value of any such asset or assets shall be determined conclusively by the Board
of Directors of the Company acting in good faith, and shall be evidenced by
resolutions of the Board of Directors of the Company delivered to the Trustee;
provided, however, that if the fair market value of such assets exceeds $10
million, the fair market value shall be determined by an investment banking firm
of national standing selected by the Company.
"GAAP" means, at any date of determination, generally accepted accounting
principles in effect in the United States that are applicable at the date of
determination and that are consistently applied for all applicable periods.
"Government Securities" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States are pledged.
"guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. A guarantee shall include,
without limitation, any agreement to maintain or preserve any other Person's
financial condition or to cause any other Person to achieve certain levels of
operating results.
"Guarantor" means each Restricted Subsidiary of the Company that guarantees
the Issuers' obligations under the Indenture and the Notes.
"Guarantor Senior Indebtedness" means, with respect to any Guarantor, at
any date, (i) all Obligations of such Guarantor under the Credit Facility, (ii)
all Interest Rate Protection Obligations of such Guarantor, (iii) all
Obligations of such Guarantor under stand-by letters of credit and (iv) all
other Indebtedness of such Guarantor for borrowed money, including principal,
premium, if any, and interest (including Post-Petition Interest) on such
Indebtedness, unless the instrument under which such Indebtedness of such
Guarantor for money borrowed is Incurred expressly provides that such
Indebtedness for money borrowed is not senior or superior in right of payment to
such Guarantor's Guaranty, and all renewals, extensions, modifications,
amendments or refinancings thereof. Notwithstanding the foregoing, Guarantor
Senior Indebtedness shall not include (i) to the extent that it may constitute
Indebtedness, any Obligation for federal, state, local or other taxes, (ii) any
Indebtedness among or between such Guarantor and the Company or any of such
Guarantor or the Company, (iii) to the extent that it may constitute
Indebtedness, any Obligation in respect of any trade payable Incurred for the
purchase of goods or materials, or for services obtained, in the ordinary course
of business, (iv) that portion of any Indebtedness that is Incurred in violation
of the Indenture; provided, however, that such Indebtedness shall be deemed not
to have been Incurred in violation of the Indenture for purposes of this clause
(iv) if (I) the holder(s) of such Indebtedness or their representative or such
Guarantor shall have furnished to the Trustee an opinion of independent legal
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counsel, unqualified in all material respects, addressed to the Trustee (which
legal counsel may, as to matters of fact, rely upon an officers' certificate of
such Guarantor) to the effect that the Incurrence of such Indebtedness does not
violate the provisions of the Indenture or (II) in the case of any Obligations
under the Credit Facility, the holder(s) of such Obligations or their agent or
representative shall have received a representation from such Guarantor to the
effect that the Incurrence of such Indebtedness does not violate the provisions
of the Indenture, (v) Indebtedness evidenced by the Guaranty, (vi) Indebtedness
of such Guarantor that is expressly subordinate or junior in right of payment to
any other Indebtedness of such Guarantor, (vii) to the extent that it may
constitute Indebtedness, any obligation owing under leases (other than Capital
Lease Obligations) or management agreements and (viii) any obligation that by
operation of law is subordinate to any general unsecured obligations of such
Guarantor.
"Guaranty" means any guarantee by any Restricted Subsidiary of the Company
of the Issuers' obligations under the Indenture and the Notes.
"High Power Satellite Transmission Business" means the business of the
acquisition, transmission or sale of programming in the high power DBS business
utilizing broadcast satellite service (including any provision of such services
to cable operators or other media providers), which may utilize all or part of
satellites owned by DirecTv, Inc. or Hughes Communication Galaxy Inc. and all
other activities relating thereto or arising therefrom.
"Incur" means, with respect to any Indebtedness or other obligation of any
Person, to create, issue, incur (including by conversion, exchange or
otherwise), assume, guarantee or otherwise become liable in respect of such
Indebtedness or other obligation or the recording, as required pursuant to GAAP
or otherwise, of any such Indebtedness or other obligation on the balance sheet
of such Person (and "Incurrence," "Incurred" and "Incurring" shall have meanings
correlative to the foregoing).
"Indebtedness" means (without duplication), with respect to any Person,
whether recourse is to all or a portion of the assets of such Person and whether
or not contingent, (a) every obligation of such Person for money borrowed; (b)
every obligation of such Person evidenced by bonds, debentures, notes or other
similar instruments, including obligations incurred in connection with the
acquisition of property, assets or businesses; (c) every reimbursement
obligation of such Person with respect to letters of credit, bankers'
acceptances or similar facilities issued for the account of such Person; (d)
every obligation of such Person issued or assumed as the deferred purchase price
of property or services (but excluding trade accounts payable incurred in the
ordinary course of business and payable in accordance with industry practices,
or other accrued liabilities arising in the ordinary course of business that are
not overdue or that are being contested in good faith); (e) every Capital Lease
Obligation of such Person; (f) every net obligation under interest rate swap
agreements, interest rate cap agreements and interest rate collar agreements,
and other agreements or arrangements designed to protect such Person against
fluctuations in interest rates; (g) every obligation of the type referred to in
clauses (a) through (f) of another Person and all dividends of another Person
the payment of which, in either case, such Person has guaranteed or is
responsible or liable for, directly or indirectly, as obligor, guarantor or
otherwise; and (h) any and all deferrals, renewals, extensions and refundings
of, or amendments, modifications or supplements to, any liability of the kind
described in any of the preceding clauses (a) through (g) above. Indebtedness
(a) shall never be calculated taking into account any cash and cash equivalents
held by such Person; (b) shall not include obligations of any Person (x) arising
from the honoring by a bank or other financial institution of a check, draft or
similar instrument inadvertently drawn against insufficient funds in the
ordinary course of business, provided that such obligations are extinguished
within two Business Days of their incurrence unless covered by an overdraft
line, (y) resulting from the endorsement of negotiable instruments for
collection in the ordinary course of business and consistent with past business
practices and (z) under stand-by letters of credit to the extent collateralized
by cash or Cash Equivalents; (c) that provides that an amount less than the
principal amount thereof shall be due upon any declaration of acceleration
thereof shall be deemed to be incurred or outstanding in an amount equal to the
accreted value thereof at the date of determination; (d) shall include the
liquidation preference and any mandatory redemption payment obligations in
respect of any Disqualified Equity Interests of the Company or any Restricted
Subsidiary; and (e) shall not include obligations under performance bonds,
performance guarantees, surety bonds and appeal bonds, letters of credit or
similar obligations, Incurred in the ordinary course of business (including
standby letters of credit securing obligations to the NRTC Incurred in the
ordinary course of business that are not overdue or that are being contested in
good faith by appropriate
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proceedings) (other than obligations under or in respect of any direct or
indirect credit support for obligations of any Unrestricted Subsidiary).
"Independent Financial Advisor" means a nationally recognized, accounting,
appraisal, investment banking firm or consultant with experience advising DBS
businesses that is, in the judgment of the Company's Board of Directors,
qualified to perform the task for which it has been engaged (i) that does not,
and whose directors, officers and employees or Affiliates do not, have a direct
or indirect financial interest in the Company and (ii) that, in the judgment of
the Board of Directors of the Company, is otherwise independent and qualified to
perform the task for which it is to be engaged.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
any liquidation, dissolution or winding up of such Person, or any bankruptcy,
reorganization, insolvency, receivership or similar proceeding with respect to
such Person, whether voluntary or involuntary.
"interest" means, with respect to the Notes, the sum of any cash interest
and any Additional Interest on the Notes.
"Interest Escrow Account" shall mean an account established in the name of
the Escrow Agent and funded by the Issuers on the Closing Date pursuant to the
Indenture.
"Interest Escrow Agreement" means the Interest Escrow Agreement dated as of
July 30, 1997 among the Issuers and the Trustee, as trustee and as escrow agent.
"Interest Rate Protection Obligations" means, with respect to any Person,
the Obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
loan, advance, guarantee or other extension of credit or capital contribution to
(by means of transfers of cash or other property or assets to others or payments
for property or services for the account or use of others, or otherwise), or
purchase or acquisition of capital stock, bonds, notes, debentures or other
securities or evidences of Indebtedness issued by, any other Person. The amount
of any Investment shall be the original cost of such Investment, plus the cost
of all additions thereto, and minus the amount of any portion of such Investment
repaid to such Person in cash as a repayment of principal or a return of
capital, as the case may be, but without any other adjustments for increases or
decreases in value, or write-ups, write-downs or write-offs with respect to such
Investment. In determining the amount of any Investment involving a transfer of
any property or asset other than cash, such property shall be valued at its fair
market value at the time of such transfer, as determined in good faith by the
Board of Directors (or comparable body) of the Person making such transfer.
"Investment Grade" means with respect to a security, that such security is
rated, by at least two nationally recognized statistical rating organizations,
in one of each such organization's four highest generic rating categories.
"Issue Date" means the original issue date of the Notes.
"Lien" means any lien, mortgage, charge, security interest, hypothecation,
assignment for security or encumbrance of any kind (including any conditional
sale or capital lease or other title retention agreement, any lease in the
nature thereof, and any agreement to give any security interest).
"Marketable Securities" means: (a) Government Securities; (b) any
certificate of deposit maturing not more than 365 days after the date of
acquisition issued by, or time deposit of, an Eligible Institution; (c)
commercial paper maturing not more than 365 days after the date of acquisition
issued by a corporation (other than an Affiliate of the Issuer) with an
Investment Grade rating, at the time as of which any investment therein is made,
issued or offered by an Eligible Institution; (d) any bankers acceptances or
money market deposit accounts issued or offered by an Eligible Institution; and
(e) any fund investing exclusively in investments of the types described in
clauses (a) through (d) above.
"Maturity Date" means the date, which is set forth on the face of the
Notes, on which the Notes will mature.
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"Net Cash Proceeds" means the aggregate proceeds in the form of cash or
Cash Equivalents received by the Company or any Restricted Subsidiary in respect
of any Asset Sale, including all cash or Cash Equivalents received upon any
sale, liquidation or other exchange of proceeds of Asset Sales received in a
form other than cash or Cash Equivalents, net of (a) the direct costs relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees, and sales commissions) and any relocation expenses
incurred as a result thereof; (b) taxes paid or payable, or amounts in respect
thereof permitted to be distributed pursuant to clause (vi) of the second
paragraph under "Limitation on Restricted Payments," as a result thereof (after
taking into account any available tax credits or deductions and any tax sharing
arrangements); (c) amounts required to be applied to the repayment of
Indebtedness secured by a Lien on the asset or assets that were the subject of
such Asset Sale; (d) amounts deemed, in good faith, appropriate by the Board of
Directors of the Company to be provided as a reserve, in accordance with GAAP,
against any liabilities associated with such assets that are the subject of such
Asset Sale (provided that the amount of any such reserves shall be deemed to
constitute Net Cash Proceeds at the time such reserves shall have been released
or are not otherwise required to be retained as a reserve); and (e) with respect
to Asset Sales by Subsidiaries, the portion of such cash payments attributable
to Persons holding a minority interest in such Subsidiary.
"Non-Payment Event of Default" means any event (other than a Payment
Default) the occurrence of which entitles one or more Persons to immediately
accelerate the maturity of any Designated Senior Indebtedness.
"NRTC" means the National Rural Telecommunications Cooperative and any
successor entity to it.
"Obligations" means any principal, interest (including, without limitation,
Post-Petition Interest), penalties, fees, indemnifications, reimbursement
obligations, damages and other liabilities payable under the documentation
governing any Indebtedness.
"Offer" has the meaning set forth in the definition of "Offer to Purchase"
below.
"Offer to Purchase" means a written offer (the "Offer") sent by or on
behalf of the Company by first-class mail, postage prepaid, to each Holder at
such Holder's address appearing in the register for the Notes on the date of the
Offer offering to purchase up to the principal amount of Notes specified in such
Offer at the purchase price specified in such Offer (as determined pursuant to
the Indenture). Unless otherwise required by applicable law, the Offer shall
specify an expiration date (the "Expiration Date") of the Offer to Purchase,
which shall be not less than 20 Business Days nor more than 60 days after the
date of such Offer, and a settlement date (the "Purchase Date") for purchase of
Notes to occur no later than five Business Days after the Expiration Date. The
Company shall notify the Trustee at least 15 Business Days (or such shorter
period as is acceptable to the Trustee) prior to the mailing of the Offer of the
Company's obligation to make an Offer to Purchase, and the Offer shall be mailed
by the Company or, at the Company's request, by the Trustee in the name and at
the expense of the Company; provided, however, that, if the Company mails the
Offer, the Company may notify the Trustee on the same Business Day as the
mailing of the Offer of the Company's obligation to make an Offer to Purchase
pursuant to the above. The Offer shall contain all the information required by
applicable law to be included therein. The Offer shall also contain information
concerning the business of the Company and its Subsidiaries that the Company in
good faith believes will enable such Holders to make an informed decision with
respect to the Offer to Purchase (which at a minimum will include (i) the most
recent annual and quarterly financial statements and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" contained in the
document required to be filed with the Trustee pursuant to the Indenture (which
requirements may be satisfied by delivery of such documents together with the
Offer), (ii) a description of material developments in the Company's business
subsequent to the date of the latest of such financial statements referred to in
clause (i) (including a description of the events requiring the Company to make
the Offer to Purchase), (iii) if applicable, appropriate pro forma financial
information concerning the Offer to Purchase and the events requiring the
Company to make the Offer to Purchase and (iv) any other information required by
applicable law to be included therein). The Offer shall contain all instructions
and materials necessary to enable such Holders to tender Notes pursuant to the
Offer to Purchase. The Offer shall also state:
(1) the Section of the Indenture pursuant to which the Offer to
Purchase is being made;
(2) the Expiration Date and the Purchase Date;
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(3) the aggregate principal amount of the outstanding Notes offered to
be purchased by the Company pursuant to the Offer to Purchase (including,
if less than 100%, the manner by which such amount has been determined
pursuant to the Section of the Indenture requiring the Offer to Purchase)
(the "Purchase Amount");
(4) the purchase price to be paid by the Company for each $1,000
aggregate principal amount of Notes accepted for payment (as specified
pursuant to the Indenture) (the "Purchase Price");
(5) that the Holder may tender all or any portion of the Notes
registered in the name of such Holder and that any portion of a Note
tendered must be tendered in an integral multiple of $1,000 principal face
amount;
(6) the place or places where Notes are to be surrendered for tender
pursuant to the Offer to Purchase;
(7) that interest on any Note not tendered or tendered but not
purchased by the Company pursuant to the Offer to Purchase will continue to
accrue;
(8) that on the Purchase Date the Purchase Price will become due and
payable upon each Note being accepted for payment pursuant to the Offer to
Purchase and that interest thereon shall cease to accrue on and after the
Purchase Date;
(9) that each Holder electing to tender all or any portion of a Note
pursuant to the Offer to Purchase will be required to surrender such Note
at the place or places specified in the Offer prior to the close of
business on the Expiration Date (such Note being, if the Company or the
Trustee so requires, duly endorsed by, or accompanied by a written
instrument of transfer in form satisfactory to the Company and the Trustee
duly executed by, the Holder thereof or such Holder's attorney duly
authorized in writing);
(10) that Holders will be entitled to withdraw all or any portion of
Notes tendered if the Company (or its Paying Agent) receives, not later
than the close of business on the fifth Business Day next preceding the
Expiration Date, a facsimile transmission or letter setting forth the name
of the Holder, the principal amount of the Note the Holder tendered, the
certificate number of the Note the Holder tendered and a statement that
such Holder is withdrawing all or a portion of such Holder's tender;
(11) that (a) if Notes in an aggregate principal amount less than or
equal to the Purchase Amount are duly tendered and not withdrawn pursuant
to the Offer to Purchase, the Company shall purchase all such Notes and (b)
if Notes in an aggregate principal amount in excess of the Purchase Amount
are tendered and not withdrawn pursuant to the Offer to Purchase, the
Company shall purchase Notes having an aggregate principal amount equal to
the Purchase Amount on a pro rata basis (with such adjustments as may be
deemed appropriate so that only Notes in denominations of $1,000 principal
amount or integral multiples thereof shall be purchased); and
(12) that in the case of any Holder whose Note is purchased only in
part, the Company shall execute and the Trustee shall authenticate and
deliver to the Holder of such Note without service charge, a new Note or
Notes, of any authorized denomination as requested by such Holder, in an
aggregate principal amount equal to and in exchange for the unpurchased
portion of the Note so tendered.
An Offer to Purchase shall be governed by and effected in accordance with
the provisions above pertaining to any Offer.
"Payment Default" means any default, after any requirement for the giving
of notice, the lapse of time or both, or any other condition to such default
becoming an event of default has occurred, in the payment of principal of (or
premium, if any) or interest on or any other amount payable in connection with
Designated Senior Indebtedness.
"Permitted Acquisition Deposits" means any advance or payment of funds,
whether as consideration for an option to acquire or as a deposit, binder or
earnest money, whether or not refundable, and whether or not made into escrow,
made pursuant to any written agreement, term sheet, letter of intent or other
instrument providing for the Acquisition of any High Power Satellite
Transmission Business, the consummation of which would not constitute a
Restricted Payment pursuant to clause (iv) of the first paragraph under
"-- Limitation on Restricted
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Payments," or providing for an Investment made in compliance with clause (vii)
of the second paragraph under "-- Limitation on Restricted Payments," to the
extent that the aggregate of such amounts outstanding at any one time with
respect to Acquisitions or such Investments that have not yet been consummated
does not exceed $10 million.
"Permitted Holder" means any of those Persons who were members of the
Company on the Issue Date, the Permitted Transferees of such Persons, and any
Person or group controlled by each or any of such Persons.
"Permitted Investments" means (a) Cash Equivalents; (b) Investments in
prepaid expenses, negotiable instruments held for collection and lease, utility
and workers' compensation, performance and other similar deposits; (c) loans and
advances to employees made in the ordinary course of business not to exceed $1.0
million in the aggregate at any one time outstanding; (d) Interest Rate
Protection Obligations; (e) bonds, notes, debentures or other securities
received as a result of Asset Sales permitted under "-- Certain Covenants --
Disposition of Proceeds of Asset Sales" above not to exceed 20% of the total
consideration for such Asset Sales (determined and computed as set forth under
"-- Certain Covenants -- Disposition of Proceeds of Asset Sales"); (f)
transactions with officers, directors and employees of the Company, or any
Restricted Subsidiary entered into in the ordinary course of business (including
compensation or employee benefit arrangements with any such director or
employee) and consistent with past business practices; (g) Investments existing
as of the Issue Date and any amendment, extension, renewal or modification
thereof to the extent that any such amendment, extension, renewal or
modification does not require the Company or any Restricted Subsidiary to make
any additional cash or non-cash payments or provide additional services in
connection therewith; (h) any Investment to the extent that the consideration
therefor consists of Qualified Equity Interests of the Company; (i) any
Investment consisting of a guarantee by a Restricted Subsidiary of Senior
Indebtedness or any guarantee permitted under clause (e) of the second paragraph
of "-- Limitation on Indebtedness" above and (j) Investments in Marketable
Securities by the Escrow Agent and held in the Interest Escrow Account.
"Permitted Junior Securities" means any securities of the Company or any
other Person that are (i) equity securities without special covenants or (ii)
subordinated in right of payment to all Senior Indebtedness that may at the time
be outstanding, to substantially the same extent as, or to a greater extent
than, the Notes are subordinated as provided in the Indenture, in any event
pursuant to a court order so providing and as to which (a) the rate of interest
on such securities shall not exceed the effective rate of interest on the Notes
on the date of the Indenture, (b) such securities shall not be entitled to the
benefits of covenants or defaults materially more beneficial to the holders of
such securities than those in effect with respect to the Notes on the date of
the Indenture and (c) such securities shall not provide for amortization
(including sinking fund and mandatory prepayment provisions) commencing prior to
the date six months following the final scheduled maturity date of the Senior
Indebtedness (as modified by the plan of reorganization or readjustment pursuant
to which such securities are issued).
"Permitted Liens" means (a) Liens on property of a Person existing at the
time such Person is merged into or consolidated with the Company or any
Restricted Subsidiary; provided, however, that such Liens were in existence
prior to the contemplation of such merger or consolidation and do not secure any
property or assets of the Company or any Restricted Subsidiary other than the
property or assets subject to the Liens prior to such merger or consolidation;
(b) Liens imposed by law such as carriers', warehousemen's and mechanics' Liens
and other similar Liens arising in the ordinary course of business that secure
payment of obligations not more than 60 days past due or that are being
contested in good faith and by appropriate proceedings; (c) Liens existing on
the Issue Date; (d) Liens securing only the Notes; (e) Liens in favor of the
Company or any Restricted Subsidiary so long as held by the Company or any
Restricted Subsidiary; (f) Liens for taxes, assessments or governmental charges
or claims that are not yet delinquent or that are being contested in good faith
by appropriate proceedings promptly instituted and diligently conducted;
provided, however, that any reserve or other appropriate provision as shall be
required in conformity with GAAP shall have been made therefor; (g) easements,
reservation of rights of way, restrictions and other similar easements,
licenses, restrictions on the use of properties, or minor imperfections of title
that in the aggregate are not material in amount and do not in any case
materially detract from the properties subject thereto or interfere with the
ordinary conduct of the business of the Company and the Restricted Subsidiaries;
(h) Liens resulting from the deposit of cash or notes in connection with
contracts, Permitted Acquisition Deposits, tenders or expropriation proceedings,
or to secure workers' compensation, surety or appeal bonds, costs of litigation
when required by law and public and statutory obligations or obligations under
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franchise arrangements and agreements with the NRTC entered into in the ordinary
course of business; (i) Liens securing Indebtedness consisting of Capital Lease
Obligations, Purchase Money Indebtedness, mortgage financings, industrial
revenue bonds or other monetary obligations, in each case incurred solely for
the purpose of financing all or any part of the purchase price or cost of
construction or installation of assets used in the business of the Company or
the Restricted Subsidiaries, or repairs, additions or improvements to such
assets; provided, however, that (I) such Liens secure Indebtedness in an amount
not in excess of the original purchase price or the original cost of any such
assets or repair, addition or improvement thereto (plus an amount equal to the
reasonable fees and expenses in connection with the incurrence of such
Indebtedness), (II) such Liens do not extend to any other assets of the Company
or the Restricted Subsidiaries (and, in the case of repair, addition or
improvements to any such assets, such Lien extends only to the assets (and
improvements thereto or thereon) repaired, added to or improved), (III) the
Incurrence of such Indebtedness is permitted by "-- Certain
Covenants -- Limitation on Indebtedness" above, and (IV) such Liens attach
within 90 days of such purchase, construction, installation, repair, addition or
improvement; (j) Liens to secure any refinancings, renewals, extensions,
modifications or replacements (collectively, "refinancing") (or successive
refinancings), in whole or in part, of any Indebtedness secured by Liens
referred to in the clauses above so long as such Lien does not extend to any
other property (other than improvements thereto); (k) Liens securing letters of
credit entered into in the ordinary course of business and consistent with past
business practice; (l) Liens on and pledges of the Equity Interests of any
Unrestricted Subsidiary securing any Indebtedness of such Unrestricted
Subsidiary; and (m) any calls or rights of first refusal with respect to any
partnership interests.
"Permitted Transferee" means, with respect to any Person: (a) in the case
of any Person who is a natural person, such individual's spouse or children, any
trust for such individual's benefit or the benefit of such individual's spouse
or children, or any corporation, limited liability company or partnership in
which the direct and beneficial owner of all of the equity interest is such
Person or such individual's spouse or children or any trust for the benefit of
such persons; (b) in the case of any Person who is a natural person, the heirs,
executors, administrators or personal representatives upon the death of such
Person or upon the incompetency or disability of such Person for purposes of the
protection and management of such individual's assets; and (c) in the case of
any Person who is not a natural person, any Affiliate of such Person.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, limited liability company, limited liability
limited partnership, trust, unincorporated organization or government or any
agency or political subdivision thereof.
"Post-Petition Interest" means, with respect to any Indebtedness of any
Person, all interest accrued or accruing on such Indebtedness after the
commencement of any Insolvency or Liquidation Proceeding with respect to such
Person in accordance with and at the contract rate (including, without
limitation, any rate applicable upon default) specified in the agreement or
instrument creating, evidencing or governing such Indebtedness, whether or not,
pursuant to applicable law or otherwise, the claim for such interest is allowed
as a claim in such Insolvency or Liquidation Proceeding.
"Preferred Equity Interest," in any Person, means an Equity Interest of any
class or classes (however designated) that is preferred as to the payment of
dividends or distributions, or as to the distribution of assets upon any
voluntary or involuntary liquidation or dissolution of such Person, over Equity
Interests of any other class in such Person.
"principal" of a debt security means the principal of the security, plus,
when appropriate, the premium, if any, on the security.
"Public Equity Offering" means an underwritten public offering of Qualified
Equity Interests of the Company or its corporate successor pursuant to an
effective registration statement filed under the Securities Act (excluding
registration statements filed on Form S-8).
"Purchase Amount" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Purchase Date" has the meaning set forth in the definition of "Offer to
Purchase" above.
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"Purchase Money Indebtedness" means Indebtedness of the Company or any
Restricted Subsidiary Incurred for the purpose of financing all or any part of
the purchase price or the cost of construction or improvement of any property;
provided, however, that the aggregate principal amount of such Indebtedness does
not exceed the lesser of the Fair Market Value of such property or such purchase
price or cost, including any refinancing of such Indebtedness that does not
increase the aggregate principal amount (or accreted amount, if less) thereof as
of the date of refinancing.
"Purchase Price" has the meaning set forth in the definition of "Offer to
Purchase" above.
"Qualified Equity Interest" in any Person means any Equity Interest in such
Person other than any Disqualified Equity Interest.
"Restricted Investment" means any Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any Subsidiary of the Company that has not
been designated by the Board of Directors of the Company, by a resolution of the
Board of Directors of the Company delivered to the Trustee, as an Unrestricted
Subsidiary pursuant to "-- Certain Covenants -- Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"SEC" means the Securities and Exchange Commission.
"Security Agreement" means the security agreement dated as of the date of
the Indenture, by and between the Escrow Agent and the Issuers, governing the
disbursement of funds for the Interest Escrow Account.
"Senior Indebtedness" means, at any date, (a) all Obligations of the
Company under the Credit Facility; (b) all Interest Rate Protection Obligations
of the Company; (c) all Obligations of the Company under stand-by letters of
credit; and (d) all other Indebtedness of the Company for borrowed money,
including principal, premium, if any, and interest (including Post-Petition
Interest) on such Indebtedness, unless the instrument under which such
Indebtedness of the Company for money borrowed is Incurred expressly provides
that such Indebtedness for money borrowed is not senior or superior in right of
payment to the Notes, and all renewals, extensions, modifications, amendments or
refinancings thereof. Notwithstanding the foregoing, Senior Indebtedness shall
not include (a) to the extent that it may constitute Indebtedness, any
Obligation for federal, state, local or other taxes; (b) any Indebtedness among
or between the Company and any Subsidiary of the Company; (c) to the extent that
it may constitute Indebtedness, any Obligation in respect of any trade payable
Incurred for the purchase of goods or materials, or for services obtained, in
the ordinary course of business; (d) that portion of any Indebtedness that is
Incurred in violation of the Indenture; provided, however, that such
Indebtedness shall be deemed not to have been Incurred in violation of the
Indenture for purposes of this clause (d) if (I) the holder(s) of such
Indebtedness or their representative or the Company shall have furnished to the
Trustee an opinion of independent legal counsel, unqualified in all material
respects, addressed to the Trustee (which legal counsel may, as to matters of
fact, rely upon an officers' certificate of the Company) to the effect that the
Incurrence of such Indebtedness does not violate the provisions of the Indenture
or (II) in the case of any Obligations under the Credit Facility, the holder(s)
of such Obligations or their agent or representative shall have received a
representation from the Company to the effect that the Incurrence of such
Indebtedness does not violate the provisions of the Indenture; (e) Indebtedness
evidenced by the Notes; (f) Indebtedness of the Company that is expressly
subordinate or junior in right of payment to any other Indebtedness of the
Company; (g) to the extent that it may constitute Indebtedness, any obligation
owing under leases (other than Capital Lease Obligations) or management
agreements; and (h) any obligation that by operation of law is subordinate to
any general unsecured obligations of the Company.
"Significant Restricted Subsidiary" means, at any date of determination,
(a) any Restricted Subsidiary that, together with its Subsidiaries that
constitute Restricted Subsidiaries (i) for the most recent fiscal year of the
Company accounted for more than 5.0% of the consolidated revenues of the Company
and the Restricted Subsidiaries or (ii) as of the end of such fiscal year, owned
more than 5.0% of the consolidated assets of the Company and the Restricted
Subsidiaries, all as set forth on the consolidated financial statements of the
Company and the Restricted Subsidiaries for such year prepared in conformity
with GAAP, and (b) any Restricted Subsidiary that, when aggregated with all
other Restricted Subsidiaries that are not otherwise Significant
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Restricted Subsidiaries and as to which any event described in clause (f), (g)
or (h) of "-- Events of Default" above has occurred, would constitute a
Significant Restricted Subsidiary under clause (a) of this definition.
"Stated Maturity", when used with respect to any Note or any installment of
interest thereon, means the date specified in such Note as the fixed date on
which the principal of such Note or such installment of interest is due and
payable.
"Strategic Equity Investor" means a Person that owns and operates
businesses in the telecommunications, DBS information systems, entertainment,
cable television, programming, electronics or similar or related industries.
"Subordinated Indebtedness" means (a) with respect to the Company, any
Indebtedness of the Company that is expressly subordinated in right of payment
to the Notes and (b) with respect to any Guarantor, any Indebtedness of such
Guarantor that is expressly subordinated in right of payment to the Guaranty of
such Guarantor.
"Subsidiary" means, with respect to any Person, (a) any corporation of
which the outstanding Voting Equity Interests having at least a majority of the
votes entitled to be cast in the election of directors shall at the time be
owned, directly or indirectly, by such Person, or (b) any other Person of which
at least a majority of Voting Equity Interests are at the time, directly or
indirectly, owned by such first named Person.
"Surviving Person" means, with respect to any Person involved in or that
makes any Disposition, the Person formed by or surviving such Disposition or the
Person to which such Disposition is made.
"Total Consolidated Indebtedness" means, as at any date of determination,
an amount equal to the aggregate amount of all Indebtedness and Disqualified
Equity Interests of the Company and the Restricted Subsidiaries outstanding as
of such date of determination.
"Unrestricted Subsidiary" means any Subsidiary of the Company designated as
such pursuant to "-- Certain Covenants -- Designation of Unrestricted
Subsidiaries" above. Any such designation may be revoked by a resolution of the
Board of Directors of the Company delivered to the Trustee, subject to the
provisions of "-- Certain Covenants -- Designation of Unrestricted Subsidiaries"
above.
"Voting Equity Interests" means Equity Interests in a corporation or other
Person with voting power under ordinary circumstances entitling the holders
thereof to elect the Board of Directors or other governing body of such
corporation or such Person.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (a) the sum of the
products obtained by multiplying (i) the amount of each then remaining
installment, sinking fund, serial maturity or other required scheduled payment
of principal, including payment of final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (b) the then outstanding
aggregate principal amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary all of
the outstanding Voting Equity Interests (other than directors' qualifying
shares) of which are owned, directly or indirectly, by the Company.
BOOK-ENTRY, DELIVERY AND FORM
The Private Notes were initially issued in the form of two senior
subordinated global notes (the "Private Global Notes"). The Private Global Notes
were deposited on July 30, 1997 (the "Closing Date") with, or on behalf of, The
Depository Trust Company (the "Depositary") and registered in the name of Cede &
Co., as nominee of the Depositary (such nominee being referred to herein the
"Global Notes Holder"). Except as set forth in the next paragraph, the Exchange
Notes exchanged for the Private Notes represented by the Private Global Notes
will be represented by one or more senior subordinated global exchange notes in
registered form (the "Global Exchange Notes" and, together with the Private
Global Notes, the "Global Notes"), deposited with DTC and registered in the name
of the Global Notes Holder.
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Exchange Notes that are issued as described below under "-- Exchange of
Global Notes for Certificated Notes" will be issued in the form of registered
definitive certificates (the "Certificated Notes"). Such Certificated Notes may,
unless the applicable Global Note has previously been exchanged for Certificated
Notes, be exchanged for an interest in the applicable Global Note representing
the principal amount of Notes being transferred.
The Depositary is a limited-purpose trust company that was created to hold
securities for its participating organizations (collectively, the "Participants"
or the "Depositary's Participants") and to facilitate the clearance and
settlement of transactions in such securities between Participants through
electronic book-entry changes in the accounts of such Participants. The
Depositary's Participants include securities brokers and dealers (including the
Initial Purchasers), banks and trust companies, clearing corporations and
certain other organizations. Access to the Depositary's system is also available
to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or the "Depositary's Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly. Persons who are not Participants may
beneficially own securities held by or on behalf of the Depositary only through
the Depositary's Participants or the Depositary's Indirect Participants.
The Issuers expect that pursuant to procedures established by the
Depositary: (i) upon deposit of the Global Notes, the Depositary will credit the
accounts of Participants designated by the Initial Purchasers with portions of
the principal amount of the Global Notes; and (ii) ownership of the Notes
evidenced by the applicable Global Note will be shown on, and the transfer of
ownership thereof will be effected only through, records maintained by the
Depositary (with respect to the interests of the Depositary's Participants), the
Depositary's Participants and the Depositary's Indirect Participants.
Prospective purchasers are advised that the laws of some states require that
certain persons take physical delivery in definitive form of securities that
they own. Consequently, the ability to transfer Notes evidenced by the Global
Notes will be limited to such extent. For certain other restrictions on the
transferability of the Notes, see "Notice to Investors."
So long as the Global Notes Holder is the registered owner of any Notes,
the Global Notes Holder will be considered the sole holder under the Indenture
of any Notes evidenced by the Global Notes. Beneficial owners of Notes evidenced
by the Global Notes will not be considered the owners or holders thereof under
the Indenture for any purpose, including with respect to the giving of any
directions, instructions or approvals to the agent or trustee thereunder. As a
result, the ability of a person having a beneficial interest in Notes
represented by any Global Note to pledge such interest to persons or entities
that do not participate in the Depositary's system or to otherwise take actions
in respect of such interest may be affected by the lack of a physical
certificate evidencing such interest. Neither the Issuers nor the Trustee will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of the Notes by the Depositary, or for maintaining,
supervising or reviewing any records of the Depositary relating to the Notes.
Payments in respect of the principal of, premium, if any, and interest on
any Notes registered in the name of the Global Notes Holder on the applicable
record date will be payable by the Trustee to or at the direction of the Global
Notes Holder in its capacity as the registered holder of such Notes. Under the
terms of the Indenture, the Issuers and the Trustee may treat the persons in
whose names Notes, including the Global Notes, are registered as the owners
thereof for the purpose of receiving such payments. Consequently, neither the
Issuers nor the Trustee have or will have any responsibility or liability for
the payment of such amounts to beneficial owners of Notes. The Issuers believe,
however, that it is currently the policy of the Depositary to immediately credit
the accounts of the relevant Participants with such payments, in amounts
proportionate to their respective holders of beneficial interests in the
relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of Notes will be governed by standing instructions and
customary practice and will be the responsibility of the Depositary's
Participants or the Depositary's Indirect Participants.
EXCHANGE OF GLOBAL NOTES FOR CERTIFICATED NOTES
Subject to certain conditions, any person having a beneficial interest in a
Global Note may, upon request to the Trustee, exchange such beneficial interest
for Exchange Notes in the form of Certificated Notes. Upon any
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such issuance, the Trustee is required to register such Certificated Notes in
the name of, and cause the same to be delivered to, such person or persons (or
the nominee of any thereof). All such Certificated Notes will be subject to the
legend requirements described herein under "Notice to Investors," unless the
Company determines otherwise in compliance with applicable law. In addition, if:
(i) the Issuers notify the Trustee in writing that the Depositary cis no longer
willing or able to act as a depository and the Issuers are unable to locate a
qualified successor within 90 days; or (ii) the Issuers, at their option, notify
the Trustee in writing that they elect to cause the issuance of Exchange Notes
in the form of Certificated Notes under the Indenture, then, upon surrender by
the Global Notes Holder of the Global Note, Exchange Notes in such form will be
issued to each person that the Global Notes Holder and the Depositary identify
as being the beneficial owner of the related Exchange Notes.
Neither the Issuers nor the Trustee will be liable for any delay by the
Global Notes Holder or the Depositary in identifying the beneficial owners of
the Exchange Notes and the Issuers and the Trustee may conclusively rely on, and
will be protected in relying on, instructions from the Global Notes Holder or
the Depositary for all purposes.
SAME-DAY SETTLEMENT AND PAYMENT
The Indenture will require that payments in respect of the Exchange Notes
represented by the Global Notes (including principal, premium, if any, and
interest) be made by wire transfer of immediately available funds to the
accounts specified by the Global Notes Holder. With respect to Certificated
Notes, the Issuers will make all payments in respect of the Exchange Notes
(including principal, premium, if any, and interest) by mailing a check to each
such holder's registered address. Secondary trading in long-term notes and
debentures of corporate issuers is generally settled in clearing-house or
next-day funds. In contrast, the Exchange Notes represented by the Global Notes
are expected to be eligible to trade in the PORTAL market and to trade in the
Depositary's Same-Day Funds Settlement System, and any permitted secondary
market trading activity in such Notes will, therefore, be required by the
Depositary to be settled in immediately available funds.
PRIVATE NOTES' REGISTRATION RIGHTS; ADDITIONAL INTEREST
The Issuers, the Guarantors and the Initial Purchasers entered into the
Registration Rights Agreement on July 30, 1997 (the "Registration Rights
Agreement"). Pursuant to the Registration Rights Agreement, the Issuers and the
Guarantors agreed to file with the Commission the Registration Statement of
which this Prospectus is a part. Upon the effectiveness of the Registration
Statement, the Issuers and the Guarantors will offer, pursuant to the Exchange
Offer, to the holders of Registrable Notes who are able to make certain
representations the opportunity to exchange their Registrable Notes for Exchange
Notes. If: (i) because of any change in law or in currently prevailing
interpretations of the staff of the Commission, the Issuers reasonably determine
in good faith, after consultation with counsel, that they are not permitted to
effect the Exchange Offer (a "Legal Prohibition"), (ii) the Exchange Offer is
not commenced on or prior to December 27, 1997, (iii) the Exchange Offer is not,
for any reason, consummated on or prior to January 26, 1998, (iv) any holder of
notes of the Issuers (the "Private Exchange Notes") issued simultaneously with
the issuance of the Exchange Notes in exchange for certain Private Notes held by
the Initial Purchasers so requests, or (v) in the case of any holder that
participates in the Exchange Offer, such holder does not receive Exchange Notes
on the Exchange Date that may be sold without restriction under state and
federal securities laws (each of the foregoing, a "Shelf Registration Event"),
the Issuers and the Guarantors will file with the Commission the Shelf
Registration Statement to cover resales of the Private Notes by the holders
thereof who satisfy certain conditions relating to the provision of information
in connection with the Shelf Registration Statement. For purposes of the
foregoing, "Registrable Notes" means each Note until: (i) a registration
statement (other than, with respect to any Exchange Note described in clause (v)
above, the Registration Statement) covering such Private Note, Exchange Note or
Private Exchange Note has been declared effective by the Commission and such
Private Note, Exchange Note or Private Exchange Note, as the case may be, has
been disposed of in accordance with such effective registration statement, (ii)
such Private Note, Exchange Note or Private Exchange Note, as the case may be,
is sold in compliance with Rule 144, (iii) such Private Note has been exchanged
for an Exchange Note and such Exchange Note is not described in clause (v) above
or (iv) such Private Note, Exchange Note or Private Exchange Note, as the case
may be, ceases to be outstanding.
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The Registration Rights Agreement provides that the Issuers and the
Guarantors will: (i) file the Registration Statement with the Commission on or
prior to November 27, 1997; (ii) use their commercially reasonable best efforts
to (x) cause the Registration Statement to be declared effective and to commence
the Exchange Offer on or prior to December 27, 1997, (y) keep the Exchange Offer
open for 30 days (or longer if required by applicable law) and (z) exchange
Exchange Notes for all Private Notes validly tendered and not withdrawn pursuant
to the Exchange Offer on or prior to the fifth day following the date on which
the Exchange Offer expires and (iii) if obligated to file the Shelf Registration
Statement, file the Shelf Registration Statement with the Commission on or prior
to (x) the 30th day after the Shelf Registration Event occurs, if the Shelf
Registration Event occurs fewer than 30 days prior to November 27, 1997 or (y)
the 45th day after the Shelf Registration Event occurs, if the Shelf
Registration Event occurs after the filing of the Registration Statement (in
either case, the "Filing Date") with the Commission and use their commercially
reasonable best efforts to cause the Shelf Registration Statement to become
effective on or prior to, if the Filing Date in respect thereof is fewer than 60
days prior to December 27, 1997, the 60th day after such Filing Date and, if the
Filing Date if after the filing of the Registration Statement, the 60th day
after such Filing Date. If: (a) the Issuers and the Guarantors fail to file any
of the Registration Statements on or before the date specified for such filing
(other than due to a Legal Prohibition), (b) any of such Registration Statements
is not declared effective by the Commission on or prior to the date specified
for such effectiveness (other than due to a Legal Prohibition), (c) the Issuers
have not exchanged Exchange Notes for all Registrable Notes validly tendered and
not withdrawn on or prior to the fifth day after the expiration of the Exchange
Offer, (d) the Registration Statement ceases to be effective at any time prior
to the date on which the Exchange Offer is to expire or (e) the Shelf
Registration Statement is declared effective but ceases to be effective at any
time during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (a) through (e) above, a "Registration
Default"), then the Issuers agree to pay to each holder of Registrable
Securities, with respect to the first 90-day period immediately following the
occurrence of such Registration Default, an amount equal to $.05 per week per
$1,000 principal amount of Registrable Securities held by such holder. Such
interest, together with interest accrued by the Issuers pursuant to the next
succeeding sentence, is collectively referred to herein as "Additional
Interest." The amount of the Additional Interest will increase by an additional
$.05 per week per $1,000 principal amount of Registrable Securities with respect
to each subsequent 90-day period until all Registration Defaults have been
cured, up to a maximum amount of Additional Interest of $.40 per week per $1,000
principal amount of Registrable Securities. All Additional Interest will be
payable to holders of the Registrable Securities in cash on each August 1 and
February 1, commencing with the first such date occurring after any such
Additional Interest commences to accrue, until such Registration Default is
cured. After the date on which such Registration Default is cured, the interest
rate on the Registrable Securities will revert to 12 1/2% per annum.
Holders of Private Notes will be required to make certain representations
to the Issuers in order to participate in the Exchange Offer and will be
required to deliver information to be used in connection with the Shelf
Registration Statement within the time periods set forth in the Registration
Rights Agreement in order to have their Private Notes included in the Shelf
Registration Statement and benefit from the provisions regarding Additional
Interest set forth above.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes the material U.S. federal income tax
consequences of the acquisition, ownership and disposition of the Exchange
Notes. This summary is based on the Internal Revenue Code of 1986, as amended to
the date hereof (the "Code"), administrative pronouncements, judicial decisions
and existing and proposed Treasury Regulations, changes to any of which
subsequent to the date hereof may affect the tax consequences described below.
This summary addresses only Exchange Notes held as capital assets within the
meaning of Section 1221 of the Code. It does not discuss all of the tax
consequences that may be relevant to a holder in light of such holder's
particular circumstances or to holders subject to special rules, such as certain
financial institutions, insurance companies, tax-exempt organizations, dealers
in securities, persons holding the Exchange Notes as part of a straddle or a
hedging arrangement or foreign persons.
HOLDERS OF EXCHANGE NOTES SHOULD CONSULT THEIR TAX ADVISORS WITH REGARD TO
THE APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS, AS WELL AS WITH REGARD TO ANY TAX CONSEQUENCES ARISING UNDER THE
LAWS OF ANY STATE, LOCAL OR FOREIGN JURISDICTION.
THE EXCHANGE
A holder of Private Notes should not recognize income, gain, or loss as a
result of the exchange of Private Notes for Exchange Notes in the Exchange
Offer. As a result, no material federal income tax consequences will result to
holders exchanging Private Notes for Exchange Notes, and initially a holder
should have the same tax basis and holding period in the Exchange Notes as it
had in the Private Notes exchanged thereof.
INTEREST
Holders of the Exchange Notes will be required to include stated interest
on the Exchange Notes in gross income for Federal income tax purposes in
accordance with their regular method of accounting for tax purposes. Although
the Private Notes were issued at a discount from their face amount, the amount
of this original issue discount ("OID") was de minimis under the Code ("de
minimis OID") and, thus, for federal income tax purposes, holders of the Private
Notes were not, and holders of the Exchange Notes will not, be required or
permitted to include any OID in income until the principal amount due under the
Notes is received. When the de minimis OID is received upon retirement of the
Exchange Notes, such amount will be treated as described below under "-- Sale,
Exchange or Retirement of the Exchange Notes." Although the de minimis OID will
not be taxed currently as interest to the holders of the Notes, the Company will
be entitled to deduct the de minimis OID as interest over the term of the Notes
on a straight-line basis.
SALE, EXCHANGE OR RETIREMENT OF THE EXCHANGE NOTES
In general, a holder of an Exchange Note will recognize gain or loss on the
sale, exchange (other than an exchange of Private Notes for Exchange Notes under
the Exchange Offer), retirement or other taxable disposition of such Exchange
Note measured by the difference, if any, between (i) the amount of cash and the
fair market value of property received (including amounts received with respect
to de minimis OID) and (ii) the holder's adjusted tax basis in the Exchange
Note. A holder's adjusted tax basis in an Exchange Note generally, will equal
the cost of the Private Note exchanged thereof, increased by any accrued
interest and market discount previously included in income by the holder, and
reduced by any amortized bond premium and any non-interest payments received by
the holder.
Subject to the exception discussed below for market discount, gain or loss
recognized on the sale, exchange or retirement of an Exchange Note generally
will be capital gain or loss provided that the Exchange Notes constitute capital
assets in the hands of the holder within the meaning of Section 1221 of the
Code. The tax rate applicable to any resulting capital gain, and the type of
income against which any resulting capital loss may be deducted, depends upon
the holding period for the Exchange Note at the time of its sale, exchange or
retirement. For tax years ending after May 6, 1997, the Taxpayer Relief Act of
1997 ("TRA '97") amended the law with respect to rates of taxation applicable to
capital gains and losses recognized by noncorporate taxpayers. On November 5,
1997 the House of Representatives approved a bill to make technical corrections
to TRA '97,
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including with respect to taxation of capital gains and losses. On October 27,
1997 the Internal Revenue Service (the "IRS") released Notice 97-59 describing
how the IRS is taking into account the pending retroactive legislative
corrections in administering the new capital gains provisions of the Code.
Although the provisions of Notice 97-59 are currently applicable, they are
subject to change or override by final passage of legislation by Congress and
signature by the President. According to Notice 97-59, long-term capital gains
and losses properly taken into account by certain noncorporate taxpayers after
July 28, 1997 must be separated into three tax rate groups: The 28-Percent
Group, the 25-Percent Group, and the 20-Percent Group. The 28-Percent Group
consists of, among other things, long-term capital loss carryovers and capital
gains and losses from capital assets held for more than one year, but not more
than 18 months. The 25-Percent Group consists of certain unrecaptured "section
1250 gain" attributable to depreciation of real property held for more than 18
months (if taken into account after July 28, 1997). The 20-Percent Group (10
percent in the case of gain that would otherwise be taxed at 15 percent)
consists of capital gains and losses from capital assets held for more than 18
months. Within each group, net long-term capital gains and losses are netted to
arrive at a net gain or loss for the group. Short-term capital losses (i.e.,
losses from the sale or exchange of capital assets held for not more than one
year, plus short-term capital loss carryovers from prior years) are first
applied to reduce short-term capital gains. Any net short-term capital loss
(i.e., the excess, if any, of short-term capital losses over short-term capital
gains) is first applied to reduce net long-term capital gain from the 28-Percent
Group, then to reduce net long-term capital gain from the 25-Percent Group, and
finally to reduce net long-term capital gain from the 20-Percent Group. A net
long-term capital loss from the 28-Percent Group (including long-term capital
loss carryovers) is used first to reduce net long-term capital gain from the
25-Percent Group, then to reduce net long-term capital gain from the 20-Percent
Group. A net long-term capital loss from the 20-Percent Group is used first to
reduce net long-term capital gain from the 28-Percent Group, then to reduce net
long-term capital gain from the 25-Percent Group. Any resulting net capital gain
remaining in any of the 28-Percent Group, the 25-Percent Group, or the
20-Percent Group is taxed at 28 percent, 25 percent, or 20 percent (10 percent
in the case of gain that would otherwise be taxed at 15 percent), respectively.
Sales and exchanges of capital assets by certain "pass-thru entities" (including
S corporations and partnerships) is expected to be governed by future Treasury
Regulations.
AMORTIZABLE BOND PREMIUM AND MARKET DISCOUNT
If a holder acquired a Note for an amount that is greater that the amount
payable at maturity, such holder will be considered to have acquired such Note
with "bond premium." The amount of bond premium is the excess of (i) the
holder's tax basis in such Note, over (ii) the amount payable at maturity (or on
an earlier call date if it results in a smaller amortizable bond premium). Such
holder may elect (in accordance with applicable Code provisions) to amortize
such premium using a constant yield method over the remaining term of such Note
(or until an earlier call date if it resulted in a smaller amortizable bond
premium) and to offset interest otherwise required to be included in income in
respect of such Note during any taxable year by the amortized amount of such
excess for such taxable year. Such election, once made, is irrevocable (unless
permission is received from the IRS) and applies to all taxable bonds held
during the taxable year for which the election is made or subsequently acquired.
If a holder acquired a Note for an amount that is less than the stated
redemption price at maturity (other than at original issuance), such holder
generally will be considered to have acquired such Note with "market discount."
For this purpose, the stated redemption price at maturity of a Note will equal
its principal amount. Market discount with respect to a Note is the excess of
the stated redemption price at maturity over the amount paid by the holder for
such Note. However, the amount of market discount will be considered zero if it
would otherwise be less than 1/4 of 1 percent of the stated redemption price of
such Note at maturity multiplied by the number of complete years to maturity
(after the holder acquired such Note). If a Note is subject to the market
discount rules, a holder generally will be required to (i) treat any gain
realized with respect to such Note as ordinary income to the extent market
discount accrued (but was not included in income) during the period such holder
held the Note, (ii) possibly treat any payment on such Note (other than stated
interest) as ordinary income to the extent market discount accrued (but was not
included in income) during the period such holder held such Note, and (iii)
defer the deduction of all or a portion of the interest expense on any
indebtedness incurred or maintained by such holder to acquire or carry such
Note. If such Note is disposed of in a nontaxable transaction (other than a
nonrecognition transaction described in Section 1276(c) of the Code), accrued
market discount will
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be includible as ordinary income to the holder as if such holder had sold such
Note at its then fair market value. Market discount will be considered to accrue
ratably during the period from the date of acquisition to the maturity date of
such Note, unless the holder irrevocably elects to accrue market discount on the
basis of a constant interest method. A holder may elect to include market
discount in income currently as it accrues (on either a ratable or constant
interest method), in which case the rules described above regarding the
treatment of gain realized and the deferral of interest deductions will not
apply. An election to include market discount currently, once made, will apply
to all market discount obligations acquired by the holder on or after the first
day of the first taxable year to which the election applies, and may not be
revoked without the consent of the IRS.
Because of the complexity of the rules relating to bond premium and market
discount, holders should consult their tax advisors as to the application of
these rules to their particular circumstances and as to the merit of making any
elections in connection therewith.
BACKUP WITHHOLDING AND INFORMATION REPORTING
Certain noncorporate holders may be subject to backup withholding at a rate
of 31% on payments of principal and interest and premium on, and the proceeds of
disposition of, an Exchange Note. Backup withholding will apply only if the
holder: (i) fails to furnish its Taxpayer Identification Number ("TIN") which,
for an individual, would be his or her Social Security number; (ii) furnishes an
incorrect TIN; (iii) is notified by the IRS that it has failed properly to
report payments of interest and dividends; or (iv) under certain circumstances,
fails to certify, under penalty of perjury, that it has furnished a correct TIN
and has not been notified by the IRS that it is subject to backup withholding
for failure to report interest and dividend payments. Holders of the Exchange
Notes should consult their tax advisors regarding their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption, if applicable.
The amount of any backup withholding from a payment to a holder of an
Exchange Note will be allowed as a credit against the holder's U.S. federal
income tax liability and may entitle the holder to a refund, provided that the
required information is furnished to the Internal Revenue Service.
OTHER TAX CONSEQUENCES
In addition to the federal income tax considerations described above,
holders of the Exchange Notes should consider potential state, local, income,
franchise, personal property and other taxation in any state or locality and the
tax effect of ownership, sale, exchange, or retirement of the Exchange Notes in
any state or locality. Holders of the Exchange Notes are advised to consult
their own tax advisors with respect to any state or local income, franchise,
personal property or other tax consequences arising out of their ownership of
the Exchange Notes.
THE FOREGOING DISCUSSION IS FOR GENERAL INFORMATION AND IS NOT TAX ADVICE.
ACCORDINGLY, EACH HOLDER OF THE EXCHANGE NOTES SHOULD CONSULT HIS OWN TAX
ADVISOR AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OF THE EXCHANGE NOTES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL, OR FOREIGN INCOME
TAX LAWS AND ANY RECENT OR PROSPECTIVE CHANGES IN APPLICABLE TAX LAWS.
PLAN OF DISTRIBUTION
Each Participating Broker-Dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a Participating Broker-Dealer in connection with the resales of Exchange
Notes received in exchange for Private Notes where such Private Notes were
acquired as a result of market-making activities or other trading activities.
The Issuers have agreed that for a period of up to 180 days after the Expiration
Date, they will make this Prospectus, as amended or supplemented, available to
any Participating Broker-Dealer that requests such document in the Letter of
Transmittal for use in connection with any such resale.
The Issuers will not receive any proceeds from any sale of Exchange Notes
by broker-dealers or any other persons. Exchange Notes received by Participating
Broker-Dealers for their own account pursuant to the
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Exchange Offer may be sold from time to time in one or more transactions in the
over-the-counter market, in negotiated transactions, through the writing of
options on the Exchange Notes or a combination of such methods of resale, at
market prices prevailing at the time of resale, at prices related to such
prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
Participating Broker-Dealer and/or the purchasers of any such Exchange Notes.
Any Participating Broker-Dealer that resells Exchange Notes that were received
by it for its own account pursuant to the Exchange Offer and any broker or
dealer that participates in a distribution of such Exchange Notes may be deemed
to be an "underwriter" within the meaning of the Securities Act and any profit
on any such resale of Exchange Notes and any commissions or concessions received
by any such persons may be deemed to be underwriting compensation under the
Securities Act. The Letter of Transmittal states that by acknowledging that it
will deliver and by delivering a prospectus, a Participating Broker-Dealer will
not be deemed to admit that it is an "underwriter" within the meaning of the
Securities Act.
The Issuers have agreed to pay all expenses incident to the Issuers's
performance of, or compliance with, the Registration Rights Agreement and will
indemnify the holders of Private Notes (including any Participating
Broker-Dealers), and certain parties related to such holders, against certain
liabilities, including liabilities under the Securities Act.
NOTICE TO INVESTORS
Because the following instructions will apply to Private Notes held by
holders who do not participate in the Exchange Offer, holders of the Private
Notes are advised to consult legal counsel prior to making any offer, resale,
pledge or transfer of any of the Private Notes.
The Private Notes have not been registered under the Securities Act and may
not be offered or sold within the United States or to U.S. Persons (as such
terms are defined under the Securities Act) except pursuant to an exemption
from, or in a transaction not subject to the registration requirements of the
Securities Act. Accordingly, the Private Notes were offered only to "qualified
institutional buyers" (as defined in Rule 144A under the Securities Act)
("QIBs") in reliance on the exemption from the registration requirements of the
Securities Act provided by Rule 144A, and to a limited number of institutional
"accredited investors" within the meaning of Rule 501(a)(1), (2), (3) and (7)
under the Securities Act ("Institutional Accredited Investors").
Each purchaser of Private Notes purchased in a sale made in reliance on
Rule 144A has been deemed to have represented and agreed as follows (terms used
in this paragraph that are defined in Rule 144A are used herein as defined
therein):
(1) The purchaser is either (A) a QIB and is aware that the sale to it
is being made in reliance on Rule 144A, and such QIB has acquired such
Private Notes for its own account or for the account of another QIB or, (B)
an Institutional Accredited Investor or, if the Private Notes are to be
purchased for one or more accounts ("investor accounts") for which it is
acting as fiduciary or agent, each such account is an Institutional
Accredited Investor on a like basis.
(2) The purchaser understands that the Private Notes were offered in a
transaction not involving any public offering in the United States within
the meaning of the Securities Act, that the Notes have not been registered
under the Securities Act and that: (A) the Private Notes may be offered,
resold, pledged or otherwise transferred only: (i) to a person who the
seller reasonably believes is a QIB in a transaction meeting the
requirements of Rule 144A, in a transaction meeting the requirements of
Rule 144 under the Securities Act, outside the United States to a foreign
person in a transaction meeting the requirements of Rule 904 under the
Securities Act or in accordance with another exemption from the
registration requirements of the Securities Act (and based upon an opinion
of counsel if the Issuers so request); (ii) to the Issuers; or (iii)
pursuant to an effective registration statement, and, in each case, in
accordance with any applicable securities laws of any State of the United
States or any other applicable jurisdictions; and (B) the purchaser will,
and each subsequent holder is required to, notify any subsequent purchaser
from it of the resale restrictions set forth in (A) above.
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(3) The purchaser understands that the certificates evidencing the
Private Notes bear, and if not exchanged pursuant to the Exchange Offer
will continue to bear unless otherwise agreed by the Issuers and the holder
thereof, a legend substantially to the following effect:
"THE SECURITY (OR ITS PREDECESSOR) EVIDENCED HEREBY WAS ORIGINALLY
ISSUED IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER SECTION 5 OF THE
UNITED STATES SECURITIES ACT OF 1933 (THE "SECURITIES ACT"), AND THE
SECURITY EVIDENCED HEREBY MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED
IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM.
EACH PURCHASER OF THE SECURITY EVIDENCED HEREBY IS HEREBY NOTIFIED THAT THE
SELLER MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF
THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER. THE HOLDER OF THE
SECURITY EVIDENCED HEREBY AGREES FOR THE BENEFIT OF THE ISSUERS THAT (A)
SUCH SECURITY MAY BE RESOLD, PLEDGED OR OTHERWISE TRANSFERRED, ONLY (1)(A)
INSIDE THE UNITED STATES TO A PERSON WHO THE SELLER REASONABLY BELIEVES IS
A QUALIFIED INSTITUTIONAL BUYER (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (B)
IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144 UNDER THE SECURITIES
ACT, (C) OUTSIDE THE UNITED STATES TO A FOREIGN PERSON IN A TRANSACTION
MEETING THE REQUIREMENTS OF RULE 904 UNDER THE SECURITIES ACT OR (D) IN
ACCORDANCE WITH ANOTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT (AND BASED UPON AN OPINION OF COUNSEL IF THE ISSUERS SO
REQUEST), (2) TO THE ISSUERS OR (3) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT AND, IN EACH CASE, IN ACCORDANCE WITH ANY APPLICABLE SECURITIES
LAWS OF ANY STATE OF THE UNITED STATES OR ANY OTHER APPLICABLE JURISDICTION
AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY
ANY PURCHASER FROM IT OF THE SECURITY EVIDENCED HEREBY OF THE RESALE
RESTRICTIONS SET FORTH IN (A) ABOVE."
(4) The purchaser acknowledged that none of the Issuers, the Initial
Purchasers or any person representing the Issuers or the Initial Purchasers
made any representations to it with respect to the Issuers or the offering
or sale of the Private Notes, other than the information contained in the
Offering Memorandum, which was delivered to it and upon which it relied in
making its investment decision with respect to the Private Notes. The
purchaser had access to such financial and other information concerning the
Issuers and the Private Notes as it was deemed necessary in connection with
its decision to purchase the Private Notes, including an opportunity to ask
questions of and request information from the Issuers and the Initial
Purchasers.
(5) The purchaser acknowledged that the Issuers and the Initial
Purchasers and others relied upon the truth and accuracy of the foregoing
acknowledgements, representations and agreements and agrees that, if any of
the foregoing acknowledgements, representations or agreements deemed to
have been made by it are no longer accurate, it shall promptly notify the
Initial Purchasers. If such purchaser acquired Private Notes as a fiduciary
or agent for one or more investor accounts, such purchaser represented that
it has sole investment discretion with respect to each such account and
that it has full power to make the foregoing acknowledgements,
representations and agreements on behalf of each such account.
Each purchaser of Private Notes that is an Institutional Accredited
Investor executed and delivered a purchaser's letter for the benefit of the
Initial Purchasers and the Issuers, substantially in the form included as
Appendix A to the Offering Memorandum, whereby such Institutional Accredited
Investor (a) agrees to the restrictions on transfer set forth in clause (2)
above, (b) confirmed that it: (i) acquired Private Notes having a minimum
purchase price of at least $100,000 for its own account and for each separate
account for which it is acting; (ii) acquired such Private Notes for its own
account or for certain qualified institutional accounts, as specified therein;
and (iii) did not acquire the Private Notes with a view to distribution thereof
in a transaction that would violate the Securities Act or the securities laws of
any State of the United States or any other applicable jurisdiction; and (c)
acknowledged that the registrar and transfer agent for the Private Notes will
not be required to accept for registration of transfer any Private Notes
acquired by them, except upon presentation of evidence
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satisfactory to the Issuers that the restrictions on transfer set forth in
clause (2) above have been complied with, and that any such Private Notes will
bear the legend set forth in clause (3) above.
The Private Notes may not be sold or transferred to, and each purchaser, by
its purchase of the Private Notes shall be deemed to have represented and
covenanted that it is not acquiring the Private Notes for or on behalf of, and
will not transfer the Private Notes to, any pension or welfare plan (as defined
in Section 3 of the Employee Retirement Income Security Act of 1974 ("ERISA"))
except that such a purchase for or on behalf of a pension or welfare plan shall
be permitted:
(1) to the extent such purchase is made by or on behalf of a bank
collective investment fund maintained by the purchaser in which no plan
(together with any other plans maintained by the same employer or employee
organization) has an interest in excess of 10% of the total assets in such
collective investment fund and the conditions of Section III of Prohibited
Transaction Class Exemption 91-38 issued by the Department of Labor are
satisfied;
(2) to the extent such purchase is made by or on behalf of an
insurance company pooled separate account maintained by the purchaser in
which, at any time while the Private Notes are outstanding, no plan
(together with any other plans maintained by the same employer or employee
organization) has an interest in excess of 10% of the total of all assets
in such pooled separate account and the conditions of Section III of
Prohibited Transaction Class Exemption 90-1 issued by the Department of
Labor are satisfied;
(3) to the extent such purchase is made on behalf of a plan by: (i) an
investment advisor registered under the Investment Advisers Act of 1940
that had as of the last day of its most recent fiscal year total assets
under its management and control in excess of $50 million and had
stockholders' or partners' equity in excess of $0.75 million, as shown in
its most recent balance sheet prepared in accordance with generally
accepted accounting principles; or (ii) a bank as defined in Section
202(a)(2) of the Investment Advisers Act of 1940 with equity capital in
excess of $1 million as of the last day of its most recent fiscal year; or
(iii) an insurance company that is qualified under the laws of more than
one state to manage, acquire or dispose of any assets of a plan, which
insurance company has as of the last day of its most recent fiscal year,
net worth in excess of $1 million and which is subject to supervision and
examination by a state authority having supervision over insurance
companies and, in any case, such investment advisor, bank or insurance
company is otherwise a qualified professional asset manager, as such term
is used in Prohibited Transaction Class Exemption 84-14 issued by the
Department of Labor, and the assets of such plan when combined with the
assets of other plans established or maintained by the same employer (or
affiliate thereof) or employee organization and managed by such investment
advisor, bank or insurance company, do not represent more than 20% of the
total client assets managed by such investment advisor, bank or insurance
company, and the conditions of Section I of such exemption are otherwise
satisfied;
(4) to the extent such plan is a governmental plan (as defined in
Section 3 of ERISA) which is not subject to the provisions of Title I of
ERISA of Section 401 of the Internal Revenue Code; or
(5) to the extent such purchase is made from funds from an insurance
company general account, the conditions of Sections I and IV of Prohibited
Transactions Class Exemption 95-60 issued by the Department of Labor are
satisfied.
LEGAL MATTERS
The validity of the Notes has been passed upon for the Issuers by Nelson
Mullins Riley & Scarborough, L.L.P., Charlotte, North Carolina. Each of H. Bryan
Ives III and C. Mark Kelly, partners of Nelson Mullins Riley & Scarborough,
L.L.P., beneficially owns a 0.1301% limited partnership interest in Columbia DBS
Investors, L.P., and 0.2381% member interest in Columbia DBS Class A Investors,
LLC, which, in the aggregate, beneficially own 63.97% of the capital stock of
the Company.
126
<PAGE> 134
EXPERTS
The (i) consolidated financial statements of the Company 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 and (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 appearing 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.
The financial statements of Northeast DBS Enterprises, L.P. for the years
ended December 31, 1994 and December 31, 1995 appearing in this 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 Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their reports appearing herein, and are included herein
in reliance upon the reports of such firm given upon their authority as experts
in accounting and auditing.
AVAILABLE INFORMATION
The Issuers and the Guarantors have filed with the Commission a
Registration Statement on Form S-4 (the "Exchange Offer Registration Statement,"
which term shall encompass all amendments, exhibits, annexes and schedules
thereto) pursuant to the Securities Act and the rules and regulations
promulgated thereunder, covering the Exchange Notes being offered hereby. This
Prospectus does not contain all the information set forth in the Exchange Offer
Registration Statement. For further information with respect to the Issuers and
the Exchange Offer, reference is made to the Exchange Offer Registration
Statement. Statements made in this Prospectus as to
127
<PAGE> 135
the contents of any contract, agreement or other document referred to are not
necessarily complete. With respect to each such contact, agreement or other
document filed as an exhibit to the Exchange Offer Registration Statement,
reference is made to the exhibit for a more complete description of the document
or matter involved, and each such statement shall be deemed qualified in its
entirety by such reference. The Exchange Offer Registration Statement, including
the exhibits thereto, can be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at the Regional Offices of the Commission at 7 World
Trade Center, 13th Floor, New York, New York 10048 and at Citicorp Center, 500
West Madison Street, Suite 1400, Chicago Illinois 60661. Copies of such
materials can be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. The address of such site is http://www.sec.gov.
As a result of the filing of the Exchange Offer Registration Statement with
the Commission, the Issuers and the Guarantors will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will be required to file
periodic reports and other information with the Commission. The obligation of
the Issuers and the Guarantors to file periodic reports and other information
with the Commission will be suspended if the Notes are held of record by fewer
than 300 holders as of the beginning of any fiscal year of the Issuers and the
Guarantors other than the fiscal year in which the Exchange Offer Registration
Statement is declared effective. The Issuers have agreed that, whether or not
they are required to do so by the rules and regulations of the Commission, for
so long as any of the Notes remain outstanding, they will furnish to the holders
of the Notes and file with the Commission (unless the Commission will not accept
such a filing) (i) all quarterly and annual financial information that would be
required to be contained in a filing with the Commission on Forms 10-Q and 10-K
if the Issuers were required to file such forms, including a "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and,
with respect to the annual information only, a report thereon by the Issuers'
certified independent accountants and (ii) all current reports that would be
required to be filed with the Commission on Form 8-K if the Issuers were
required to file such reports. In addition, for so long as any of the Notes
remain outstanding, the Issuers have agreed to furnish to the holders of the
Notes or any prospective transferee of any such holder, upon their request, the
information required to be delivered by Rule 144A(d)(4) under the Securities
Act. Such information may be requested by contacting Donald A. Doering, the
Company's Vice President, Chief Financial Officer, Treasurer and Secretary at
880 Holcomb Bridge Road, Building C-200, Roswell, Georgia, 30076, telephone
number (770) 645-4440, facsimile number (770) 645-9586.
128
<PAGE> 136
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PRO FORMA FINANCIAL STATEMENTS
Digital Television Services, Inc.
Unaudited Condensed Consolidated Pro Forma Financial
Statements............................................. F-4
Unaudited Condensed Consolidated Pro Forma Balance Sheet
as of September 30, 1997............................... F-5
Unaudited Condensed Consolidated Pro Forma Statement of
Operations for the Nine Months Ended September 30, 1997
and for the Year Ended December 31, 1996............... F-6
Notes to Unaudited Condensed Consolidated Pro Forma
Financial Statements................................... F-7
HISTORICAL FINANCIAL STATEMENTS
Digital Television Services, LLC
Report of Independent Public Accountants.................. F-10
Consolidated Balance Sheets as of December 31, 1996 and as
of September 30, 1997 (unaudited)...................... F-11
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-12
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-13
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-14
Notes to Consolidated Financial Statements................ F-15
WEP Intermediate Corp.
Report of Independent Public Accountants.................. F-36
Balance Sheet as of September 30, 1997.................... F-37
Statement of Cash Flows for the Period from Inception
(January 28, 1997) through September 30, 1997.......... F-38
Notes to Financial Statements............................. F-39
Direct Programming Services Limited Partnership
Report of Independent Public Accountants.................. F-41
Balance Sheets as of December 31, 1995 and 1996........... F-42
Statements of Operations for the Years Ended December 31,
1994, 1995 and 1996.................................... F-43
Statements of Changes in Partners' Capital for the Years
Ended December 31, 1994, 1995 and 1996................. F-44
Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996.................................... F-45
Notes to Financial Statements............................. F-46
Kansas DBS, L.L.C.
Report of Independent Public Accountants.................. F-52
Balance Sheets as of December 31, 1995 and 1996........... F-53
Statements of Operations and Changes in Accumulated
Deficit for the Years Ended December 31, 1995 and
1996................................................... F-54
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996.......................................... F-55
Notes to Financial Statements............................. F-56
</TABLE>
F-1
<PAGE> 137
DBS Operations of NRTC System No. 0422
Report of Independent Public Accountants.................. F-61
Statements of Assets and Liabilities and Accumulated
Deficit as of December 31, 1995 and 1996 and as of
March 31, 1997 (unaudited)............................. F-62
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-63
Statements of Cash Flows for the Years Ended December 31,
1995 and 1996 and for the Three Months Ended March 31,
1997 (unaudited)....................................... F-64
Notes to Financial Statements............................. F-65
DBS Operations of NRTC System No. 0073
Report of Independent Public Accountants.................. F-70
Statement of Assets and Liabilities and Accumulated
Earnings as of December 31, 1996 and as of March 31,
1997 (unaudited)....................................... F-71
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-72
Statements of Cash Flows for the Year Ended December 31,
1996 and for the Three Months Ended March 31, 1997
(unaudited)............................................ F-73
Notes to Financial Statements............................. F-74
Northeast DBS Enterprises, L.P.
Independent Auditor's Report.............................. F-79
Balance Sheets as of December 31, 1994 and 1995........... F-80
Statements of Operations and Partners' Equity for the
Years Ended December 31, 1994 and 1995................. F-81
Statements of Cash Flows for the Years Ended December 31,
1994 and 1995.......................................... F-82
Notes to Financial Statements............................. F-84
Northeast DBS Enterprises, L.P.
Report of Independent Public Accountants.................. F-88
Balance Sheet as of December 31, 1996..................... F-89
Statement of Operations for the Year Ended December 31,
1996................................................... F-90
Statement of Changes in Partners' Capital for the Year
Ended December 31, 1996................................ F-91
Statement of Cash Flows for the Year Ended December 31,
1996................................................... F-92
Notes to Financial Statements............................. F-93
DBS Operations of NRTC System No. 0001
Report of Independent Public Accountants.................. F-99
Statements of Assets and Liabilities and Accumulated
Deficit as of December 31, 1995 and November 26,
1996................................................... F-100
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-101
Statements of Cash Flows for the Year Ended December 31,
1995 and the Period From January 1, 1996 Through
November 26, 1996...................................... F-102
Notes to Financial Statements............................. F-103
DBS Operations of NRTC System No. 1025
Report of Independent Public Accountants.................. F-108
Statements of Assets and Liabilities and Accumulated
Deficit as of December 31, 1995 and August 28, 1996.... F-109
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-110
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-111
Notes to Financial Statements............................. F-112
F-2
<PAGE> 138
Satellite Television Services, Inc.
Independent Auditors' Report.............................. F-116
Balance Sheet as of September 30, 1996 and 1997........... F-117
Statement of Cash Flows for the Years Ended September 30,
1995, 1996 and 1997.................................... F-118
Statement of Operations for the Years Ended September 30,
1995, 1996 and 1997.................................... F-119
Statements of Shareholder's Equity for the Years Ended
September 30, 1995, 1996 and 1997...................... F-120
Notes to Financial Statements............................. F-121
F-3
<PAGE> 139
DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
The following unaudited condensed pro forma financial statements include
the effects of the following transactions: (i) the acquisition by the Company
during 1996 of the rights to distribute DIRECTV Services in eight Rural DirecTv
Markets (the "1996 Acquisitions"), (ii) the acquisition by the Company in the
first half of 1997 of the rights to distribute DIRECTV Services in eight Rural
DirecTv Markets in Kentucky, Kansas, Vermont and Georgia (the "1997
Acquisitions"), (iii) the sale by the Company in January 1997 of 205,902 Class B
Units to Columbia and senior management raising approximately $2,059,000 of
equity capital and the sale by the Company in February 1997 of 1,333,333 Class A
Units to 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, (v) the amendment and restatement of its
existing credit facility (the "Existing 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 sublimit for letters of credit,
(vi) the offering (the "Offering") of the Senior Subordinated Notes of the
Company (the "Notes") generating gross proceeds to the Company of $152.8
million, (vii) the placement of approximately $36.2 million in an interest
escrow account (the "Interest Escrow Account") to fund the first four
semi-annual interest payments on the Notes, (viii) the repayment of the $50.0
million term loans outstanding under the Existing Credit Facility and
approximately $29.2 million of the revolving credit loans outstanding at June
30, 1997 under the Existing Credit Facility along with outstanding accrued
interest of approximately $0.6 million, (ix) the amendment and restatement of
the Existing Credit Facility pursuant to the Second Amended and Restated Credit
Agreement dated July 30, 1997 among the Company and the lenders parties thereto
providing for a revolving credit facility in the amount of up to $70.0 million,
with a $50.0 million sublimit for Letters of Credit, and a $20.0 million term
loan facility of which $55.6 million is immediately available thereunder, (x)
the conversion of DTS from a limited liability company to a corporation (the
"Corporate Conversion") and (xi) the consummation of the acquisition of the
rights to distribute DIRECTV Services in one Rural DirecTV Market in Indiana,
which the Company expects to be completed during the last quarter of 1997 (the
"Pending Acquisition").
All such transactions are reflected as if they had occurred as of January
1, 1996 for the unaudited condensed pro forma statements of operations and at
September 30, 1997 for the unaudited condensed pro forma balance sheet.
Actual information for the Company for the period from inception (January
30, 1996) through December 31, 1996 has been derived from the audited financial
statements of the Company. See audited financial statements of the Company
elsewhere in this Prospectus. Actual information for the Company as of September
30, 1997 and for the nine months then ended has been derived from the unaudited
condensed consolidated financial statements of the Company. The financial
information for the 1996 Acquisitions, the 1997 Acquisitions and the Pending
Acquisition has been derived from the respective historical financial statements
of the various entities. To the extent that such historical financial
information is audited, the respective audited financial statements are included
elsewhere in this Prospectus. See Index to Financial Statements. Financial
information for the remaining 1996 Acquisitions and 1997 Acquisitions is
unaudited.
The pro forma condensed consolidated financial statements and notes thereto
are provided for informational purposes only and do not purport to be indicative
of actual results had the 1996 Acquisitions, the 1997 Acquisitions, the Pending
Acquisition, the Offering, and the 1997 Equity been completed on the dates
indicated or of future results.
F-4
<PAGE> 140
DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
---------------------------------------
ACQUISITION TOTAL
ACTUAL(1) ADJUSTMENTS(2) PRO FORMA
($ IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash, cash equivalents and marketable investment
securities........................................... $ 29,971 $(27,291)(3) $ 2,680
Other current assets.................................... 5,696 1,360(3) 7,056
-------- -------- --------
Total current assets............................ 35,667 (25,931) 9,736
RESTRICTED CASH........................................... 36,544 -- 36,544
PROPERTY AND EQUIPMENT, NET............................... 1,836 84(3) 1,920
CONTRACT RIGHTS AND OTHER ASSETS.......................... 144,399 28,447(3) 172,846
-------- -------- --------
TOTAL ASSETS.................................... $218,446 $ 2,600 $221,046
======== ======== ========
LIABILITIES AND MEMBERS' EQUITY/STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt.................... $ 9,324 $ -- $ 9,324
Other current liabilities............................... 15,162 1,200(4) 16,901
500(5)
39(6)
-------- -------- --------
Total current liabilities....................... 24,486 1,739 26,225
LONG-TERM DEBT, less current maturities................... 166,896 -- 167,796
900(7)
OTHER LIABILITIES......................................... 47 989(6) 1,036
MEMBERS' EQUITY/STOCKHOLDERS' EQUITY
Class A units........................................... 29,820 (29,820)(8) 0
Class B units........................................... 20,500 (20,500)(8) 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 14(8) 14
Common stock, $.01 par value; 10,000,000 shares
authorized; 2,137,049 issued and outstanding at
September 30, 1997................................... 0 21(8) 21
Additional paid-in capital.............................. 0 26,982 25,954
(1,028)(6)
Retained deficit........................................ (23,303) 23,303(8) 0
-------- -------- --------
Total members' equity/stockholders' equity...... 27,017 (1,028) 25,989
-------- -------- --------
TOTAL LIABILITIES AND MEMBERS'
EQUITY/STOCKHOLDERS' EQUITY................... $218,446 $ 2,600 $221,046
======== ======== ========
</TABLE>
F-5
<PAGE> 141
DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
----------------------------------------------------------
ACQUISITION OFFERING TOTAL
ACTUAL(9) ADJUSTMENTS(2) ADJUSTMENTS(14) PRO FORMA
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE:
Programming revenue...... $ 3,085 $ 29,869(10) $ -- $ 32,954
Equipment and
installation revenue... 324 6,746(10) 7,070
------- -------- -------- --------
Total revenue...... 3,409 36,615 -- 40,024
------- -------- -------- --------
COST OF REVENUE:
Programming expense...... 1,596 15,289(10) -- 16,885
Cost of equipment and
installation........... 398 5,043(10) -- 5,441
Service fees............. 276 2,933(10) -- 3,209
------- -------- -------- --------
Total cost of
revenue.......... 2,270 23,265 -- 25,535
------- -------- -------- --------
GROSS PROFIT............... 1,139 13,350 -- 14,489
------- -------- -------- --------
OPERATING EXPENSES:
Sales and marketing...... 778 4,691(10) -- 5,469
General and
administrative......... 1,954 7,593(10) -- 12,156
2,609(11)
Depreciation and
amortization........... 1,148 643(10) -- 17,793
16,002(12)
------- -------- -------- --------
Total operating
expenses......... 3,880 31,538 -- 35,418
------- -------- -------- --------
OPERATING LOSS............. (2,741) (18,188) -- (20,929)
------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest Expense......... (818) (1,386)(13) (19,705)(15) (23,831)
(28)(10) (1,894)(16)
Other Income (Expense)... 24 (118)(10) -- (94)
------- -------- -------- --------
(794) (1,532) (21,599) (23,925)
------- -------- -------- --------
NET LOSS................... $(3,535) $(19,720) $(21,599) $(44,854)
======= ======== ======== ========
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
-----------------------------------------------------------
ACQUISITION OFFERING TOTAL
ACTUAL(9) ADJUSTMENTS(2) ADJUSTMENTS(14) PRO FORMA
($ IN THOUSANDS)
<S> <C> <C> <C> <C>
REVENUE:
Programming revenue...... $ 28,811 $ 7,366(17) $ -- $ 36,177
Equipment and
installation revenue... 3,291 929(17) -- 4,220
-------- ------- ------- --------
Total revenue...... 32,102 8,295 -- 40,397
-------- ------- ------- --------
COST OF REVENUE:
Programming expense...... 14,117 3,299(17) -- 17,416
Cost of equipment and
installation........... 4,026 866(17) -- 4,892
Service fees............. 2,759 1,395(17) -- 4,154
-------- ------- ------- --------
Total cost of
revenue.......... 20,902 5,560 -- 26,462
-------- ------- ------- --------
GROSS PROFIT............... 11,200 2,735 -- 13,935
-------- ------- ------- --------
OPERATING EXPENSES:
Sales and marketing...... 5,557 956(17) -- 6,513
General and
administrative......... 5,885 1,408(17) -- 7,293
Depreciation and
amortization........... 10,484 243(17) -- 14,282
3,555(12)
-------- ------- ------- --------
Total operating
expenses......... 21,926 6,162 -- 28,088
-------- ------- ------- --------
OPERATING LOSS............. (10,726) (3,427) -- (14,153)
-------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest Expense......... (8,918) (362)(13) (7,645)(15) (18,003)
(1,078)(16)
Other Income (Expense)... (124) (16)(17) -- (140)
-------- ------- ------- --------
(9,042) (378) (8,723) (18,143)
-------- ------- ------- --------
NET LOSS................... $(19,768) $(3,805) $(8,723) $(32,296)
======== ======= ======= ========
</TABLE>
F-6
<PAGE> 142
DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS
- ---------------
(1) Represents the historical unaudited condensed consolidated balance sheet of
the Company as of September 30, 1997.
(2) Represents the effects of the Acquisitions.
(3) Purchased assets, including contracts rights established in purchase
accounting from the Pending Acquisition.
(4) Current liabilities assumed in the Pending Acquisition.
(5) Estimated additional liabilities incurred in connection with the Pending
Acquisition.
(6) In connection with the Corporate Conversion, the tax loss carryforwards of
$74,581,000, as of September 30, 1997, were previously used in the tax
returns of the individual members and are not available to the Company. The
following net deferred tax liabilities shall be recognized for temporary
differences in accordance with Statements of Financial Accounting Standards
No. 109, "Accounting for Income Taxes."
(i) Current deferred tax liabilities consists of $38,000 for legal fees
and $1,000 for other miscellaneous items.
(ii) Long-term deferred tax liabilities consists of $747,000 for
amortization, $114,000 for interest expense, $48,000 for depreciation,
$34,000 for patronage dividends and $46,000 for other miscellaneous items.
(7) Restated Credit Facility used in connection with the Pending Acquisition.
(8) Represents the effects of the Corporate Conversion.
(9) Represents the historical consolidated statement of operations of the
Company for the period from inception (January 30, 1996) through December
31, 1996 and the historical unaudited condensed consolidated statement of
operations of the Company for the nine months ended September 30, 1997.
F-7
<PAGE> 143
DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(10) The following represents the unaudited combined statements of operations
and pro forma adjustments for the 1996 preacquisition period for the 1996
Acquisitions, and for the year ended December 31, 1996 for the 1997
Acquisitions and the Pending Acquisition:
<TABLE>
<CAPTION>
1997 PRO FORMA
ACQUISITIONS ADJUSTMENTS TO
1996 ACQUISITIONS AND PENDING 1997
JANUARY 1, 1996 PRO FORMA ACQUISITION ACQUISITIONS
THROUGH ADJUSTMENTS TO ADJUSTED YEAR ENDED AND PENDING
ACQUISITION DATES 1996 ACQUISITIONS 1996 ACQUISITIONS DECEMBER 31, 1996 ACQUISITION
----------------- ----------------- ----------------- ----------------- --------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
Programming revenue... $4,304 $ $4,304 $25,565 $
Equipment and
installation
revenue............. 486 -- 486 6,260 --
------ ----- ------ ------- -------
Total revenue... 4,790 -- 4,790 31,825 --
------ ----- ------ ------- -------
COST OF REVENUE:
Programming expense... 2,322 2,322 12,967
Cost of equipment and
installations....... 417 -- 417 4,626 --
Service fees.......... 181 -- 181 2,752 --
------ ----- ------ ------- -------
Total cost of
revenue....... 2,920 -- 2,920 20,345 --
------ ----- ------ ------- -------
GROSS PROFIT............ 1,870 -- 1,870 11,480 --
------ ----- ------ ------- -------
OPERATING EXPENSES:
Sales and marketing... 383 -- 383 4,308 --
General and
administrative...... 856 -- 856 6,737 --
Depreciation and
amortization........ 577 (571)(A) 6 2,448 (1,811)(A)
------ ----- ------ ------- -------
Total operating
expenses...... 1,816 (571) 1,245 13,493 (1,811)
------ ----- ------ ------- -------
OPERATING INCOME
(LOSS)................ 54 571 625 (2,013) 1,811
------ ----- ------ ------- -------
OTHER INCOME (EXPENSE):
Interest Expense...... (155) 155(B) -- (500) 472(B)
Other Income
(Expense)........... 7 -- 7 32 (157)(C)
------ ----- ------ ------- -------
(148) 155 7 (468) 315
------ ----- ------ ------- -------
NET INCOME (LOSS)....... $ (94) $ 726 $ 632 $(2,481) $ 2,126
====== ===== ====== ======= =======
<CAPTION>
COMBINED
PRO FORMA
1996
ACQUISITIONS
ADJUSTED AND
1997 1997
ACQUISITIONS ACQUISITIONS
AND PENDING AND PENDING
ACQUISITION ACQUISITION
-------------- ---------------
<S> <C> <C>
REVENUE:
Programming revenue... $25,565 $29,869
Equipment and
installation
revenue............. 6,260 6,746
------- -------
Total revenue... 31,825 36,615
------- -------
COST OF REVENUE:
Programming expense... 12,967 15,289
Cost of equipment and
installations....... 4,626 5,043
Service fees.......... 2,752 2,933
------- -------
Total cost of
revenue....... 20,345 23,265
------- -------
GROSS PROFIT............ 11,480 13,350
------- -------
OPERATING EXPENSES:
Sales and marketing... 4,308 4,691
General and
administrative...... 6,737 7,593
Depreciation and
amortization........ 637 643
------- -------
Total operating
expenses...... 11,682 12,927
------- -------
OPERATING INCOME
(LOSS)................ (202) 423
------- -------
OTHER INCOME (EXPENSE):
Interest Expense...... (28) (28)
Other Income
(Expense)........... (125) (118)
------- -------
(153) (146)
------- -------
NET INCOME (LOSS)....... $ (355) $ 277
======= =======
</TABLE>
(A) Elimination of historical basis amortization expense for
preacquisition contract rights and other intangible assets eliminated in
purchase accounting of the acquired businesses.
(B) Elimination of interest expense on debt not acquired.
(C) Elimination of interest income on lease receivables not acquired.
(11) Annualization of December 1996 home office expense, net of total home
office expense recorded, in order to reflect such expense for the full year
at December level. As Company began operations during 1996, the Company
built its home office infrastructure throughout the year. In the opinion of
management, the December 1996 level of home office expenses is more
indicative of expenses to be incurred in future operations.
(12) Amortization of capitalized license fees for the acquisitions. The
capitalized license fees are being amortized over ten years, the estimated
remaining useful life of the satellites operated by DirecTv which provide
service under the related contracts and reflects:
(i) Amortization of $2,251,000 for December 31, 1996 for the 1996
Acquisitions.
(ii) Amortization of $10,906,000 for December 31, 1996 and $1,422,000
for September 30, 1997 for the 1997 Acquisitions.
(iii) Amortization of $2,845,000 for December 31, 1996 and $2,133,000
for September 30, 1997 for the Pending Acquisition.
(13) Interest expense on the Notes issued in connection with the acquisition of
the Company's DirecTV markets in Georgia and interest expense on the
Restated Credit Facility used in connection with the Pending Acquisition.
(14) Represents the effects of the Offering.
F-8
<PAGE> 144
DIGITAL TELEVISION SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
PRO FORMA FINANCIAL STATEMENTS -- (CONTINUED)
(15) Addition to interest expense reflects:
(i) Interest expense on the Notes, including the original issue discount
of approximately $2.16 million on the Notes for 12 months for December 31,
1996 of $19,487,000 and seven months for September 30, 1997 of $11,368,000,
(ii) Annualization of commitment fees on the Restated Credit Facility of
$264,000 for December 31, 1996,
(iii) Elimination of interest expense recorded on the Existing Credit
Facility of $46,000 for December 31, 1996 and $3,723,000 for September 30,
1997,
(16) Annualization of amortization of debt issuance costs and debt discount on
seller notes (Note 5) and amortization of estimated Offering expenses.
(17) The following represents the unaudited combined statements of operations
and pro forma adjustments for the 1997 preacquisition period, for the 1997
Acquisitions, and for the nine months ended September 30, 1997 for the 1997
Acquisitions and the Pending Acquisition:
<TABLE>
<CAPTION>
1997 PENDING PRO FORMA
ACQUISITIONS PRO FORMA ACQUISITION ADJUSTMENTS
JANUARY 1, 1997 ADJUSTMENTS TO ADJUSTED 9 MONTHS TO
THROUGH 1997 1997 ENDED PENDING
ACQUISITION DATES ACQUISITIONS ACQUISITIONS SEPTEMBER 30, 1997 ACQUISITION
----------------- -------------- ------------ ------------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
REVENUE:
Programming revenue...... $3,733 $ $3,733 $3,633 $
Equipment and
installation revenue... 821 -- 821 108 --
------- ----- ------ ------- -----
Total revenue...... 4,554 -- 4,554 3,741 --
------- ----- ------ ------- -----
COST OF REVENUE:
Programming expense...... 1,802 -- 1,802 1,497 --
Cost of equipment and
installations.......... 564 -- 564 302 --
Service fees............. 454 -- 454 941 --
------- ----- ------ ------- -----
Total cost of
revenue.......... 2,820 -- 2,820 2,740 --
------- ----- ------ ------- -----
GROSS PROFIT............... 1,734 -- 1,734 1,001 --
------- ----- ------ ------- -----
OPERATING EXPENSES:
Sales and marketing...... 625 -- 625 331 --
General and
administrative......... 930 -- 930 478 --
Depreciation and
amortization........... 467 (236)(A) 231 118 (106)(A)
------- ----- ------ ------- -----
Total operating
expenses......... 2,022 (236) 1,786 927 (106)
------- ----- ------ ------- -----
OPERATING INCOME (LOSS).... (288) 236 (52) 74 106
------- ----- ------ ------- -----
OTHER INCOME (EXPENSE):
Interest Expense......... (11) 11(B) -- -- --
Other Income (Expense)... (23) 23(C) -- (16) --
------- ----- ------ ------- -----
(34) 34 -- (16) --
------- ----- ------ ------- -----
NET INCOME (LOSS).......... $ (322) $ 270 $ (52) $ 58 $ 106
======= ===== ====== ======= =====
<CAPTION>
COMBINED
PRO FORMA
1997
ADJUSTED ACQUISITIONS
PENDING AND PENDING
ACQUISITION ACQUISITION
------------ ------------
($ IN THOUSANDS)
<S> <C> <C>
REVENUE:
Programming revenue...... $3,633 $7,366
Equipment and
installation revenue... 108 929
------ ------
Total revenue...... 3,741 8,295
------ ------
COST OF REVENUE:
Programming expense...... 1,497 3,299
Cost of equipment and
installations.......... 302 866
Service fees............. 941 1,395
------ ------
Total cost of
revenue.......... 2,740 5,560
------ ------
GROSS PROFIT............... 1,001 2,735
------ ------
OPERATING EXPENSES:
Sales and marketing...... 331 956
General and
administrative......... 478 1,408
Depreciation and
amortization........... 12 243
------ ------
Total operating
expenses......... 821 2,607
------ ------
OPERATING INCOME (LOSS).... 180 128
------ ------
OTHER INCOME (EXPENSE):
Interest Expense......... -- --
Other Income (Expense)... (16) (16)
------ ------
(16) (16)
------ ------
NET INCOME (LOSS).......... $ 164 $ 112
====== ======
</TABLE>
(A) Elimination of historical basis amortization expense for
preacquisition contract rights and other intangible assets eliminated in
purchase accounting of the acquired (or to be acquired) businesses.
(B) Elimination of interest expense on debt not acquired.
(C) Elimination of interest income on lease receivables not acquired.
F-9
<PAGE> 145
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-10
<PAGE> 146
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, PRO FORMA
1996 1997 SEPTEMBER 30,
------------ ------------- 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-11
<PAGE> 147
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-12
<PAGE> 148
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 CLASS C CLASS D TOTAL
----------------------- ----------------------- --------------- ---------------- MEMBERS'
UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT UNITS AMOUNT EQUITY
--------- ----------- --------- ----------- ------ ------ ------- ------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, January 30,
1996............... -- $ -- -- $ -- -- $ -- -- $ -- $ --
Sale of Class B
Units............ -- -- 1,844,098 18,440,982 -- -- -- -- 18,440,982
Issuance of Class C
Units............ -- -- -- -- 87,049 -- -- -- --
Net loss........... -- -- -- (3,535,259) -- -- -- -- (3,535,259)
--------- ----------- --------- ----------- ------ ---- ------- ---- -----------
BALANCE, December 31,
1996............... -- -- 1,844,098 14,905,723 87,049 -- -- -- 14,905,723
Sale of Class A
Units............ 1,333,333 29,820,008 -- -- -- -- -- -- 29,820,008
Sale of Class B
Units............ -- -- 205,902 2,058,997 -- -- -- -- 2,058,997
Issuance of Class D
Units............ -- -- -- -- -- -- 124,000 -- --
Net Loss
(unaudited)...... -- (2,803,390) -- (16,964,720) -- -- -- -- (19,768,110)
--------- ----------- --------- ----------- ------ ---- ------- ---- -----------
BALANCE, September
30, 1997
(unaudited)........ 1,333,333 $27,016,618 2,050,000 $ 0 87,049 $ -- 124,000 $ -- $27,016,618
========= =========== ========= =========== ====== ==== ======= ==== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-13
<PAGE> 149
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, SEPTEMBER 30, SEPTEMBER 30,
1996 1996 1997
--------------- --------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
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-14
<PAGE> 150
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 conditions,
F-15
<PAGE> 151
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-16
<PAGE> 152
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Deferred promotional costs........................ $214,939 $699,678
Other............................................. 19,214 129,481
-------- --------
$234,153 $829,159
======== ========
</TABLE>
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-17
<PAGE> 153
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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-18
<PAGE> 154
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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 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
F-19
<PAGE> 155
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
- 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.
- In April 1996, the Company acquired the rights to provide DIRECTV
Services in certain counties in California from Pacific Coast DBS, Inc.
- 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.
- 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
F-20
<PAGE> 156
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the issuance of promissory notes to the sellers of the contract rights (Note 5).
Under these acquisitions, rights were acquired in the following markets:
- In January 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Kentucky from Direct Programming Services
Limited Partnership
- 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.
- In February 1997, the Company acquired the rights to provide DIRECTV
Services in certain counties in Vermont from Northeast DBS Enterprises,
L.P.
- 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
F-21
<PAGE> 157
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
to Pacific the sum of (i) $480,000, payable in 24 equal monthly installments
commencing May 1, 1996, and (ii) an amount payable on October 1, 1998 equal to
the greater of $4.0 million or the Contingent Payment Amount. The Contingent
Payment Amount is determined by multiplying the number of subscribers to DIRECTV
Services in DTS California's rural DirecTv market as of October 1, 1998 by
certain dollar amounts. As of December 31, 1996 and 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")
F-22
<PAGE> 158
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
payable to Planters Electric Membership Corporation ("Planters") in the amount
of approximately $850,000, (ii) a promissory note dated May 9, 1997 (the
"Mitchell Note") payable to Mitchell Electric Membership Corporation
("Mitchell") in the amount of approximately $9.4 million and (iii) a promissory
note dated May 9, 1997 (the "Washington Note") payable to Washington Electric
Membership Corporation ("Washington") in the amount of approximately $5.2
million. The principal amount of the Planters Note 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%.
F-23
<PAGE> 159
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
<TABLE>
<S> <C>
1997........................................................ $ 6,130,183
1998........................................................ 9,004,332
1999........................................................ 7,111
2000........................................................ 0
2001........................................................ 9,400,000
-----------
$24,541,626
===========
</TABLE>
F-24
<PAGE> 160
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<S> <C>
1997........................................................ $ 298,000
1998........................................................ 297,000
1999........................................................ 300,000
2000........................................................ 148,000
2001........................................................ 106,000
----------
Total future minimum lease payments............... $1,149,000
==========
</TABLE>
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.
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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, directly or indirectly, in the
aggregate at least 50% of the equity interests of the Company held by them on
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
certain registration rights and certain liquidated damages which were applicable
to the Private Notes in certain circumstances under the Registration Rights
Agreement.
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.
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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%.
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-33
<PAGE> 169
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of the Liquidation Preference to the holders of the Series A Preferred Stock and
the payment of the liquidation preference with respect to any capital stock
ranking (as to any such distribution) senior to or on a parity with the Series A
Preferred Stock, assets remain in the Company, all such remaining funds shall be
distributed first to the holders of the Common Stock, until such holders have
received an amount per share equal to the Liquidation Preference, subject to
certain adjustments, and then on an equal per share basis to holders of all
capital stock of the Company on a pro rata, as-if-converted to Common Stock
basis.
The holders of the Series A Preferred Stock shall be entitled to receive
when, as and if declared by the Board cumulative dividends payable on the shares
of the Series A Preferred Stock for each quarterly dividend period, commencing
March 15, June 15, September 15 and December 15 of each year and ending on the
day next preceding the first day of the next quarterly dividend period, at a
rate of 8% per annum, compounded annually, in respect of the Liquidation
Preference. All such dividends shall be payable on March 15, June 15, September
15 and December 15 of each year. The Company may, at its option, pay a certain
portion of such dividends through the issuance of that number of additional
shares of Series A Preferred Stock having an aggregate Liquidation Preference
equal to the aggregate dollar amount of dividends to be paid on such dividend
payment date.
Except as provided by law, the holders of the Series A Preferred Stock are
entitled to only those voting rights set forth in the Stockholders Agreement.
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-34
<PAGE> 170
DIGITAL TELEVISION SERVICES, LLC
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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-35
<PAGE> 171
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-36
<PAGE> 172
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-37
<PAGE> 173
WEP INTERMEDIATE CORP.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JANUARY 28, 1997)
THROUGH SEPTEMBER 30, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Investment in Digital Television Services, LLC............ $(13,000,000)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of stock............................... 13,000,000
------------
NET CHANGES IN CASH......................................... 0
CASH AT BEGINNING OF PERIOD................................. 0
------------
CASH AT END OF PERIOD....................................... $ 0
============
</TABLE>
The accompanying notes are an integral part of these statement.
F-38
<PAGE> 174
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
F-39
<PAGE> 175
WEP INTERMEDIATE CORP.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
intangibles to held and used by an entity be reviewed whenever events or changes
in circumstances indicate that the carrying amount of an assets may not be
recoverable. When events or changes in circumstances occur related to long-lived
assets, management estimates the future cash flows expected to result from the
use of the asset and 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-40
<PAGE> 176
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-41
<PAGE> 177
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-42
<PAGE> 178
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-43
<PAGE> 179
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-44
<PAGE> 180
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-45
<PAGE> 181
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-46
<PAGE> 182
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (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:
<TABLE>
<CAPTION>
1995 1996
<S> <C> <C>
Deferred promotional costs, net.......................... $ -- $484,957
Other.................................................... 5,506 2,647
------ --------
$5,506 $487,604
====== ========
</TABLE>
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 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.
F-47
<PAGE> 183
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
CONTRACT RIGHTS AND OTHER ASSETS
Contract rights and other assets consist of the following at December 31,
1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
Accrued commissions................................. $ 148,460 $ 153,907
Accrued service fees................................ 59,224 108,788
Other............................................... 20,415 362,354
---------- ----------
$ 228,099 $ 625,049
========== ==========
</TABLE>
F-48
<PAGE> 184
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (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:
<TABLE>
<S> <C>
1997........................................................ $5,520
1998........................................................ 2,300
------
Total future minimum lease payments............... $7,820
======
</TABLE>
Rental expense charged to general and administrative expenses in the
accompanying statements of operations for the years ended December 31, 1994,
1995 and 1996 totaled $11,218, $46,739 and $68,705, respectively.
MINIMUM SUBSCRIBERS
As part of the NRTC Member Agreements, the Partnership is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the
Partnership's Rural DirecTv Market, or up to 16,914 subscribers) and the
requirements of certain programming agreements between DirecTv and providers of
programming, beginning in the fourth year of operation of the NRTC Member
Agreement if the Partnership fails to obtain such minimum number of subscribers
prior to such time. The Partnership had achieved the minimum subscriber
requirement at December 31, 1996 and is therefore not required to pay such fees.
F-49
<PAGE> 185
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Partnership is involved in certain litigation arising in the ordinary
course of business. In the opinion of management, the ultimate resolution of
these matters will not have a material adverse effect on the Partnership's
financial position and results of operations.
4. LONG-TERM DEBT
In September 1994, the Partnership obtained a line of credit from a bank in
the amount of $400,000. Borrowings under this line of credit were $70,000 at
December 31, 1995. Amounts due under the line of credit were repaid during 1996
and the line of credit is no longer outstanding. The Partnership also had notes
payable and obligations under capital leases of $18,029 and $26,873,
respectively, outstanding at December 31, 1995. The notes payable were repaid
during 1996 and $19,498 remained outstanding under the capital leases. The
capital leases accrued interest at 11.07% at December 31, 1996 and were repaid
subsequent to year-end. The carrying amount of long-term debt approximates fair
value based on borrowing rates available to the Partnership.
5. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS
The NRTC has contracted with third parties to provide the NRTC members with
certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements of
operations. The NRTC also sells DSS(R) equipment to its members.
Because the Partnership is, through the NRTC, a distributor of DIRECTV
Services, the Partnership would be adversely affected by any material adverse
changes in the assets, financial condition, programming, technological
capabilities or services of DirecTv or its parent corporation, Hughes
Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or
renew its Federal Communication Commission (the "FCC") licenses to transmit
radio frequency signals from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and Hughes
(the "Hughes Agreement"), and the NRTC Member Agreements, participating NRTC
members acquired the exclusive rights to provide DIRECTV Services to residential
and commercial subscribers in certain rural DirecTv markets. In general, upon
default by the NRTC under the Hughes Agreement, the Partnership would have the
right to acquire DIRECTV Services directly from DirecTv. The NRTC has contracted
with third parties to provide the NRTC members with certain services, including
billing services and centralized remittance processing services. If the NRTC is
unable to provide these services for whatever reason, the Partnership would be
required to acquire the services from other sources. There can be no assurance
that the cost to the Partnership to obtain these services elsewhere would not
exceed the amounts currently payable to the NRTC.
The Partnership would also be adversely affected by the termination of the
NRTC Member Agreements by the NRTC prior to the expiration of their respective
terms. If the NRTC Member Agreements are terminated by the NRTC, the Partnership
would no longer have the right to provide DIRECTV Services. There can be no
assurance that the Partnership would be able to obtain similar DBS services from
other sources.
Both the Hughes Agreement and the NRTC Member Agreements expire when Hughes
removes its current satellites from their assigned orbital locations. Although,
according to Hughes, the three DirecTv satellites have estimated orbital lives
of approximately 15 years from their respective launches in December 1993 and
1994, there can be no assurance as to the longevity of the satellites and thus
no assurance as to how long the Partnership will be able to continue to acquire
DBS services pursuant to the NRTC Member Agreements.
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
F-50
<PAGE> 186
DIRECT PROGRAMMING SERVICES LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-51
<PAGE> 187
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-52
<PAGE> 188
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-53
<PAGE> 189
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-54
<PAGE> 190
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-55
<PAGE> 191
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-56
<PAGE> 192
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (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:
<TABLE>
<CAPTION>
1995 1996
------- --------
<S> <C> <C>
Deferred promotional costs, net......................... $ -- $236,800
Other................................................... 25,373 17,973
------- --------
$25,373 $254,773
======= ========
</TABLE>
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:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
F-57
<PAGE> 193
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (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 that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur
F-58
<PAGE> 194
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
related to long-lived assets, management estimates the future cash flows
expected to result from the use of the asset and its eventual disposition.
Having found no instances whereby the sum of expected future cash flows
(undiscounted and without interest charges) was less than the carrying amount of
the asset and thus requiring the recognition of an impairment loss, management
believes that the long-lived assets in the accompanying balance sheets are
appropriately valued.
401(K) PROFIT-SHARING PLAN
Effective January 1, 1994, the Company offered its employees a contributory
401(k) profit-sharing plan. Under the plan, the Company matches a portion of
participant contributions. Company contributions to the plan were $340 and
$3,467 for the years ended December 31, 1995, and 1996, respectively.
3. RECEIVABLES UNDER SALES-TYPE LEASES
The Company leases DSS(R) equipment to customers through long-term
sales-type leases, collateralized by the equipment. The leases range from three
to five years and are discounted at 9.75%. Receivables under sales-type leases
consist of the following at December 31, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
--------- ---------
<S> <C> <C>
Minimum lease payments receivables.................... $ 665,376 $ 548,943
Less unearned interest income......................... (135,740) (110,467)
Less allowance for doubtful accounts.................. (16,635) (54,732)
--------- ---------
513,001 383,744
Less current portion.................................. 129,609 63,316
--------- ---------
$ 383,392 $ 320,428
========= =========
</TABLE>
4. LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 consisted of notes payable to
National Cooperative Services Corporation which provided for borrowings of up to
$4,875,000 with interest at the lender's variable rate (6.25% at December 31,
1996). These notes were repaid subsequent to year-end in connection with the
Agreement (Note 1) and, therefore, are classified as current in the accompanying
balance sheets. The carrying amount of long-term debt approximates fair value
based on borrowing rates available to the Company.
5. COMMITMENTS AND CONTINGENCIES
As part of the NRTC Member Agreements, the Company is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the Company's
Rural DirecTv Market, or up to 11,442 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
Company fails to obtain such minimum number of subscribers prior to such time.
The Company had achieved approximately 75% of the minimum subscriber requirement
at December 31, 1996. Based on the subscriber growth rate of the Company to
date, management anticipates that the Company will meet the minimum subscriber
requirement prior to the fourth year of operations of the NRTC Member Agreement
and therefore does not expect to be required to pay such fees.
6. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS
The NRTC has contracted with third parties to provide the NRTC members with
certain services, including billing services and centralized remittance
processing services. The NRTC bills the Company for these services
F-59
<PAGE> 195
KANSAS DBS, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-60
<PAGE> 196
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-61
<PAGE> 197
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-62
<PAGE> 198
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-63
<PAGE> 199
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-64
<PAGE> 200
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 provisions
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.
F-65
<PAGE> 201
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS -- (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 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>
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
F-66
<PAGE> 202
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-67
<PAGE> 203
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
F-68
<PAGE> 204
DBS OPERATIONS OF NRTC SYSTEM NO. 0422
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-69
<PAGE> 205
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-70
<PAGE> 206
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-71
<PAGE> 207
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-72
<PAGE> 208
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-73
<PAGE> 209
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.
F-74
<PAGE> 210
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (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 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:
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1996 1997
------------ ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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,
F-75
<PAGE> 211
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
for the year ended December 31, 1996 and for the three months ended March 31,
1997 is $106,440 and $26,610, respectively.
NRTC Patronage Capital: Washington EMC is a voting member of the NRTC with
an ownership interest in the NRTC in proportion to its prior patronage. NRTC
patronage certificates represent the noncash portion of NRTC patronage income.
Under its bylaws, the NRTC declares a patronage dividend of its excess of
revenues over expenses each year. Of the total patronage dividend, 20% is paid
in cash and is netted against programming expense in the accompanying statement
of revenues over expenses and change in accumulated earnings when received. The
remaining 80% is distributed in the form of noncash patronage capital, which
will be redeemed in cash only at the discretion of the NRTC. The System includes
noncash patronage capital as other assets, with an offsetting deferred patronage
income amount included in other liabilities in the accompanying statement of
assets and liabilities and accumulated earnings. The patronage capital will be
recognized as income when cash distributions are declared by the NRTC.
INCOME TAXES
The System is not considered a taxable entity for federal and state income
tax purposes, as it is a not-for profit-corporation. Accordingly, no provision
for income taxes is included in the accompanying financial statements.
CASH AND CASH EQUIVALENTS
The System considers all highly liquid investments purchased with a
maturity of three months or less to be cash equivalents. The carrying amount
approximates fair value due to the relatively short period to maturity of these
instruments.
CONCENTRATION OF CREDIT RISK
Concentration of credit risk with respect to accounts receivable is limited
due to the large number of subscribers. As a result, at December 31, 1996,
management does not believe any significant concentration of credit risk exists.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying statement of assets and liabilities and accumulated
earnings are appropriately valued.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-76
<PAGE> 212
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. RELATED-PARTY TRANSACTIONS
Certain administrative services are performed by Washington EMC on behalf
of the System. Costs attributable to these support functions are included in
general and administrative expenses in the accompanying statement of revenues
over expenses and change in accumulated earnings. The costs allocated to the
System were approximately $235,000 and $55,000 for the year ended December 31,
1996 and for the three months ended March 31, 1997, respectively. Such
allocations do not necessarily represent actual and/or ongoing expenses of the
System.
Washington EMC either advances funds to or borrows funds from the System.
Included in the accompanying statement of assets and liabilities and accumulated
earnings is a net payable to Washington EMC representing amounts due for the
initial purchase of contract rights and net operating activities as funded by
Washington EMC.
4. COMMITMENTS AND CONTINGENCIES
As part of the NRTC Member Agreements, the System is required to pay
certain programming fees based on a minimum number of subscribers (such minimum
number of subscribers being equal to up to 5% of the households in the System's
Rural DirecTv Market, or up to 3,100 subscribers) and the requirements of
certain programming agreements between DirecTv and providers of programming,
beginning in the fourth year of operation of the NRTC Member Agreement if the
System fails to obtain such minimum number of subscribers prior to such time.
The System had achieved the minimum subscriber requirement at December 31, 1996
and is therefore not required to pay such fees.
5. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS
The NRTC has contracted with third parties to provide the NRTC members with
certain services, including billing services and centralized remittance
processing services. The NRTC bills the System for these services on a monthly
basis. These fees are recorded as service fees on the accompanying statements of
revenues over expenses and change in accumulated earnings. The NRTC also sells
DSS(R) equipment to its members.
Because the System is, through the NRTC, a distributor of DIRECTV Services,
the System would be adversely affected by any material adverse changes in the
assets, financial condition, programming, technological capabilities, or
services of DirecTv or its parent corporation, Hughes Communication Galaxy, Inc.
("Hughes"), including DirecTv's failure to retain or renew its Federal
Communication Commission ("FCC") licenses to transmit radio frequency signals
from the orbital slots occupied by its satellites.
The NRTC is a cooperative organization whose members are engaged in the
distribution of telecommunications and other services in predominantly rural
areas of the United States. Pursuant to an agreement between the NRTC and Hughes
(the "Hughes Agreement") and the NRTC Member Agreements, participating NRTC
members acquired the exclusive rights to provide DIRECTV Services to residential
and commercial subscribers in certain rural DirecTv markets. In general, upon
default by the NRTC under the Hughes Agreement, the System would have the right
to acquire DIRECTV Services directly from DirecTv. The NRTC has contracted with
third parties to provide the NRTC members with certain services, including
billing services and centralized remittance processing services. If the NRTC is
unable to provide these services for whatever reason, the System would be
required to acquire the services from other sources. There can be no assurance
that the cost to the System to obtain these services elsewhere would not exceed
the amounts currently payable to the NRTC.
The System would also be adversely affected by the termination of the NRTC
Member Agreements by the NRTC prior to the expiration of their respective terms.
If the NRTC Member Agreements are terminated by the NRTC, the System would no
longer have the right to provide DIRECTV Services. There can be no assurance
that the System would be able to obtain similar DBS services from other sources.
F-77
<PAGE> 213
DBS OPERATIONS OF NRTC SYSTEM NO. 0073
NOTES TO FINANCIAL STATEMENTS -- (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-78
<PAGE> 214
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-79
<PAGE> 215
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 depreciation............................. 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-80
<PAGE> 216
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
STATEMENTS OF OPERATIONS AND PARTNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1995 1994
----------- ----------
<S> <C> <C>
OPERATING INCOME
Programming............................................... $ 2,670,015 $ 110,422
Equipment sales and installation.......................... 2,025,501 671,122
Rental.................................................... 106,663 144,343
----------- ----------
4,802,179 925,887
----------- ----------
DIRECT COSTS
Programming............................................... 1,611,657 66,405
Equipment sales and installation.......................... 1,720,634 566,610
Rental.................................................... 97,573 118,627
----------- ----------
3,429,864 751,642
----------- ----------
GROSS PROFIT
Programming............................................... 1,058,358 44,017
Equipment sales and installation.......................... 304,867 104,512
Rental.................................................... 9,090 25,716
----------- ----------
1,372,315 174,245
----------- ----------
OPERATING EXPENSES
Marketing and selling..................................... 1,697,782 232,565
Administrative............................................ 1,223,003 641,015
Amortization of franchise costs........................... 362,451 181,225
Depreciation and amortization............................. 118,151 102,395
----------- ----------
3,401,387 1,157,200
----------- ----------
LOSS FROM OPERATIONS........................................ (2,029,072) (982,955)
----------- ----------
OTHER INCOME (EXPENSES)
Interest income........................................... 41,018 97,212
Interest expense.......................................... (9,478) (97,545)
Loan commitment fees...................................... (7,500) --
----------- ----------
24,040 (333)
----------- ----------
NET LOSS.................................................... (2,005,032) (983,288)
PARTNERS' EQUITY -- BEGINNING............................... 5,036,614 1,108,561
PARTNERS' CAPITAL CONTRIBUTIONS............................. 257,993 5,155,687
PRIVATE PLACEMENT COSTS INCURRED............................ (19,358) (244,346)
----------- ----------
PARTNERS' EQUITY -- ENDING.................................. $ 3,270,217 $5,036,614
=========== ==========
</TABLE>
See notes to financial statements.
F-81
<PAGE> 217
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-82
<PAGE> 218
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-83
<PAGE> 219
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
F-84
<PAGE> 220
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 PARTNERSHIP 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.
F-85
<PAGE> 221
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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>
3. ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued expenses and other current liabilities consists of the following:
<TABLE>
<CAPTION>
1995 1994
-------- --------
<S> <C> <C>
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
======== ========
</TABLE>
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).
F-86
<PAGE> 222
NORTHEAST DBS ENTERPRISES, L.P.
T/A DIGITAL ONE TELEVISION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
<S> <C>
1996...................................................... $34,661
1997...................................................... 2,896
-------
$37,557
=======
</TABLE>
Rent expense under all operating leases was $39,111 and $44,415 for the
years ended December 31, 1995 and 1994, respectively.
F-87
<PAGE> 223
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-88
<PAGE> 224
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-89
<PAGE> 225
NORTHEAST DBS ENTERPRISES, L.P.
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C>
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)
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-90
<PAGE> 226
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-91
<PAGE> 227
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-92
<PAGE> 228
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 subscrip-
F-93
<PAGE> 229
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
tions; 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 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:
<TABLE>
<S> <C>
Deferred promotional costs, net............................. $310,667
Other....................................................... 31,223
--------
$341,890
========
</TABLE>
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-94
<PAGE> 230
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (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:
<TABLE>
<S> <C>
1997........................................................ $ 411,742
1998........................................................ 403,821
1999........................................................ 327,002
2000........................................................ 67,754
----------
$1,210,319
==========
</TABLE>
CONTRACT RIGHTS AND OTHER ASSETS
Contract rights and other assets consist of the following at December 31,
1996:
<TABLE>
<S> <C>
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
==========
</TABLE>
Contract Rights: Contract rights represent the cost of acquiring rights to
distribute DIRECTV Services. Contract rights are being amortized over ten years,
the estimated remaining useful life of the satellites operated by DirecTv which
provide service under the related contracts. Amortization expense, included in
depreciation and amortization in the accompanying statement of operations, for
the year ended December 31, 1996 was $362,451. Accumulated amortization at
December 31, 1996 was $906,127.
Organization Costs: Organization costs are costs associated with the
formation of the Partnership and are being amortized over five years.
Amortization expense, included in depreciation and amortization in the
accompanying statement of operations, for the year ended December 31, 1996 was
$10,518. Accumulated amortization at December 31, 1996 was $33,436.
Debt Issuance Costs: Debt issuance costs are amortized over the term of
the related long-term debt facility. Amortization expense, included in interest
expense in the accompanying statement of operations, for the year ended December
31, 1996 was $12,120 and accumulated amortization at December 31, 1996 was
$12,120.
NRTC Patronage Capital: The Partnership is an affiliate of the NRTC. While
affiliates have no vote, they do have an interest in the NRTC in proportion to
their prior patronage. NRTC patronage capital represents the noncash portion of
NRTC patronage income. Under its bylaws, the NRTC declares a patronage dividend
of its excess of revenues over expenses each year. Of the total patronage
dividend, 20% is paid in cash and is recognized as income when received and is
netted against programming expense in the accompanying statement of 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
F-95
<PAGE> 231
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<S> <C>
Accrued programming expense................................. $325,462
Accrued salaries and wages.................................. 251,128
Accrued commissions......................................... 132,717
Other....................................................... 260,474
--------
$969,781
========
</TABLE>
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:
<TABLE>
<S> <C>
1997........................................................ $46,430
1998........................................................ 38,211
1999........................................................ 2,958
-------
Total future minimum lease payments............... $87,599
=======
</TABLE>
F-96
<PAGE> 232
NORTHEAST DBS ENTERPRISES, L.P.
NOTES TO FINANCIAL STATEMENTS -- (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-97
<PAGE> 233
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-98
<PAGE> 234
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-99
<PAGE> 235
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-100
<PAGE> 236
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-101
<PAGE> 237
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-102
<PAGE> 238
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-103
<PAGE> 239
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (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:
<TABLE>
<CAPTION>
1995 1996
---------- ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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,
F-104
<PAGE> 240
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-105
<PAGE> 241
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-106
<PAGE> 242
DBS OPERATIONS OF NRTC SYSTEM NO. 0001
NOTES TO FINANCIAL STATEMENTS -- (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-107
<PAGE> 243
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-108
<PAGE> 244
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-109
<PAGE> 245
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-110
<PAGE> 246
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-111
<PAGE> 247
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 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
F-112
<PAGE> 248
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1995 1996
------------ ----------
<S> <C> <C>
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
========== ==========
</TABLE>
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.
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.
F-113
<PAGE> 249
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,"
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. When
events or changes in circumstances occur related to long-lived assets,
management estimates the future cash flows expected to result from the use of
the asset and its eventual disposition. Having found no instances whereby the
sum of expected future cash flows (undiscounted and without interest charges)
was less than the carrying amount of the asset and thus requiring the
recognition of an impairment loss, management believes that the long-lived
assets in the accompanying 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 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
F-114
<PAGE> 250
DBS OPERATIONS OF NRTC SYSTEM NO. 1025
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-115
<PAGE> 251
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-116
<PAGE> 252
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-117
<PAGE> 253
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-118
<PAGE> 254
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-119
<PAGE> 255
SATELLITE TELEVISION SERVICES, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON RETAINED
STOCK EARNINGS 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-120
<PAGE> 256
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-121
<PAGE> 257
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (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, beginning in the fourth year of operation of the NRTC
Member Agreement if the Company fails to obtain such
F-122
<PAGE> 258
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
1996 1997
------- --------
<S> <C> <C>
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
======= ========
</TABLE>
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 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.
F-123
<PAGE> 259
SATELLITE TELEVISION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (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.
F-124
<PAGE> 260
======================================================
NO DEALER, SALESMAN OR ANY OTHER PERSON IS AUTHORIZED IN CONNECTION WITH ANY
OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT
CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR BY THE INITIAL PURCHASERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY OTHER THAN SECURITIES
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 1
Risk Factors......................... 13
The Company.......................... 23
Use of Proceeds...................... 26
The Exchange Offer................... 28
Capitalization....................... 36
Selected Financial Data.............. 37
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 39
Business............................. 48
Management........................... 65
Certain Relationships and Related
Transactions....................... 71
Security Ownership of Certain
Beneficial Owners and Management... 72
Description of Certain
Indebtedness....................... 75
Description of Capital Stock......... 78
Description of the Notes............. 85
Certain United States Federal Income
Tax Considerations................. 121
Plan of Distribution................. 123
Notice to Investors.................. 124
Legal Matters........................ 126
Experts.............................. 127
Available Information................ 127
Index to Financial Statements........ F-1
</TABLE>
======================================================
======================================================
PROSPECTUS
$155,000,000
DIGITAL
TELEVISION
SERVICES, INC.
DTS CAPITAL, INC.
OFFER TO EXCHANGE
$1,000 PRINCIPAL AMOUNT OF THEIR
SERIES B 12 1/2% SENIOR SUBORDINATED
NOTES DUE 2007 WHICH HAVE BEEN
REGISTERED UNDER
THE SECURITIES ACT FOR EACH $1,000
PRINCIPAL AMOUNT OF THEIR OUTSTANDING
SERIES A 12 1/2% SENIOR SUBORDINATED
NOTES DUE 2007
THE EXCHANGE AGENT FOR THE
EXCHANGE OFFER IS:
THE BANK OF NEW YORK
BY FACSIMILE:
(212) 571-3080
BY REGISTERED OR CERTIFIED MAIL:
THE BANK OF NEW YORK
101 BARCLAY STREET, 7E
NEW YORK, NEW YORK 10286
ATTENTION: REORGANIZATION SECTION
THE BANK OF NEW YORK
101 BARCLAY STREET
NEW YORK, NEW YORK 10286
CORPORATE TRUST SERVICES WINDOW
GROUND LEVEL
ATTENTION: REORGANIZATION SECTION
, 1997
======================================================
<PAGE> 261
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Each of the Company and Capital is incorporated under the laws of the State
of Delaware. Section 145 of the General Corporation Law of the State of
Delaware, inter alia ("Section 145"), provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or in the
right of such corporation), by reason of the fact that such person is or was an
officer, director, employee or agent of such corporation, or is or was serving
at the request of such corporation as a director, officer employee or agent of
another corporation or enterprise. The indemnity may include expenses (including
attorneys' fees), judgments, fines and amounts pain in settlement actually and
reasonably incurred by such person acted in good faith and in a manner he
reasonably believed to be in or not opposed to the corporation's best interests
and, with respect to any criminal action or proceeding, had no reasonable cause
to believe that his conduct was illegal. A Delaware corporation may indemnify
any persons who are, were or are threatened to be made, a party to any
threatened, pending or completed action or suit by or in the right of the
corporation by reasons of the fact that such person was a director, officer,
employee or agent of such corporation, or is or was serving at the request of
such corporation as a director, officer, employee or agent of another
corporation or enterprise. The indemnity may include expenses (including
attorneys' fees) actually and reasonably incurred by such person in connection
with the defense or settlement of such action or suit, provided such person
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the corporation's best interests, provided that no indemnification is
permitted without judicial approval if the officer, director, employee or agent
is adjudged to be liable to the corporation. Where an officer, director,
employee or agent is successful on the merits or otherwise in the defense of any
action referred to above, the corporation must indemnify him against the
expenses which such officer or director has actually and reasonably incurred.
The Amended and Restated Certificate of Incorporation of the Company and
the Certificate of Incorporation of Capital each provide that such Corporations
shall, to the fullest extent permitted by the provisions of the General
Corporation Law of Delaware, as the same exists or may hereafter be amended,
indemnify all persons whom it may indemnify under such provisions. The
indemnification provided by such Certificates of Incorporation provides that
such provisions shall not limit or exclude any rights, indemnities or
limitations of liability to which any person may be entitled, whether as a
matter of law, under the bylaws of such corporation, by agreement, vote of the
stockholders or disinterested directors of the corporation or others. The
personal liability of the directors of such corporations is eliminated to the
fullest extent permitted by paragraph (7) of subsection (b) of Section 102 of
the General Corporation Law of the State of Delaware as the same may be amended
or supplemented. Except as specifically required by the Delaware General
Corporation Law as the same exists or may hereafter amended, no director of such
corporations shall be liable to such corporation or its stockholders for
monetary damages for breach of his or her fiduciary duty as a director. No
amendment to or repeal of the foregoing provision shall apply to or have any
effect on the liability or alleged liability of any director for or with respect
to any acts or omissions of such director occurring prior to such amendment or
repeal.
Article VII of the Bylaws of each of the Company and Capital ("Article
VII") provides that such corporation shall indemnify each director and officer
of such corporations, and each person serving at the request of such corporation
as a director or officer of another corporation, partnership, joint venture,
trust or other enterprise, to the fullest extent permitted by the laws of
Delaware, as from time to time in effect. The Company or Capital may, if and to
the extent authorized by its Board of Directors in a specific case, indemnify
employees or agents of such corporation in the same manner and to the same
extent. The indemnification obligations set forth in Article VII shall inure to
the benefit of heirs, executors, administrators and personal representatives of
those entitled to indemnification and shall be binding upon any successor to
such corporation to the fullest extent permitted by the laws of Delaware, as
from time to time in effect. The Board of Directors of such corporation may also
provide any other rights of indemnity which it may deem appropriate.
II-1
<PAGE> 262
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation or enterprise,
against any liability asserted against him and incurred by him in any such
capacity, arising out of his status as such, whether or not the corporation
would otherwise have the power to indemnity him under Section 145.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
*2.1 -- Certificate of Merger of WEP Intermediate Corp. and Digital
Television Services, LLC.
2.2 -- Agreement in Principle dated November 6, 1997 between
Pegasus Communications Corporation and Digital Television
Services, Inc.+
3.1(a) -- Certificate of Formation of Digital Television Services,
LLC.+
3.1(b) -- Certificate of Conversion to Limited Liability Company of
Digital Television Services, LLC.+
3.1(c) -- Certificate of Amendment to Certificate of Formation of
Digital Television Services, LLC.+
3.1(d) -- Amended and Restated Limited Liability Company Agreement of
Digital Television Services, LLC.+
3.1(e) -- First Amendment of Amended and Restated Limited Liability
Company Agreement of Digital Television Services, LLC.+
3.1(f) -- Amended and Restated Certificate of Incorporation of Digital
Television Services, Inc.+
3.1(g) -- Bylaws of Digital Television Services, Inc.+
3.2(a) -- Certificate of Incorporation of DTS Capital, Inc.+
3.2(b) -- Bylaws of DTS Capital, Inc.+
3.3(a) -- Articles of Organization of DTS Management, LLC.+
3.3(b) -- Articles of Amendment of DTS Management, LLC.+
3.3(c) -- Amended and Restated Operating Agreement of DTS Management,
LLC.+
3.4(a) -- Certificate of Formation of Digital Television Services of
California, LLC.+
3.4(b) -- Limited Liability Company Agreement of Digital Television
Services of California, LLC.+
3.5(a) -- Articles of Organization of Digital Television Services of
Colorado, LLC.+
3.5(b) -- Operating Agreement of Digital Television Services of
Colorado, LLC.+
3.6(a) -- Articles of Organization of Digital Television Services of
Georgia, LLC.+
3.6(b) -- Operating Agreement of Digital Television Services of
Georgia, LLC.+
3.7(a) -- Articles of Organization of Digital Television Services of
Kansas, LLC.+
3.7(b) -- Operating Agreement of Digital Television Services of
Kansas, LLC.+
3.8(a) -- Articles of Organization of Digital Television Services of
Kentucky, LLC.+
3.8(b) -- Operating Agreement of Digital Television Services of
Kentucky, LLC.+
3.9(a) -- Articles of Organization of Digital Television Services of
New Mexico, LLC.+
3.9(b) -- Operating Agreement of Digital Television Services of New
Mexico, LLC.+
3.10(a) -- Articles of Organization of Digital Television Services of
New York I, LLC.+
3.10(b) -- Operating Agreement of Digital Television Services of New
York I, LLC.+
3.11(a) -- Articles of Organization of Digital Television Services of
South Carolina I, LLC.+
3.11(b) -- Operating Agreement of Digital Television Services of South
Carolina I, LLC.+
3.12(a) -- Articles of Organization of Digital Television Services of
Vermont, LLC.+
3.12(b) -- Operating Agreement of Digital Television Services of
Vermont, LLC.+
</TABLE>
II-2
<PAGE> 263
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
3.13(a) -- Articles of Incorporation of Spacenet, Inc.+
3.13(b) -- Certificate of Amendment of Spacenet, Inc.+
3.13(c) -- Bylaws of Spacenet, Inc.+
3.14(a) -- Articles of Organization of Digital Television Services of
Indiana, LLC.+
3.14(b) -- Articles of Amendment of Digital Television Services of
Indiana, LLC.+
3.14(c) -- Operating Agreement of Digital Television Services of
Indiana, LLC.+
4.1 -- Indenture dated as of July 30, 1997 among the Issuers, the
Guarantors, and The Bank of New York, as Trustee.+
4.2 -- Form of Notes (included in Exhibit 4.1 above).+
4.3 -- Registration Rights Agreement dated as of July 30, 1997
among the Issuers, the Guarantors, Donaldson, Lufkin &
Jenrette Securities Corporation, CIBC Wood Gundy Securities
Corp. and J.P. Morgan Securities Inc.+
4.4 -- Interest Escrow Agreement dated as of July 30, 1997 among
The Bank of New York, as Escrow Agent and Collateral Agent,
and the Issuers.+
4.5 -- Escrow Security Agreement dated as of July 30, 1997 between
The Bank of New York, as Collateral Agent, and the Issuers.+
*4.6 -- Supplemental Indenture dated October 10, 1997 among the
Issuers, the Guarantors, WEP Intermediate Corp. and The Bank
of New York, as Trustee.
*5.1 -- Opinion of Nelson Mullins Riley & Scarborough, L.L.P.,
counsel to the Registrants, as to the legality of the
securities being registered.
10.1 -- Second Amended and Restated Credit Agreement dated as of
July 30, 1997 among Digital Television Services, LLC, and
the several Lenders, CIBC Wood Gundy Securities Corp., as
arranger, Morgan Guaranty Trust Company of New York, Fleet
National Bank, and Canadian Imperial Bank of Commerce.+(P)
10.2 -- Guarantee and Collateral Agreement among the Guarantors
named therein and Canadian Imperial Bank of Commerce.+(P)
10.3 -- Stock Purchase Agreement dated as of January 30, 1996 by and
between Edward Botefuhr and Janet Blakeley Botefuhr and
Digital Television Services, LLC (formerly DBS Holdings,
L.P.).+(P)
10.4(a) -- Asset Purchase Agreement dated as of March 19, 1996 between
Digital Television Services of California, LLC (formerly
Columbia DBS San Luis Obispo, L.P.) and Pacific Coast DBS,
Inc. (the "Pacific Coast Purchase Agreement").+
10.4(b) -- Amendment to Pacific Coast Purchase Agreement dated as of
April 1, 1996.+(P)
10.5(a) -- Asset Purchase Agreement dated as of June 11, 1996 between
Omega Cable and Dale Hazard and Scott Alexander and Digital
Television Services of Colorado, LLC (formerly Digital
Television Services of Colorado, LP) (the "Omega Purchase
Agreement").+(P)
10.5(b) -- Amendment to Omega Purchase Agreement dated July 14,
1996.+(P)
10.6(a) -- Asset Purchase Agreement dated as of June 26, 1996 among
Falls Earth Station, Inc. and Gerald R. Barnes and Digital
Television Services of New York I, LLC (successor by merger
to Digital Television Services of New York II, LP) (the
"Falls Earth Purchase Agreement").+(P)
10.6(b) -- First Amendment dated July 11, 1996 to the Falls Earth
Purchase Agreement.+(P)
10.7(a) -- Asset Purchase Agreement dated as of June 28, 1996 among TEG
DBS Services, Inc. and Kulwinder Singh and Jadwinder Singh
and Digital Television Services of New Mexico, LLC (formerly
Digital Television Services of New Mexico, LP) (the "Teg
Purchase Agreement").+(P)
10.7(b) -- First Amendment dated July 11, 1996 to Teg Purchase
Agreement.+(P)
</TABLE>
II-3
<PAGE> 264
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
10.8(a) -- Asset Purchase Agreement dated as of June 28, 1996 between
Northeast Cable Services, Inc. and Digital Television
Services of New York I, LLC (formerly Digital Television
Services of New York I, LP) (the "Northeast Cable Purchase
Agreement").+(P)
10.8(b) -- Amendment dated August 28, 1996 to the Northeast Cable
Purchase Agreement.+(P)
10.9(a) -- Asset Purchase Agreement dated as of October 5, 1996 among
Pee Dee Electricom, Inc. and Pee Dee Electric Cooperative,
Inc. and Digital Television Services of South Carolina I,
LLC (formerly Digital Television Services of South Carolina
I, LP) (the "Pee Dee Purchase Agreement").+(P)
10.9(b) -- First Amendment dated November 4, 1996 to the Pee Dee
Purchase Agreement.+(P)
10.9(c) -- Second Amendment dated November 25, 1996 to the Pee Dee
Purchase Agreement.+(P)
10.10(a) -- Asset Purchase Agreement dated as of October 5, 1996 among
Santee Satellite Systems, Inc. Santee Electric Cooperative,
Inc. and Digital Television Services of South Carolina I,
LLC (successor by merger to Digital Television Services of
South Carolina II, LP) (the "Santee Purchase
Agreement").+(P)
10.10(b) -- First Amendment dated November 4, 1996 to the Santee
Purchase Agreement.+(P)
10.11(a) -- Asset Purchase Agreement dated as of October 28, 1996
between Direct Programming Services Limited Partnership and
Digital Television Services of Kentucky, LLC (formerly
Digital Television Services of Kentucky, LP) (the "Direct
Purchase Agreement").+(P)
10.11(b) -- First Amendment dated November 26, 1996 to the Direct
Purchase Agreement.+
10.12(a) -- Asset Purchase Agreement dated as of November 13, 1996
between Northeast DBS Enterprises, L.P., DTS Management, LLC
(formerly DBS Management, LLC) (the "Northeast DBS Purchase
Agreement")+(P)
10.12(b) -- Amendment dated February 11, 1997 to the Northeast DBS
Purchase Agreement among Northeast DBS Enterprises, L.P.,
DTS Management, LLC and Digital Television Services of
Vermont, LLC.+(P)
10.13 -- Asset Purchase Agreement dated as of November 22, 1996
between Skywave Communications, Inc. and Digital Television
Services of Kansas, LLC (formerly Digital Television
Services of Kansas, LP).+(P)
10.14 -- Asset Purchase Agreement dated as of November 22, 1996
between Kansas DBS, L.L.C. and Digital Television Services
of Kansas, LLC (formerly Digital Television Services of
Kansas, LP).+(P)
10.15 -- Asset Purchase Agreement dated as of February 19, 1997
between Mitchell Electric Membership Corporation and Digital
Television Services of Georgia, LLC.+(P)
10.16(a) -- Asset Purchase Agreement dated as of February 19, 1997
between DigiCom Services, Inc. and Digital Television
Services of Georgia, LLC (the "DigiCom Purchase
Agreement").+(P)
10.16(b) -- First Amendment dated April 15, 1997 to the DigiCom Purchase
Agreement.+(P)
10.17 -- Asset Purchase Agreement dated as of February 19, 1997
between Planters Electric Membership Corporation and Digital
Television Services of Georgia, LLC.+(P)
10.18 -- Asset Purchase Agreement dated as of February 19, 1997
between Washington Electric Membership Corporation and
Digital Television Services of Georgia, LLC.+(P)
10.19 -- Form of NRTC/Member Agreement for Marketing and Distribution
of DBS Services, as amended by Amendment to NRTC/Member
Agreement for Marketing and Distribution of DBS Services.
(1)+(P)
10.20 -- Employee Unit Plan+
10.21(a) -- Lease Agreement dated August 2, 1996 between Fund II, Fund
III, Fund IV and Fund VII Associates and DTS Management, LLC
(the "Lease Agreement").+(P)
</TABLE>
II-4
<PAGE> 265
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
10.21(b) -- Amendment dated December 20, 1996 to the Lease
Agreement.+(P)
10.22 -- Employment Agreement effective April 1, 1996 between DTS
Management, LLC and Douglas S. Holladay, Jr. (the "Holladay
Employment Agreement")+
10.23 -- Employment Agreement effective March 24, 1997 between DTS
Management, LLC and Earle A. MacKenzie (the "MacKenzie
Employment Agreement").+
10.24 -- Employment Agreement effective April 1, 1996 between DTS
Management, LLC and William J. Dorran.+
10.25 -- Employment Agreement effective April 15, 1996 between DTS
Management and Donald A. Doering (the "Doering Employment
Agreement").+
10.26 -- Asset Purchase Agreement dated as of October 17, 1997
between Digital Television Services of Indiana, LLC,
Satellite Television Services, Inc. and Clay County Rural
Telephone Cooperative, Inc.+(P)
*10.27 -- Digital Television Services, Inc. 1997 Stock Option Plan.
*10.28 -- Amendment to Holladay Employment Agreement.
*10.29 -- Amendment to MacKenzie Employment Agreement.
*10.30 -- Amendment to Doering Employment Agreement.
*10.31 -- Stockholders Agreement dated October 10, 1997 among the
Company and the holders of its Common Stock and Series A
Preferred Stock.
10.32 -- Registration Rights Agreement dated February 10, 1997 among
the Company and the stockholders named therein. (filed as
Exhibit H to Exhibit 3.1(d) hereto)
*10.33 -- Form of Warrant Agreement.
12 -- Statement regarding Computation of Ratios.+
21.1 -- Subsidiaries of Registrants.+
23.1 -- Consent of Nelson Mullins Riley & Scarborough, L.L.P.
(included in Exhibit 5.1).
23.2 -- Consent of Arthur Andersen LLP.
23.3 -- Consent of Fishbein & Company, P.C.
23.4 -- Consent of Deloitte & Touche
24.1 -- Powers of Attorney.+
25.1 -- Statement of Eligibility on Form T-1 under the Trust
Indenture Act of 1939 of The Bank of New York, as Trustee of
the Indenture relating to the 12 1/2% Senior Subordinated
Notes due 2007.+
27.1 -- Financial data schedule Digital Television Services, Inc.+
27.2 -- Financial data schedule DTS Capital, Inc.+
27.3 -- Financial data schedule DTS Management, LLC.+
27.4 -- Financial data schedule Digital Television Services of
California, LLC.+
27.5 -- Financial data schedule Digital Television Services of
Colorado, LLC.+
27.6 -- Financial data schedule Digital Television Services of
Georgia, LLC.+
27.7 -- Financial data schedule Digital Television Services of
Kansas, LLC.+
27.8 -- Financial data schedule Digital Television Services of
Kentucky, LLC.+
27.9 -- Financial data schedule Digital Television Services of New
Mexico, LLC.+
27.10 -- Financial data schedule Digital Television Services of New
York I, LLC.+
27.11 -- Financial data schedule Digital Television Services of South
Carolina, LLC.+
27.12 -- Financial data schedule Digital Television Services of
Vermont, LLC.+
</TABLE>
II-5
<PAGE> 266
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <S> <C>
27.13 -- Financial data schedule Spacenet, Inc.+
27.14 -- Financial data schedule Digital Television Services of
Indiana, LLC.+
99.1 -- Form of Letter of Transmittal.+
99.2 -- Form of Notice of Guaranteed Delivery.+
99.3 -- Form of Letter to Securities Dealers, Commercial Banks,
Trust Companies and Other Nominees.+
99.4 -- Form of Letter to Clients.+
99.5 -- Guidelines for Certification of Taxpayer Identification
Number on Form W-9.+
</TABLE>
- ---------------
(1) See Schedule 1 to Exhibit 10.19 for list of the NRTC/Member Agreements for
Marketing and Distribution of DBS Services to which the Registrants are
party.
+ Previously filed.
* To be filed by amendment.
(P) Attachments to this Exhibit to be filed in paper format pursuant to a
continuing hardship exemption.
(b) Financial Statement Schedules
None
II-6
<PAGE> 267
ITEM 22. UNDERTAKINGS.
The undersigned registrants hereby undertake:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Securities Act") may be permitted to
directors, officers and controlling persons of the registrant pursuant to
the provisions described under Item 20 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, suite or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(2) The undersigned registrant hereby undertakes to respond to
requests for information that is incorporated by reference into the
prospectus pursuant to Item 4, 10(b), 11, or 13 of this form, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date
of the registration statement through the date of responding to the
request.
(3) The undersigned registrant hereby undertakes to 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.
(4) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement (i) to
include any prospectus required by Section 10(a)(3) of the Securities Act
of 1933; (ii) to reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement; and (iii) to include any material information with
respect to the plan of distribution not previously disclosed in the
registration statement or any material change to such information in the
registration statement.
(5) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment 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.
(6) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-7
<PAGE> 268
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, DIGITAL
TELEVISION SERVICES, INC. HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT ON FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA
ON DECEMBER 15, 1997.
DIGITAL TELEVISION SERVICES, INC.
By: **
------------------------------------
Douglas S. Holladay, Jr.
President, Chief Executive Officer
and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATES
- --------- -------- -----
<C> <S> <C>
** President, Chief Executive
- --------------------------------------------------- Officer and Director
Douglas S. Holladay, Jr. (Principal Executive Officer) December 15, 1997
** Vice President, Chief Financial
- --------------------------------------------------- Officer, Treasurer and
Donald A. Doering Secretary (Principal December 15, 1997
Financial and Accounting
Officer)
** Director
- ---------------------------------------------------
Michael C. Brooks December 15, 1997
** Director
- ---------------------------------------------------
Harry F. Hopper, III December 15, 1997
** Director
- ---------------------------------------------------
William Laverack, Jr. December 15, 1997
** Director
- ---------------------------------------------------
David P. Mixer December 15, 1997
** Director
- ---------------------------------------------------
James B. Murray, Jr. December 15, 1997
** Director
- ---------------------------------------------------
Riordon B. Smith December 15, 1997
</TABLE>
** The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 2 to the Registration Statement on behalf of the above named
officers and directors of Digital Television Services, Inc. pursuant to the
Power of Attorney executed by such officers and directors and previously
filed with the Securities and Exchange Commission.
/s/ DONALD A. DOERING
--------------------------------
Donald A. Doering
Attorney-in-fact
II-8
<PAGE> 269
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, EACH OF DTS
MANAGEMENT, LLC ("MANAGEMENT"); DIGITAL TELEVISION SERVICES OF CALIFORNIA, LLC;
DIGITAL TELEVISION SERVICES OF COLORADO, LLC; DIGITAL TELEVISION SERVICES OF
GEORGIA, LLC; DIGITAL TELEVISION SERVICES OF INDIANA, LLC; DIGITAL TELEVISION
SERVICES OF KANSAS, LLC; DIGITAL TELEVISION SERVICES OF KENTUCKY, LLC; DIGITAL
TELEVISION SERVICES OF NEW MEXICO, LLC; DIGITAL TELEVISION SERVICES OF NEW YORK
I, LLC; DIGITAL TELEVISION SERVICES OF SOUTH CAROLINA I, LLC; AND DIGITAL
TELEVISION SERVICES OF VERMONT, LLC HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT ON FORM S-4 TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF ATLANTA, STATE OF GEORGIA
ON DECEMBER 15, 1997.
DTS MANAGEMENT, LLC
DIGITAL TELEVISION SERVICES OF CALIFORNIA, LLC
DIGITAL TELEVISION SERVICES OF COLORADO, LLC
DIGITAL TELEVISION SERVICES OF GEORGIA, LLC
DIGITAL TELEVISION SERVICES OF INDIANA, LLC
DIGITAL TELEVISION SERVICES OF KANSAS, LLC
DIGITAL TELEVISION SERVICES OF KENTUCKY, LLC
DIGITAL TELEVISION SERVICES OF NEW MEXICO, LLC
DIGITAL TELEVISION SERVICES OF NEW YORK I, LLC
DIGITAL TELEVISION SERVICES OF SOUTH CAROLINA I,
LLC
DIGITAL TELEVISION SERVICES OF VERMONT, LLC
By: **
-----------------------------------------------
Douglas S. Holladay, Jr.
President, Chief Executive Officer
and Manager of Management*
II-9
<PAGE> 270
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATES
- --------- -------- -----
<C> <S> <C>
** President, Chief Executive
- --------------------------------------------------- Officer and Manager of
Douglas S. Holladay, Jr. Management* (Principal December 15, 1997
Executive Officer)
** Vice President and Chief
- --------------------------------------------------- Financial Officer of
Donald A. Doering Management* (Principal December 15, 1997
Financial and Accounting
Officer)
** Manager of Management*
- ---------------------------------------------------
Michael C. Brooks December 15, 1997
** Manager of Management*
- ---------------------------------------------------
Harry F. Hopper, III December 15, 1997
** Manager of Management*
- ---------------------------------------------------
William Laverack, Jr. December 15, 1997
** Manager of Management*
- ---------------------------------------------------
David P. Mixer December 15, 1997
** Manager of Management*
- ---------------------------------------------------
James B. Murray, Jr. December 15, 1997
** Manager of Management*
- ---------------------------------------------------
Riordon B. Smith December 15, 1997
</TABLE>
- ---------------
* Management is the sole member of each of Digital Television Services of
California, LLC; Digital Television Services of Colorado, LLC; Digital
Television Services of Georgia, LLC; Digital Television Services of Indiana,
LLC; Digital Television Services of Kansas, LLC; Digital Television Services
of Kentucky, LLC; Digital Television Services of New Mexico, LLC; Digital
Television Services of New York I, LLC; Digital Television Services of South
Carolina I, LLC and Digital Television Services of Vermont, LLC.
** The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 2 to the Registration Statement on behalf of the above named
officers and managers of DTS Management, LLC pursuant to the Power of
Attorney executed by such officers and managers and previously filed with the
Securities and Exchange Commission.
/s/ DONALD A. DOERING
--------------------------------
Donald A. Doering
Attorney-in-fact
II-10
<PAGE> 271
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, DTS CAPITAL,
INC. HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT ON FORM
S-4 TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN
THE CITY OF ATLANTA, STATE OF GEORGIA ON DECEMBER 15, 1997.
DTS CAPITAL, INC.
By: **
--------------------------------------
Douglas S. Holladay, Jr.
President and Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 2 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATES
- --------- -------- -----
<C> <S> <C>
** President and Director December 15, 1997
- --------------------------------------------------- (Principal Executive Officer)
Douglas S. Holladay, Jr.
** Vice President, Treasurer and December 15, 1997
- --------------------------------------------------- Secretary and Director
Donald A. Doering (Principal Financial and
Accounting Officer)
</TABLE>
** The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 2 to the Registration Statement on behalf of the above named
officers and directors of DTS Capital, Inc. pursuant to the Power of Attorney
executed by such officers and directors and previously filed with the
Securities and Exchange Commission.
/s/ DONALD A. DOERING
--------------------------------
Donald A. Doering
Attorney-in-fact
II-11
<PAGE> 272
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, SPACENET, INC.
HAS DULY CAUSED THIS AMENDMENT NO. 2 TO THE REGISTRATION STATEMENT ON FORM S-4
TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF ATLANTA, STATE OF GEORGIA ON DECEMBER 15, 1997.
SPACENET, INC.
By: **
------------------------------------
Harry F. Hopper, III
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
SIGNATURE CAPACITY DATES
- --------- -------- -----
<C> <S> <C>
** President, (Principal Executive
- ------------------------------------------------ Officer) December 15, 1997
Harry F. Hopper, III
** Vice President Secretary and
- ------------------------------------------------ Treasurer (Principal Financial
Neil P. Byrne and Accounting Officer) December 15, 1997
** Director December 15, 1997
- ------------------------------------------------
Robert B. Blow
** Director December 15, 1997
- ------------------------------------------------
Mark J. Kington
** Director December 15, 1997
- ------------------------------------------------
David P. Mixer
** Director December 15, 1997
- ------------------------------------------------
James B. Murray, Jr.
</TABLE>
** The undersigned, by signing his name hereto, does sign and execute this
Amendment No. 2 to the Registration Statement on behalf of the above named
officers and directors of Spacenet, Inc. pursuant to the Power of Attorney
executed by such officers and directors and previously filed with the
Securities and Exchange Commission.
/s/ DONALD A. DOERING
--------------------------------
Donald A. Doering
Attorney-in-fact
II-12
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the inclusion in this
Registration Statement of our report on 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 on 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 on 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 on 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 on 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 expenses over
revenues and changes in accumulated deficit and cash flows for the years then
ended dated February 21, 1997, our report on 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 revenues over expenses
and changes in accumulated earnings and cash flows for the year then ended
dated February 21, 1997, our report on 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 then ended
dated February 21, 1997, our report on 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, and our report on 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 to all references to our Firm included in or made as part of this
Registration statement.
/s/ Arthur Andersen LLP
Atlanta, Georgia
December 12, 1997
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the incorporation by reference in this Prospectus
of our report dated February 23, 1996 accompanying the financial statements of
Northeast DBS Enterprises, L.P. included in the Registration Statement. It
should be noted that we have not audited any financial statements of the
company subsequent to December 31, 1995 or performed any audit procedures
subsequent to the date of our report.
/s/ Fishbein & Company, P.C.
FISHBEIN & COMPANY, P.C.
Elkins Park, Pennsylvania
December 12, 1997
<PAGE> 1
EXHIBIT 23.4
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 2 to Registration Statement
No. 333-36217 of Digital Television Services, Inc. and DTS Capital, Inc. of our
report dated November 10, 1997 on the financial statements of Satellite
Television Services, Inc. appearing in the Prospectus, which is a part of
such Registration Statement, and to the reference to us under the heading
"Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
Indianapolis, Indiana
December 12, 1997
