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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the fiscal year ended December 31, 1998
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OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from__________ to __________
333-36217
333-36217-01
Commission File Number
DIGITAL TELEVISION SERVICES, INC.
DTS CAPITAL, INC.
(Exact name of registrants as specified in their respective charters)
Delaware 06-1473713
Delaware 58-2332106
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(State of other jurisdiction of (IRS Employer
incorporation of organization) Identification Number)
c/o Pegasus Communications Management Company;
5 Radnor Corporate Center; Suite 454, Radnor, PA 19087
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(Address of principal executive offices) (Zip code)
Registrants' telephone number, including area code: (888) 438-7488
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Securities registered pursuant to section 12(b) of the Act:
None
Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark whether each of the registrants: (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days. Yes_X_ No_ _
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of regulation S-K is not contained herein, and will not be contained,
to the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
Number of shares of each class of the registrants' common stock
outstanding as of March 22, 1999:
Digital Television Services, Inc.: 100 shares of Common Stock
DTS Capital, Inc.: 100 shares of Common Stock
The Registrants meet the conditions set forth in General Instructions (I)(1)(a)
and (b) of Form 10-K and are therefore filing this Form with the reduced
disclosure format.
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PART I 3
Item 1. Business 3
Item 2. Properties 6
Item 3. Legal Proceedings 6
Item 4. Submission of Matters to a Vote of Security Holders 6
PART II 6
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters 6
Item 6. Selected Financial Data 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations 7
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 12
Item 8. Financial Statements and Supplementary Data 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure 12
PART III 13
PART IV 13
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 13
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DIGITAL TELEVISION SERVICES, INC.
DTS CAPITAL, INC.
PART I
As used in this Report, unless the context otherwise requires, the term
"Digital Television Services" refers to Digital Television Services, Inc. and
its consolidated subsidiaries, including DTS Capital, Inc.
This Report contains certain forward-looking statements (as such term
is defined in the Private Securities Litigation Reform Act of 1995) and
information relating to us that are based on the beliefs of our management, as
well as assumptions made by and information currently available to our
management. When used in this Report, the words "estimate," "project,"
"believe," "anticipate," "intend," "expect" and similar expressions are intended
to identify forward-looking statements. Such statements reflect our current
views with respect to future events and are subject to unknown risks,
uncertainties and other factors that may cause actual results to differ
materially from those contemplated in such forward-looking statements. Such
factors include, among others, the following: general economic and business
conditions, both nationally, internationally and in the regions in which we
operate; demographic changes; existing government regulations and changes in, or
the failure to comply with government regulations; competition; the loss of any
significant numbers of subscribers; changes in business strategy or development
plans; technological developments and difficulties (including any associated
with the Year 2000); the ability to attract and retain qualified personnel; our
significant indebtedness; the availability and terms of capital to fund the
expansion of our business; and other factors referenced in this Report.
ITEM 1: BUSINESS
General
Digital Television Services has the exclusive right to distribute
DIRECTV(R) digital broadcast satellite, or DBS, services to approximately 1.8
million rural households in 11 states. These states consist of California,
Indiana, Florida, Georgia, Kansas, Kentucky, New Hampshire, New Mexico, New
York, South Carolina and Vermont. As of January 31, 1999, we had approximately
185,000 subscribers.
On April 27, 1998, we became a wholly owned subsidiary of Pegasus
Communications Corporation, the largest independent provider of DIRECTV, through
a merger with a subsidiary of Pegasus. Digital Television Services, Inc. was
formed in October 1997 under the laws of the State of Delaware. It is a
successor to Digital Television Services, LLC, a limited liability company
formed in November 1996 under the Delaware Limited Liability Company Act, which,
in turn, is a successor to DBS Holdings, L.P., a Delaware limited partnership
initially formed in January 1996.
As a subsidiary of Pegasus Communications Corporation, we distribute
DIRECTV through the Pegasus retail network, a network of approximately 2,000
independent retailers.
DIRECTV
DIRECTV is a service of Hughes Electronics, a subsidiary of General
Motors Corporation. After completing its announced acquisition of United States
Satellite Broadcasting, Inc. and Primestar described below, DIRECTV will offer
in excess of 370 entertainment channels of near laser disc quality video and
compact disc quality audio programming. DIRECTV currently transmits via three
high-power Ku band satellites and has announced its intention to launch a fourth
Ku band satellite in the third quarter of this year. We believe that DIRECTV's
extensive line-up of cable networks, pay-per-view movies and events and sports
packages, including the exclusive "NFL Sunday Ticket," have enabled DIRECTV to
capture a majority market share of existing DBS subscribers and will continue to
drive strong subscriber growth for DIRECTV services in the future. DIRECTV added
1.2 million new subscribers in 1998, which was a greater increase than any other
DBS service and accounted for approximately 48% of all new DBS subscribers in
that year.
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DIRECTV Rural Affiliates
Prior to the launch of DIRECTV's programming service, Hughes
Electronics (which was succeeded by its subsidiary DIRECTV) entered into an
agreement with the National Rural Telecommunications Cooperative, or NRTC,
authorizing the NRTC to offer its members and associates the opportunity to
acquire exclusive rights to distribute DIRECTV programming services in rural
areas of the United States. The NRTC is a cooperative organization whose members
and associates are engaged in the distribution of telecommunications and other
services in predominantly rural areas of the United States. Approximately 250
NRTC members and associates acquired such exclusive rights, thereby becoming
DIRECTV rural affiliates. The DIRECTV exclusive territories acquired by
DIRECTV's rural affiliates include approximately 9.0 million rural households.
We completed our first DBS acquisition in March 1996 and have made a total of 18
acquisitions to date.
We distribute DIRECTV in the following DIRECTV exclusive territories:
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Homes
Exclusive DIRECTV Total Homes Homes Not Passed Passed Total
Territory in Territory by Cable By Cable Subscribers Penetration
--------- ------------ -------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Northeast 310,820 105,860 204,960 43,491 14.0%
Central 538,577 152,561 386,016 55,082 10.2%
Southeast 452,488 153,398 299,090 42,717 9.4%
Central Plains 301,952 57,798 244,154 22,545 7.5%
Southwest 185,184 22,010 163,174 21,135 11.4%
========= ======= ========= ======= ====
Total 1,789,021 491,627 1,297,394 184,970 10.3%
========= ======= ========= ======= ====
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Total homes in territory, homes not passed by cable, and homes passed by cable
are based on estimates of primary residences by Claritas, Inc.
Rural Focus and Strategy
We believe that DBS and other digital satellite services will achieve
disproportionately greater consumer acceptance in rural areas than in
metropolitan areas. DBS services have already achieved a penetration of more
than 17% in rural areas of the United States, as compared to approximately 5% in
metropolitan areas.
Our long-term goal is to become, together with Pegasus Media &
Communications, Inc. (the other significant operating subsidiary of Pegasus
Communications Corporation, which also provides DIRECTV services), an integrated
provider of DBS and other digital satellite services for the 76.0 million
people, 30.0 million homes and 3.0 million businesses located in rural areas of
the United States. To accomplish our goal, we are pursuing the following
strategy:
o continuing to grow our rural subscriber base by aggressively
marketing DIRECTV,
o continuing to utilize the developing Pegasus retail network, and
o generating future growth by bundling additional digital satellite
services with DIRECTV.
The Pegasus Retail Network
As a subsidiary of Pegasus Communications Corporation, the Pegasus
retail network of 2,000 independent satellite, consumer electronics and other
retailers serving rural areas is available to us. The Pegasus retail network
began development in 1995 in order to distribute DIRECTV in Pegasus' original
DIRECTV exclusive territories in New England. This network has been expanded
into 36 states as a result of Pegasus' acquisitions of DIRECTV rural affiliates
since 1996, including Pegasus' April 1998 acquisition of Digital Television
Services. Today, the Pegasus retail network is one of the few sales and
distribution channels available to digital satellite service providers seeking
broad and effective distribution in rural areas throughout the continental
United States.
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We believe that the national reach of the Pegasus retail network has
positioned us to:
o Improve the penetration of DIRECTV in DIRECTV exclusive territories
that we now own or that we may acquire from other DIRECTV rural
affiliates.
o Assist DIRECTV in improving DIRECTV's DBS market share in rural areas
outside of the DIRECTV exclusive territories held by DIRECTV rural
affiliates.
o Offer providers of new digital satellite services (such as the soon
to be launched digital audio and broadband multimedia satellite
services) an effective and convenient means for reaching the
approximately 30% of America's population that live and work in
rural areas.
Recent DBS Developments
Three important events have occurred recently in the DBS industry.
DIRECTV/Hughes Acquisition of United States Satellite Broadcasting
Company, Inc. In December 1998, Hughes Electronics, the parent company of
DIRECTV, announced that it had reached an agreement with United States Satellite
Broadcasting Company, Inc. to acquire its business and assets for approximately
$1.3 billion in cash and stock. The transaction will enable DIRECTV to add such
premium networks as multichannel HBO, Cinemax and Showtime. We expect these
added offerings to increase DIRECTV's appeal to consumers and drive subscriber
growth. DIRECTV and United States Satellite Broadcasting have said that they
expect the transaction to close in the first half of this year. It is subject to
review and approval by the FCC and other conditions. We are still evaluating the
impact of this transaction on our business.
DIRECTV/ Hughes Acquisition of Primestar. In January 1999, Hughes
announced that it reached agreement with Primestar to acquire Primestar's DBS
business and rights to acquire certain other DBS satellite assets in two
transactions valued at approximately $1.8 billion. DIRECTV has stated that it
intends to operate Primestar's business for approximately two years, during
which time it will attempt to transition Primestar's approximately 2.3 million
subscribers to the DIRECTV service. DIRECTV has also said it expects that its
acquisition of the other Primestar DBS assets along with its pending acquisition
of the assets of United States Satellite Broadcasting will enable DIRECTV to
offer more than 370 entertainment channels, almost twice its current channel
capacity. If the Primestar and United States Satellite Broadcasting transactions
are consummated, we expect that DIRECTV and EchoStar will be the only
distributors of DBS services. The Primestar transactions are subject to approval
of the FCC and other conditions. We are targeting Primestar customers in our
territories with promotions that we hope will encourage them to convert to
DIRECTV. EchoStar is doing the same thing. It is not possible to predict with
certainty how well these efforts will succeed. We are continuing to evaluate the
effects of the Primestar transactions on our business.
EchoStar-News Corporation-MCI Agreement. In November 1998, EchoStar,
News Corporation, MCI WorldCom Inc. and certain other parties reached an
agreement for the transfer to EchoStar of a license to operate a DBS business at
the 110(Degree) west longitude orbital location and certain other DBS assets in
exchange for shares of EchoStar. EchoStar already operates a DBS business at the
119(Degree) west longitude orbital location. The agreement with News Corporation
and MCI has been approved by the Department of Justice and is pending approval
of the FCC. EchoStar plans to launch satellites for operation at the 110(Degree)
west longitude orbital slot in 1999. While we believe that this transaction, if
completed, will help increase the overall competitive position of DBS relative
to cable, it could also increase EchoStar's competitive position relative to
DIRECTV.
Employees
As of December 31, 1998, we had 205 full-time and 100 part-time
employees. We are not a party to any collective bargaining agreements and we
consider our relations with our employees to be good.
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ITEM 2: PROPERTIES
Our corporate headquarters are located in Radnor, Pennsylvania. Our
corporate headquarters will be relocated in March 1999 when Pegasus moves its
headquarters to Bala Cynwyd, Pennsylvania. Our DBS operations are conducted out
of headquarters that Pegasus maintains in Marlborough, Massachusetts. We operate
call centers out of leased space in San Luis Obispo, California and Louisville,
Kentucky. These leases expire in 2000 and 2002, respectively.
ITEM 3: LEGAL PROCEEDINGS
DBS Late Fee Litigation
In November 1998 we were sued in Indiana for allegedly charging DBS
subscribers excessive fees for late payments. The plaintiffs, who claim to
represent a class consisting of residential DIRECTV customers in Indiana, seek
unspecified damages for the purported class and modification of our late-fee
policy. We are in the process of evaluating our response and are unable to
estimate the amount involved or to determine whether this suit is material to
us. Similar suits have been brought against DIRECTV and various cable operators
in other parts of the United States.
Other Matters
In addition to the matter discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our consolidated operations, cash flows or financial
position.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
In reliance upon General Instruction (I)(2)(c) of Form 10-K, Digital
Television Services has omitted the disclosure required by this item.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
None of Digital Television Services equity securities are publicly
traded. All of Digital Television Services, Inc.'s equity securities are held by
Pegasus, and all of DTS Capital, Inc.'s equity securities are held by Digital
Television Services, Inc. Digital Television Services, Inc. and DTS Capital,
Inc. did not sell any equity securities that would be required to be reported in
accordance with regulation S-K Item 701 of the Securities Act of 1933, as
amended.
ITEM 6: SELECTED FINANCIAL DATA
In reliance upon General Instruction (I)(2)(a) of Form 10-K, Digital
Television Services has omitted the disclosure required by this item.
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ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
In reliance upon General Instruction (I)(2)(a) of Form 10-K, Digital
Television Services is providing the limited disclosure set forth below. Such
disclosure requires us only to provide narrative analysis of the results of
operations which explains the reasons for material changes in the amount of
revenue and expense items between the most recent fiscal year presented and the
fiscal year immediately preceding it.
General
Digital Television Services, Inc. is:
o A wholly owned subsidiary of Pegasus Communications Corporation.
o An independent provider of DIRECTV with 185,000 subscribers at
January 31, 1999. We have the exclusive right to distribute DIRECTV
digital broadcast satellite services to approximately 1.8 million
rural households in 11 states. We distribute DIRECTV through the
Pegasus retail network, a network of approximately 2,000 independent
retailers.
o We have increased our revenues at a compound growth rate of 433% per
annum since our inception in 1996.
We were originally formed on January 30, 1996, to acquire, own and
manage rights to distribute DIRECTV services to residential households and
commercial establishments in certain rural areas of the United States. On April
27, 1998, we became a wholly owned subsidiary of Pegasus Communications
Corporation, the largest independent provider of DIRECTV, through a merger with
a subsidiary of Pegasus.
In connection with the merger, the stockholders of Digital Television
Services exchanged all of their capital stock for approximately 5.5 million
shares of Pegasus' Class A Common Stock and, as a consequence, we became a
wholly owned subsidiary of Pegasus Communications Corporation.
Total consideration for the merger was approximately $363.9 million,
which consisted of:
o approximately 5.5 million shares of Pegasus' Class A Common Stock
(amounting to $118.8 million),
o options and warrants to purchase a total of 224,038 shares of
Pegasus' Class A Common Stock (amounting to $3.3 million),
o approximately $158.9 million in assumed net liabilities, and
o approximately $82.9 million of a deferred tax liability, primarily
as a result of non-deductible amortization.
Pegasus has accounted for the acquisition as a purchase and applied
"push down" accounting, thereby adjusting our accounting basis. The effect of
the change in accounting basis has been a $205.0 million increase in our
intangible assets. Results prior to and subsequent to the acquisition of Digital
Television Services by Pegasus are not comparable.
Revenues are principally derived from external customers. We earn
revenue by providing DIRECTV services to our 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.
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In this section we use the terms pre-marketing operating expenses,
pre-marketing cash flow and location cash flow. Pre-marketing operating expenses
consist of:
o programming expenses, including amounts paid to program suppliers,
digital satellite system authorization charges and satellite control
fees, each of which is paid on a per subscriber basis, and DIRECTV
royalties which are equal to 5% of DBS program service revenues,
o marketing and selling costs, including advertising and promotion
expenses, local sales commissions and research expenditures, and
o general and administrative expenses, including administrative costs
associated with our sales and service operations.
Costs associated with subscriber acquisition are a significant
component of our operating expenses. These expenses include variable commission
expenses, fixed and variable promotional expenses, equipment subsidies and
marketing salaries and benefits. Our policy is to expense all subscriber
acquisition costs at the time the sale is made. We anticipate that we will
continue to incur a significant level of subscriber acquisition costs in
conjunction with the growth of our 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 our operating cash flow. Subscriber acquisition
costs charged to operations are excluded from pre-marketing operating expenses.
Pre-marketing cash flow is calculated by taking our earnings and adding
back the following expenses:
o interest,
o income taxes,
o depreciation and amortization,
o non-cash charges, such as incentive compensation under Pegasus'
restricted stock plan and 401(k) plans, and
o subscriber acquisition costs.
Location cash flow is pre-marketing cash flow less subscriber
acquisition costs.
Pre-marketing cash flow and location cash flow are not, and should not
be considered, an alternative to net income from operations, net income, net
cash provided by operating activities or any other measure for determining our
operating performance or liquidity, as determined under generally accepted
accounting principles. Pre-marketing cash flow and location cash flow also do
not necessarily indicate whether our cash flow will be sufficient to fund
working capital, capital expenditures, or to react to changes in Digital
Television Services' industry or the economy generally. We believe that
pre-marketing cash flow and location cash flow are important, however, for the
following reasons:
o people who follow our industry frequently use them as measures of
performance and ability to pay debt service, and
o they are measures that we, our lenders and investors use to monitor
our financial performance and debt leverage.
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Results of Operations
Year ended December 31, 1998 compared to the year ended December 31, 1997
During 1998, Digital Television Services acquired approximately 5,000
subscribers and the exclusive DIRECTV distribution rights to approximately
42,000 households in rural areas of the United States. During 1997, we acquired
approximately 79,000 subscribers and the exclusive DIRECTV distribution rights
to approximately 1.3 million households. At December 31, 1998, Digital
Television Services had exclusive DIRECTV distribution rights to 1.8 million
households and 181,000 subscribers as compared to 1.7 million households and
126,000 subscribers at December 31, 1997. Subscriber penetration increased from
7.2% at December 31, 1997 to 10.1% at December 31, 1998.
Total net revenues were $76.0 million in 1998, an increase of $34.3
million, or 82%, compared to total net revenues of $41.8 million in 1997. The
increase is primarily due to an increase in the average number of subscribers in
1998 compared to 1997. Of the $34.3 million increase, $11.0 million, or 32%, is
due to the increased number of subscribers in territories owned at the beginning
of 1997 and $23.3 million, or 68%, is attributable to acquisitions made in 1997
and 1998. The average monthly revenue per subscriber was $41.20 in 1998 compared
to $38.32 in 1997. Pro forma net revenues, including completed acquisitions,
were $76.2 million, an increase of $23.5 million, or 45%, compared to pro forma
net revenues of $52.7 million in 1997.
Pre-marketing operating expenses were $53.6 million in 1998, an
increase of $24.9 million, or 87%, compared to $28.7 million in 1997. The
increase is attributable to significant growth in subscribers in 1998. Of the
$24.9 million increase, $6.9 million, or 28%, is due to a same territory
increase in programming and other operating costs, resulting from the increased
number of subscribers in territories owned at the beginning of 1997, and $18.0
million, or 72%, is attributable to territories acquired in 1997 and 1998. As a
percentage of revenue, pre-marketing operating expenses were 70.5% in 1998
compared to 68.8 % in 1997.
Subscriber acquisition costs were $25.1 million, an increase of $11.0
million compared to $14.1 million in 1997. The total subscriber acquisition
costs per gross subscriber addition were $338 in 1998 compared to $357 in 1997.
Digital Television Services expects subscriber acquisition costs per gross
subscriber addition to increase in 1999.
Incentive compensation, through a plan that became applicable to us on
April 27, 1998, when Pegasus acquired Digital Television Services, was $174,000
in 1998. Incentive compensation is calculated from increases in pro forma
location cash flow.
Depreciation and amortization was $35.2 million in 1998, an increase of
$20.7 million, or 142%, compared to $14.5 million in 1997. The increase in
depreciation and amortization is primarily due to an increase in the fixed and
intangible asset base as a result of the change in accounting basis resulting
from the acquisition of Digital Television Services by Pegasus, nine other
completed acquisitions during 1997 and an acquisition completed in January 1998.
Interest expense, net of interest income, was $23.8 million in 1998, an
increase of $9.4 million, or 65%, compared to net interest expense of $14.5
million in 1997. The increase in net interest expense is primarily due to a full
year's interest on Digital Television Services' $155.0 million senior notes (the
"Notes") and an increase in bank borrowings.
Other expenses were $287,000 in 1998, an increase of $176,000, or 158%,
compared to $111,000 in 1997. The increase is primarily due to nonrecurring
severance payments to former employees as a result of the acquisition of Digital
Television Services by Pegasus.
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The benefit for income taxes was $4.8 million in 1998. The benefit for
income taxes is primarily a result of the amortization of the deferred tax
liability that originated from the acquisition of Digital Television Services by
Pegasus. There was no income tax provision in 1997 as a result of Digital
Television Services' status as a nontaxable entity for federal and state income
tax purposes prior to its conversion to a corporation in October 1997 and the
incurrence of net operating losses subsequent to that event.
Liquidity and Capital Resources
Digital Television Services has required significant capital since its
formation in order to fund acquisitions, to implement the infrastructure to
support its operations, to meet debt service obligations and to fund subscriber
acquisition costs. Digital Television Services' primary sources of liquidity
have been credit available under its credit facilities, the issuance of seller
notes and proceeds from private offerings.
Pre-marketing cash flow increased by approximately $9.4 million, or
72%, for the year ended December 31, 1998 as compared to the same period in
1997. Of the $9.4 million increase in pre-marketing cash flow:
o $3.9 million, or 41%, is attributable to same territory
pre-marketing cash flow, and
o $5.5 million, or 59%, is attributable to territories acquired in
1997 and 1998.
During the year ended December 31, 1998, $39.1 million of cash on hand,
together with $33.1 million of net cash provided by Digital Television Services'
financing activities, was used to fund operating activities of approximately
$21.5 million and investing activities of $44.5 million. Investing activities
consisted of:
o the acquisition of DBS assets for approximately $37.2 million,
o costs related to the acquisition by Pegasus totaling $4.3 million,
and
o maintenance and other capital expenditures and intangibles totaling
approximately $3.0 million.
Financing activities consisted of :
o net borrowings on bank credit facilities totaling $30.9 million,
o the repayment of approximately $18.1 million of long-term debt,
primarily sellers' notes and capital leases,
o contributions by Pegasus of approximately $2.2 million, and
o net restricted cash draws of approximately $18.1 million to pay
interest on the Notes.
As of December 31, 1998, cash on hand amounted to $6.3 million plus
restricted cash of $18.9 million. Digital Television Services had $46.4 million
drawn and standby letters of credit amounting to $18.5 million outstanding under
its $90.0 million credit facilities.
In 1996, Digital Television Services entered into a credit facility
which provides for borrowings up to $90.0 million. Approximately $50.4 million
was outstanding as of March 1, 1999. The credit facility expires in July 2003.
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On July 30, 1997, Digital Television Services completed an offering of
$155.0 million 12 1/2% senior notes, resulting in net proceeds of approximately
$146.0 million. The Notes are unconditionally guaranteed, on a senior
subordinated basis, as to payment of principal, premium, if any, and interest,
jointly and severally, by the Guarantors. The Guarantors consist of all of the
subsidiaries of Digital Television Services, Inc., except DTS Capital, Inc.,
which is a co-issuer of the Notes and has no separate assets or operations.
Digital Television Services does not have assets or operations apart from the
assets and operations of its subsidiaries.
In connection with certain acquisitions made in 1996 and 1997, Digital
Television Services issued promissory notes totaling $41.7 million. The sellers'
notes bear interest at rates ranging from 3% to 15%. Notes with interest rates
below 9% have been discounted to reflect Digital Television Services'
incremental borrowing rate.
Digital Television Services believes that it has adequate resources to
meet its working capital, maintenance capital expenditure and debt service
obligations for at least the next twelve months. However, our ability in the
future to repay our existing indebtedness will depend upon the success of our
business strategy, prevailing economic conditions, regulatory matters, levels of
interest rates and financial, business and other factors that are beyond our
control. We cannot assure you that we will be able to generate the substantial
increases in cash flow from operations that we will need to meet the obligations
under our indebtedness. Furthermore, our agreements with respect to our
indebtedness contain numerous covenants that, among other things, restrict our
ability to:
o pay dividends and make certain other payments and investments;
o borrow additional funds;
o create liens; and
o to sell our assets.
Failing to make debt payments or comply with our covenants could result in an
event of default which, if not cured or waived, could have a material adverse
effect on us.
Digital Television Services closely monitors conditions in the capital
markets to identify opportunities for the effective use of financial leverage.
In financing its future expansion requirements, Digital Television Services
would expect to avail itself of such opportunities and thereby increase its
indebtedness. This could result in increased debt service requirements. We
cannot assure you that such debt financing can be completed on terms
satisfactory to Digital Television Services or at all. Digital Television
Services may also issue additional equity to fund its future expansion
requirements.
Year 2000
The year 2000 issue is a general term used to describe the various
problems that may result from the improper processing of dates and
date-sensitive calculations by computers and other equipment as the year 2000
approaches and is reached. These problems generally arise from the fact that
most computer hardware and software have historically used only two digits to
identify the year in a date, often resulting in the computer failing to
distinguish dates in the 2000s from dates in the 1900s. These problems may also
arise from additional sources, such as the use of special codes and conventions
in software utilizing the date field.
Digital Television Services has reviewed all of its systems as to the
Year 2000 issue. Digital Television Services' primary focus has been on its own
internal systems. Digital Television Services has replaced its corporate
accounting system. However, if any other necessary changes are not made or
completed in a timely fashion or unanticipated problems arise, the year 2000
issue may take longer for Digital Television Services to address and may have a
material impact on Digital Television Services' financial condition and its
results of operations.
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Digital Television Services relies on outside vendors for the operation
of its DBS satellite control and billing systems, including DIRECTV, the
National Rural Telecommunications Cooperative and their respective vendors.
Digital Television Services has established a policy to ensure that these
vendors are currently in compliance with the year 2000 issue or have a plan in
place to be in compliance with the year 2000 issue by the first quarter of 1999.
In addition, Digital Television Services has had initial communications with
certain of its other significant suppliers, distributors, financial
institutions, lessors and parties with which it conducts business to evaluate
their year 2000 compliance plans and state of readiness and to determine the
extent to which Digital Television Services' systems may be affected by the
failure of others to remediate their own year 2000 issues. To date, however,
Digital Television Services has received only preliminary feedback from such
parties and has not independently confirmed any information received from other
parties with respect to the year 2000 issue. As such, we cannot assure you that
these other parties will complete their year 2000 conversion in a timely fashion
or will not suffer a year 2000 business disruption that may adversely affect
Digital Television Services' financial condition and its results of operations.
Because Digital Television Services' year 2000 conversion is expected
to be completed prior to any potential disruption to Digital Television
Services' business, Digital Television Services has not yet completed the
development of a comprehensive year 2000-specific contingency plan. However, as
part of our year 2000 contingency planning effort, Digital Television Services
examines information received from external sources for date integrity before
bringing it into its internal systems. If Digital Television Services determines
that its business or a segment thereof is at material risk of disruption due to
the year 2000 issue or anticipates that its year 2000 conversion will not be
completed in a timely fashion, it will work to enhance its contingency plan.
Costs to be incurred beyond December 31, 1998 relating to the year 2000 issue
are not expected to be significant.
Other
Digital Television Services' operating results in any period may be
affected by the incurrence of advertising and promotion expenses that do not
necessarily produce commensurate revenues in the short-term until the impact of
such advertising and promotion is realized in future periods.
Digital Television Services believes that inflation has not been a
material factor affecting its business. In general, Digital Television Services'
revenues and expenses are impacted to the same extent by inflation. A majority
of Digital Television Services' indebtedness bears interest at a fixed rate.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is set forth on pages F-1 through
F-20.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On May 21, 1998, Digital Television Services notified Arthur Andersen
LLP that Arthur Andersen's relationship as independent accountants for Digital
Television Services had ceased. We terminated our relationship with Arthur
Andersen due to our acquisition by Pegasus on April 27, 1998. This decision did
not result from any disagreement or dispute concerning accounting principles or
practices, financial statement disclosure or auditing scope or procedure, but
was the result of a change in control of Digital Television Services' ownership
and management. The decision to change accountants was approved by Digital
Television Services, Inc.'s and DTS Capital, Inc.'s respective boards of
directors.
12
<PAGE>
During the period from inception (January 30, 1996) through December
31, 1996, for the year ended December 31, 1997 and from January 1, 1998 through
and including May 21, 1998, there were no disagreements between Digital
Television Services and Arthur Andersen on any matter of accounting principles
or practices, financial statement disclosure or auditing scope or procedure,
which disagreement, if not resolved to the satisfaction of Arthur Andersen,
would have caused it to make a reference to the subject matters of such
disagreements in connection with their report.
Digital Television Services' financial statements for the year ending
December 31, 1998 was audited and reported on by PricewaterhouseCoopers LLP, the
independent auditors for Digital Television Services. Digital Television
Services had formally engaged PricewaterhouseCoopers on May 21, 1998 as its
newly appointed independent accountants to audit Digital Television Services'
financial statements and express an opinion on such statements in the future.
PART III
The Registrants meet the conditions set forth in General Instructions
(I)(1)(a) and (b) of Form 10-K and in reliance thereof are filing this Form with
reduced disclosure. As such, the entire Part III is omitted.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(b) The following documents are filed as part of this Report:
(b) Financial Statements
The financial statements filed as part of this Reportare listed
on the Index to Financial Statements on page F-1.
(b) Financial Statement Schedules
Page
Report of PricewaterhouseCoopers LLP...............................S-1
Report of Arthur Andersen LLP......................................S-2
Schedule II - Valuation and Qualifying Accounts.....................S-3
All other schedules are omitted because they are not applicable or the
required information is shown in the financial statements or notes thereto.
13
<PAGE>
(3) Exhibits
Exhibit
Number Description of Document
2.1 Agreement and Plan of Merger dated January 8, 1998 among Pegasus
Communications Corporation and certain of its shareholders, Pegasus DTS
Merger Sub, Inc., and Digital Television Services, Inc. and certain of its
shareholders, including forms of Registration Rights Agreement and Voting
Agreement as exhibits (which is incorporated by reference to Exhibit 2.1
to Pegasus's Form 8-K dated December 10, 1997).
3.1* Amended and Restated Certificate of Incorporation of Digital Television
Services, Inc., as amended as of April 27, 1998. 3.2 By-Laws of Digital
Television Services, Inc. (which is incorporated by reference to Exhibit
3.1(g) to Digital Television Services' Registration Statement on Form S-4
(File No. 333-36217)).
3.3 Certificate of Incorporation or DTS Capital, Inc. (which is incorporated
by reference to Exhibit 3.2(a) to Digital Television Services'
Registration Statement on Form S-4 (File No. 333-36217)).
3.4 By-laws of DTS Capital, Inc. (which is incorporated by reference to
Exhibit 3.2(b) to Digital Television Services' Registration Statement on
Form S-4 (File No. 333-36217)).
4.1 Indenture, dated as of July 30, 1997 among Digital Television Services,
Inc., certain of its subsidiaries, and The Bank of New York, as trustee
(the "DTS Indenture") (which is incorporated by reference to Exhibit 4.1
to Digital Television Services' Registration Statement on Form S-4 (File
No. 333-36217)).
4.2 Supplemental Indenture to the DTS Indenture, dated October 10, 1997 (which
is incorporated by reference to Exhibit 4.6 to Digital Television
Services' Registration Statement on Form S-4 (File No. 333-36217)).
4.3 Form of Notes (which is incorporated by reference to Exhibit 4.2 to
Digital Television Services' Registration Statement on Form S-4 (File No.
333-36217)).
4.4 Interest Escrow Agreement dated as of July 30, 1997 by and between The
Bank of New York, as Escrow Agent and Collateral Agent, and Digital
Television Services (which is incorporated by reference to Exhibit 4.4 to
Digital Television Services' Registration Statement on Form S-4 (File No.
333-36217)).
4.5 Escrow Security Agreement dated as of July 30, 1997 by and between The
Bank of New York, as Collateral Agent, and Digital Television Services
(which is incorporated by reference to Exhibit 4.5 to Digital Television
Services' Registration Statement on Form S-4 (File No. 333-36217)).
10.1 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 (which is incorporated by reference to
Exhibit 10.19 to Digital Television Services' Registration Statement on
Form S-4 (File No. 333-36217).
10.2 Lease Agreement dated August 2, 1996 between Fund II, Fund III, Fund IV
and Fund VII Associates and DTS Management, LLC (the "Lease Agreement")
(which is incorporated by reference to Exhibit 10.21(a) to Digital
Television Services' Registration Statement on Form S-4 (File No.
333-36217)).
10.3 Amendment dated December 20, 1996 to the Lease Agreement (which is
incorporated by reference to Exhibit 10.21(b) to Digital Television
Services' Registration Statement on Form S-4 (File No. 333-36217)).
10.4+ Pegasus Restricted Stock Plan (which is incorporated by reference to
Exhibit 10.28 to Pegasus' Registration Statement on Form S-1 (File No.
333-05057)).
10.5+ Pegasus 1996 Stock Option Plan (which is incorporated by reference to
Exhibit 10.30 to Pegasus' Registration Statement on Form S-1 (File No.
333-05057)).
10.6 Second Amended and Restated Credit Agreement dated as of July 30, 1997
among Digital Television Services, LLC, and 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 (which
is incorporated by reference to Exhibit 10.1 of Digital Television
Services' Registration Statement on Form S-4 (File No. 333-36217)).
10.20 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 (incorporated by reference to Exhibit
10.19 to the 1997 Registration Statement).
10.21 Lease Agreement dated August 2, 1996 between Fund II, Fund III, Fund IV
and Fund VII Associates and DTS Management, LLC (the "Lease Agreement")
(incorporated by reference to Exhibit 10.21(a) to the 1997 Registration
Statement).
14
<PAGE>
10.22 Amendment dated December 20, 1996 to the Lease Agreement (incorporated by
reference to Exhibit 10.21(b) to the 1997 Registration Statement).
24.1* Powers of Attorney (included in Signatures and Powers of Attorney).
27.1* Financial Data Schedule - Digital Television Services, Inc.
27.2* Financial Data Schedule - DTS Capital, Inc.
- ---------------
* Filed herewith.
+ Indicates a management contract or compensatory plan.
(b) Reports on Form 8-K.
There were no Current Reports on Form 8-K filed during the
quarter ended December 31, 1998.
15
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DIGITAL TELEVISION SERVICES, INC.
By: /s/ Marshall W. Pagon
---------------------------
Marshall W. Pagon
Chairman of the Board,
Chief Executive Officer and President
Date: March 25, 1999
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Marshall W. Pagon, Robert N.
Verdecchio and Ted S. Lodge and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of such attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/s/ Marshall W. Pagon Chairman of the Board, Chief March 25, 1999
- ------------------------------------ Executive Officer and President
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, March 25, 1999
- ------------------------------------ Financial Officer, Treasurer and
Robert N. Verdecchio Assistant Secretary
(Principal Financial and Accounting
Officer)
/s/ Howard E. Verlin Executive Vice President, March 25, 1999
- ------------------------------------ Assistant Secretary and
Howard E. Verlin Director
/s/ William Dorran Senior Vice President and March 25, 1999
- ------------------------------------ Director
William Dorran
</TABLE>
16
<PAGE>
SIGNATURES AND POWERS OF ATTORNEY
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DTS CAPITAL, INC.
By: /s/ Marshall W. Pagon
------------------------
Marshall W. Pagon
Chairman of the Board,
Chief Executive Officer and President
Date: March 25, 1999
Know all men by these presents, that each person whose signature
appears below hereby constitutes and appoints Marshall W. Pagon, Robert N.
Verdecchio and Ted S. Lodge and each of them, his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead, in any and all capacities, to sign any
or all amendments to this Annual Report, and to file the same, with all exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, granting unto each of such attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary in connection with such matters and hereby
ratifying and confirming all that each of such attorneys-in-fact and agents or
his substitutes may do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Title Date
----- ----
<S> <C> <C>
/s/ Marshall W. Pagon Chairman of the Board, Chief March 25, 1999
- -------------------------------------------- Executive Officer and President
Marshall W. Pagon
(Principal Executive Officer)
/s/ Robert N. Verdecchio Senior Vice President, Chief March 25, 1999
- --------------------------------------------- Financial Officer, Treasurer and
Robert N. Verdecchio Assistant Secretary
(Principal Financial and Accounting Officer)
</TABLE>
17
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of PricewaterhouseCoopers LLP F-2
Report of Arthur Andersen LLP F-3
Consolidated Balance Sheets as of December 31, 1997 and 1998 F-4
Consolidated Statements of Operations for the period from Inception (January 30,
1996) to December 31, 1996, for the year ended December 31, 1997 and for the
periods from January 1, 1998 to April 27, 1998 and from April 28, 1998 to
December 31, 1998 F-5
Consolidated Statements of Changes in Total Equity for the period from Inception
(January 30, 1996) to December 31, 1996, for the year ended December 31,
1997 and for the periods ended April 27, 1998 and December 31, 1998 F-6
Consolidated Statements of Cash Flows for the period from Inception (January 30,
1996) to December 31, 1996, for the year ended December 31, 1997 and for
the periods from January 1, 1998 to April 27, 1998 and from April 28, 1998 to
December 31, 1998 F-7
Notes to Consolidated Financial Statements F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Digital Television Services, Inc.:
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of operations and retained earnings and of cash flows
present fairly, in all material respects, the financial position of Digital
Television Services, Inc. and its subsidiaries at December 31, 1998, and the
results of their operations and their cash flows for the periods from January 1,
1998 to April 27, 1998 and from April 28, 1998 to December 31, 1998, in
conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 12, 1999
F-2
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Digital Television Services, Inc.:
We have audited the accompanying consolidated balance sheets of DIGITAL
TELEVISION SERVICES, INC. (a Delaware corporation and formerly Digital
Television Services, LLC) AND SUBSIDIARIES as of December 31, 1996 and 1997 and
the related consolidated statements of operations, changes in total equity, and
cash flows for the period from inception (January 30, 1996) to December 31, 1996
and for the year ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We have conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Digital
Television Services, Inc. and subsidiaries as of December 31, 1996 and 1997 and
the results of their operations and their cash flows for the period from
inception (January 30, 1996) to December 31, 1996 and for the year ended
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 18, 1998
F-3
<PAGE>
Digital Television Services, Inc.
Consolidated Balance Sheets
<TABLE>
<CAPTION>
December 31,
------------------------------------
1997 1998
------------ -------------
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 39,113,152 | $ 6,255,370
Restricted cash 19,006,386 | 18,879,305
Accounts receivable, less allowance for doubtful |
accounts of $191,000 and $183,000, respectively 5,174,019 | 6,360,216
Inventory 2,229,918 | 732,898
Prepaid expenses and other 92,605 | 228,962
------------ | -------------
Total current assets 65,616,080 | 32,456,751
|
Restricted cash 18,020,702 | -
Property and equipment, net 2,920,217 | 3,268,884
Intangible assets, net 170,808,421 | 343,986,107
Deferred taxes - | 2,109,901
Deposits and other 250,000 | -
------------ | ------------
|
Total assets $257,615,420 | $381,821,643
============ | ============
LIABILITIES AND EQUITY
Current liabilities:
Current portion of long-term debt $ 14,950,430 | $ 4,061,677
Accounts payable 1,183,236 | 1,369,324
Accrued interest 8,247,073 | 8,334,313
Accrued satellite programming and fees 3,652,701 | 8,080,181
Unearned revenue 3,314,397 | 3,641,433
Amounts due seller 27,971,199 | -
Accrued expenses and other 4,017,395 | 3,033,709
------------ | ------------
Total current liabilities 63,336,431 | 28,520,637
|
Long-term debt 177,641,876 | 204,804,632
Deferred taxes - | 66,941,018
------------ | ------------
Total liabilities 240,978,307 | 300,266,287
------------ | ------------
|
Commitments and contingent liabilities - | -
|
Stockholders' equity: |
Preferred stock; $0.01 par value; 10.0 million shares |
authorized; 1,404,056 and no shares issued and outstanding 14,041 | -
Common stock; $0.01 par value; 10.0 million shares |
authorized; 2,137,049 and 100 shares issued and outstanding 21,370 | 1
Additional paid-in capital 25,826,080 | 124,264,836
Deficit (9,224,378) | (42,709,481)
------------ | ------------
Total stockholders' equity 16,637,113 | 81,555,356
------------ | ------------
|
Total liabilities and stockholders' equity $257,615,420 | $381,821,643
============ | ============
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE>
Digital Television Services, Inc.
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Inception 1998
(January 30, 1996) to Year Ended ----------------------------------------
December 31, December 31, January 1 April 28
1996 1997 to April 27 to December 31
--------------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Net revenues:
Programming revenue $ 2,918,918 $ 39,243,002 $ 21,719,945 | $ 50,400,448
Other 166,228 2,509,871 1,262,320 | 2,654,272
------------ ------------- ------------- | -------------
Total net revenues 3,085,146 41,752,873 22,982,265 | 53,054,720
|
Operating expenses: |
Programming 1,595,963 20,694,127 10,374,799 | 23,813,479
General and administrative 2,229,339 12,716,204 5,816,706 | 10,795,329
Marketing and selling 852,517 9,412,567 6,448,320 | 21,468,224
Incentive compensation - - - | 173,919
Depreciation and amortization 1,147,963 14,509,152 6,977,759 | 28,190,971
------------- ------------- ------------- | -------------
Loss from operations (2,740,636) (15,579,177) (6,635,319) | (31,387,202)
|
Interest expense, net (817,603) (14,457,088) (7,686,869) | (16,132,066)
Other income (expenses), net 22,980 (111,350) (290,203) | 3,279
------------- ------------- ------------- | -------------
Loss before income taxes (3,535,259) (30,147,615) (14,612,391) | (47,515,989)
Benefit for income taxes - - - | ( 4,806,508)
------------- ------------- ------------- | -------------
Net loss ($3,535,259) ($30,147,615) ($14,612,391) | ($42,709,481)
============= ============= ============= | =============
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE>
Digital Televison Services, Inc.
Consolidated Statements of Changes in Total Equity
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------
Class A Class B Class C
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Units Amount Units Amount Units Amount
----- ------ ----- ------ ----- ------
Balances at January 30, 1996
Sale of Class B Units 1,844,098 $18,440,982
Issuance of Class C Units 87,049
Net loss (3,535,259)
------------------------------------------------------------------------------------
Balances at December 31, 1996 1,844,098 14,905,723 87,049
Sale of Class A Units 1,333,333 $29,820,008
Sale of Class B Units 205,902 2,058,997
Issuance of Class D Units
Net loss (Jan. 1, 1997 - Oct. 10, 1997) (3,958,517) (16,964,720)
------------------------------------------------------------------------------------
Balances at October 10, 1997 1,333,333 25,861,491 2,050,000 87,049
Conversion of capital (1,333,333) ($25,861,491) (2,050,000) (87,049)
Net loss (Oct. 11, 1997 - Dec. 31, 1997)
------------------------------------------------------------------------------------
Balances at December 31, 1997
Net loss (Jan. 1, 1998 - Apr. 27, 1998)
------------------------------------------------------------------------------------
Balances at April 27, 1998
Conversion of capital
PCC Merger consideration
Contribution by PCC
Net loss (Apr. 28, 1998 - Dec. 31, 1998)
=======================================================================================
Balances at December 31, 1998
=======================================================================================
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------------------
Class D Preferred Stock Common Stock
----------------------------------------------------------------------
No. of Par No. of Par
Units Amount Shares Value Shares Value
----- ------ ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Balances at January 30, 1996
Sale of Class B Units
Issuance of Class C Units
Net loss
-----------------------------------------------------------------------
Balances at December 31, 1996
Sale of Class A Units
Sale of Class B Units
Issuance of Class D Units 124,000
Net loss (Jan. 1, 1997 - Oct. 10, 1997)
-----------------------------------------------------------------------
Balances at October 10, 1997 124,000
Conversion of capital (124,000) 1,404,056 $14,041 2,137,049 $21,370
Net loss (Oct. 11, 1997 - Dec. 31, 1997)
-----------------------------------------------------------------------
Balances at December 31, 1997 1,404,056 14,041 2,137,049 21,370
Net loss (Jan. 1, 1998 - Apr. 27, 1998)
-----------------------------------------------------------------------
Balances at April 27, 1998 1,404,056 14,041 2,137,049 21,370
Conversion of capital (1,404,056) (14,041) (2,136,949) (21,369)
PCC Merger consideration
Contribution by PCC
Net loss (Apr. 28, 1998 - Dec. 31, 1998)
=======================================================================
Balances at December 31, 1998 100 $ 1
=======================================================================
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Additional Retained
Paid-In Earnings Total
Capital (Deficit) Equity
------- --------- ------
<S> <C> <C> <C>
Balances at January 30, 1996
Sale of Class B Units $ 18,440,982
Issuance of Class C Units
Net loss (3,535,259)
------------------------------------------------
Balances at December 31, 1996 14,905,723
Sale of Class A Units 29,820,008
Sale of Class B Units 2,058,997
Issuance of Class D Units
Net loss (Jan. 1, 1997 - Oct. 10, 1997) (20,923,237)
------------------------------------------------
Balances at October 10, 1997 25,861,491
Conversion of capital $25,826,080
Net loss (Oct. 11, 1997 - Dec. 31, 1997) ($9,224,378) (9,224,378)
------------------------------------------------
Balances at December 31, 1997 25,826,080 (9,224,378) 16,637,113
Net loss (Jan. 1, 1998 - Apr. 27, 1998) (14,612,391) (14,612,391)
------------------------------------------------
Balances at April 27, 1998 25,826,080 (23,836,769) 2,024,722
Conversion of capital 35,410
PCC Merger consideration 96,257,259 23,836,769 120,094,028
Contribution by PCC 2,146,087 2,146,087
Net loss (Apr. 28, 1998 - Dec. 31, 1998) (42,709,481) (42,709,481)
================================================
Balances at December 31, 1998 $124,264,836 ($42,709,481) $ 81,555,356
================================================
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE>
Digital Television Services, Inc.
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Inception 1998
(January 30, 1996) to Year Ended ------------------------------
December 31, December 31, January 1 April 28
1996 1997 to April 27 to December 31
-------------------- ------------ ----------- --------------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss ($3,535,259) ($30,147,615) ($14,612,391) | ($42,709,481)
Adjustments to reconcile net loss |
to net cash used for operating activities: |
Depreciation and amortization 1,147,963 14,509,152 6,977,759 | 28,190,971
Amortization of debt issuance costs and debt discount 313,329 2,423,535 459,199 | 923,395
Bad debt expense 63,791 660,490 375,152 | 860,064
Change in assets and liabilities: |
Accounts receivable (646,912) (2,728,780) (1,294,546) | (912,143)
Inventory (218,140) (1,566,129) 858,949 | 638,071
Prepaid expenses and other (114,881) (381,554) 33,377 | (185,740)
Accounts payable and accrued expenses 1,773,127 3,697,385 (1,126,214) | (419,692)
Unearned revenue 379,533 (1,817,178) 327,036 | -
Accrued interest 203,506 8,043,567 (3,151,341) | 3,238,581
------------ ------------- ----------- | ------------
Net cash used for operating activities (633,943) (7,307,127) (11,153,020) | (10,375,974)
------------ ------------- ----------- | ------------
|
Cash flows from investing activities: |
Acquisitions (12,695,488) (89,590,710) (37,172,504) | -
Capital expenditures (386,105) (2,611,405) (552,844) | (753,336)
Purchase of intangible assets (693,690) (1,222,307) (958,171) | (5,033,612)
------------ ------------- ----------- | ------------
Net cash used for investing activities (13,775,283) (93,424,422) (38,683,519) | (5,786,948)
------------ ------------- ----------- | ------------
|
Cash flows from financing activities: |
Proceeds from long-term debt 32,399 153,185,267 - | -
Repayments of long-term debt and capital leases (9,047,023) (6,201,532) (9,571,794) | (8,480,397)
Borrowings on bank credit facilities 9,400,000 88,269,409 14,000,000 | 17,300,000
Repayments on bank credit facilities - (82,169,409) - | (400,000)
Restricted cash - (37,027,088) 9,226,699 | 8,921,084
Debt issuance costs (2,821,177) (9,649,936) - | -
Contributions by Parent - - - | 2,146,087
Sale of Member Units 18,440,982 31,879,005 - | -
Other, net - (36,970) - | -
------------ ------------- ----------- | ------------
Net cash provided by financing activities 16,005,181 138,248,746 13,654,905 | 19,486,774
------------ ------------- ----------- | ------------
|
Net increase (decrease) in cash and cash equivalents 1,595,955 37,517,197 (36,181,634) | 3,323,852
Cash and cash equivalents, beginning of period - 1,595,955 39,113,152 | 2,931,518
------------ ------------- ----------- | ------------
Cash and cash equivalents, end of period $ 1,595,955 $ 39,113,152 $ 2,931,518 | $ 6,255,370
============ ============= =========== | ============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. The Company:
Digital Television Services, Inc. ("DTS" or together with its
subsidiaries stated below, the "Company") is a holding company which operates
primarily through its wholly owned subsidiaries and is a successor to Digital
Television Services, LLC and DBS Holdings, L.P., originally formed on January
30, 1996. DTS' significant direct operating subsidiaries consist of eleven
entities (the "Operating Subsidiaries") which provide direct broadcast satellite
television ("DBS") services to customers in certain rural areas of 11 states.
Until April 27, 1998 the sole member and manager of the Operating
Subsidiaries was DTS Management, LLC ("DTS Management"), which is a subsidiary
of DTS. The Company's other subsidiary, DTS Capital, Inc. ("DTS Capital"), was
formed in 1997 and has nominal assets and does not conduct any operations. DTS
Capital was formed to facilitate the issuance of $155.0 million of 12.5% Series
A Senior Subordinated Notes due 2007 (the "Series A Notes") in July 1997.
On April 27, 1998, the Company merged (the "Merger") with Pegasus DTS
Merger Sub, Inc., a wholly owned subsidiary of Pegasus Communications
Corporation ("Pegasus" or the "Parent") in a transaction accounted for as a
purchase. In connection with the Merger, the stockholders of the Company
exchanged all of their outstanding capital stock for approximately 5.5 million
shares of Pegasus' Class A Common Stock and, as a consequence, the Company
became a wholly owned subsidiary of Pegasus. Pegasus did not assume, guarantee
or otherwise have any liability for DTS' outstanding indebtedness or any other
liability of the Company or its subsidiaries. After the Merger, except to the
extent permitted under the terms of the Notes, the Company did not assume,
guarantee or otherwise have any liability for any indebtedness or other
liability of Pegasus or any of Pegasus' subsidiaries.
Total consideration for the Merger was approximately $363.9 million,
which consisted of approximately 5.5 million shares of Pegasus' Class A Common
Stock (amounting to $118.8 million at a price of $21.71 per share, the average
closing price per share five days prior and subsequent to the acquisition
announcement), options and warrants to purchase a total of 224,038 shares of
Pegasus' Class A Common Stock (amounting to $3.3 million at the time of
issuance), approximately $158.9 million in assumed net liabilities and
approximately $82.9 million of a deferred tax liability, primarily as a result
of non-deductible amortization.
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 the rights to provide DIRECTV(R)
("DIRECTV") services and related assets and general corporate overhead expenses.
The Company expects negative cash flows and net losses to continue through at
least 1999 as the Company expects to incur substantial marketing and selling
expenses in order to build its subscriber base. The ability to generate positive
cash flow in the future is dependent upon many factors, including general
economic conditions, the level of market acceptance for the Company's services
and the degree of competition encountered by the Company.
The success of the Company is dependent on the future ability of DTS
and its subsidiaries to generate projected revenues through successful
operations. In the opinion of management, capital on hand, as well as funds
provided by financing activities, will be sufficient to meet the capital and
operating needs of the Company through at least 1999. 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.
F-8
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying consolidated financial statements include the accounts
of DTS and its subsidiaries. All intercompany transactions and balances have
been eliminated. Certain amounts for 1996 and 1997 have been reclassified for
comparative purposes. As a result of the Merger and Pegasus' use of the purchase
method of accounting to record the acquisition of the Company, the "push down"
effect of the purchase price increased the Company's intangible assets by
approximately $205.0 million. As a consequence, results prior to the Merger are
not comparable with those subsequent to the Merger.
Use of Estimates in the Preparation of Financial Statements:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of revenues, expenses, assets and
liabilities and the disclosure of contingencies. Actual results could differ
from those estimates. Significant estimates relate to the useful lives and
recoverability of intangible assets.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid investments purchased
with an initial maturity of three months or less. The Company has cash balances
in excess of the federally insured limits at various banks.
Restricted Cash:
The Company has restricted cash held in escrow of approximately $18.9
million at December 31, 1998 to fund interest payments on the Notes.
Inventories:
Inventories consist of equipment held for resale to customers and
installation supplies. Inventories are stated at the lower of cost or market on
a first-in, first-out basis.
Long-Lived Assets:
The Company's assets are reviewed for impairment whenever events or
circumstances provide evidence which suggest the carrying amounts may not be
recoverable. The Company assesses the recoverability of its assets by
determining whether the depreciation or amortization of the respective asset
balance can be recovered through projected undiscounted future cash flows. To
date, no such impairments have occurred.
Property and Equipment:
Property and equipment are stated at cost. The cost and related
accumulated depreciation of assets fully depreciated, sold, retired or otherwise
disposed of are removed from the respective accounts and any resulting gains or
losses are included in the accompanying statements of operations. Satellite
equipment that is leased to customers is stated at cost.
Depreciation is computed for financial reporting purposes using the
straight-line method based upon the following lives:
Equipment, furniture and fixtures................ 5 to 10 years
Leasehold improvements........................... 3 to 7 years
Vehicles......................................... 3 to 5 years
F-9
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
Intangible Assets:
Intangible assets are stated at cost. The cost and related accumulated
amortization of assets fully amortized, sold, retired or otherwise disposed of
are removed from the respective accounts and any resulting gains or losses are
included in the accompanying statements of operations. Financing costs incurred
in obtaining long-term financing are amortized over the term of the applicable
loan.
Amortization of intangible assets is computed for financial reporting
purposes using the straight-line method based upon the following lives:
DBS rights.................................... 10 years
Other intangibles............................. 5 to 10 years
Revenue:
The Company operates in the DBS industry. All of the Company's revenues
are derived from external customers. The Company earns 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. The
Company recognizes revenue when video and audio services are provided. As
programming revenue is earned uniformly over the period of the purchase
agreement with the customer, approximately $2.3 million and $2.9 million of net
accounts receivable in the accompanying balance sheets represent unearned
revenue at December 31, 1997 and 1998, respectively.
Advertising Costs:
Advertising costs are charged to operations in the period incurred and
totaled approximately $522,000, $2.4 million, $1.2 million and $4.5 million for
the period from inception (January 30, 1996) to December 31, 1996, the year
ended December 31, 1997, the period from January 1, 1998 to April 27, 1998 and
the period from April 28, 1998 to December 31, 1998, respectively.
Income Taxes:
The Company accounts for income taxes utilizing the asset and liability
approach, whereby deferred tax assets and liabilities are recorded for the tax
effect of differences between the financial statement carrying values and tax
bases of assets and liabilities. A valuation allowance is recorded for deferred
taxes where it appears more likely than not that the Company will not be able to
recover the deferred tax asset.
The Company was considered a partnership for federal and state income
tax purposes for the period from inception (January 30, 1996) to October 10,
1997. All taxable income or loss was allocated to the members in accordance with
the terms of the limited liability company agreement of the Company (the "LLC
Agreement"). The Company became a taxable entity for federal and state income
tax purposes effective with its conversion to a corporation on October 10, 1997.
F-10
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
2. Summary of Significant Accounting Policies: - (Continued)
Concentration of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade receivables, cash and
cash equivalents. Concentrations of credit risk with respect to accounts
receivable are limited due to the large number of customers comprising the
Company's customer base and their dispersion across different geographic
regions. As of December 31, 1997 and 1998, the Company had no significant
concentrations of credit risk.
Reliance on DIRECTV:
The Company's business is derived from providing DBS services as an
independent DIRECTV provider. Because the Company is 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, Hughes Electronics
Corporation.
New Accounting Pronouncements:
In April 1998, the Accounting Standards Executive Committee issued
Statement of Position 98-5 "Reporting on the Costs of Start-Up Activities" ("SOP
98-5"), which is effective for fiscal years beginning after December 15, 1998.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") SFAS No. 133 "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133"), which is effective
for fiscal quarters of fiscal years beginning after June 15, 1999. Management
has reviewed the provisions of SOP 98-5 and SFAS No. 133 and the implementation
of these standards is not expected to have any significant impact on its
consolidated financial statements.
3. Property and Equipment:
Property and equipment consist of the following:
December 31, December 31,
1997 1998
---- ----
Equipment, furniture and fixtures.......... $2,662,556 $3,13 9,988
Leasehold improvements..................... 327,804 1,160,054
Vehicles................................... 484,394 484,394
---------- -----------
3,474,754 4,784,436
Accumulated depreciation................... (554,537) (1,515,552)
---------- -----------
Net property and equipment................. $2,920,217 $ 3,268,884
========== ===========
Depreciation expense amounted to $48,000, $510,000, $290,000 and
$668,000 for the period from inception (January 30, 1996) to December 31, 1996,
the year ended December 31, 1997, the period from January 1, 1998 to April 27,
1998 and the period from April 28, 1998 to December 31, 1998, respectively.
F-11
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
4. Intangibles:
Intangible assets consist of the following:
December 31, December 31,
1997 1998
---- ----
DBS rights................................ $170,715,335 $376,696,181
Deferred financing costs.................. 12,471,112 12,981,402
Other deferred costs...................... 2,757,950 3,655,716
------------ ------------
185,944,397 393,333,299
Accumulated amortization.................. (15,135,976) (49,347,192)
------------- ------------
Net intangible assets..................... $170,808,421 $343,986,107
============ ============
Amortization expense amounted to $1.1 million, $14.0 million, $6.7
million and $27.5 million for the period from inception (January 30, 1996) to
December 31, 1996, the year ended December 31, 1997, the period from January 1,
1998 to April 27, 1998 and the period from April 28, 1998 to December 31, 1998,
respectively.
5. Equity:
Prior to October 10, 1997 the Company was a limited liability
corporation ("LLC"). The LLC had four classes of equity interests, denominated
as "Class A Units," "Class B Units," "Class C Units" and "Class D Units," with
the classes having different voting and distribution rights per the LLC
Agreement. On October 10, 1997, the Company converted to corporate form in a
transaction (the "Corporate Conversion") contemplated on the LLC Agreement
pursuant to which the LLC merged with and into WEP Intermediate Corporation
("WEP"). As a result of the Corporate Conversion, all of the units were
converted/exchanged for Series A Preferred Stock, Common Stock and warrants to
purchase Common Stock of the Company, the surviving entity changed its name to
Digital Television Services, Inc. and DTS assumed by operation of law and
supplemental indenture all of the obligations of the LLC under the terms of the
Notes.
Subsequent to the Corporate Conversion, substantially all of the
outstanding shares of the Company were owned by the holders of the equity
interests in the LLC. Therefore, the Corporate Conversion has been treated for
accounting purposes as the acquisition of WEP by the LLC. The LLC's assets and
liabilities have been recorded at historical cost and WEP's assets and
liabilities have been recorded at fair value. However, given that WEP's only
asset consisted of its investment in the LLC, no goodwill has been recognized.
Effective with the Corporate Conversion, the historical financial statements of
the LLC have become the historical financial statements of WEP and include the
business of both companies.
On April 27, 1998, in connection with the Merger, the stockholders of
the Company exchanged all of their outstanding capital stock for shares of
Pegasus' Class A Common Stock and warrants to purchase Pegasus' Class A Common
Stock and, as a result, the Company became a wholly owned subsidiary of Pegasus.
Common Stock:
As of December 31, 1997 and 1998, the Company had one class of Common
Stock. The Company's ability to pay dividends on its Common Stock is subject to
certain restrictions.
F-12
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
5. Equity: - (Continued)
Preferred Stock:
As of December 31, 1997 and 1998, the Company had 10.0 million shares
of Preferred Stock authorized of which 5.0 million shares have been designated
Series A Payment-in-Kind Convertible Preferred Stock (the "Series A Preferred
Stock"). The Company's ability to pay dividends on its Preferred Stock is
subject to certain restrictions.
6. Long-Term Debt:
<TABLE>
<CAPTION>
Long-term debt consists of the following : December 31, December 31,
1997 1998
---- ----
<S> <C> <C>
Series B Notes payable by DTS, due 2007, interest at 12.5%, payable
semi-annually in arrears on February 1 and August 1, net of unamortized
discount of $2,069,185 and $1,784,844 as of December 31, 1997 and 1998,
respectively........................................................... $152,930,815 $153,215,156
Senior six-year $70.0 million revolving credit facility,
payable by DTS, interest at the Company's option at
either the bank's base rate or the Eurodollar Rate (8.94%
at December 31, 1998)................................................... - 26,800,000
Senior six-year $20.0 million term loan facility, payable by
DTS, interest at the Company's option at either the
bank's base rate or the Eurodollar Rate (9.03% at
December 31, 1998)...................................................... 15,500,000 19,600,000
Sellers' notes, due 1998 to 2001, interest at 3% to 4%, net
of unamortized discount of $2,675,149 and $1,576,895 as
of December 31, 1997 and 1998, respectively............................. 23,869,849 9,161,681
Capital leases and other.................................................... 291,642 89,472
------------ ------------
192,592,306 208,866,309
Less current maturities...................................................... 14,950,430 4,061,677
------------ ------------
Long-term debt................................................................ $177,641,876 $204,804,632
============ ============
</TABLE>
In April 1996, in connection with the acquisition of the Company's
California DBS rights, one of the Operating Subsidiaries entered into a
promissory note in favor of the seller. Pursuant to the note, the Operating
Subsidiary is obligated to pay to the seller 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, $8.3 million, is determined by
multiplying the number of DBS subscribers in the Company's California territory
as of October 1, 1998 by certain dollar amounts. The balance of the note was
paid in October 1998 with borrowings from the DTS Credit Facility.
In November 1996, in connection with the acquisition of one of the
Company's South Carolina DBS rights, one of the Operating Subsidiaries entered
into a promissory note in favor of the seller in the amount of approximately
$8.0 million, of which approximately $3.3 million was paid in January 1997. The
balance was paid in January 1998.
F-13
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
6. Long-Term Debt: - (Continued)
In May 1997, in connection with the acquisition of the Company's
Georgia DBS rights (the "Georgia DBS Rights"), one of the Operating Subsidiaries
issued three promissory notes (the "Georgia Notes"), each of which represents a
portion of the purchase price for one of the Georgia DBS Rights. The Operating
Subsidiary issued (i) a promissory note in favor of the seller in the amount of
approximately $850,000 ("Georgia Note 1"), (ii) a promissory note in favor of
the seller in the amount of approximately $9.4 million ("Georgia Note 2"), and
(iii) a promissory note in favor of the seller in the amount of approximately
$5.2 million ("Georgia Note 3"). The principal amount of the Georgia Note 1 was
paid in January 1998. The principal amount of each of the Georgia Note 2 and the
Georgia Note 3 is payable in annual installments beginning in January 1998
through January 2001.
In July 1997, the Company entered into an amended and restated $70.0
million senior revolving credit facility and a $20.0 million senior term credit
facility (collectively, the "DTS Credit Facility") which expires in 2003 and is
collateralized by substantially all of the assets of DTS and its subsidiaries.
The DTS Credit Facility is subject to certain financial covenants as defined in
the loan agreement, including a debt to adjusted cash flow covenant. As of
December 31, 1998, $18.5 million of stand-by letters of credit were issued
pursuant to the DTS Credit Facility, including $10.7 million collateralizing
certain of the Company's outstanding sellers' notes.
In July 1997, the Company completed a senior subordinated notes
offering (the "Notes Offering") in which it sold $155.0 million of its Series A
Notes. A portion of the net proceeds from the Notes Offering was used to fund an
interest escrow account, which is included in restricted cash on the Company's
consolidated balance sheets, for the first four semi-annual interest payments on
the Series A Notes. The Company exchanged its Series A Notes for its 12.5%
Series B Senior Subordinated Notes due 2007 (the "Series B Notes" and, together
with the Series A Notes, the "Notes"). The Series B Notes have substantially the
same terms and provisions as the Series A Notes. The Notes are guaranteed on a
full, unconditional, senior subordinated basis, jointly and severally by all
direct and indirect subsidiaries of the Company, except DTS Capital, which is a
co-issuer of the Notes and has nominal assets and does not conduct any
operations.
The Notes may be redeemed, at the option of the Company, in whole or in
part, at various points in time after August 1, 2002 at the redemption prices
specified in the indenture governing the Notes, plus accrued and unpaid interest
thereon.
The Company's indebtedness contain certain financial and operating
covenants, including restrictions on the Company to incur additional
indebtedness, create liens and to pay dividends.
At December 31, 1998, maturities of long-term debt and capital leases
are as follows:
1999.......................... $4,061,677
2000.......................... 4,204,026
2001.......................... 3,385,450
2002.......................... 800,000
2003.......................... 43,200,000
Thereafter.................... 153,215,156
============
$208,866,309
============
F-14
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
7. Leases:
The Company leases certain office and retail space and vehicles under
operating leases. The operating leases expire at various dates through 2002.
Rent expense for the period from inception (January 30, 1996) to December 31,
1996, the year ended December 31, 1997, the period from January 1, 1998 to April
27, 1998 and the period from April 28, 1998 to December 31, 1998 was $83,000,
$673,000, $176,000 and $506,000, respectively. The Company leases vehicles under
long-term leases and has the option to purchase the vehicles for a nominal cost
at the termination of the leases. The related obligations are included in
long-term debt. Property and equipment at December 31 include the following
amounts for leases that have been capitalized:
1997 1998
---- ----
Vehicles............................... $299,889 $169,947
Accumulated depreciation............... (47,147) (59,528)
======== ========
Total.............................. $252,742 $110,419
======== ========
Future minimum lease payments on noncancellable operating and capital
leases at December 31, 1998 are as follows:
Operating Capital
Leases Leases
--------- -------
1999............................................. $ 559,788 $47,551
2000............................................. 429,944 42,796
2001............................................. 402,465 8,689
2002............................................. 277,018 -
-------- -------
Total minimum payments........................ $1,669,215 99,036
==========
Less: amount representing interest........... 9,564
=======
Present value of net minimum lease payments
including current maturities of $40,939... $89,472
=======
8. Income Taxes:
The following is a summary of the components of income taxes from
operations:
<TABLE>
<CAPTION>
January 1 to April 28 to
April 27, December 31,
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
Federal and state - deferred ............. - - | ($4,806,508)
State and local - current ................ - - | -
---- ---- | -----------
Provision (benefit) for income taxes .. - - | ($4,806,508)
==== ==== | ===========
</TABLE>
F-15
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
8. Income Taxes: - (Continued)
The deferred income tax assets and liabilities recorded in the
consolidated balance sheets at December 31, 1997 and 1998 are
as follows:
<TABLE>
<CAPTION>
1997 1998
---- ----
Assets:
<S> <C> <C>
Receivables............................................ - $69,707
Excess of tax basis over book basis of amortizable
intangible assets.................................. $1,989,000 -
Loss carryforwards..................................... 3,072,000 19,912,263
Other.................................................. 269,000 -
---------- -----------
Total deferred tax assets......................... 5,330,000 19,981,970
---------- -----------
Liabilities:
Excess of book basis over tax basis of amortizable
intangible assets.................................. - 66,941,018
---------- -----------
Total deferred tax liabilities..................... - 66,941,018
---------- -----------
Net deferred tax assets (liabilities).................. 5,330,000 (46,959,048)
Valuation allowance............................... 5,330,000) (17,872,069)
---------- -----------
Net deferred tax liabilities........................... - $64,831,117)
========== ============
</TABLE>
The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets which may not be realized due to the expiration of
the Company's net operating loss carryforwards and portions of other deferred
tax assets related to prior acquisitions. The valuation allowance increased
primarily as the result of net operating loss carryforwards generated during
1998, which may not be utilized.
At December 31, 1998, the Company has net operating loss carryforwards
of approximately $52.4 million which are available to offset future taxable
income and expire through 2018.
A reconciliation of the Federal statutory rate to the effective tax
rate is as follows:
<TABLE>
<CAPTION>
January 1 April 28 to
to April December 31,
1997 27, 1998 1998
---- -------- ----
<S> <C> <C> <C>
U.S. statutory federal income tax rate ..... 34.00% 35.00% | 35.00%
Valuation allowance ........................ (34.00) (35.00) | (29.16)
------ ------ | ------
Effective tax rate ......................... - - | 5.84%
====== ====== | ======
</TABLE>
9. Supplemental Cash Flow Information:
Significant noncash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Inception
(January 30,
1996) to Year ended January 1 to April 28 to
December 31, December 31, April 27, December 31,
1996 1997 1998 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Notes payable and related acquisition of
intangibles................................. $24,156,000 $17,552,000 $9,500,000 | -
Capital contribution and related acquisition - - - | $122,240,115
of intangibles.............................. |
Deferred taxes, net and related intangibles... - - - | 82,934,179
</TABLE>
F-16
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
9. Supplemental Cash Flow Information: - (Continued)
For the period from inception (January 30, 1996) to December 31, 1996,
the year ended December 31, 1997, the period from January 1, 1998 to April 27,
1998 and the period from April 28, 1998 to December 31, 1998, the Company paid
cash for interest in the amount of $301,000, $5.4 million, $11.5 million and
$13.7 million, respectively. The Company paid no federal income taxes for the
period from inception (January 30, 1996) to December 31, 1996, for the year
ended December 31, 1997 and for the periods ended April 27, 1998 and December
31, 1998.
10. Acquisitions:
In 1997, the Company acquired, from nine independent DIRECTV providers,
the rights to provide DIRECTV programming in certain rural areas of Georgia,
Indiana, Kansas, Kentucky, New Hampshire and Vermont and the related net assets
in exchange for total consideration of approximately $134.3 million, which
consisted of $119.7 million in cash and $17.6 million (before fair value
adjustments related to the sellers' notes of $3.0 million) in promissory notes.
On January 30, 1998, the Company acquired, from an independent DIRECTV
provider, the rights to provide DIRECTV programming in certain rural areas of
Georgia and the related assets in exchange for total consideration of
approximately $9.5 million, which consisted of $9.5 million in cash and $37,000
in assumed net liabilities.
The following unaudited summary, prepared on a pro forma basis,
combines the results of operations as if the above DBS territories had been
acquired as of the beginning of the periods presented, after including the
impact of certain adjustments, such as the amortization of intangibles, interest
expense and related income tax effects. The pro forma information does not
purport to be indicative of what would have occurred had the acquisitions been
made on those dates or of results which may occur in the future.
<TABLE>
<CAPTION>
January 1 April 28 to
(in thousands) to April 27, December 31,
1997 1998 1998
---- ---- ----
<S> <C> <C> <C>
Net revenues.................................. $ 52,719 $ 25,805 | $ 50,400
========= ======== | =========
Operating loss................................ ($20,092) ($6,654) | ($31,387)
========= ======== | =========
Net loss...................................... ($45,893) ($14,702) | ($42,709)
========= ======== | =========
</TABLE>
11. Financial Instruments:
The carrying values and fair values of the Company's financial
instruments at December 31 consisted of:
<TABLE>
<CAPTION>
1997 1998
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Value Value Value Value
----- ----- ----- -----
(in thousands)
<S> <C> <C> <C> <C>
Long-term debt, including current portion $192,592 $192,592 $208,866 $221,501
</TABLE>
Long-term debt: The fair value of long-term debt is estimated based on
the quoted market price for the same or similar instruments.
All other financial instruments are stated at cost which approximates
fair market value.
F-17
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
12. Employee Benefit Plans:
Employment Agreements:
DTS Management entered into employee agreements, as amended, with
certain executive officers of DTS Management (the "Employee Agreements"). The
Employee Agreements provided for base salaries and bonuses at the discretion of
the Board of Directors of DTS. Effective with the Merger, the Employee
Agreements were terminated.
401(k) Plans:
In January 1997, the Company established the Digital Television
Services 401(k) Plan (the "Plan") covering substantially all of its employees.
As part of the Plan, the Company provided matching contributions of 20% of the
participant's contributions up to a maximum of 5% of the participant's pay. The
Plan also provided for additional contributions at the discretion of the
Company. The Company incurred the cost of administering this plan. Effective
with the Merger, the Plan was terminated. Substantially all employees who have
completed at least one year of service with the Company are eligible to
participate under Pegasus' 401(k) Plan.
Employee Stock Plans:
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 may be issued to employees or independent
contractors of the Company at prices equal to the market value thereof as of the
date of issuance and pursuant to such terms and conditions, including vesting,
as determined by the Board of Directors. As of December 31, 1997, stock options
were granted with respect to 43,633 shares of Common Stock, with an exercise
price of $22.50 per share on the date of grant. The stock options were to expire
from two to ten years after each respective grant date. A portion of the options
were exercisable at the grant date and the remaining options were to become
exercisable one year from the grant date, with vesting periods of four years.
Effective with the Merger, generally all unvested options became fully vested
and were converted to options to purchase Pegasus' Class A Common Stock.
The Company applies Accounting Principals Board Opinion No. 25
"Accounting for Stock Issued to Employees" ("APB 25") in accounting for its
stock plan. The Company has adopted the disclosure-only provisions of SFAS No.
123 "Accounting for Stock Based Compensation" ("SFAS 123"). Under SFAS 123,
companies can either continue to account for stock compensation plans pursuant
to existing accounting standards or elect to expense the value derived from
using an option pricing model. The Company is continuing to apply existing
accounting standards. However, SFAS 123 requires disclosures of pro forma net
income as if the Company had adopted the expensing provisions of SFAS 123. The
fair value of options was estimated at the date of grant using an option pricing
model with the following assumptions: weighted average risk free interest rate
of 5.65%, no dividend yield and a life of the options approximating one year to
reflect the accelerated vesting provisions of the Merger. The estimated fair
value of these options was calculated using a minimum value method and may not
be indicative of the future impact, since the model for this method does not
take volatility into consideration.
Pro forma net losses for the period from inception (January 30, 1996)
through December 31, 1996 and for the year ended December 31, 1997 would have
been $3.5 million and $30.3 million, respectively.
Effective with the Merger, the Employee Stock Plan was terminated.
Pegasus has two active stock plans available to grant stock options and
restricted stock awards to purchase Pegasus' Class A Common Stock to eligible
employees, executive officers and non-employee directors of Pegasus.
F-18
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
13. Commitments and Contingent Liabilities:
Legal Matters:
The Company was notified that is has been sued in Indiana for allegedly
charging DBS subscribers excessive fees for late payments. The plaintiffs, who
purport to represent a class consisting of residential DIRECTV customers in
Indiana, seek unspecified damages for the purported class and modification of
the Company's late-fee policy. The Company is advised that similar suits have
been brought against DIRECTV and various cable operators in other parts of the
United States.
From time to time the Company is involved with claims that arise in the
normal course of business.
In the opinion of management, the ultimate liability with respect to
the aforementioned claims and matters will not have a material adverse effect on
the consolidated operations, liquidity, cash flows or financial position of the
Company.
14. Related Party Transactions:
Columbia Capital Corporation ("Columbia"), which is owned by certain
members of the Company holding Class A and Class B units prior to October 10,
1997 and preferred stock and common stock subsequent to October 10, 1997 and
prior to the Merger, provided financial, managerial, and other services to the
Company. Total fees and expenses paid to Columbia were approximately $322,000
and $47,000 for the period from inception (January 30, 1996) through December
31, 1996 and for the year ended December 31, 1997, respectively. Such fees are
included in general and administrative expenses and other expenses in the
accompanying consolidated statements of operations.
Other related party transaction balances at December 31, 1997 and 1998
are as follows:
1997 1998
---------- --------
Accrued expenses and other.......... - $160,703
In 1998, PCC made contributions to the Company totaling $122.2 million
in connection with the Merger.
15. Quarterly Information (unaudited):
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
(in thousands) March 31, June 30, September 30, December 31,
1998 1998 1998 1998
---------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
1998
- ----
Net revenues $17,116 $18,104 $19,464 $21,353
Operating loss (5,277) (6,587) (10,859) (15,299)
Net loss ($11,185) ($12,593) ($16,781) ($16,763)
</TABLE>
The Company had no extraordinary gains or losses for the year ended
December 31, 1998.
F-19
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
15. Quarterly Information (unaudited): - (Continued)
<TABLE>
<CAPTION>
Quarter Ended
-------------------------------------------------------------------------
(in thousands) March 31, June 30, September 30, December 31,
1997 1997 1997 1997
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
1997
Net revenues $6,977 $10,036 $11,798 $12,942
Operating loss (2,386) (4,032) (5,044) (4,118)
Net loss ($3,899) ($6,354) ($9,515) ($10,380)
</TABLE>
The Company had no extraordinary gains or losses for the year ended
December 31, 1997.
F-20
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Our report on the consolidated financial statements of Digital Television
Services, Inc. and its subsidiaries is included on page F-2 of this Form 10-K.
In connection with our audits of such financial statements, we have also audited
the related financial statement schedule on page S-3 of this Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Philadelphia, Pennsylvania
February 12, 1999
S-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of Digital Television Services, Inc. and
subsidiaries included in this Form 10-K and have issued our report thereon dated
February 18, 1998. Our audits were for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index is
the responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 18, 1998
S-2
<PAGE>
DIGITAL TELEVISION SERVICES, INC.
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
For the Period from Inception (January 30, 1996) to December 31, 1996 and for
the Years Ended December 31, 1997 and 1998
(Dollars in thousands)
<TABLE>
<CAPTION>
Balance at Additions Additions
Beginning of Charged To Charged To Balance at
Description Period Expenses Other Accounts Deductions End of Period
- ----------- ------ -------- -------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
Allowance for
Uncollectible
Accounts Receivable
Inception (January 30,
1996) to $ - $ - $ 7 (a) $ - $ 7
December 31, 1996
Year 1997 $ 7 $ 111 $ 180 (a) $ 107 (b) $ 191
Year 1998 $ 191 $ 9 $ - $ 17 (b) $ 183
Valuation Allowance for
Deferred Tax Assets
Inception (January 30,
1996) to $ - $ - $ - $ - $ -
December 31, 1996
Year 1997 $ - $ 5,330 $ - $ - $ 5,330
Year 1998 $ 5,330 $ 12,542 $ - $ - $ 17,872
</TABLE>
(a) Amounts acquired as a result of various acquisitions made in rural areas of
Georgia, Indiana, Kansas, Kentucky, New Mexico, New York, South Carolina
and Vermont.
(b) Amounts written off, net of recoveries.
S-3
<PAGE>
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
DIGITAL TELEVISION SERVICES, INC.
(as amended as of April 27, 1998)
FIRST: The name of this corporation is Digital Television Services,
Inc. (hereinafter referred to as the "Corporation").
SECOND: The address of the Corporation's registered office in the State
of Delaware is 1209 Orange Street, in the City of Wilmington, County of New
Castle, 19801, and its registered agent at such address is THE CORPORATION TRUST
COMPANY.
THIRD: The purpose of the Corporation is to engage in any lawful act or
activity for which the Corporation may be organized under the General
Corporation Law of the State of Delaware.
The purpose specified in the foregoing paragraph shall in no way be
limited or restricted by the reference to, or inference from, the terms of any
provision in this Certificate of Incorporation.
The Corporation shall possess and may exercise all powers and
privileges necessary or convenient to effect the foregoing purpose, including
the general powers now or hereafter conferred by the laws of the State of
Delaware upon corporations formed under the General Corporation Law of the State
of Delaware.
FOURTH: The aggregate number of shares of capital stock which the
Corporation shall have authority to issue is two thousand (2,000) shares, of
which one thousand (1,000) shares shall be designated common stock, par value
$.01 per share (the "Common Stock"), and one thousand (1,000) shares shall be
designated preferred stock, par value $.01 per share (the "Preferred Stock").
The Board of Directors is authorized, subject to limitations prescribed
by law and the provisions of this Article FOURTH, to provide for the issuance of
the shares of Preferred Stock in series, and by filing a certificate pursuant to
the applicable law of the State of Delaware, to establish from time to time the
number of shares to be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series and the
qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each series
shall include, but not be limited to, determination of the following:
(a) The number of shares constituting that series and the distinctive
designation of that series;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payment of dividends on shares of that series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provision for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
(e) Whether or not the shares of that series shall be redeemable, and,
if so, the terms and conditions of such redemption, including the date or dates
upon or after which they shall be redeemable, and the amount per share payable
in case of redemption, which amount may vary under different conditions and at
different redemption dates;
1
<PAGE>
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of voluntary
or involuntary liquidation, dissolution or winding up of the Corporation, and
the relative rights of priority, if any, of payment of shares of that series;
(h) Any other relative rights, preferences and limitations of that
series.
Dividends on outstanding shares of Preferred Stock shall be paid or
declared and set apart for payment before any dividends shall be paid or
declared and set apart for payment on the Common Stock with respect to the same
dividend period.
If upon any voluntary or involuntary liquidation, dissolution or
winding up of the Corporation the assets available for distribution to holders
of shares of Preferred Stock of all series shall be insufficient to pay such
holders the full preferential amount to which they are entitled, then such
assets shall be distributed ratably among the shares of all series of Preferred
Stock in accordance with the respective preferential amounts (including unpaid
cumulative dividends, if any) payable with respect thereto.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: The private property of the stockholders of the Corporation
shall not be subject to the payment of the corporate debts to any extent
whatsoever.
SEVENTH: The following provisions are inserted for the management of
the business and for the conduct of the affairs of the Corporation, and for
further definition, limitation and regulation of the powers of the directors and
stockholders:
(1) Election of directors need not be by written ballot unless the
bylaws of the Corporation so provide.
(2) The Board of Directors shall have power without the assent or vote
of the stockholders:
(a) To make, alter, amend, change, add to or repeal the bylaws of
the Corporation; to determine the use and disposition of any surplus or
net profits; and to fix the times for the declaration and payment of
dividends; and
(b) To determine from time to time whether, and to what extent, and
at what time and places, and under what conditions and regulation, the
accounts and books of the Corporation (other than the stock ledger), or
any of them, shall be open to the inspection of the stockholders.
(3) In addition to the powers and authorities herein before or by
statute expressly conferred upon them, the directors are hereby empowered to
exercise all such powers and to do all such acts and things as may be exercised
or done by the Corporation; subject, nevertheless, to the provisions of the
General Corporation Law of Delaware, of this Certificate of Incorporation, and
to any bylaws from time to time adopted by the stockholders; provided, however,
that no bylaw so adopted shall invalidate any prior act of the directors which
would have been valid if such bylaw had not been made.
EIGHTH: The Corporation shall, to the fullest extent permitted by the
provisions of the General Corporation Law of Delaware, as now or hereafter in
effect, indemnify all persons whom it may indemnify under such provisions. The
indemnification provided by this Article EIGHTH 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 the Corporation, by
agreement, vote of the stockholders or disinterested directors of the
Corporation or others.
2
<PAGE>
The personal liability of the directors of the Corporation is hereby
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 be amended, no
director of the Corporation shall be liable to the Corporation or its
stockholders for monetary damages for breach of his or her fiduciary duty as a
director. No amendment to or repeal of this 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.
NINTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation in the
manner now or hereafter prescribed by statute, and all rights and powers
conferred upon stockholders, directors, and officers herein are granted subject
to this reservation.
3
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,255,370
<SECURITIES> 0
<RECEIVABLES> 6,543,216
<ALLOWANCES> 183,000
<INVENTORY> 732,898
<CURRENT-ASSETS> 32,456,751
<PP&E> 4,784,436
<DEPRECIATION> 1,515,552
<TOTAL-ASSETS> 381,821,643
<CURRENT-LIABILITIES> 28,520,637
<BONDS> 153,215,156
0
0
<COMMON> 1
<OTHER-SE> 81,555,355
<TOTAL-LIABILITY-AND-EQUITY> 381,821,643
<SALES> 76,036,985
<TOTAL-REVENUES> 76,036,985
<CGS> 0
<TOTAL-COSTS> 114,059,506
<OTHER-EXPENSES> 286,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,818,935
<INCOME-PRETAX> (62,128,380)
<INCOME-TAX> (4,806,508)
<INCOME-CONTINUING> (57,321,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,321,872)
<EPS-PRIMARY> (573,218.72)
<EPS-DILUTED> (573,218.72)
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 6,255,370
<SECURITIES> 0
<RECEIVABLES> 6,543,216
<ALLOWANCES> 183,000
<INVENTORY> 732,898
<CURRENT-ASSETS> 32,456,751
<PP&E> 4,784,436
<DEPRECIATION> 1,515,552
<TOTAL-ASSETS> 381,821,643
<CURRENT-LIABILITIES> 28,520,637
<BONDS> 153,215,156
0
0
<COMMON> 1
<OTHER-SE> 81,555,355
<TOTAL-LIABILITY-AND-EQUITY> 381,821,643
<SALES> 76,036,985
<TOTAL-REVENUES> 76,036,985
<CGS> 0
<TOTAL-COSTS> 114,059,506
<OTHER-EXPENSES> 286,924
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 23,818,935
<INCOME-PRETAX> (62,128,380)
<INCOME-TAX> (4,806,508)
<INCOME-CONTINUING> (57,321,872)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (57,321,872)
<EPS-PRIMARY> (573,218.72)
<EPS-DILUTED> (573,218.72)
</TABLE>
