-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PbCMs6tO70O6IQK1UHnL21cquPmJeo8FuvgcgiOSqnZfLKmZEGj/jwgC+TBrrJix +H6ZPIT/RL4EY9RRGsHStg== 0000950116-97-001844.txt : 19971009 0000950116-97-001844.hdr.sgml : 19971009 ACCESSION NUMBER: 0000950116-97-001844 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 ITEM INFORMATION: FILED AS OF DATE: 19971008 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PEGASUS COMMUNICATIONS CORP CENTRAL INDEX KEY: 0001015629 STANDARD INDUSTRIAL CLASSIFICATION: TELEVISION BROADCASTING STATIONS [4833] IRS NUMBER: 510374669 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-21389 FILM NUMBER: 97692615 BUSINESS ADDRESS: STREET 1: 5 RADNOR CORPORATE CTR STE 454 STREET 2: 100 MATSONFORD RD CITY: RADNOR STATE: PA ZIP: 19087 BUSINESS PHONE: 6103411801 MAIL ADDRESS: STREET 1: 1345 CHESTNUT ST STREET 2: 1345 CHESTNUT ST CITY: PHILADELPHIA STATE: PA ZIP: 19107-3496 FORMER COMPANY: FORMER CONFORMED NAME: PEGASUS COMMUNICATIONS & MEDIA CORP DATE OF NAME CHANGE: 19960530 8-K 1 FORM 8-K ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- FORM 8-K Current Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Date of Report (Date of earliest event reported): September 8, 1997 PEGASUS COMMUNICATIONS CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in charter) Delaware 0-21389 51-0374669 - ----------------- -------------- -------------------- (State or other (Commission (I.R.S. Employer jurisdiction of File Number) Identification No.) incorporation) c/o Pegasus Communications Management Company, 100 Matsonford Road, 5 Radnor Corporate Center, Suite 454, Radnor, Pennsylvania 19087 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 610-341-1801 Not Applicable - -------------------------------------------------------------------------------- (Former name or former address, if changed since last report.) ================================================================================ Item 5. Other Events. (a) Completed DBS Acquisitions. From January 1, 1997 to an effective date of September 8, 1997, Pegasus Communications Corporation ("Pegasus" and together with its direct and indirect subsidiaries, the "Company") acquired from 19 independent DIRECTV(R) ("DIRECTV") providers the rights to provide DIRECTV programming in certain rural areas of 21 states and related assets (the "Completed DBS Acquisitions"). Total consideration for the acquisitions was approximately $114.0 million, which, depending upon the particular transaction, consisted of cash, promissory notes, shares of Class A Common Stock, warrants to purchase Class A Common Stock, preferred stock of a subsidiary and/or assumed liabilities. (b) Senior Notes Offering. On October 8, 1997, the Company announced that it planned to make a private offering (the "Senior Notes Offering") of $100.0 million aggregate principal amount of senior notes (the "Senior Notes"). The Senior Notes Offering will be made in reliance on Rule 144A and other registration exemptions under the Securities Act of 1933, as amended (the "Act"). The Company indicated in its press release that it anticipates using the proceeds of the Senior Notes Offering to finance direct broadcast satellite television ("DBS") acquisitions and to repay in full and terminate all commitments under the existing credit facility of Pegasus Satellite Holdings, Inc. ("PSH"). The entire text of the Company's press release is incorporated by reference herein and a copy of the press release has been filed as an exhibit to this report. (c) Pending DBS Acquisitions. The Company has entered into letters of intent or definitive agreements to acquire DIRECTV distribution rights and related assets from ten independent providers of DIRECTV services (the "Pending DBS Acquisitions"), which have exclusive DIRECTV service territories in certain rural areas of Alabama, Georgia, Illinois, Minnesota, Nebraska, Texas, Utah and Wyoming and whose territories include, in the aggregate, approximately 417,100 television households (including 19,200 seasonal residences), 41,100 business locations and 30,400 subscribers. The Pending DBS Acquisitions range in consideration from $500,000 to $18.4 million. In the aggregate, the consideration for the Pending DBS Acquisitions is $64.1 million and consists of $54.2 million of cash, $3.2 million in promissory notes and $6.7 million in shares of Class A Common Stock. When negotiating the price of the Pending DBS Acquisitions, the Company takes into account such factors as the number of subscribers, the mix between cabled and uncabled households in the service territory, competition, current DBS penetration rates, the structure of the acquisition, and the form of consideration. The cash portion of certain of the Pending DBS Acquisitions will be paid from proceeds of the Senior Notes Offering. The largest Pending DBS Acquisition involves total consideration of approximately $18.4 million (subject to certain adjustments) consisting of approximately $16.2 million in cash and a $2.2 million promissory note. As of August 31, 1997, the territories to be acquired in this acquisition consisted of approximately 79,000 television households (including 2,100 seasonal residences), 6,100 business locations and 8,400 subscribers. The second largest Pending DBS Acquisition involves the acquisition of territories and related assets from an entity controlled by Donald W. Weber, a director of Pegasus. The total consideration for this acquisition will be approximately $13.1 million (subject to certain adjustments) and will consist of approximately $6.4 million in cash and $6.7 million in shares of Class A Common Stock. As of August 31, 1997, the territories to be acquired in this acquisition consisted of approximately 115,700 television households (including 2,700 seasonal residences), 11,000 business locations and 5,800 subscribers. Each of the Pending DBS Acquisitions for which there is only a letter of intent is subject to negotiation of a definitive agreement, and all of the Pending DBS Acquisitions are subject, if not already obtained, to the prior approval of Hughes Electronics Corporation or one of its subsidiaries ("Hughes") and the National Rural Telecommunications Cooperative ("NRTC"). In addition to these conditions, each of the Pending DBS Acquisitions will be subject to conditions typical in acquisitions of this nature, certain of which conditions, like the Hughes and NRTC consents, may be beyond the Company's control. There can be no assurance that definitive agreements will be entered into with respect to all of the Pending DBS Acquisitions or, if entered into, that all or any of the Pending DBS Acquisitions will be completed. (d) Subsidiaries Combination. The Company currently has two principal operating subsidiaries: Pegasus Media & Communications, Inc. ("PM&C") and PSH. Upon consummation of the Senior Notes Offering, 2 PM&C will acquire the assets of PSH (the "Subsidiaries Combination"), which assets consist of the stock of its subsidiaries that hold the rights to all of the Company's DBS territories. As a result of the Subsidiaries Combination, PM&C will be the direct or indirect parent of all of the Company's subsidiaries that operate the Company's TV, DBS and cable businesses. (e) New Credit Facility. Shortly after the consummation of the Senior Notes Offering, PM&C will enter into a $180.0 million six-year, secured, reducing revolving credit facility (the "New Credit Facility"). Borrowings under the New Credit Facility are available for acquisitions, subject to the approval of the lenders in certain circumstances, working capital and general corporate purposes. The closing of the New Credit Facility is conditioned upon the Subsidiaries Combination and the closing of the Senior Notes Offering. Concurrently with the closing of the New Credit Facility, PM&C's existing credit facility will be repaid in full and the commitments thereunder will be terminated. Item 7. Financial Statements, Pro Forma Financial Information and Exhibits. (a) Financial Statements of Acquired or to be Acquired Businesses. Historical financial statements for the following acquired or to be acquired businesses are attached hereto:
Page ----- (i) Clearvision, Inc. (an acquired business) Report of Poole Cunningham & Reitano, P.A. ....................................... F-1 Balance Sheet as of January 16, 1997 ............................................. F-2 Statement of Operations for the fiscal year ended January 16, 1997 ............... F-3 Statement of Stockholders' Equity for the fiscal year ended January 16, 1997 ...... F-4 Statement of Cash Flows for the fiscal year ended January 16, 1997 ............... F-5 Notes to Financial Statements ................................................... F-6 (ii) Southeastern Communication Systems, Inc. (an acquired business) Report of Greenway, Smith & Haisten, P.C. ....................................... F-8 Statements of Net Assets to be Sold as of December 31, 1996 and March 31, 1997 (unaudited) ....................................................................... F-9 Statements of Operations of Assets to be Sold for the year ended December 31, 1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited) ..... F-10 Statements of Cash Flows for the year ended December 31, 1996 and the three months ended March 31, 1996 (unaudited) and 1997 (unaudited) ........................... F-11 Notes to Financial Statements ................................................... F-12 (iii) Northern Electric Service Corporation (an acquired business) Report of Larson, Allen, Weishair & Co., LLP .................................... F-14 Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-15 Statements of Operations and Accumulated Deficit for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) .... F-16 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-17 Notes to Financial Statements ................................................... F-18 (iv) Direct Broadcast Satellites (an acquired business) Report of Ernst & Young LLP ...................................................... F-22 Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-23 Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ........................... F-24 Statement of Changes in Division Equity for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited)................................... F-25 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ............................ F-26 Notes to Financial Statements ................................................... F-27
3
Page ----- (v) Suwannee Valley Satellite, Inc. (an acquired business) Report of Bolinger, Segars, Gilbert & Moss, L.L.P. .............................. F-30 Balance Sheets as of December 31, 1996 and April 30, 1997 (unaudited) ............ F-31 Statements of Income and Retained Earnings for the year ended December 31, 1996 and the four months ended April 30, 1996 (unaudited) and 1997 (unaudited) ......... F-32 Statements of Cash Flows for the year ended December 31, 1996 and the four months ended April 30, 1996 (unaudited) and 1997 (unaudited) ........................... F-33 Notes to Financial Statements ................................................... F-34 (vi) View Star Entertainment Services, Inc. (a proposed acquisition) Report of Arthur Andersen, LLP ................................................... F-37 Balance Sheets as of December 31, 1996 and June 30, 1997 (unaudited) ............ F-38 Statements of Operations for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited)........................... F-39 Statement of Stockholders' Equity for the year ended December 31, 1996 and the six months ended June 30, 1997 (unaudited) .......................................... F-40 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ........................... F-41 Notes to Financial Statements ................................................... F-42 (vii) Midwest Minnesota DBS, LLC (an acquired business) Report of Bradley R. Helmeke, Ltd. ............................................. F-51 Statements of Net Assets to be Sold as of December 31, 1996 and June 30, 1996 (unaudited) and 1997 (unaudited) ................................................ F-52 Statements of Operations of Assets to be Sold for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited) ......... F-53 Statements of Cash Flows for the year ended December 31, 1996 and the six months ended June 30, 1996 (unaudited) and 1997 (unaudited)............................. F-54 Notes to Financial Statements ................................................... F-55 (viii) DBS Operations of Turner-Vision, Inc. (an acquired business) Report of Grigoraci, Trainer, Wright & Paterno .................................... F-57 Statement of Net Assets to be Sold as of December 31, 1996 ........................ F-58 Statement of Operations for the year ended December 31, 1996 ..................... F-59 Statement of Cash Flows for the year ended December 31, 1996 ..................... F-60 Notes to Financial Statements ................................................... F-61 (ix) DBS Operations of Pioneer Services Corporation (a proposed acquisition) Report of Jackson, Thornton & Co., P.C. .......................................... F-64 Balance Sheets as of September 30, 1996 and June 30, 1997 (unaudited) ............ F-65 Statements of Operations and Division Deficiency for the fiscal year ended September 30, 1996 and the nine months ended June 30, 1996 (unaudited) and 1997 (unaudited) ................................................................ F-66 Statements of Cash Flows for the fiscal year ended September 30, 1996 and the nine months ended June 30, 1996 (unaudited) and 1997 (unaudited) ..................... F-67 Notes to Financial Statements ................................................... F-68 Page ---- (b) Pro Forma Consolidated Financial Information. (i) Basis of Presentation ............................................................. F-71 (ii) Pro Forma Consolidated Balance Sheet ............................................ F-72 (iii) Pro Forma Consolidated Statement of Operations for the Year Ended December 31, 1996. ............................................................................ F-73 (iv) Pro Forma Consolidated Statement of Operations for the Six Months Ended June 30, 1997 ............................................................................. F-74 (v) Pro Forma Consolidated Statement of Operations for the Twelve Months Ended June 30, 1997 ........................................................................ F-75 (vi) Notes to Pro Forma Consolidated Statements of Operations .......................... F-76 (c) Exhibits. 99.1 Press release dated October 8, 1997
4 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PEGASUS COMMUNICATIONS CORPORATION By /s/ Robert N. Verdecchio ------------------------------------- Robert N. Verdecchio, Senior Vice President and Chief Financial Officer October 8, 1997 5 INDEPENDENT AUDITORS' REPORT The Stockholders of ClearVision, Inc.: We have audited the accompanying balance sheet of ClearVision, Inc. as of January 16, 1997, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ClearVision, Inc. as of January 16, 1997, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Our audit was made for the purpose of forming an opinion on the basic financial statements taken as a whole. The accompanying supplementary data is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audit of the basic financial statements, and, in our opinion, is fairly stated in all material respects in relation to the financial statements taken as a whole. Poole Cunningham & Reitano, P.A. Jackson, Mississippi March 20, 1997 F-1 CLEARVISION, INC. Balance Sheet January 16, 1997 ASSETS Current assets: Cash ........................................................................... $ 62,971 Accounts receivable, net of $10,283 allowance ................................. 332,488 Notes receivable, net of $200,112 allowance .................................... 1,026,783 Inventories .................................................................. 99,282 Prepaid assets ............................................................... 8,012 ---------- Total current assets ...................................................... 1,529,536 ---------- Property and equipment ............................................................ 150,877 Less: accumulated depreciation ................................................ (45,563) ---------- Property and equipment, net ................................................ 105,314 ---------- Other assets: TV rights, net ............................................................... 1,251,596 Organization costs, net ...................................................... 599 ---------- Total other assets, net ................................................... 1,252,195 ---------- $2,887,045 ========== LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Current liabilities: Accounts payable -- trade ................................................... $ 192,130 Accrued expenses ............................................................ 46,031 Line of credit with bank ...................................................... 1,041,356 Deferred revenue ............................................................ 226,427 ---------- Total current liabilities ................................................... 1,505,944 Long-term liabilities -- Loans from stockholders ...................................................... 750,000 ---------- Total liabilities ......................................................... 2,255,944 Stockholders' equity: Common stock-$1 par value, authorized 1,500,000 shares; 900,000 shares issued and outstanding .................................................................. 900,000 Accumulated deficit ............................................................ (268,899) ---------- Total stockholders' equity ................................................ 631,101 ---------- $2,887,045 ==========
See accompanying notes to financial statements. F-2 CLEARVISION, INC. Statement of Operations For the Year Ended January 16, 1997 Revenue: Programming ........................... $3,352,207 Hardware .............................. 940,077 Installation ........................... 337,901 ---------- Total revenue ........................ 4,630,185 ---------- Cost of sales: Programming ........................... 2,160,202 Hardware .............................. 882,379 Installation ........................... 159,506 ---------- Total cost of sales .................. 3,202,087 ---------- Gross profit ..................... 1,428,098 General and administrative expenses ...... 1,730,546 ---------- Operating loss .................. (302,448) Other income (expense): Interest income ........................ 331,616 Other income ........................... 39,071 ---------- Total other income (expense) ......... 370,687 ---------- Net earnings ..................... $ 68,239 ========== See accompanying notes to financial statements. F-3 CLEARVISION, INC. Statement of Stockholders' Equity For the Year Ended January 16, 1997
Common Accumulated Stock Deficit Total ---------- ------------ --------- Stockholders' Equity -- January 17, 1996 ...... $900,000 $(337,138) $562,862 Net earnings .................................... -- 68,239 68,239 --------- ---------- --------- Stockholders' Equity -- January 16, 1997 ...... $900,000 $(268,899) $631,101 ========= ========== =========
See accompanying notes to financial statements F-4 CLEARVISION, INC. Statement of Cash Flows For the Year Ended January 16, 1997 Cash flows used in operating activities: Net earnings .......................................... $ 68,239 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization ..................... 179,797 Increase in accounts receivable .................. (262,245) Increase in prepaid expenses ..................... (3,507) Decrease in inventories ........................... 205,093 Decrease in deposits .............................. 320 Decrease in accounts payable ..................... (195,854) Decrease in accrued expenses ..................... (39,622) Decrease in deferred revenues ..................... (161,390) ---------- Total adjustments .............................. (277,408) ---------- Net cash used in operating activities ......... (209,169) Cash flows used in investing activities: Purchase of property and equipment ............... (60,286) ---------- Cash flows used in financing activities: Increase in notes receivable ..................... 494,705 Decrease in line of credit with bank ............... (201,061) Repayment of loans to stockholders ............... (150,000) ---------- Net cash provided by financing activities ...... 143,644 ---------- Net decrease in cash and cash equivalents ......... (125,811) Cash and cash equivalents at January 17, 1996 ......... 188,782 ---------- Cash and cash equivalents at January 16, 1997 ......... $ 62,971 ========== Supplemental disclosures of cash flow information: Cash paid during the year for interest ............ $ 101,295 ========== See accompanying notes to financial statements. F-5 CLEARVISION, INC. Notes to Financial Statements January 16, 1997 (1) ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ClearVision, Inc. (the Company) was organized as an S corporation formed under the laws of Mississippi on September 2, 1993. It is located in Madison, Mississippi. The Company offers satellite programming services to certain cities and counties in Mississippi. (a) Basis of Accounting The financial statements have been prepared using the accrual method of accounting in accordance with generally accepted accounting principles. (b) Year End The company operates on a 52-53 week fiscal year with a year end date at or near January 16. (c) Cash Equivalents For purposes of the statement of cash flows, the Company considers all short-term investments maturing within the normal operating cycle to be cash equivalents. (d) Concentration of Credit Risk The Company has two sources of revenue: programming services and equipment sales. Receivables are primarily due from residents in ClearVision's territory. Customers' services are disconnected upon past due over sixty days. Receivables from equipment sales result from customers financing the purchase price of their equipment. Receivables are secured by a lien on the equipment sold to the customers. (e) Inventories Inventories are stated at the lower of cost (first-in, first-out) or market (net realizable value). (f) Property and Equipment Property and equipment are stated at cost. Capital additions, improvements and major renewals which increase asset values or extend useful lives, are capitalized as property and equipment. Maintenance and repairs are charged to operations as incurred. The Company generally provides for depreciation of its assets under the straight-line method for financial reporting purposes and on the modified accelerated cost recovery system for income tax purposes. (g) Intangibles The Company amortizes TV rights using the straight-line method over the estimated economic life of the satellite which is projected to be twelve years. Organizational costs are being amortized over sixty months using the straight-line method. Total amortization for TV rights and organizational costs for the period ended January 16, 1997, were $151,159 and $382, respectively. (h) Revenue Recognition The Company derives revenue primarily from programming services, sales of equipment and installations. Programming revenue is received monthly based on the date service originated. Interest on financed equipment sales is recognized when earned. (i) Income Taxes The Company, with the consent of its stockholders, has elected under the Internal Revenue Code to be taxed as an S corporation. In lieu of corporation income taxes, the stockholders of an S corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for Federal income taxes has been included in the financial statements. (2) NOTES RECEIVABLE Notes receivable consist of customer financing of satellite systems through various repayment plans. At January 16, 1997, the net notes receivable balance was $1,226,985. Deferred revenue represents unearned F-6 CLEARVISION, INC. Notes to Financial Statements -- (Continued) January 16, 1997 (2) NOTES RECEIVABLE -- (Continued) interest on the uncollected notes receivable balance. The balance of deferred revenue at January 16, 1997 was $226,427. Management's allowances for doubtful accounts are based upon collection practices of ClearVision, Inc. Results may vary significantly should Pegasus (see note 7) employ collection practices different from ClearVision, Inc. (3) PROPERTY AND EQUIPMENT A summary of property and equipment follows: Depreciable Description Lives Amount ----------- ------------ ------------ Vehicles 5 yrs $ 72,773 Leasehold improvements 3 yrs 27,889 Furniture and fixtures 3 - 7 yrs 50,215 --------- Property and equipment 150,877 Less accumulated depreciation (45,563) --------- Property and equipment, net $ 105,314 ========= (4) ACCRUED LIABILITIES The following is an analysis of accrued liabilities: Description Amount ----------- -------- Accrued payroll taxes ........................ $ 7,579 Accrued sales tax .............................. 22,887 Other accrued expenses ........................ 15,565 -------- Total ....................................... $46,031 ======== (5) SHORT-TERM BORROWINGS -- LINE-OF-CREDIT The Company has entered into a line-of-credit agreement with Deposit Guaranty National Bank whereby funds may be advanced to the Company up to a maximum of $1,600,000. Interest on the line-of-credit is at the bank's current prime rate plus one-half percent (1/2%). This line-of-credit is collateralized by accounts receivable, inventories and company notes receivable. At January 16, 1997, there were $1,041,356 of advances outstanding under the agreement. (6) LONG-TERM DEBT The Company has non-interest bearing notes payable due to the stockholders at January 16, 1997, in the amount of $750,000. (7) SUBSEQUENT EVENT The Company sold substantially all of its assets to Pegasus Communications Corporation on February 14, 1997, pursuant to an asset purchase agreement dated January 25, 1997. F-7 INDEPENDENT AUDITOR'S REPORT To Southeastern Communication Systems, Inc. We have audited the accompanying statement of net assets to be sold of Southeastern Communication Systems, Inc. (an "S" Corporation) as of December 31, 1996 and the related statements of operations and cash flows for the year then ended. These statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statements referred to above are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall presentation of the statements. We believe that our audit provide a reasonable basis for our opinion. The accompanying statement of net assets to be sold was prepared to present the net assets of Southeastern Communication Systems, Inc. to be acquired by Pegasus Communications Corporation pursuant to the purchase agreement described in Note 4, and is not intended to be a complete presentation of Southeastern Communication Systems, Inc. assets and liabilities. In our opinion, the statements referred to above present fairly, in all material respects, the net assets to be sold of Southeastern Communication System, Inc. as of December 31, 1996 and the results of operations and cash flows for the year then ended pursuant to the purchase agreement referred to in Note 4, in conformity with generally accepted accounting principles. Greenway, Smith & Haisten, P.C. Griffin, Georgia September 25, 1997 F-8 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. STATEMENTS OF NET ASSETS TO BE SOLD
December 31, March 31, 1996 1997 -------------- ------------ (unaudited) CURRENT ASSETS: Subscriber accounts receivable, less allowance for doubtful accounts of $3,314 at December 31, 1996 and March 31, 1997 .......................................... $ 62,960 $ 65,985 ---------- --------- Total current assets ......................................................... 62,960 65,985 ---------- --------- DIRECT BROADCAST SATELLITE FRANCHISE, NET OF ACCUMULATED AMORTIZATION ...................................................... 178,429 171,738 ---------- --------- Total assets .................................................................. 241,389 237,723 ---------- --------- CURRENT LIABILITIES: Unearned revenue ............................................................... 128,567 164,184 ---------- --------- Total current liabilities ................................................... 128,567 164,184 ---------- --------- NET ASSETS TO BE SOLD ......................................................... $ 112,822 $ 73,539 ========== =========
See Independent Auditor's Report and accompanying footnotes. F-9 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. STATEMENTS OF OPERATIONS OF ASSETS TO BE SOLD
Three months ended Year ended --------------------------- December 31, March 31, March 31, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Operating Revenues Subscriber revenue (Programming) ...... $ 552,386 $112,381 $204,463 ---------- -------- --------- Total Operating Revenue ............... 552,386 112,381 204,463 ---------- -------- --------- Operating Expenses Programming ........................... 377,851 62,161 130,430 Payroll and related expenses ......... 155,244 43,017 35,287 Advertising ........................... 1,985 548 134 Amortization ........................... 26,764 6,691 6,691 Commissions ........................... 30,087 2,258 8,208 Legal and Professional ............... 213 -- -- Miscellaneous ........................ 81 13 -- Rent ................................. 1,340 256 16 Supplies .............................. 4,278 919 373 Travel ................................. 3,359 784 457 Utilities and Telephone ............... 8,250 2,250 2,385 ---------- -------- --------- Total Operating Expenses ............ 609,452 118,897 183,981 ---------- -------- --------- Operating Income (Loss) ............ ($ 57,066) ($ 6,516) $ 20,482 ========== ======== =========
See Independent Auditor's Report and accompanying footnotes. F-10 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. STATEMENTS OF CASH FLOWS
Three months ended ---------------------------- December 31, March 31, March 31, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Cash flows from operating activities: Operating income (loss) ................................. ($ 57,066) ($ 6,516) $ 20,482 Adjustments to reconcile operating income (loss) to net cash provided by operating activities: Amortization ............................................. 26,764 6,691 6,691 Change in assets and liabilities: (Increase) decrease in accounts receivable ............... (37,646) (3,854) (3,025) Increase (decrease) in unearned revenue .................. 99,553 (6,474) 35,617 --------- --------- --------- Net cash provided (used) by operating activities ......... 31,605 (10,153) 59,765 --------- --------- --------- Net increase (decrease) in shareholders' equity ............ (31,605) 10,153 (59,765) --------- --------- --------- Net change in cash ....................................... -- -- -- Cash at beginning of period .............................. -- -- -- --------- --------- --------- Cash at end of period .................................... $ -- $ -- $ -- ========= ========= =========
See Independent Auditor's Report and accompanying footnotes. F-11 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of operations Southeastern Communication Systems, Inc. markets and distributes direct broadcast satellite (DBS) services to cable and noncable television subscribers residing within Henry County, Georgia. Southeastern Communication System, Inc. obtained these exclusive rights to its service territory by investment with the National Rural Telecommunications Cooperative (NRTC). Accounts Receivable Subscriber accounts receivable represents amounts due from customers for satellite television services and includes amounts billed, but unearned at year-end. Revenue Recognition Southeastern Communication Systems, Inc. recognizes revenues monthly for DBS services which have been earned through the end of the month. The unearned portion of billed services is recorded as unearned revenue. Advertising Costs Advertising costs are expensed as incurred. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Income Taxes Southeastern Communication Systems, Inc. has made the election to be treated as a "Small Business Corporation" for income tax purposes. S Corporations are generally exempt from federal and state income tax. The shareholders of an S Corporation are taxed on their proportionate share of the Company's taxable income. Therefore, no provision or liability for federal or state income taxes has been included in the financial statements. Concentrations of Credit Risk Financial instruments that potentially subject Southeastern Communication Systems, Inc. to concentrations of credit risk consist principally of trade accounts receivable. The risk is limited due to the large number of individuals comprising the Southeastern Communication Systems, Inc. customer base. Exposure to losses on receivables is principally dependent on each customer's financial condition. Southeastern Communication Systems, Inc. monitors the exposure for credit losses and maintains an allowance for anticipated losses. F-12 SOUTHEASTERN COMMUNICATION SYSTEMS, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) AS OF DECEMBER 31, 1996 (2) DIRECT BROADCAST SATELLITE FRANCHISE In September of 1993 and 1994 Southeastern Communication System, Inc. invested $253,685 with NRTC acquiring exclusive franchise right to market direct broadcast satellite service to cable and noncable television subscribers residing within the Henry County area. This investment is in an agreement with NRTC for the rights to provide broadcast services to this service territory for a period of approximately ten years, which is the expected life of the satellite. The satellite was launched in late 1993 and became available for use by Southeastern Communication System, Inc. in 1994. Amortization expense for these rights for the year ended December 31, 1996 was $26,764. (3) CONTINGENCY Southeastern Communication Systems, Inc. relies on NRTC as its sole provider of programming via Direct broadcast satellite services. (4) SUBSEQUENT EVENTS On March 28, 1997, Pegasus entered into an Asset Purchase Agreement with Southeastern Communication Systems, Inc. Pursuant to the terms of the agreement, Pegasus purchased certain net assets of Southeastern Communication Systems, Inc. for $3,900,000 minus certain current liabilities and adjustments on April 9, 1997. F-13 INDEPENDENT AUDITOR'S REPORT Board of Directors Northern Electric Service Corporation DBA: Northern Horizons (A wholly owned subsidiary Of Northern Electric Cooperative Association) Virginia, Minnesota We have audited the accompanying balance sheet of Northern Electric Service Corporation, DBA: Northern Horizons (a wholly owned subsidiary Of Northern Electric Cooperative Association) as of December 31, 1996, and the related statements of operations and retained deficit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Northern Electric Service Corporation, DBA: Northern Horizons (a wholly owned subsidiary Of Northern Electric Cooperative Association) as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. LARSON, ALLEN, WEISHAIR & CO., LLP Brainerd, Minnesota August 5, 1997 F-14 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) BALANCE SHEETS
December 31, June 30, 1996 1997 -------------- ------------ (unaudited) ASSETS CURRENT ASSETS Cash and Cash Equivalents .......................................... $ -- $ 54,648 Accounts Receivable ................................................ 137,869 103,853 Inventory ......................................................... 90,598 3,168 Prepaid Expenses ................................................... 1,004 109 ---------- ---------- Total Current Assets .......................................... 229,471 161,778 ---------- ---------- PROPERTY AND EQUIPMENT (At Cost) Furniture and Equipment ............................................. 15,139 15,139 Less: Accumulated Depreciation .................................... (4,163) (5,777) ---------- ---------- Total Property and Equipment (At Depreciated Cost) ............ 10,976 9,362 ---------- ---------- OTHER ASSETS Franchise Fees, Net of Accumulated Amortization of $96,917 and $117,902 at December 31, 1996 and June 30, 1997, respectively ...... 532,649 511,664 Investments in Associated Organizations ........................... 13,481 30,057 Organization Costs, Net of Accumulated Amortizations of $1,452 and $1,767 at December 31, 1996 and June 30, 1997, respectively......... 7,981 7,666 ---------- ---------- Total Other Assets ............................................. 554,111 549,387 ---------- ---------- Total Assets ................................................... $ 794,558 $ 720,527 ========== ========== LIABILITIES AND STOCKHOLDER'S DEFICIT CURRENT LIABILITIES Current Portion of Long-Term Debt ................................. $ 568,860 $ 538,257 Checks Written in Excess of Bank ................................. 3,916 -- Accounts Payable ................................................... 50,962 163,596 Unearned Revenue ................................................... 211,237 182,252 Taxes Payable Other Than Income Taxes .............................. 34,969 4,868 Other Current Liabilities .......................................... 34,298 18,462 ---------- ---------- Total Current Liabilities ....................................... 904,242 907,435 ---------- ---------- LONG-TERM DEBT (Net of Current Portion Shown Above) .................. 150,476 134,246 ---------- ---------- Total Liabilities ................................................ 1,054,718 1,041,681 ---------- ---------- STOCKHOLDER'S DEFICIT Common Stock -- $1.00 Par Value 100,000 and 250,000 Shares Authorized at December 31, 1996 and June 30, 1997, respectively; 100,000 Shares Issued and Outstanding ........................... 100,000 100,000 Additional Paid-In Capital .......................................... 9,433 9,433 Accumulated Deficit ................................................ (369,593) (430,587) ---------- ---------- Total Stockholder's Deficit .................................... (260,160) (321,154) ---------- ---------- Total Liabilities and Stockholder's Deficit ..................... $ 794,558 $ 720,527 ========== ==========
See accompanying Notes to Financial Statements. F-15 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHEN ELECTRIC COOPERATIVE ASSOCIATION) STATEMENTS OF OPERATIONS AND ACCUMULATED DEFICIT
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) REVENUES Merchandising Sales ........................... $ 339,948 $ 148,777 $ 81,399 Television Programming Sales .................. 958,551 359,910 616,174 ---------- ---------- ---------- Total Operating Revenues .................. 1,298,499 508,687 697,573 ---------- ---------- ---------- COST OF SALES Cost of Merchandising Sales .................. 338,456 147,278 84,428 Cost of Television Programming Sales ......... 623,532 225,822 396,342 ---------- ---------- ---------- Total Cost of Sales ........................ 961,988 373,100 480,770 ---------- ---------- ---------- GROSS PROFIT .................................... 336,511 135,587 216,803 ---------- ---------- ---------- OPERATING EXPENSES Management Services ........................... 76,258 36,000 36,000 Advertising and Promotion ..................... 194,326 26,672 82,521 Other Administrative and General Expense ...... 27,066 801 2,392 Depreciation and Amortization Expense ......... 48,167 22,958 22,814 Interest ....................................... 44,582 19,481 26,019 Bad Debts .................................... 8,316 1,573 2,562 Billing and Collections ........................ 22,239 12,297 16,712 Postage ....................................... 10,204 2,160 3,415 Outside Services .............................. 14,720 13,870 1,741 Meetings ....................................... 11,332 6,452 20,831 Security System Labor ........................ 97,266 33,229 70,573 Pension ....................................... 6,620 2,172 8,027 Telephone .................................... 44,930 19,796 7,871 ---------- ---------- ---------- Total Operating Expenses .................. 606,026 197,461 301,478 ---------- ---------- ---------- OPERATING LOSS .................................... (269,515) (61,874) (84,675) OTHER INCOME Capital Credit Income ........................ 14,987 14,987 23,681 ---------- ---------- ---------- NET LOSS .......................................... (254,528) (46,887) (60,994) ---------- ---------- ---------- ACCUMULATED DEFICIT, BEGINNING .................. (115,065) (115,065) (369,593) ---------- ---------- ---------- ACCUMULATED DEFICIT, ENDING ..................... $ (369,593) $ (161,952) $(430,587) ========== ========== ==========
See accompanying Notes to Financial Statements. F-16 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHEN ELECTRIC COOPERATIVE ASSOCIATION) STATEMENTS OF CASH FLOWS
For the six months ended --------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Cash Received from Customers ........................... $ 1,350,053 $ 494,941 $ 702,605 Cash Paid to Suppliers and Employees ..................... (1,436,120) (541,974) (587,442) Interest Paid .......................................... (54,453) (29,352) (16,870) ------------ ---------- ---------- Net Cash Provided (Used) by Operating Activities ...... (140,520) (76,385) 98,293 ------------ ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of Furniture and Equipment .................. (6,251) (5,357) -- Proceeds from Sale of Fixed Assets ..................... -- 627 -- Proceeds from Investments in Association Organizations ... 2,997 2,997 7,104 ------------ ---------- ---------- Net Cash Provided (Used) by Investing Activities ...... (3,254) (1,733) 7,104 ------------ ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in Checks Written in Excess of Cash ............ 3,216 -- (3,916) Proceeds from Issuance of Long-Term Debt ............... 180,000 100,000 -- Principal Payments on Long-Term Debt ..................... (90,664) (45,239) (46,833) ------------ ---------- ---------- Net Cash Provided (Used) by Financing Activities ...... 92,552 54,761 (50,749) ------------ ---------- ---------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................................ (51,222) (23,357) 54,648 CASH AND CASH EQUIVALENTS -- BEGINNING ..................... 51,222 51,222 -- ------------ ---------- ---------- CASH AND CASH EQUIVALENTS -- ENDING ........................ $ -- $ 27,865 $ 54,648 ============ ========== ========== RECONCILIATON OF NET LOSS TO CASH FLOWS FROM OPERATING ACTIVITIES Net Loss ................................................ $ (222,128) $ (46,887) $ (60,994) Adjustments to Reconcile Net Loss to Net Cash Provided by Operating Activities: Depreciation and Amortization ........................... 48,167 22,958 22,914 Gain on Sale of Fixed Assets ........................... -- (285) -- Capital Credit Income ................................. (14,987) (14,987) (23,681) (Increase) Decrease in Accounts Receivable ............ (99,069) (23,696) 34,016 (Increase) Decrease in Resale Merchandise ............... (43,013) (554) 87,431 (Increase) Decrease in Prepayments ..................... (638) (415) 896 Increase (Decrease) in Accounts Payable ............... (11,234) (4,392) 118,294 Increase (Decrease) in Unearned Revenue ............... 185,423 9,950 (28,984) Increase (Decrease) in Other Current Liabilities ...... 16,959 (18,077) (51,599) ------------ ---------- ---------- Net Cash Provided (Used) by Operating Activities ...... $ (140,520) $ (76,385) $ 98,293 ============ ========== ==========
See accompanying Notes to Financial Statements. F-17 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization In October 1994, Northern Electric Service Corporation (NESCO) was established as a separate legal entity from Northern Electric Cooperative Association (the Parent). NESCO, d.b.a. Northern Horizons, is a for-profit Minnesota corporation. The Corporation is governed by a nine member board of directors elected by the shareholders to serve three year terms. Northern Electric Cooperative Association is the sole shareholder and is the only voting member of the corporation. As the sole shareholder the Cooperative owns 100,000 shares of NESCO stock at $1.00 per share. The Cooperative established the Corporation for the purpose of promoting the sale of Direct Broadcast Service systems and programming to members of the parent cooperative and non-members in the NESCO franchise area, which generally coincides with the parent cooperative's electric distribution territory. Basis of Accounting The Corporation prepares its financial statements on the accrual method of accounting, recognizing income when earned and expenses when incurred. Cash and Cash Equivalents Cash and cash equivalents consist of deposits held primarily in two financial institutions, as well as investments with maturities of less than three months. Concentration of Credit Risk The Company's programming services are provided primarily to customers in the geographical area covered by the parent cooperative's electric service territory. The Company does not perform credit evaluations of its customers and does not require collateral on the accounts. The Company does follow the practice of disconnecting service to those customers with balances more than forty-five days old. Historically, credit losses have not been significant; therefore, currently, no allowance for doubtful accounts is deemed necessary by management. Furniture and Equipment Furniture and equipment are recorded at original cost. Maintenance and repairs are expensed, and additions, improvements or major renewals are capitalized. Depreciation expense for 1996 was $2,346. Depreciation is computed using the straight-line method over its estimated useful life as follows: Furniture and Equipment 5 - 10 Years Inventories Inventories are stated at the lower of moving average cost or market. Advertising Advertising costs are charged to operations when incurred. Advertising expense was $52,141 for the year ended December 31, 1996. F-18 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Income Taxes Northern Electric Service Corporation files a corporate tax return including only it own operating activity. The Parent is organized under the IRS rules allowing tax-exempt cooperatives and therefore is a non-taxable entity. The Company accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Financial Instruments The carrying amounts for all financial instruments approximate fair values. The carrying amounts for cash and cash equivalents, investments, receivables, accounts payable and accrued liabilities approximate fair value because of the short maturity of these instruments. The fair value of long-term debt is based on current rates at which the Company could borrow funds with similar remaining maturities. Interim Financial Data The interim financial data is unaudited; however, in management's opinion, the interim data includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of results for the interim periods. NOTE 2 -- OTHER ASSETS Franchise Fee During 1994, the Corporation began participating, through National Rural Telecommunications Cooperative (NRTC), in Direct Broadcast Service (DBS), a program to sell direct TV programming. This technology allows subscribers to receive television programming on a small satellite dish. The franchise agreement required the Corporation to pay NRTC a committed member payment of thirty-eight dollars for each non-cabled residence and nine dollars for each cabled residence in the counties served by Northern Electric Cooperative Association (the Parent) for a total of $629,566. The franchise fees are being amortized on a straight-line basis over a fifteen year period. Accumulated amortization totaled $96,917 at December 31, 1996. Intangible Assets The Corporation incurred costs related to incorporation during its formation. The Corporation is accounting for these costs as intangible assets and is amortizing them over a fifteen year period from the date the DBS program was officially in place. Organization costs and accumulated amortization were $9,433 and $1,452, respectively, at December 31, 1996. F-19 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 NOTE 2 -- OTHER ASSETS -- (Continued) Investments in Associated Organizations The Company is a member of NRTC, which obtained the rights to distribute Direct Broadcast Service (DBS) through its members. The members or owners share margins realized by NRTC, on the cooperative principle, based on programming purchased. A summary of investments in associated organizations at December 31, 1996, is as follows: Membership Investment in NRTC ............ $ 1,000 Patronage Capital Allocation in NRTC ...... 12,481 -------- Total Investment in NRTC ............... $13,481 -------- NOTE 3 -- LONG-TERM DEBT
Description Secured By 1996 - ----------------------------------------- ------------------------------------- --------- Note Payable -- National Cooperative All Personal Property, Tangible and $539,336 Services Corporation, variable interest Intangible, including Inventory, currently at 6.25%, quarterly principal Receivables and Equipment and interest payments of approximately Guaranteed by Parent. $23,000; due December 2001 Note Payable -- Northern Electric Furniture, Fixtures, Equipment, Cooperative Association (Parent), Inventory, Accounts Receivble, variable interest at prime rate plus Contract Rights, General 2%, monthly principal and interest Intangibles, and Motor Vehicles. 180,000 payments of approximately $3,780; -------- due December 2001. Total Long-Term Debt ................................................... $719,336 Current Maturities ...................................................... 568,860 --------- Long-Term Debt -- Net of Current Maturities .............................. $150,476 =========
Maturity requirements by year on long-term debt are as follows: Years Ending December 31, Amount -------------------------- --------- 1997 .............................. $568,860 1998 .............................. 32,460 1999 .............................. 35,680 2000 .............................. 39,220 2001 .............................. 43,116 --------- Total .............................. $719,336 --------- F-20 NORTHERN ELECTRIC SERVICE CORPORATION DBA: NORTHERN HORIZONS (A WHOLLY OWNED SUBSIDIARY OF NORTHERN ELECTRIC COOPERATIVE ASSOCIATION) NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 NOTE 4 -- INCOME TAXES The Company has available at December 31, 1996, approximately $366,350 of unused operating loss carryforwards that may be applied against future taxable income and that will expire in various years from 2009 to 2011. The $114,360 deferred tax asset that would have been recognized related to the net operating loss carryforward has been fully offset by a valuation allowance to reflect the estimated amount of deferred tax benefits which may not be utilized due to the expiration of the Company's net operating loss carryforwards. The valuation allowance increased approximately $85,800 during 1996 as the result of net operating losses generated during 1996 which may not be utilized. NOTE 5 -- RELATED PARTY TRANSACTIONS The Company paid its parent, Northern Electric Cooperative Association, $72,000 in management fees for 1996. The Company also leased a vehicle from the Parent on a month-to-month lease for $679 per month, for a total paid during 1996 of approximately $5,575. NOTE 6 -- SUBSEQUENT EVENTS At the date of the report on these financial statements, the Company's Board of Directors has voted to accept an offer to purchase the stock of the Company. As a result of this sale, the Company's general manager will receive a severance payment of $100,000 at the termination of his employment contract. F-21 Report of Independent Auditors Management Advanced Tel-Com Systems Corporation We have audited the accompanying balance sheet of Direct Broadcast Satellites (a division of Advanced Tel-Com Systems Corporation) (DBS) as of December 31, 1996, and the related statements of operations, changes in division equity, and cash flows for the year then ended. These financial statements are the responsibility of DBS' management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Direct Broadcast Satellites at December 31, 1996, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Ernst & Young LLP San Antonio, Texas July 16, 1997 F-22 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Balance Sheets
December 31, June 30, 1996 1997 -------------- ------------ (unaudited) Assets Current assets: Cash .................................................................. $ 22,238 $ 46,390 Accounts receivable, net of allowance of $10,000 at December 31, 1996 and June 30, 1997, respectively .......................................... 349,473 303,030 Inventory ............................................................ 111,279 5,959 Customer acquisition costs ............................................. 192,369 231,119 ----------- ----------- Total current assets ...................................................... 675,359 586,498 Equipment, at cost ...................................................... 541,836 534,790 Less accumulated depreciation ............................................. 85,969 138,842 ----------- ----------- 455,867 395,948 Contract costs, net of accumulated amortization of $303,917 and $364,700 at December 31, 1996 and June 30, 1997, respectively ........................ 911,750 850,967 Patronage dividend receivable ............................................. 47,789 80,408 Deferred federal income taxes, net ....................................... 29,788 38,033 Deferred charge, net ...................................................... 2,630 2,067 ----------- ----------- 991,957 971,475 ----------- ----------- Total assets ............................................................ $2,123,183 $1,953,921 =========== =========== Liabilities and Division Equity Current liabilities: Current maturities of long-term debt ................................. $ 183,333 $ 183,333 Accounts payable ...................................................... 395,510 470,741 Accrued taxes ......................................................... 39,704 34,635 Accrued interest ...................................................... 8,259 5,423 Advance billings ...................................................... 406,450 431,397 Deferred federal income taxes .......................................... 65,405 78,506 ----------- ----------- Total current liabilities ................................................ 1,098,661 1,204,035 Long-term debt, net of current maturities ................................. 366,667 183,334 Division equity ......................................................... 657,855 566,552 ----------- ----------- Total liabilities and division equity .................................... $2,123,183 $1,953,921 =========== ===========
See accompanying notes. F-23 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Statements of Operations
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Operating revenues: Lease and maintenance revenue ............... $ 117,358 $ 46,164 $ 66,136 Satellite sales and installation ............ 473,642 140,314 329,485 Programming ................................. 2,444,796 1,021,162 1,670,696 Uncollectible revenues ..................... (76,201) (23,855) (25,958) ---------- ---------- ---------- Total operating revenues ........................ 2,959,595 1,183,785 2,040,359 Operating expenses: Cost of goods sold ........................... 408,238 126,506 275,435 Plant-specific operations .................. 20,938 6,966 8,097 Plant-nonspecific operations ............... 250,274 102,964 153,288 Customer operations ........................ 537,940 188,508 575,032 Corporate operations ........................ 112,624 53,568 66,739 Programming ................................. 1,557,993 611,933 1,086,092 Operating taxes .............................. 2,180 -- 3,000 ---------- ---------- ---------- Total operating expenses ........................ 2,890,187 1,090,445 2,167,683 ---------- ---------- ---------- Income (loss) from operations .................. 69,408 93,340 (127,324) Other expenses (income): Interest expense ........................... 50,676 27,652 19,937 Other, net ................................. (39,787) (46,268) (46,328) ---------- ---------- ---------- Income (loss) before federal income taxes ...... 58,519 111,956 (100,933) Federal income tax provision (benefit): Current .................................... (36,386) 38,059 (39,173) Deferred .................................... 56,282 -- 4,856 ---------- ---------- ---------- 19,896 38,059 (34,317) ---------- ---------- ---------- Net income (loss) ........................... $ 38,623 $ 73,897 $ (66,616) ========== ========== ==========
See accompanying notes. F-24 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Statement of Changes in Division Equity Balance at December 31, 1995 .............................. $ 552,864 Net income ............................................. 38,623 Equity contributions, net .............................. 66,368 --------- Balance at December 31, 1996 .............................. 657,855 Net loss (unaudited) .................................... (66,616) Return of equity, net (unaudited) ........................ (24,687) --------- Balance at June 30, 1997 (unaudited) ........................ $ 566,552 ========= See accompanying notes. F-25 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Statements of Cash Flows
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) Operating Activities Net income (loss) .......................................... $ 38,623 $ 73,897 $ (66,616) Adjustments to reconcile net income to net cash provided by operating activities: Loss on sale of equipment .............................. -- -- 7,420 Depreciation and amortization ........................... 194,811 89,743 319,185 Deferred federal income tax provision .................. 56,282 -- 4,856 Provision for bad debts ................................. 76,201 -- 25,958 Changes in current assets and current liabilities ...... 91,084 30,683 (26,201) Changes in other assets ................................. (35,662) (36,789) (32,056) ---------- ---------- ---------- Net cash provided by operating activities .................. 421,339 157,534 232,546 Investing Activities Cash proceeds from sale of equipment ........................ -- -- 2,679 Additions to equipment, net .............................. (333,965) (167,742) (3,053) ---------- ---------- ---------- Net cash used in investing activities ..................... (333,965) (167,742) (374) Financing Activities Payments on long-term debt ................................. (183,333) (183,333) (183,333) Equity contributions (return), net ........................ 66,368 189,714 (24,687) ---------- ---------- ---------- Net cash provided by (used in) financing activities ...... (116,965) 6,381 (208,020) ---------- ---------- ---------- Net increase (decrease) in cash ........................... (29,591) (3,827) 24,152 Cash at beginning of period .............................. 51,829 51,829 22,238 ---------- ---------- ---------- Cash at end of period .................................... $ 22,238 $ 48,002 $ 46,390 ========== ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................ $ 53,400 $ 30,531 $ 22,773 Income taxes .......................................... 34,200 17,117 --
See accompanying notes. F-26 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Notes to Financial Statements December 31, 1996 1. Organization and Significant Accounting Policies Basis of Presentation Direct Broadcast Satellites (DBS) is an operating division of Advanced Tel-Com Systems Corporation (Advanced), a Texas corporation. Advanced is a wholly owned subsidiary of Kerrville Communications Corporation, Inc. (Communications). DBS provides direct broadcast satellite television services in Kerrville, Texas and its surrounding area. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Equipment Equipment consists primarily of satellite equipment available for leasing. These satellites are depreciated using the straight-line method over the satellites' estimated useful lives of five years. These satellites are leased to customers on a month-to-month basis. Inventory Inventory consists primarily of satellite equipment and is carried at the lower of cost or market, with costs determined on an average cost method. Customer Acquisition Costs DBS incurs certain costs to obtain new subscribers to its direct satellite television system. These costs are commissions paid to agents and employees for acquiring new customers and selling equipment, and promotional coupons redeemed by customers. The deferred costs are amortized over a one-year period. Advertising Costs DBS expenses advertising costs as incurred. Advertising expense was approximately $107,000 for 1996. Contract Costs Contract costs consist of the amount paid to the National Rural Telephone Cooperative, Inc. (NRTC) for DBS' participation in NRTC's program to provide satellite feed television programming. Under the terms of the NRTC contract, DBS acquired the rights to distribute such television services to 16 rural Texas counties. The services began in July 1994, at which time these contract costs began to be amortized over the agreement's term of ten years. Federal Income Taxes Advanced is a member of an affiliated group electing to file on a consolidated basis as defined by federal income tax regulations and, as such, the taxable income of Advanced is included in the consolidated tax return of Communications. Under an informal tax sharing agreement, members of the Communications consolidated group with taxable income are charged with the amount of income taxes as if they filed separate federal income tax returns, and members providing deductions and credits which result in income tax savings are allocated credits for such savings. These financial statements include DBS' share of the Advanced federal income taxes allocated based on DBS' operating results. F-27 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Notes to Financial Statements -- (Continued) December 31, 1996 1. Organization and Significant Accounting Policies -- (Continued) Federal Income Taxes -- (continued): The provision for federal income taxes includes taxes currently payable and those deferred due to temporary differences between the financial statement and tax bases of assets and liabilities. These differences result from the use of different accounting methods for financial and tax reporting purposes with respect principally to depreciation and amortization of intangibles. Statement of Cash Flows In order to determine net cash provided by operating activities, net income has been adjusted by, among other things, changes in current assets and current liabilities, excluding changes in cash and current maturities of long-term debt. Those changes, shown as an (increase) decrease in current assets and an increase (decrease) in current liabilities for the year ended December 31, 1996, are as follows: Receivables ............................................. $ (248,341) Inventory ............................................. 36,381 Payables and accrued liabilities ........................ 184,413 Advance billings ....................................... 311,000 Customer acquisition costs .............................. (192,369) ----------- Changes in current assets and current liabilities ...... $ 91,084 ===========
2. Related Party Transactions Advanced and Kerrville Telephone Company (Kerrville), a wholly owned subsidiary of Communications, have a service agreement whereby Kerrville provides general management, financial, selling, maintenance, installation, and other services to Advanced. Charges under this agreement allocated to DBS were approximately $313,200 during 1996. 3. Long-Term Debt Long-term debt of Advanced relating to DBS at December 31, 1996 is summarized below: Note payable due Norwest Bank, 8.19%, due in annual principal installments of $183,333 and quarterly interest payments to April 1999, secured by property, equipment, future contracts, and accounts receivable related thereto ................................. $ 550,000 Less current maturities ............................................................ 183,333 ---------- Long-term debt, net of current maturities .......................................... $ 366,667 ==========
Scheduled maturities of long-term debt for the years ending December 31, 1997 through 1999 are $183,333 annually. Under its loan agreements, Advanced is restricted from paying cash dividends in excess of 50% of prior year's net income. The agreements also contain covenants restricting additional borrowings, mergers, transfer of stock, transactions with affiliates, and sale or transfer of substantial parts of its assets. F-28 Direct Broadcast Satellites (A Division of Advanced Tel-Com Systems Corporation) Notes to Financial Statements -- (Continued) December 31, 1996 4. Income Taxes The components of DBS' net deferred tax liability are as follows at December 31, 1996: Gross deferred tax liabilities .......................... $ 70,059 Gross deferred tax assets ................................ 34,442 --------- Net deferred tax liability ............................. $ 35,617 ========= 5. Principal Supplier The NRTC is the principal supplier of satellite programming services and equipment. 6. Subsequent Event In July 1997, Communications sold the assets of DBS to Pegasus Communications Corporation for approximately $14.9 million in cash. F-29 INDEPENDENT AUDITORS'REPORT Board of Trustees Suwannee Valley Satellite, Inc. Live Oak, Florida We have audited the accompanying balance sheet of Suwannee Valley Satellite, Inc. as of December 31, 1996, and the related statements of income and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Suwannee Valley Satellite, Inc. as of December 31, 1996, and the results of its operations and its cash flows for the year then ended, in conformity with generally accepted accounting principles. The accompanying balance sheet of Suwannee Valley Satellite, Inc. as of April 30, 1997, and the related statements of income and retained earnings, and cash flows for the four months ended April 30, 1997, and April 30, 1996, were not audited by us and, accordingly, we do not express an opinion on them. Bolinger, Segars, Gilbert & Moss, L.L.P. Certified Public Accountants Lubbock, Texas February 7, 1997 F-30 SUWANNEE VALLEY SATELLITE, INC. BALANCE SHEETS
December 31, April 30, 1996 1997 -------------- ------------ (unaudited) ASSETS PLANT AT COST Property, Plant, & Equipment .............................. $ 78,056 $ 76,739 ----------- ---------- 78,056 76,739 Less: Accumulated Provision for Depreciation ............... 41,664 44,444 ----------- ---------- 36,392 32,295 ----------- ---------- OTHER PROPERTY AND INVESTMENTS - AT COST OR STATED VALUE Patronage Capital From Associated Coop. .................. 29,262 29,262 Start Up & Organizational Cost (Net of Amortization) ...... 64,042 55,779 Franchise Costs (Net of Amortization) ..................... 563,585 544,629 ----------- ---------- 656,889 629,670 ----------- ---------- CURRENT ASSETS Cash - General ............................................. 152,170 131,582 Accounts Receivable ....................................... 99,350 85,967 Materials and Supplies .................................... 81,246 25,518 Other Current and Accrued Assets ........................... 429 787 ----------- ---------- 333,195 243,854 ----------- ---------- DEFERRED CHARGES ............................................. 24,383 30,217 ----------- ---------- $ 1,050,859 $ 936,036 =========== ========== EQUITIES AND LIABILITIES EQUITIES Common Stock ............................................. $ 1,000 $ 1,000 Retained Earnings .......................................... (209,603) (282,957) ----------- ---------- (208,603) (281,957) ----------- ---------- LONG-TERM DEBT Notes Payable - SVEC ....................................... 800,000 -- Notes Payable - CoBank .................................... -- 825,104 ----------- ---------- 800,000 825,104 ----------- ---------- POSTRETIREMENT BENEFIT OBLIGATION ........................... 1,900 1,644 ----------- ---------- CURRENT LIABILITIES Accounts Payable - SVEC .................................... 107,132 124,236 Accounts Payable - Other ................................. 131,281 84,496 Accrued Interest .......................................... 41,419 14,896 Consumer Deposits .......................................... 2,250 3,750 Other Current Liabilities ................................. 42,415 32,315 Accrued Employee Compensated Absences ..................... 10,553 1,344 ----------- ---------- 335,050 261,037 ----------- ---------- DEFERRED CREDITS ............................................. 122,512 130,208 ----------- ---------- $ 1,050,859 $ 936,036 =========== ==========
See accompanying notes to financial statements. F-31 SUWANNEE VALLEY SATELLITE, INC. STATEMENTS OF INCOME AND RETAINED EARNINGS
Four months ended Year ended ---------------------------- December 31, April 30, April 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) OPERATING REVENUES Sales of Programming .............................. $ 1,108,563 $ 302,814 $ 470,941 Sales of Dishes and Installation Fees ............ 90,235 59,743 45,071 Sales of Materials & Magazines ..................... 25,874 8,599 8,567 Service Fees ....................................... 3,600 -- 1,305 Other Satellite Revenue ........................... 2,711 -- 1,391 ----------- ---------- ---------- Total Operating Revenue ........................ 1,230,983 371,156 527,275 ----------- ---------- ---------- COST OF SALES Cost of Programming .............................. 555,334 140,184 240,225 Cost of Dishes and Installations .................. 141,612 56,921 90,869 Cost of Materials & Magazines ..................... 19,467 6,699 6,797 Cost of Service Calls .............................. 4,902 482 650 ----------- ---------- ---------- Total Cost of Sales ........................... 721,315 204,286 338,541 ----------- ---------- ---------- GROSS PROFIT .......................................... 509,668 166,870 188,734 ----------- ---------- ---------- OPERATING EXPENSES Operations ....................................... 10,045 4,135 4,885 Consumer Accounts ................................. 223,631 37,059 113,703 Selling Expense .................................... 46,838 18,983 14,586 Administrative and General ........................ 98,887 19,088 62,063 Depreciation and Amortization ..................... 94,022 30,856 30,602 Taxes ............................................. 2,662 -- 6,411 Other Interest .................................... 27 -- -- ----------- ---------- ---------- Total Operating Expenses ........................ 476,112 110,121 232,250 ----------- ---------- ---------- OPERATING MARGINS - BEFORE FIXED CHARGES ............ 33,556 56,749 (43,516) FIXED CHARGES Interest on Long-Term Debt ........................ 41,419 -- 29,345 ----------- ---------- ---------- OPERATING MARGINS (DEFICIT) - AFTER FIXED CHARGES (7,863) 56,749 (72,861) Capital Credits .................................... 20,795 -- -- ----------- ---------- ---------- NET OPERATING MARGINS ................................. 12,932 56,749 (72,861) ----------- ---------- ---------- NONOPERATING MARGINS Gain (Loss) from Disposition of Property ......... (192) -- (493) ----------- ---------- ---------- NET MARGINS .......................................... 12,740 56,749 (73,354) RETAINED EARNINGS (DEFICIT) - BEGINNING OF PERIOD ...... (222,343) (222,343) (209,603) ----------- ---------- ---------- RETAINED EARNINGS (DEFICIT) - END OF PERIOD ............ $ (209,603) $ (165,594) $(282,957) =========== ========== ==========
See accompanying notes to financial statements. F-32 SUWANNEE VALLEY SATELLITE, INC STATEMENTS OF CASH FLOWS
Four months ended Year ended ---------------------------- December 31, April 30, April 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Margins ............................................. $ 12,740 $ 56,749 $ (73,354) Adjustments to Reconcile Net Income (Loss) to Net Cash Pro- vided by Operating Activities Depreciation and Amortization ........................ 97,230 33,845 30,602 Capital Credits - Non-cash ........................... (20,795) -- -- Accounts Receivable ................................. (43,545) (19,863) 13,383 Materials and Supplies .............................. (7,443) 54,340 55,728 Other Current Assets ................................. 26 260 (358) Deferred Charges .................................... (23,101) 1,282 (5,834) Accounts Payable and Other Current Liabilities ...... 267,033 17,109 (74,013) Accumulated Provision - Pensions & Benefits ......... 1,900 -- (1,352) Deferred Credits .................................... 86,305 19,828 7,696 ------------ ---------- ---------- Net Cash Provided (Used) by Operating Activities . 370,350 163,550 (47,502) ------------ ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Additions to Utility Plant .............................. (10,621) 1,030 1,317 Salvage Value of Retirements and Other Credits ......... 400 -- -- Net Loss on Retirement of Plant ........................ 193 -- 493 Other Property and Investments ........................... 4,159 -- -- ------------ ---------- ---------- Net Cash Provided by (Used in) Investing Activities (5,869) 1,030 1,810 ------------ ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Advances on Line of Credit .............................. 800,000 -- (800,000) Proceeds From Long-Term Debt, Net ........................ -- -- 825,104 Other Equities .......................................... (1,144,713) (185,264) -- ------------ ---------- ---------- Net Cash Provided by (Used in) Financing Activities (344,713) (185,264) 25,104 ------------ ---------- ---------- INCREASE (DECREASE) IN CASH ................................. 19,768 (20,684) (20,588) CASH - BEGINNING OF PERIOD ................................. 132,402 132,402 152,170 ------------ ---------- ---------- CASH - END OF PERIOD ....................................... $ 152,170 $ 111,718 $ 131,582 ============ ========== ========== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the period for: Interest on Long-Term Debt ........................... $ 0 $ 0 $ 55,868 ============ ========== ========== Income Taxes .......................................... $ 0 $ 0 $ 0 ============ ========== ==========
See accompanying notes to financial statements. F-33 SUWANNEE VALLEY SATELLITE, INC. NOTES TO FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Nature of Operations Suwannee Valley Satellite, Inc. (SVS), is a for-profit corporation which distributes direct broadcast television services to subscribers in its franchised television geographical service area in north central Florida, headquartered in Live Oak, Florida. Suwannee Valley Electric Cooperative, Inc. owns all the issued and outstanding stock of the company. Inventories Materials and supplies inventories are valued at average unit cost. Recognition of Income Direct television programming revenues are billed in advance and are recognized when earned. Unearned amounts are classified as deferred credits in these financial statements. Group Concentration of Credit Risk The company's headquarters facility is located in Live Oak, Florida. The service area includes members located in an area which extends around the city of Live Oak, Florida. SVS records a receivable for revenues as billed on a monthly basis. SVS requires a deposit from most of its members, which is applied to unpaid bills and fees in the event of default. The deposit accrues interest and is returned periodically. As of December 31, 1996, deposits on hand totaled $2,250. The cash balances maintained by the company are insured by the Federal Deposit Insurance Corporation up to $100,000 per each banking institution where deposits are held. At December 31, 1996, the cash balances exceeded insured limits. Patronage Capital Certificates Patronage capital from associated companies are recorded at the stated amount of the certificate. Income Taxes SVS is a for-profit taxable corporation. Due to net operating loss carryforwards, the current provision for income taxes is $0. Tax assets or liabilities are not significant. Use of Estimates in the Preparation of Financial Statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Assets Pledged All assets are pledged as security for the long-term debt due RUS and the National Rural Utilities Cooperative Finance Corporation (CFC). F-34 SUWANNEE VALLEY SATELLITE, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 3. Property and Equipment The major classes of plant in service are as follows: Structures and Improvements $ 34,627 Computer Equipment 7,064 Transportation Equipment 16,487 Communication Equipment 19,878 --------- $ 78,056 ========= Provision for depreciation on nonelectric plant, property and equipment is computed using the double-declining balance method as follows: Structures and Improvements 5 years Computer Equipment 7 years Transportation Equipment 5 years Communication Equipment 7 years Depreciation for the year ended December 31, 1996 was $15,572, of which $12,364 was charged to depreciation expense, and $3,208 allocated to other accounts. 4. Other Property and Investments Other property and investments consisted of the following at December 31, 1996: Investments in Associated Organizations NRTC - Patronage Capital $ 29,262 ---------- Start Up and Organizational Cost Original Cost $ 123,953 Amortization (59,911) ---------- $ 64,042 ---------- Franchise Cost Original Cost $ 701,014 Amortization (137,429) ---------- $ 563,585 ---------- $ 656,889 ========== The company expensed amortization costs of $81,658 in 1996. 5. Deferred Charges Deferred charges consist of installation rebates totaling $24,383 at December 31, 1996. 6. Deferred Credits Deferred credits represent direct television revenues billed in advance totaling $122,512 at December 31, 1996. 7. Pension Benefits Pension benefits for substantially all employees of the company are provided through the National Rural Electric Cooperative Association (NRECA) Retirement and Security Program, a defined benefit plan qualified under section 401 and tax-exempt under section 501(a) of the Internal Revenue Code. F-35 SUWANNEE VALLEY SATELLITE, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) 7. Pension Benefits -- (Continued) The company makes contributions to the plan equal to the amounts accrued for pension expense. In this multi-employer plan, which is available to all member cooperatives of NRECA, the accumulated benefits and plan assets are not determined or allocated separately by individual employers. Effective, July 1, 1987, NRECA declared a moratorium which suspended employer contributions due to the plan's funding limitations. In November, 1994, the moratorium was lifted and contributions were required to April 1995 when the moratorium was reinstated. The moratorium was once again lifted in October 1996. The NRECA Savings Plan, a defined contribution plan, has also been made available to employees of the company. Contributions by the company match employee contributions up to 3 percent. The cost to the company for these plans for the year ended December 31, 1996 was $502. 8. Benefits to Retirees Retirees between the age of 62 and 65 are allowed to continue in the company's group health insurance plan and are required to reimburse the company for one-half of the premium. Upon reaching age 65, retirees are responsible for the entire premium if they continue to participate in the plan. Effective in 1995, the company adopted FASB Statement No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pension." Adoption of this statement does not materially affect the financial statements. Statement 106 requires that the cost of postretirement medical benefits be recognized on the accrual basis as employees render service to earn the benefit. The company elected to recognize the net transition obligation of $1,600 in 1995. Annual service and interest cost for 1996 was $300. 9. Related Party Transactions During 1996, the company executed a note payable to Suwannee Valley Electric Cooperative, Inc. totaling $800,000 payable upon demand. The note bears interest at a variable rate based on the National Rural Utilities Cooperative Finance Corporation's 30-day commercial paper rates. This rate was 5.55% at December 31, 1996. The company intends to refinance the note with CoBank in 1997. F-36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors of ViewStar Entertainment Services, Inc.: We have audited the accompanying balance sheet of VIEWSTAR ENTERTAINMENT SERVICES, INC. (a Georgia corporation) as of December 31, 1996 and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of ViewStar Entertainment Services, Inc. as of December 31, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Arthur Andersen LLP Atlanta, Georgia April 18, 1997 (except with respect to Note 10, as to which the date is September 15, 1997) F-37 VIEWSTAR ENTERTAINMENT SERVICES, INC. BALANCE SHEETS
December 31, June 30, 1996 1997 -------------- --------------- (unaudited) ASSETS CURRENT ASSETS: Cash and cash equivalents .................................... $ 182,181 $ 186,960 Accounts receivable: Trade, net of allowance for doubtful accounts of $8,666 and $7,496 at December 31, 1996 and June 30, 1997, respectively . 207,800 185,370 Other ......................................................... 11,987 7,860 Deferred promotional costs .................................... 68,984 104,804 Prepaid expenses and other .................................... 51,530 9,077 Inventory ...................................................... 27,938 55,604 ------------ ------------ Total current assets ....................................... 550,420 549,675 ------------ ------------ PROPERTY AND EQUIPMENT, at cost: Furniture and equipment ....................................... 129,478 131,717 Rental satellite systems equipment ........................... 42,651 40,092 Service vehicles ............................................. 28,913 28,913 Leasehold improvements ....................................... 17,260 17,260 ------------ ------------ 218,302 217,982 Less accumulated depreciation ................................. (99,102) (128,073) ------------ ------------ Property and equipment, net ................................. 119,200 89,909 ------------ ------------ CONTRACT RIGHTS AND OTHER ASSETS (Note 2) ........................ 1,512,298 1,453,142 ------------ ------------ Total assets ................................................ $ 2,181,918 $ 2,092,726 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Notes payable ................................................ $ 493,963 $ 434,061 Accounts payable ............................................. 166,420 254,020 Accrued liabilities .......................................... 147,714 104,640 Unearned revenue ............................................. 299,505 330,685 Other ......................................................... 88,844 40,498 ------------ ------------ Total liabilities .......................................... 1,196,446 1,163,904 ------------ ------------ DEFERRED CREDITS ................................................ 43,007 67,291 ------------ ------------ COMMITMENTS AND CONTINGENCIES (Note 7) STOCKHOLDERS' EQUITY: Common stock, no par value; 1,000,000 shares authorized and 641,680 shares issued and outstanding ........................ 2,037,525 2,037,525 Retained deficit ................................................ (1,095,060) (1,175,994) ------------ ------------ Total stockholders' equity ................................. 942,465 861,531 ------------ ------------ Total liabilities and stockholders' equity .................. $ 2,181,918 $ 2,092,726 ============ ============
The accompanying notes are an integral part of this balance sheet. F-38 VIEWSTAR ENTERTAINMENT SERVICES, INC. STATEMENTS OF OPERATIONS
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) REVENUES: Programming ........................ $ 2,100,927 $ 939,128 $1,372,248 Equipment and installation ......... 308,082 160,059 151,702 Other .............................. 14,779 11,081 2,684 ----------- ---------- ---------- Total revenues .................. 2,423,788 1,110,268 1,526,634 ----------- ---------- ---------- COST OF REVENUES: Programming ........................ 987,379 416,209 614,872 Equipment and installation ......... 250,347 124,360 143,660 Service fees ........................ 280,771 139,395 183,718 ----------- ---------- ---------- Total cost of revenues ......... 1,518,497 679,964 942,250 ----------- ---------- ---------- GROSS PROFIT ........................... 905,291 430,304 584,384 ----------- ---------- ---------- OPERATING EXPENSES: General and administrative ......... 694,718 309,450 240,323 Sales and marketing ............... 255,540 81,407 297,227 Depreciation and amortization ...... 226,963 112,160 112,411 ----------- ---------- ---------- Total operating expenses ......... 1,177,221 503,017 649,961 ----------- ---------- ---------- OPERATING LOSS ........................ (271,930) (72,713) (65,577) ----------- ---------- ---------- OTHER INCOME (EXPENSE): Interest expense .................. (76,848) (39,784) (24,750) Loss on sale of rental units ...... (36,339) -- (1,281) Other .............................. 9,246 37,615 10,674 ----------- ---------- ---------- (103,941) (2,169) (15,357) ----------- ---------- ---------- NET LOSS .............................. $ (375,871) $ (74,882) $ (80,934) =========== ========== ==========
The accompanying notes are an integral part of this statement. F-39 VIEWSTAR ENTERTAINMENT SERVICES, INC. STATEMENT OF STOCKHOLDERS' EQUITY
Common Stock ------------------------ Retained Shares Amount Earnings Total --------- ------------ --------------- ------------- BALANCE, December 31, 1995 ............... 508,340 $1,537,525 $ (719,189) $ 818,336 Conversion of note (Note 3) ............ 133,340 500,000 0 500,000 Net loss .............................. 0 0 (375,871) (375,871) -------- ----------- ------------ ---------- BALANCE, December 31, 1996 ............... 641,680 2,037,525 (1,095,060) 942,465 Net loss (unaudited) .................. 0 0 (80,934) (80,934) -------- ----------- ------------ ---------- BALANCE, June 30, 1997 (unaudited) ...... 641,680 $2,037,525 $ (1,175,994) $ 861,531 ======== =========== ============ ==========
The accompanying notes are an integral part of this statement. F-40 VIEWSTAR ENTERTAINMENT SERVICES, INC. STATEMENTS OF CASH FLOWS
Six months ended Year ended ---------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES: Net loss ......................................................... $ (375,871) $ (74,882) $ (80,934) ---------- --------- --------- Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ................................. 226,963 112,160 112,411 Loss on sale of rental units ................................. 36,339 -- 1,281 Changes in operating assets and liabilities: Accounts receivable, net .................................... (103,090) (43,556) 22,430 Inventory ................................................... 96,767 80,463 (27,666) Other current assets .......................................... (46,371) 4,818 10,760 Accounts payable ............................................. 135,759 41,742 87,600 Accrued liabilities and other ................................. (6,329) (23,977) (93,342) Unearned revenue ............................................. 199,405 3,667 31,180 ---------- --------- --------- Total adjustments .......................................... 539,443 175,317 144,654 ---------- --------- --------- Net cash provided by operating activities .................. 163,572 100,435 63,720 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment .............................. (44,485) (30,135) 961 ---------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long term debt .................................... (17,464) -- (59,902) ---------- --------- --------- NET INCREASE IN CASH AND CASH EQUIVALENTS ........................ 101,623 70,300 4,779 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ......................................................... 80,558 80,558 182,181 ---------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................ $ 182,181 $ 150,858 $ 186,960 ========== ========= ========= SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest .......................................... $ 51,308 $ 27,901 $ 25,831 ========== ========= ========= Cash paid for taxes ............................................. $ 500 $ 500 $ 750 ========== ========= ========= NONCASH TRANSACTIONS: Conversion of note (Note 3) .................................... $ 500,000 $ -- $ -- ========== ========= ========= Noncash patronage dividend (Note 2) .............................. $ 29,856 $ 29,856 $ 24,284 ========== ========= =========
The accompanying notes are an integral part of this statement. F-41 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1996 1. THE COMPANY ViewStar Entertainment Services, Inc. ("ViewStar" or the "Company") is a full-service provider of direct broadcast satellite ("DBS") service to approximately 4,900 customers in eight counties in North Georgia. The Company was incorporated in Georgia on August 12, 1993 and began marketing its services in July 1994. Through a contracted agreement with the National Rural Telecommunications Cooperative ("NRTC"), ViewStar has the exclusive right to market and distribute DirecTv's (a subsidiary of Hughes Aircraft) satellite programming services to the eight-county area for a period of ten years or the life of the DirecTv satellite, whichever is longer. The life of the satellite is currently estimated to be 15 years. The Company has experienced operating losses since its inception as a result of efforts to build its customer base and develop its operations. The Company expects to continue to focus on developing its operations while continuing to expand its market penetration. While the Company has achieved positive cash flows from operations during 1996, there are risks associated with the Company's growth plans and its ability to continue to generate positive cash flows from operations and achieve or sustain profitability. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Estimates and Assumptions The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Source of Supplies As a distributor of DirecTv services, the Company relies on DirecTv for programming services. Further, the NRTC provides its members certain services, such as billing, centralized payment processing, and promotions. Any disruption of these services could have an adverse effect on the operating results of the Company. Concentration of Credit Risk Concentration of credit risk with respect to accounts receivable is limited due to the large number of subscribers comprising the customer base. The Company's risk of loss is also limited due to advance billings to customers for monthly programming services. As a result, at December 31, 1996, management does not believe that any significant concentration of credit risk exists. Inventories The Company maintains inventories consisting of Digital Satellite Systems ("DSS(R)") equipment and related accessories. The inventories are stated at the lower of cost or market, determined generally by the average cost method, which approximates the first-in, first-out ("FIFO") method. Deferred Promotional Costs Deferred promotional costs consist of costs related to a subscriber rebate program sponsored by DirecTv. Effective September 1, 1996, DirecTv introduced a national marketing program offering new purchasers of DSS(R) equipment a $200 cash rebate, called the cash back offer rebate. To be eligible, a buyer must subscribe to and pay for one year's worth of programming in advance. The Company has elected to defer these costs and is amortizing these expenses over the life of the buyer's one-year contract. F-42 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Deferred Promotional Costs (continued) ViewStar had 407 of these customers, with gross rebate costs of $81,400, of which $12,416 was amortized during the year. In addition, as a part of this program, ViewStar receives $1 per month for up to five years from the NRTC for each subscriber whose account remains active. These amounts are included as a reduction of sales and marketing expense in the accompanying statement of operations when earned. Property and Equipment Property and equipment are stated at cost. ViewStar capitalizes major property additions and expenses maintenance and repairs which do not extend the useful lives of these assets. Depreciation for property and equipment is provided using the straight-line method over the estimated useful lives of the respective assets, ranging from three to five years. Depreciation expense for the year was $59,893. Upon retirement or disposal of assets, the cost and related accumulated depreciation are removed from the balance sheet and any gain or loss is reflected in current earnings. Depreciation is computed for financial reporting purposes based on the following lives: Furniture and equipment Three to five years Rental satellite systems equipment Five years Service vehicles Three years Leasehold improvements Three years Contract Rights and Other Assets Contract rights and other assets consist of the following at December 31, 1996: Contract rights ........................... $1,573,409 Organization costs ........................ 309,930 ---------- 1,883,339 Accumulated amortization .................. (417,200) ---------- 1,466,139 NRTC patronage capital ..................... 43,007 Other .................................... 3,152 ---------- $1,512,298 ========== Contract Rights In 1993, the Company acquired from the NRTC the exclusive right to market and distribute DirecTv services to households and commercial establishments in the following eight counties located in northern Georgia: Banks, Bartow, Dawson, Gordon, Hall, Habersham, Lumpkin, and Pickens. The Company acquired these rights for a purchase price of $1,573,409 and for a period of ten years or the life of the current satellite, whichever is longer. Contract rights are being amortized over 15 years, the estimated useful life of the satellite (Note 1) operated by DirecTv which provides service under the related contracts. Amortization expense, included in depreciation and amortization in the accompanying statement of operations, for the year ended December 31, 1996 was $104,894. Organization Costs All costs incurred prior to the commencement of operations on July 1, 1994 have been capitalized on the balance sheet as organization costs and are being amortized over five years. Amortization expense, included in depreciation and amortization in the accompanying statement of operations, for the year ended December 31, 1996 was $62,176. F-43 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) NRTC Patronage Capital ViewStar is an affiliate member of the NRTC (Note 9). While affiliate members have no vote, they do have an ownership interest in the NRTC in proportion to their prior patronage. NRTC patronage capital represents the noncash portion of NRTC patronage income. Under its bylaws, the NRTC declares a patronage dividend of its excess of revenues over expenses each year. Of the total patronage dividend, 20% is paid in cash and the remaining 80% is distributed in the form of noncash patronage capital, which will be redeemed in cash only at the discretion of the NRTC. Noncash patronage capital is included in other assets. The Company has also deferred the recognition of income from the noncash portion of the patronage dividend until it is realized. Accordingly, this amount is recorded in deferred credits in the accompanying balance sheet. Long-Lived Assets Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Management believes that the long-lived assets in the accompanying balance sheet are appropriately valued. Income Taxes Deferred income taxes are recorded using enacted tax laws and rates for the years in which the taxes are expected to be paid. Deferred income taxes are provided for items when there is a temporary difference in recording such items for financial reporting and income tax reporting. Stock-Based Compensation Plans The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB No. 25"). In 1996, the Company adopted the disclosure option of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). SFAS No. 123 requires that companies which do not choose to account for stock-based compensation as prescribed by this statement shall disclose the pro forma effects on earnings and earnings per share as if SFAS No. 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS No. 123. Advertising Costs The Company expenses all advertising costs as incurred. Revenue Recognition ViewStar earns programming revenue by providing DirecTv services to its subscribers. Programming revenue includes DirecTv services purchased by subscribers in monthly or annual subscriptions; additional premium programming available on an a la carte basis; sports programming available under monthly, annual, or seasonal subscriptions; and movies and events programming available on a pay-per-view basis. Programming purchased on a monthly, annual, or seasonal basis, including premium programming, is billed in advance and is recorded as unearned revenue. All programming revenue is recognized when earned. Equipment and installation revenues primarily consist of the sale of DSS(R) equipment and accessories and related installation charges. Equipment sales revenue is recognized upon delivery of the equipment to the customer. Installation revenue is recognized when the equipment is installed. F-44 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Cost of Revenues Cost of revenues includes the cost associated with providing DirecTv services to the Company's subscribers. These costs include the direct wholesale cost of purchasing related programming from DirecTv through the NRTC, the royalty fee paid to DirecTv, and monthly subscriber maintenance fees charged by DirecTv, such as security fees, ground service fees, system authorization fees, and fees for subscriber billings. Cost of equipment and installation includes the wholesale cost of the equipment, fees paid to independent contractor installers, and service department costs. 3. STOCKHOLDERS' EQUITY The Company has authorized 1,000,000 shares of no par value common stock. On August 24, 1993, the Company issued 18,750 shares of common stock for total proceeds of $1,037,500 to the following three individuals: Donald W. Weber--15,000 shares (80%) (the "majority stockholder"), Steven D. Weber--1,875 shares (10%), and Woodrow W. Griffin, Jr.--1,875 shares (10%). Under a stockholder agreement dated August 24, 1993, the majority stockholder or the Company possesses the right of first refusal to purchase shares owned by minority stockholders before any transfer of these shares may occur. On March 30, 1994, the Company issued 6,667 shares of common stock at $75 per share to ITC Holding Company for total proceeds of $500,025. Under a stockholder agreement dated March 30, 1994, the majority stockholder or the Company possesses the right of first refusal to purchase shares owned by ITC Holding Company before any transfer of these shares may occur. On March 30, 1994, the board of directors and stockholders approved a restatement of the $500,000 note payable to Donald W. Weber to include the option to convert the note to common stock at a rate of $75 per share. On December 31, 1996, this note was converted to 133,340 shares of common stock. Interest of $88,844 accrued on the note during the period that it was outstanding but has not been paid. On June 30, 1995, the board of directors and stockholders approved a 20-for-1 stock split by way of a 19-share dividend or 482,923 shares to current stockholders on a pro rata basis. The following table summarizes stock ownership as of December 31, 1996: Number Percentage Total of of Consideration Shares Shares Paid --------- ------------ -------------- Donald W. Weber ............... 433,340 67.54% $1,500,000 ITC Holding Company ......... 133,340 20.78 500,025 Woodrow W. Griffin, Jr. ...... 37,500 5.84 18,750 Steven D. Weber ............... 37,500 5.84 18,750 -------- ----------- Total ........................ 641,680 $2,037,525 ======== =========== 4. STOCK-BASED COMPENSATION PLANS Employee Stock Option Plan Under the Company's 1995 stock option plan (the "Stock Option Plan"), as adopted by the board of directors and approved by the stockholders on June 30, 1995, 75,000 shares of common stock are reserved and authorized for issuance over a nine-year period. All permanent employees of the Company are eligible to receive options under the Stock Option Plan. The Stock Option Plan is administered by the board of directors. The plan is intended to provide for incentive stock options ("ISOs") under Section 422 of the Internal F-45 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 4. STOCK-BASED COMPENSATION PLANS -- (Continued) Employee Stock Option Plan (continued) Revenue Code of 1986, as amended, and for options which do not qualify as ISOs. Options were granted at an exercise price of at least 100% of the estimated fair value of the common stock at the dates of grant, as determined by the board of directors based on previous equity transactions, historical financial condition and results of operations, and other analyses. Options are generally granted at a price (established by the board of directors) equal to at least 100% of the estimated fair market value of the common stock on the option grant date. Options granted become exercisable pro rata over four years from the date of grant. The options expire on December 31, 2004. Statement of Financial Accounting Standards No. 123 During 1995, the Financial Accounting Standards Board issued SFAS No. 123, "Accounting for Stock-Based Compensation," which defines a fair value-based method of accounting for an employee stock option or similar equity instrument and which encourages all entities to adopt that method of accounting for all of their employee stock compensation plans. However, it also allows an entity to continue to measure compensation cost for those plans using the method of accounting prescribed by APB No. 25, "Accounting for Stock Issued to Employees." Entities electing to remain with the accounting methodology required by APB No. 25 must make pro forma disclosures of net income as if the fair value-based method of accounting defined in SFAS No. 123 was used. The Company has elected to account for its Stock Option Plan under APB No. 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1995 and 1996 using the minimum value option pricing model as prescribed by SFAS No. 123 using the following assumptions: 1995 1996 ------------ -------------- Risk-free interest rate .................. 5.95% 6.5% Expected dividend yield .................. 0 0 Expected lives ........................... Five years Five years Volatility .............................. 0% 0% Using these assumptions, the total fair value of the stock options granted in 1996 and 1995 is $45,920 and $31,322, respectively, which would be amortized as compensation expense over the four-year vesting period of the options. Had compensation cost been determined consistent with the provisions of SFAS No. 123, the Company's net loss and pro forma net loss per share for 1996 would have been as follows: As Pro Reported Forma -------------- ------------ Net loss ................................. $ (375,871) $387,844 Net loss per share ........................ $ (.59) $ (.60) F-46 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 4. STOCK-BASED COMPENSATION PLANS -- (Continued) The following table summarizes stock option transactions under the Stock Option Plan during 1996 and 1995: Weighted Number Average of Price Shares Per Share ----------- ---------- Granted .............................. 20,800 $ 6.00 Forfeited ........................... (1,000) 6.00 ------- Outstanding at December 31, 1995 ...... 19,800 6.00 Granted .............................. 21,250 8.00 Forfeited ........................... (2,500) 8.00 ------- Outstanding at December 31, 1996 ...... 38,550 6.97 ======= The following table sets forth the exercise price range, number of shares, weighted average exercise price, and remaining contractual lives by groups of similar price and grant date: Number Weighted Outstanding Average Weighted Actual at Remaining Average Exercise December 31, Contractual Exercise Prices 1996 Life Price - ------------------- -------------- ------------- --------- $ 6.00 19,800 2.50 $ 6.00 8.00 18,750 3.42 8.00 ------ ---- ------- 38,550 2.96 6.97 ====== There were 4,950 options exercisable at a weighted average exercise price of $6 per share at December 31, 1996. 5. RELATED-PARTY TRANSACTIONS During 1996, the Company shared administrative, executive, and accounting functions and incurred certain costs on behalf of DBS Depot, a company which is owned by certain common stockholders of the Company. The Company was reimbursed by DBS Depot for all expenses at full cost. The amount due from DBS Depot as of December 31, 1996 was $4,165. As of December 31, 1996, the Company had outstanding a demand note payable in the amount of $100,000 and an equipment loan payable in the amount of $14,061 due to the principal stockholder. See Note 6 for discussion of notes payable terms. 6. DEBT The Company's debt obligations at December 31, 1996 are as follows: Note payable to First Community Bank of Dawsonville, due March 31, 1997, interest at prime plus 2%, secured by certain assets of the Company ........................ $375,000 Note payable to majority stockholder, due on demand, interest at prime plus 2% ... 100,000 Equipment loans from majority stockholder, due on demand, interest at 5% ......... 14,061 --------- Total outstanding ............................................................ $489,061 =========
F-47 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 6. DEBT -- (Continued) As all of the Company's debt at December 31, 1996 matures in 1997 or is due on demand, these amounts are classified as current in the accompanying balance sheet. 7. COMMITMENTS AND CONTINGENCIES Leases ViewStar leases office space and equipment. Rent expense for the year ended December 31, 1996 was $53,878. The operating leases expire at various dates through 2000. At December 31, 1996, the Company's minimum rental commitments under noncancelable operating leases with initial or remaining terms of more than one year were as follows: 1997 ....................................... $50,000 1998 ....................................... 24,000 1999 ....................................... 5,000 2000 ....................................... 5,000 -------- Total future minimum lease payments ...... $84,000 ======== Legal Proceedings The Company is subject to legal proceedings and claims which arise in the ordinary course of business. There are no pending legal proceedings to which the Company is a party. 8. INCOME TAXES Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax assets and liabilities as of December 31, 1996 are as follows: Deferred tax assets: Net operating loss carryforwards ............... $ 288,000 Unearned revenue ................................. 110,000 Accrued interest ................................. 34,000 Depreciation .................................... 15,000 ---------- Total deferred tax assets ..................... 447,000 Deferred tax liabilities: Other .......................................... (3,000) ---------- Net deferred tax assets ........................ 444,000 Valuation allowance for deferred tax assets ...... (444,000) ---------- Net deferred taxes ........................... $ 0 ========== The Company's net operating loss carryforwards will expire between 2008 and 2011 unless utilized. Due to the fact that the Company has incurred losses since inception, the Company has not recognized the income tax benefit of the net operating loss carryforwards. Management has provided a 100% valuation reserve against its net deferred tax asset, consisting primarily of net operating loss carryforwards. In addition, the Company's ability to recognize the benefit from the net operating loss carryforwards could be limited under Section 382 of the Internal Revenue Code if ownership of the Company changes by more than 50%, as defined. F-48 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 8. INCOME TAXES -- (Continued) A reconciliation of the income tax provision computed at statutory tax rates to the income tax provision for the year ended December 31, 1996 is as follows: Income tax benefit at statutory rate ............ 34% State income taxes, net of federal benefit ...... 4 Deferred tax asset valuation allowance ......... (38) Effective tax rate .............................. 0% 9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS The NRTC has contracted with third parties to provide the NRTC members with certain services, including billing services and centralized remittance processing services. The NRTC bills the Company for these services on a monthly basis. These fees are recorded as service fees in the accompanying statement of operations. The NRTC also sells DSS(R) equipment to its members. Because the Company is, through the NRTC, a distributor of DirecTv Services, the Company would be adversely affected by any material adverse changes in the assets, financial condition, programming, technological capabilities, or services of DirecTv or its parent corporation, Hughes Communication Galaxy, Inc. ("Hughes"), including DirecTv's failure to retain or renew its Federal Communications Commission ("FCC") licenses to transmit radio frequency signals from the orbital slots occupied by its satellites. The NRTC is a cooperative organization whose members are engaged in the distribution of telecommunications and other services in predominantly rural areas of the United States. Pursuant to an agreement between the NRTC and Hughes (the "Hughes Agreement") and the NRTC Member Agreements, participating NRTC members acquired the exclusive rights to provide DirecTv services to residential and commercial subscribers in certain rural DirecTv markets. In general, upon default by the NRTC under the Hughes Agreement, the Company would have the right to acquire DirecTv Services directly from DirecTv. The NRTC has contracted with third parties to provide the NRTC members with certain services, including billing services and centralized remittance processing services. If the NRTC is unable to provide these services for whatever reason, the Company would be required to acquire the services from other sources. There can be no assurance that the cost to the Company to obtain these services elsewhere would not exceed the amounts currently payable to the NRTC. The Company would also be adversely affected by the termination of the NRTC Member Agreements by the NRTC prior to the expiration of their respective terms. If the NRTC Member Agreements are terminated by the NRTC, the Company would no longer have the right to provide DirecTv Services. There can be no assurance that the Company would be able to obtain similar DBS services from other sources. Both the Hughes Agreement and the NRTC Member Agreements expire when Hughes removes its current satellites from their assigned orbital locations. Although, according to Hughes, the three DirecTv satellites have estimated orbital lives of approximately 15 years from their respective launches in December 1993 and 1994, there can be no assurance as to the longevity of the satellites and thus no assurance as to how long the Company will be able to continue to acquire DBS services pursuant to the NRTC Member Agreements. While the Company believes it will have access to DirecTv Services following the expiration of the current Hughes Agreement by virtue of the NRTC's right of first refusal in the Hughes Agreement and the Company's existing contractual and membership relationship with the NRTC, there can be no assurance that such services will be available to the Company from Hughes or the NRTC, and if available, there can be no assurance with regard to the financial and other terms under which the Company could acquire the services. F-49 VIEWSTAR ENTERTAINMENT SERVICES, INC. NOTES TO FINANCIAL STATEMENTS -- (Continued) DECEMBER 31, 1996 9. RELIANCE ON DIRECTV AND THE NRTC AND OTHER MATTERS -- (Continued) The Company's DBS business is a new business with a limited operating history. There are numerous risks associated with satellite transmission technology. There can be no assurance as to the longevity of the satellites or that loss, damage, or changes in the satellites will not occur and have a material adverse effect on DirecTv and the Company's DBS business. DirecTv and, therefore, the Company are dependent on third parties to provide high-quality programming that appeals to mass audiences. DirecTv's programming agreements have terms which expire on various dates and have different renewal and cancellation provisions. There can be no assurance that any such agreements will be renewed or will not be canceled prior to expiration of their original terms. DBS operators, such as DirecTv, are free to set prices and serve subscribers according to their business judgment without rate of return and other regulation. However, DirecTv is subject to the regulatory jurisdiction of the FCC. 10. SUBSEQUENT EVENT In September 1997, the Company entered into a non-binding letter of intent with Pegagus Communications Corporation ("Pegasus") to sell the stock of the Company to Pegasus in exchange for a combination of cash and stock. F-50 INDEPENDENT AUDITOR'S REPORT To the Members Midwest Minnesota DBS, LLC Perham, Minnesota I have audited the accompanying statement of net assets to be sold of Midwest Minnesota DBS, LLC, as of December 31, 1996, and the related statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audits in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. The accompanying statement of net assets to be sold was prepared to present the net assets of Midwest Minnesota DBS, LLC to be acquired by Pegasus Communications Corporation pursuant to the purchase agreement described in Note 5, and is not intended to be a complete presentation of Midwest Minnesota DBS, LLC's assets and liabilities. In my opinion, the statements referred to above present fairly, in all material respects, the net assets to be sold of Midwest Minnesota DBS, LLC, as of December 31, 1996 and the results of operations and cash flows for the year then ended pursuant to the purchase agreement referred to in Note 6, in conformity with generally accepted accounting principles. Bradley R. Helmeke, Ltd. Perham, Minnesota July 18, 1997 F-51 MIDWEST MINNESOTA DBS, LLC STATEMENTS OF NETS ASSETS TO BE SOLD December 31, June 30, 1996 1997 -------------- ------------ (unaudited) ASSETS CURRENT ASSETS Accounts Receivable .................. $135,270 $102,495 Inventory ........................... 31,255 56,916 --------- --------- TOTAL CURRENT ASSETS ..................... 166,525 159,411 --------- --------- PROPERTY AND EQUIPMENT .................. 36,953 31,833 --------- --------- OTHER ASSETS Investment in NRTC .................. 37,705 51,058 Franchise Cost ........................ 472,810 441,292 Organization and Start-up Costs ...... 7,635 6,108 Cashback and Access Cards ............ 72,847 97,941 --------- --------- TOTAL OTHER ASSETS ..................... 590,997 596,399 --------- --------- TOTAL ASSETS ........................... 794,475 787,643 CURRENT LIABILITIES Customer Deposits ..................... 1,140 1,960 Deferred Revenue ..................... 177,270 140,156 --------- --------- TOTAL CURRENT LIABILITIES ............... 178,410 142,116 --------- --------- NET ASSETS TO BE SOLD ..................... $616,065 $645,527 ========= ========= See accompanying notes to the financial statements. F-52 MIDWEST MINNESOTA DBS, LLC STATEMENTS OF OPERATIONS OF ASSETS TO BE SOLD
Six months ended Year ended --------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) REVENUE Programming Revenue ..................... $ 833,231 $ 348,714 $ 597,408 Equipment Sales ........................ 426,169 179,169 103,052 ---------- --------- --------- TOTAL REVENUE ........................ 1,259,400 527,883 700,460 COST OF REVENUE Programming Costs ..................... 400,231 165,354 266,783 Programming Fees ..................... 131,313 53,461 86,627 Equipment Costs ........................ 345,412 146,275 93,997 Selling Commissions .................. 131,316 38,540 55,542 Installation Costs .................. 29,027 10,335 18,070 Patronage Dividend ..................... (21,956) (21,956) (19,077) ---------- --------- --------- TOTAL COSTS OF REVENUE .................. 1,015,343 392,009 501,942 ---------- --------- --------- GROSS PROFIT ........................... 244,057 135,874 198,518 ---------- --------- --------- OPERATING EXPENSES Salaries and Wages ..................... 84,652 44,113 46,790 Employee Benefits and Taxes ............ 9,604 4,742 7,788 Insurance ........................... 3,032 1,478 1,817 Advertising ........................... 15,992 8,226 12,725 Marketing .............................. 14,071 7,527 4,364 Depreciation and Amortization ......... 88,600 41,199 61,179 Travel and Entertainment ............... 4,853 2,092 901 Training and Development ............ 3,979 1,949 2,104 Rent ................................. 5,400 2,700 2,700 Telephone ........................... 22,300 9,782 14,055 Supplies .............................. 5,737 3,688 2,081 Postage .............................. 5,550 2,169 3,357 Accounting and Legal .................. 910 850 6,928 Bank and Finance Charges ............ 3,697 1,884 933 Bad Debts .............................. 11,484 3,591 4,441 Miscellaneous Expenses ............... 4,792 2,045 4,738 ---------- --------- --------- 284,653 138,035 176,901 NET INCOME (LOSS) FROM OPERATIONS ...... $ (40,596) $ (2,161) $ 21,617 ========== ========= =========
See accompanying notes to the financial statements. F-53 MIDWEST MINNESOTA DBS, LLC STATEMENTS OF CASH FLOWS
Six months ended Year ended --------------------------- December 31, June 30, June 30, 1996 1996 1997 -------------- ------------- ------------ (unaudited) (unaudited) CASH FLOWS FROM OPERATING ACTIVITIES Net Income (Loss) from Operations .............................. $ (40,596) $ (2,161) $ 21,617 Adjustments to Reconcile Net Income (Loss) from Operations to Net Cash Provided by Operating Activities: Depreciation and Amortization ................................. 88,600 41,199 61,179 Changes in: Accounts Receivable .......................................... (56,833) 2,506 32,775 Inventory ................................................... 20,421 17,636 25,661 Customer Deposits .......................................... (160) (140) 820 Deferred Revenue ............................................. 153,172 8,414 (37,114) ---------- --------- --------- Net Cash Provided by Operating Activities ..................... 164,604 67,454 104,938 ---------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of Property and Equipment ........................... (20,122) (4,404) (23,198) Purchases of Cash Back Offer ................................. (74,200) -- (25,000) Purchases of Access Card Changeouts ........................... (4,110) -- -- Equity from NRTC Patronage .................................... (17,565) (17,565) (13,353) Proceeds from Sale of Property and Equipment .................. 6,740 -- -- ---------- --------- --------- Net Cash Used in Investing Activities ........................... (109,257) (21,969) (61,551) ---------- --------- --------- NET DECREASE IN MEMBERS' EQUITY ................................. (55,347) (45,485) (43,387) NET CHANGE IN CASH ............................................. -- -- -- CASH -- BEGINNING OF PERIOD .................................... -- -- -- ---------- --------- --------- CASH -- END OF PERIOD .......................................... $ -- $ -- $ -- ========== ========= =========
See accompanying notes to the financial statements. F-54 MIDWEST MINNESOTA DBS, LLC NOTES TO FINANCIAL STATEMENTS December 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: This summary of significant accounting policies of Midwest Minnesota DBS, LLC is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. The accounting policies conform to generally accepted accounting principles and have been consistently applied in the preparation of the financial statements. Business Activity -- The Company is primarily engaged in the programming service of Direct TV via satellite. They also retail satellite dish systems to the general public. Property and Equipment -- Property and equipment are carried at cost. Depreciation is calculated on the straight-line or accelerated methods over the estimated useful lives of the assets. Use of Estimates -- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Inventories -- Inventories consist primarily of digital satellite systems (DSS) and are stated at the lower of cost (first-in, first-out) or market value. Amortization of Other Assets -- The cost of organizing, starting up, acquiring franchises, and selling DSS systems is being amortized over 5-15 years on a straight line basis. Income Taxes -- The Company is organized as an LLC partnership and all respective income and loss items are taxed to the respective partners. NOTE 2 -- PROPERTY AND EQUIPMENT Property and equipment are summarized by major classifications as follows: Computer Equipment .................. $ 17,708 Demo Equipment ..................... 22,136 Vehicle .............................. 18,293 Leasehold Improvements ............ 2,276 --------- 60,413 Less Accumulated Depreciation ...... (23,460) --------- $ 36,953 ========= NOTE 3 -- OTHER ASSETS Other assets are summarized by major classifications as follows: Investment in NRTC .................. $ 37,705 Franchise Cost ..................... 630,400 Marketing and Development ......... 72,905 Organization Costs .................. 2,163 Start-Up Costs ..................... 15,274 Cash Back Offer ..................... 74,200 Access Card Change-Out ............ 4,110 ---------- 836,757 Less Accumulated Amortization ...... (245,760) ---------- $ 590,997 ========== F-55 MIDWEST MINNESOTA DBS, LLC NOTES TO FINANCIAL STATEMENTS -- (Continued) December 31, 1996 NOTE 3 -- OTHER ASSETS -- (Continued) The Company co-operates with NRTC in administering the DSS programming services. The investment in NRTC is this Company's equity in NRTC from their participation with them for the years 1994 and 1995. This investment is not being amortized. The remaining other assets are being amortized according to their estimated years of value. NOTE 4 -- TRANSACTIONS WITH RELATED PARTIES The Company leases office space from a company that is substantially owned by a partner of Midwest Minnesota DBS, LLC. The lease is a five-year lease starting on August 1, 1995. The lease calls for payments of $450 per month. Total lease payments for the year ended December 31, 1996, were $5,400. NOTE 5 -- SEP PENSION PLAN The Company sponsors a simplified employee pension plan (SEP) for all of its employees. The Company will match contributions by its employees of 50% of their contribution, up to 4%. The Company's pension contribution for the year ended December 31, 1996, was $1,472. The Company raised the matching percentage up to 6% at January 1, 1997. NOTE 6 -- SUBSEQUENT EVENT The Company has entered into an agreement to sell all of the assets and business operations to an unrelated party. The sale is scheduled to close on August 8, 1997. F-56 INDEPENDENT AUDITOR'S REPORT To the Shareholders Turner-Vision, Inc. Bluefield, West Virginia We have audited the accompanying statement of net assets to be sold of Turner-Vision, Inc. (an S-Corporation) DBS Operations as of December 31, 1996 and the related statements of operations and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. The accompanying statement of net assets to be sold was prepared to present the net assets of Turner-Vision, Inc. DBS Operations to be acquired by Pegasus Communications Corporation (Pegasus) pursuant to the purchase agreement described in Note 7, and is not intended to be a complete presentation of the assets and liabilities of Turner-Vision, Inc. and its DBS Operation. In our opinion, the financial statements referred to above present fairly, in all material respects, the net assets to be sold of Turner-Vision, Inc. DBS Operations as of December 31, 1996 and the results of operations and cash flows for the year then ended pursuant to the purchase agreement referred to in Note 7, in conformity with generally accepted accounting principles. Grigoraci, Trainer, Wright & Paterno Charleston, West Virginia June 6, 1997 F-57 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS STATEMENT OF NET ASSETS TO BE SOLD AS OF DECEMBER 31, 1996 CURRENT ASSETS: Subscriber accounts receivable, less allowance for doubtful accounts of $3,813 $ 171,265 Equipment held for resale ................................................... 92,574 --------- TOTAL CURRENT ASSETS ...................................................... 263,839 --------- DIRECT BROADCAST SATELLITE FRANCHISE, net of accumulated amortization ......... 623,179 --------- PROPERTY AND EQUIPMENT, at cost: Property and equipment ...................................................... 1,855 Less: accumulated depreciation ............................................. (719) --------- PROPERTY AND EQUIPMENT, NET ................................................ 1,136 --------- TOTAL ASSETS ............................................................... 888,154 --------- CURRENT LIABILITIES: Accrued liabilities ......................................................... 84,372 Customer advance payments ................................................... 15,076 Unearned revenue ............................................................ 176,139 --------- TOTAL CURRENT LIABILITIES ................................................ 275,587 --------- NET ASSETS TO BE SOLD ...................................................... $ 612,567 =========
The accompanying notes are an integral part of the financial statements F-58 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1996 OPERATING REVENUES: Programming and equipment sales, net ........................ $ 2,368,081 Uncollectible operating revenues ........................... (26,570) Other operating revenues .................................... 16,934 ----------- TOTAL OPERATING REVENUES ................................. 2,358,445 ----------- OPERATING EXPENSES: Programming ................................................ 1,074,320 Cost of equipment sold .................................... 997,545 Payroll and payroll related expenses ........................ 183,854 Advertising, maintenance and other operating expenses ...... 762,505 Depreciation and amortization .............................. 85,576 Allocated costs (Note 5) .................................... 103,360 ----------- TOTAL OPERATING EXPENSES ................................. 3,207,160 ----------- OPERATING LOSS .......................................... $ (848,715) =========== The accompanying notes are an integral part of the financial statements F-59 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS STATEMENT OF CASH FLOWS FOR THE YEAR ENDED DECEMBER 31, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: Operating loss ....................................... $ (848,715) ADJUSTMENT TO RECONCILE OPERATING LOSS TO NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES: Depreciation and amortization ........................ 85,576 Change in assets and liabilities: Increase in accounts receivable ..................... (95,656) Decrease in equipment held for resale ............... 68,793 Increase in accounts payable ........................ 159,327 Increase in accrued liabilities ..................... 45,282 Increase in customer advance payments ............... 8,286 Increase in unearned revenue ........................ 124,354 Increase in amount due to Turner-Vision, Inc. ...... 537,585 ----------- Total adjustments ................................. 933,547 ----------- NET CASH PROVIDED BY OPERATING ACTIVITIES ......... 84,832 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures ................................. (2,226) ----------- NET CHANGE IN CASH ................................. $ 82,606 =========== The accompanying notes are an integral part of the financial statements F-60 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS NOTES TO FINANCIAL STATEMENTS AS OF DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Turner-Vision, Inc. (the Company), through its DBS operations, markets and distributes direct broadcast satellite services to cable and noncable television subscribers residing within a five county area in southern West Virginia and southwestern Virginia. The Company obtained these exclusive rights to its service territory by investment with the National Rural Telecommunications Cooperative (NRTC). Subscriber Accounts Receivable Subscriber accounts receivable represents amounts due from customers for satellite television services and includes amounts billed, but unearned at each year-end. Equipment Held for Resale The Company's DBS operations sells direct broadcast satellite receivers and dishes, and supplies and materials commonly used for satellite installations. At December 31, 1996, the equipment is carried at the lower of cost or market, on a specific identification method. Property and Equipment Property and equipment are stated at original cost and include display equipment and various tools, equipment and supplies for installation and maintenance of DirectTV systems. Depreciation expense for the year ended December 31, 1996 was $3,398. Subsequent to December 31, 1996, the Company's DBS operations acquired five vehicles from another company controlled by the Company's shareholders. Since the vehicles were not acquired until after December 31, 1996, they are not included in the accompanying financial statements. The vehicles were included in the personal property sold to Pegasus under a Contribution Agreement between Pegasus and the Company, dated March 10, 1997. Revenue Recognition The Company's DBS operations recognizes revenues monthly for DBS services which have been earned through the end of the month. The unearned portion of billed services is recorded as unearned revenue. The Company's DBS operations recognized revenues from DBS equipment sales at the time of sale. Advertising Costs Advertising costs are expensed as incurred. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. F-61 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS NOTES TO FINANCIAL STATEMENTS -- (Continued) AS OF DECEMBER 31, 1996 NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (Continued) Concentration of Credit Risk Financial instruments that potentially subject the Company's DBS operations to concentration of credit risk consist principally of trade accounts receivable. The risk is limited due to the large number of individuals comprising the Company's DBS customer base. Exposure to losses on receivables is principally dependent on each customer's financial condition. The Company's DBS operations monitors the exposure for credit losses and maintains an allowance for anticipated losses. NOTE 2 -- DIRECT BROADCAST SATELLITE FRANCHISE During 1993, the Company invested $821,775 with NRTC, acquiring exclusive franchise rights to market direct broadcast satellite services to cable and noncable television subscribers residing within a five county area in southern West Virginia and southwestern Virginia. This investment is in an agreement with NRTC for the rights to provide broadcast services to this service territory for a period of approximately ten years, which is the expected life of the satellite. The satellite was launched in late 1993 and became available for use by the Company in July 1994. Amortization expense for these rights for the year ended December 31, 1996 was $82,178. NOTE 3 -- INCOME TAXES Effective July 1, 1988, the Company elected by unanimous consent of its shareholders to be taxed under the provision of Subchapter S of the Internal Revenue Code. Under such election, the Company's federal and state income or loss is passed through to the individual shareholders. Therefore, no provision or liability for income tax has been included in these financial statements. NOTE 4 -- CONTINGENCY The Company's DBS operations relies on NRTC as its sole provider of programming via direct broadcast satellite services. NOTE 5 -- ALLOCATED COSTS The accompanying statements of operations include costs allocated from the Company to the Company's DBS operations for use of common property and services. The costs were allocated on a proportional cost basis. The Company's management believes its method of allocation is reasonable. NOTE 6 -- RELATED PARTY TRANSACTIONS The Company's DBS operations purchased customer satellite installation services from another company that is controlled by the Company's shareholders. For the year ended December 31, 1996, charges paid by the Company's DBS operations for installation services totaled $425,310. NOTE 7 -- SUBSEQUENT EVENTS Acquisition of DBS Operations Pegasus Communications Corporation entered into a Contribution Agreement with the Company. The effective closing date of this transaction was March 10, 1997. Pursuant to the terms of the agreement, Pegasus purchased certain net assets of the Company's DBS operations for $7 million, plus $1,400 for each excess subscriber over 4,800 subscribers plus or minus, as applicable, the estimated operating adjustments. The total cash consideration paid to the Company by Pegasus at the closing totaled $8,189,267. In addition, Pegasus issued to the Company 3,000 shares of Pegasus Satellite Television of Virginia, Inc., Series A preferred stock, F-62 TURNER-VISION, INC. (AN S-CORPORATION) DBS OPERATIONS NOTES TO FINANCIAL STATEMENTS -- (Continued) AS OF DECEMBER 31, 1996 NOTE 7 -- SUBSEQUENT EVENTS -- (Continued) and assigned and transferred to the Company Pegasus warrants to purchase 283,969 shares of Pegasus Communications Corporation, Class A Common Stock. The Series A preferred stock has a stated price of $1,000 per share and is subject to certain transfer restrictions. The warrants have an exercise price of $11.81 per share. The historic statements herein include the net assets to be sold and the related results of operations and cash flows for the Company's DBS operations as of and for the year ended December 31, 1996. The Company was notified by Pegasus by a letter dated May 28, 1997 asserting indemnification claims pursuant to the Contribution Agreement, dated as of March 10, 1997 for an alleged overstatement in the number of active DirectTV subscribers. Pegasus has asked for damages in the amount of $459,200. Outside counsel for the Company has advised that at this stage no opinion can be offered as to the probable outcome or the amount or range of potential loss. F-63 INDEPENDENT AUDITORS' REPORT The Board of Directors Pioneer Services Corporation Greenville, Alabama We have audited the accompanying balance sheet of the DBS Operations of Pioneer Services Corporation (operating division of Pioneer Services Corporation as more fully described in Note 1 to financial statements) (the Division) as of September 30, 1996 and the related statements of operations and retained earnings, and cash flows for the year then ended. These financial statements are the responsibility of the Division's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the DBS Operations of Pioneer Services Corporation as of September 30, 1996 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying financial statements may not necessarily be indicative of the conditions that would have existed or the results of operations had the Division been unaffiliated with Pioneer Services Corporation. As discussed in Notes 1 and 6 to the financial statements, Pioneer Services Corporation provides financing and certain general and administrative and other corporate services to the Division. Jackson Thornton & Co., P.C. Montgomery, Alabama January 14, 1997, except for Note 7 as to which the date is September 26, 1997 F-64 DBS OPERATIONS OF PIONEER SERVICES CORPORATION GREENVILLE, ALABAMA BALANCE SHEETS ASSETS
September 30, June 30, 1996 1997 --------------- ------------ (unaudited) CURRENT ASSETS: Cash ............................................................... $ 25,907 $ 26,347 Accounts receivable: Customers, less provision for doubtful accounts of $20,000 at Sep- tember 30, 1996 and June 30, 1997 338,500 340,699 Inventories ......................................................... 330,551 163,145 ------------ ------------ Total current assets ............................................. 694,958 530,191 ------------ ------------ EQUIPMENT: Leased property (net of accumulated depreciation of $210,964 and $624,124 at September 30, 1996 and June 30, 1997, respectively)...... 3,026,009 2,622,700 ------------ ------------ OTHER ASSETS: Deferred charges ...................................................... 1,884 2,656 ------------ ------------ Total assets ................................................... $ 3,722,851 $ 3,155,547 ============ ============
LIABILITIES AND DIVISION DEFICIENCY CURRENT LIABILITIES: Accounts payable ..................................................... $ 161,257 $ 217,302 Accrued liabilities .................................................. 34,758 -- Deferred credits ..................................................... 195,065 232,417 ------------ ---------- Total current liabilities ...................................... 391,080 449,719 ------------ ---------- LONG-TERM DEBT: Notes payable ........................................................ 5,057,051 4,722,867 ------------ ---------- Total liabilities ............................................... 5,448,131 5,172,586 ------------ ---------- EQUITY: Division deficiency .................................................. (1,725,280) (2,017,039) ------------ --------- Total liabilities and division deficiency ....................... $ 3,722,851 $ 3,155,547 ============ ==========
The accompanying notes are an integral part of these financial statements. F-65 DBS OPERATIONS OF PIONEER SERVICES CORPORATION STATEMENTS OF OPERATIONS AND DIVISION DEFICIENCY
Nine months ended Year ended ----------------------------------- September 30, June 30, June 30, 1996 1996 1997 --------------- ----------------- --------------- (unaudited) (unaudited) OPERATING REVENUES ........................ $ 3,027,960 $ 1,966,721 $ 3,912,923 OPERATING EXPENSES ........................ (2,843,580) (2,182,553) (3,922,294) ------------- ------------- ------------- INCOME (LOSS) FROM OPERATIONS ............ 184,380 (215,832) (9,371) INTEREST EXPENSE ........................... (215,147) (156,990) (282,388) ------------- ------------- ------------- NET INCOME (LOSS) ........................ (30,767) (372,822) (291,759) DIVISION DEFICIENCY AT BEGINNING OF PERIOD . (1,694,513) (1,694,513) (1,725,280) ------------- ------------- ------------- DIVISION DEFICIENCY AT END OF PERIOD ...... $ (1,725,280) $ (2,067,335) $ (2,017,039) ============= ============= =============
The accompanying notes are an integral part of these financial statements. F-66 DBS OPERATIONS OF PIONEER SERVICES CORPORATION STATEMENTS OF CASH FLOWS
Nine months ended Year ended -------------------------------- September 30, June 30, June 30, 1996 1996 1997 --------------- -------------- --------------- (unaudited) (unaudited) CASH FLOWS FROM (USED FOR) OPERATING ACTIVITIES: Net loss ............................................. $ (30,767) $ (372,822) $ (291,759) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization ........................ 203,739 126,614 413,160 Provision for losses on notes and accounts receivable 105,417 79,063 152,092 Decrease (increase) in operating assets and increase (decrease) in operating liabilities: Accounts receivable .............................. (489,836) (218,779) (154,291) Inventories ....................................... (24,869) (182,696) 167,406 Accounts payable ................................. (69,393) 214,025 56,045 Accrued liabilities .............................. (8,050) 8,816 (34,758) Deferred credits ................................. 138,563 58,875 37,352 ------------ ------------ ----------- Net cash from (used for) operating activities (175,196) (286,904) 345,247 ------------ ------------ ----------- CASH FLOWS USED FOR INVESTING ACTIVITIES: Capital expenditures ................................. (2,796,178) (2,096,623) (9,851) Net change in deferred assets ........................ (8,406) (1,357) (772) ------------ ------------ ----------- Net cash used for investing activities ......... (2,804,584) (2,097,980) (10,623) ------------ ------------ ----------- CASH FLOWS FROM (USED FOR) FINANCING ACTIVITIES: Proceeds from long-term debt ........................... 2,983,181 2,377,490 (334,184) ------------ ------------ ----------- Net cash from (used for) financing activities 2,983,181 2,377,490 (334,184) ------------ ------------ ----------- NET INCREASE (DECREASE) IN CASH ........................ 3,401 (7,394) 440 CASH AT BEGINNING OF PERIOD ........................... 22,506 22,506 25,907 ------------ ------------ ----------- CASH AT END OF PERIOD ................................. $ 25,907 $ 15,112 $ 26,347 ============ ============ =========== SUPPLEMENTAL INFORMATION: Cash paid for interest on long-term debt ............... $ 52,896 $ 41,550 $ 270,150 ============ ============ ===========
The accompanying notes are an integral part of these financial statements. F-67 DBS OPERATIONS OF PIONEER SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS SEPTEMBER 30, 1996 NOTE 1 - PRESENTATION AND NATURE OF BUSINESS: Basis of presentation - The DBS operations of Pioneer Services Corporation (the Division) are comprised of the assets and liabilities of the division of Pioneer Services Corporation (Pioneer) which provides direct broadcast satellite (DBS) services. Pioneer intends to sell these assets pursuant to an agreement with Pegasus Communications Holdings, Inc. (see Note 7). This division has no separate legal existence apart from Pioneer. The historical financial statements of the DBS operations of Pioneer do not necessarily reflect the results of operations or financial position that would have existed if the DBS operations were an independent company. Pioneer provides certain general and administrative and other corporate services to the Division (see Note 6). Nature of business - The Corporation sells direct broadcast satellite equipment and programming for television to consumers in rural central Alabama franchised by the National Rural Telecommunication Cooperative (NRTC). While this franchise is exclusive as it relates to programming provided through NRTC, other programming providers may offer DBS services within the Division's market. Under the franchise agreement, NRTC leases satellite capacity through which programming is transmitted. The NRTC provides certain billing functions for the Division. The Division extends credit to its customers who are primarily in the State of Alabama. NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Inventories - Inventories are stated at the lower of cost (first-in, first-out (FIFO) method) or market. Equipment - Equipment is stated at cost. Depreciation of equipment is computed on a straight-line basis over the useful lives of the assets. The useful life of equipment held at the balance sheet date was determined to be from five to seven years. The useful life of direct broadcast satellite equipment is estimated to be seven years. Depreciation expense on all equipment totaled $195,958 in 1996. Leased property is leased to customers on a monthly basis. In 1993, the Division borrowed $1,400,520 to acquire the franchise for the DBS service areas which it now serves. This loan was secured by the franchise for satellite television service. This note was satisfied in full on September 30, 1995 when Pioneer Services Corporation transferred the franchise for satellite television service to Pioneer Electric Cooperative. Deferred credits - Deferred credits include programming charges which have been collected in advance from the consumer. These charges are brought into income as the service is provided to the consumer. Revenue recognition - Revenue in connection with programming services and associated costs are recognized when such services are provided. Revenue in connection with the sale of equipment and installation and associated costs are recognized when the equipment is installed. Income taxes - Pioneer is established as a not-for-profit organization under the laws of the State of Alabama. Pioneer is subject to federal income tax. The Division is included in the tax return of Pioneer. Accordingly income taxes have been presented in these financial statements as though the Division filed a separate federal income tax return. The Division accounts for income taxes under the provisions of Statement of Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes (see Note 5). Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Supplier - The Division purchases all of its programming from NRTC. The cost of programming was $1,022,400 for 1996. F-68 DBS OPERATIONS OF PIONEER SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (Continued) SEPTEMBER 30, 1996 NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: -- (Continued) Unaudited data - The balance sheet as of June 30, 1997 and the statements of operations and division deficiency and cash flows for the nine months ended June 30, 1996 and 1997 have been prepared by the Division's management and have not been audited. The data as of June 30, 1997 and for the nine months ended June 30, 1996 and 1997 has not subjected to any auditing procedures and, accordingly, we do not express an opinion on the data. The results of operations for the nine months ended June 30, 1996 and 1997 are not necessarily indicative of operating results for the full year. NOTE 3 - CASH AND CASH EQUIVALENTS: The Division maintains its cash accounts in a bank located in Ohio. The account at this bank is guaranteed by the Federal Deposit Insurance Corporation (FDIC) for up to $100,000. At September 30, 1996, all of the Division's cash was insured. NOTE 4 - LONG-TERM DEBT: Long-term debt consists of the following: NRUCFC - variable interest rate, currently 6.20%; secured by all assets of Pioneer; note matures April 17, 2000 ..... $ 2,760,551 Pioneer Electric Cooperative - interest rate of 6.75%; unsecured; note matures December 19, 1997 ................. 2,296,500 ------------ Totals ................................................ $ 5,057,051 ============ Annual maturities on long-term debt are as follows: September 30, 1998 ........................................ $ 2,296,500 September 30, 2000 ........................................ 2,760,551 ------------ Total ................................................. $ 5,057,051 ============
NOTE 5 - INCOME TAXES: Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes (SFAS 109) requires companies to record deferred tax assets or liabilities for the deferred tax consequences of all temporary differences. The Statement requires that deferred tax balances be adjusted to reflect new tax rates when they are enacted into law. Also, SFAS 109 requires the establishment of an asset and/or liability to recognize the cumulative effect of deferred tax activity. The provision for income taxes consists of an amount for taxes currently payable and a provision for tax consequences deferred to future periods. Deferred income taxes are provided for certain temporary differences principally due to the use of accelerated depreciation for income tax purposes. Such deferred taxes are credited to income as the related temporary differences reverse. There is no provision or benefit for income taxes due to net losses incurred and the effect of recording a 100% valuation allowance on net deferred tax assets. F-69 DBS OPERATIONS OF PIONEER SERVICES CORPORATION NOTES TO FINANCIAL STATEMENTS -- (Continued) SEPTEMBER 30, 1996 NOTE 5 - INCOME TAXES: -- (Continued) Significant items comprising the Division's deferred tax assets and liabilities at September 30, 1996 are as follows: Net deferred income tax asset: Deferred tax asset: Benefit from net operating loss carryforwards expiring through the year 2012 .............................. $ 194,400 Deferred tax liability: Depreciation expense ................................. (61,560) ---------- Net deferred tax asset ................................. 132,840 Valuation allowance .................................... (132,840) ---------- Net deferred tax balance ........................... $ 0 ==========
NOTE 6 - RELATED PARTIES: Some of the Pioneer Services Corporation's directors also serve as directors of Pioneer Electric Cooperative (PEC). Pioneer Services Corporation is managed in accordance with a management contract between Pioneer Services Corporation and PEC. At September 30, 1996, PEC is the guarantor of the long-term debt payable to NRUCFC. As disclosed in Note 4, the Division has notes payable to PEC for capital expenditures and working capital deficiencies. Interest expense on PEC loans for the year ended September 30, 1996 includes $60,719. Interest paid to PEC for the year ended September 30, 1996 was $52,896. Accrued interest payable at September 30, 1996 includes $35,507 due to PEC. NOTE 7 - SUBSEQUENT EVENT: Subsequent to January 14, 1997, Pioneer entered into a letter of intent with Pegasus Communications Holdings, Inc. (Pegasus). The terms of this letter are subject to change pursuant to ongoing negotiations between Pegasus and Pioneer. Under the present understanding of the terms of the negotiations as of September 26, 1997, Pioneer would sell to Pegasus its operating assets along with its subscribers list for the Division for a negotiated price. Although the Division believes that this transaction will be consummated, there can be no assurances that it will occur. F-70 PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Basis of Presentation Pro forma consolidated statement of operations and other data for the year ended December 31, 1996, the six months ended June 30, 1997 and the twelve months ended June 30, 1997 give effect to (i) the Portland, Maine TV acquisition, which closed on January 29, 1996, and the Tallahassee, Florida TV acquisition, which closed on March 8, 1996, (ii) the acquisition of a Puerto Rico cable system, which closed on August 29, 1996, (iii) the Completed DBS Acquisitions, (iv) the Pending DBS Acquisitions, (v) the sale of the New Hampshire cable system (the "New Hampshire Cable Sale"), which closed on January 31, 1997, (vi) Pegasus' initial public offering of 3,000,000 shares of Class A Common Stock (the "Initial Public Offering"), which was consummated on October 8, 1996, and Pegasus' public offering of 100,000 shares of 12 3/4% Series A Cumulative Exchangeable Preferred Stock and warrants to purchase 193,600 shares of Class A Common Stock (the "Unit Offering"), which was consummated on January 27, 1997, and (vii) the Senior Notes Offering, all as if such events had occurred at the beginning of each period. The pro forma condensed consolidated balance sheet as of June 30, 1997 gives effect to (i) payments in connection with the Completed DBS Acquisitions, (ii) the Pending DBS Acquisitions and the New Credit Facility, which, if not completed prior to the consummation of the Senior Notes Offering, are anticipated to occur in the fourth quarter of 1997, (iii) the closing of an existing credit facility and the payment of accrued interest to holders of the PM&C 12 1/2% Series B Senior Subordinated Notes due 2005 ("PM&C Notes"), and (iv) the Senior Notes Offerring and the proceeds thereof, as if such events had occurred on such date. The acquisitions are accounted for using the purchase method of accounting. The total costs of such acquisitions are allocated to the tangible and intangible assets acquired and liabilities assumed based upon their respective fair values. The allocation of the purchase price included in the pro forma financial statements is preliminary. The Company does not expect that the final allocation of the purchase price will materially differ from the preliminary allocation. The pro forma adjustments are based upon available information and upon certain assumptions that the Company believes are reasonable. The pro forma consolidated financial information should be read in conjunction with the Notes to Pro Forma Consolidated Statements of Operation, as well as the financial statements and notes thereto of the acquisitions, included elsewhere in this report. The pro forma consolidated financial information is not necessarily indicative of the Company's future results of operations. There can be no assurance whether or when the Pending DBS Acquisitions will be consummated. F-71 Pro Forma Consolidated Balance Sheet As of June 30, 1997 (Dollars in thousands)
Completed Pending DBS DBS Actual Acquisitions(a) Acquisitions(b) ------------ ----------------- ----------------- ASSETS Cash and cash equivalents ......... $ 12,518 ($ 8,221) Restricted cash ..................... 6,892 Accounts receivable, net ............ 10,482 Inventory ........................... 721 Prepaid expenses and other current assets .............................. 4,779 Property and equipment, net ......... 25,500 Intangibles, net .................. 192,873 $45,700 64,095 Other assets ........................ 2,147 ---------- -------- -------- Total assets ..................... $ 255,912 $45,700 $55,874 ========== ======== ======== LIABILITIES AND EQUITY Current liabilities ............... $ 10,440 Accrued interest .................. 5,771 Current portion of long-term debt ... 3,884 Current portion of program rights payable ........................... 1,102 Long-term debt, net ............... 83,061 $ 3,193 PSH Credit Facility ............... $45,700 46,000 New Credit Facility .................. Senior Notes ........................ Program rights payable ............ 1,542 Other long term liabilities ......... 1,389 Preferred Stock ..................... 105,313 Minority Interest .................. 3,000 Class A Common Stock ............... 53 3 Class B Common Stock ............... 46 Additional paid in capital ......... 59,463 6,678 Retained earnings .................. (19,152) ---------- -------- -------- Total liabilities and equity ...... $ 255,912 $45,700 $55,874 ========== ======== ======== RESTUBBED TABLE The Senior Notes Other(c) Subtotal Offering(d) Pro Forma ------------ ------------ ------------- ------------ ASSETS Cash and cash equivalents ......... $25,479 $ 29,776 ($ 21,150) $ 8,626 Restricted cash ..................... (6,892) -- Accounts receivable, net ............ 10,482 10,482 Inventory ........................... 721 721 Prepaid expenses and other current assets .............................. 4,779 4,779 Property and equipment, net ......... 25,500 25,500 Intangibles, net .................. 302,668 5,550 308,218 Other assets ........................ 2,147 2,147 -------- ---------- ---------- ---------- Total assets ..................... $18,587 $ 376,073 ($ 15,600) $ 360,473 ======== ========== ========== ========== LIABILITIES AND EQUITY Current liabilities ............... $ 10,440 $ 10,440 Accrued interest .................. ($ 5,313) 458 458 Current portion of long-term debt ... 3,884 3,884 Current portion of program rights payable ........................... 1,102 1,102 Long-term debt, net ............... 86,254 86,254 PSH Credit Facility ............... 23,900 115,600 ($ 115,600) -- New Credit Facility .................. -- Senior Notes ........................ 100,000 100,000 Program rights payable ............ 1,542 1,542 Other long term liabilities ......... 1,389 1,389 Preferred Stock ..................... 105,313 105,313 Minority Interest .................. 3,000 3,000 Class A Common Stock ............... 56 56 Class B Common Stock ............... 46 46 Additional paid in capital ......... 66,141 66,141 Retained earnings .................. (19,152) (19,152) -------- ---------- ---------- ---------- Total liabilities and equity ...... $18,587 $ 376,073 ($ 15,600) $ 360,473 ======== ========== ========== ==========
- ------------ (a) To record ten Completed DBS Acquisitions which occurred after June 30, 1997. (b) To record ten Pending DBS Acquisitions. (c) To record additional borrowings under an existing credit facility and the payment of interest on July 1, 1997 to holders of the PM&C Notes. (d) To record the proceeds from the Senior Notes Offering and the uses of such proceeds and the use of cash to finance the Pending DBS Acquisitions and to record costs in connection with the New Credit Facility. F-72 Pro Forma Consolidated Statement of Operations Year Ended December 31, 1996 (Dollars in thousands)
Acquisitions ------------------------------------------------------------ Completed Pending DBS DBS Actual TV(a) Cable(b) Acquisitions(c) Acquisitions(d) Income Statement Data: ------------ ---------- ---------- ----------------- ----------------- Net Revenues: TV .................. $ 28,488 $ 651 DBS .................. 5,829 $23,080 $10,975 Cable ............... 13,496 $4,056 Other ............... 116 ---------- ------ ------ -------- ------- Total net revenues . 47,929 651 4,056 23,080 10,975 ---------- ------ ------ -------- ------- Location operating expenses: TV .................. 18,726 537 DBS .................. 4,958 22,877 10,089 Cable ............... 7,192 2,448 Other ............... 28 Incentive compensation ......... 985 Corporate expenses ... 1,429 33 88 1,050 464 Depreciation and amorti- zation 12,061 17 365 1,777 989 ---------- ------ ------ -------- ------- Income (loss) from operations ......... 2,550 64 1,155 (2,624) (567) Interest expense ...... (12,455) (585) (482) (902) (493) Other income (expense), net .................. 61 3 519 64 Provision (benefit) for income taxes ......... (120) 35 20 29 (102) Dividends on Series A Preferred Stock ...... ---------- ------ ------ -------- ------- Income (loss) applicable to common shares before extraordinary items .................. ($ 9,724) ($ 553) $ 653 ($ 3,036) ($ 894) ========== ====== ====== ======== ======= Other Data: Location Cash Flow(r) . $ 17,025 $ 114 $1,608 $ 203 $ 886 Operating Cash Flow(r) 15,596 81 1,520 (847) 422 Capital Expenditures ... 6,294 96 4,143 1,397 RESTUBBED TABLE The NH Senior Cable Previous Sub- Notes Pro Adjustments Sale(e) Offerings(f) total Offering Forma Income Statement Data: ----------------- ------------ -------------- ------------ ------------- ----------- Net Revenues: TV .................. $ 17(g) $ 29,156 $ 29,156 DBS .................. 39,884 39,884 Cable ............... ($ 1,688) 15,864 15,864 Other ............... 116 116 ------------- -------- ---------- --------- ---------- --------- Total net revenues . 17 (1,688) 85,020 85,020 ------------- -------- ---------- --------- ---------- --------- Location operating expenses: TV .................. (43)(h) 19,220 19,220 DBS .................. (7,121)(i) 30,803 30,803 Cable ............... (249)(j) (918) 8,473 8,473 Other ............... 28 28 Incentive compensation ......... (75) 910 910 Corporate expenses ... (1,635)(k) 1,429 1,429 Depreciation and amorti- zation 16,137(l) (618) $ 97 30,825 $ 800(p) 31,625 ------------- -------- ---------- --------- ---------- --------- Income (loss) from operations ......... (7,072) (77) (97) (6,668) (800) (7,468) Interest expense ...... (16,342)(m) 11,330 (19,929) (988)(q) (20,917) Other income (expense), net .................. (586)(n) 61 61 Provision (benefit) for income taxes ......... 18(o) (120) (120) Dividends on Series A Preferred Stock ...... (12,750) (12,750) (12,750) Income (loss) applicable ------------- -------- ---------- --------- ---------- --------- to common shares before extraordinary items .................. ($ 24,018) ($ 77) ($ 1,517) ($ 39,166) ($ 1,788) ($ 40,954) ============= ======== ========== ========= ========== ========= Other Data: Location Cash Flow(r) .. $ 7,430 ($ 770) $ 26,496 $ 26,496 Operating Cash Flow(r) .. 9,065 (770) 25,067 25,067 Capital Expenditures ... (204) 11,726 11,726
F-73 Pro Forma Consolidated Statement of Operations Six Months Ended June 30, 1997 (Dollars in thousands)
Completed Pending DBS DBS Actual Acquisitions(c) Acquisitions(d) Income Statement Data: ------------- ----------------- ----------------- Net Revenues: TV ........................ $ 14,636 DBS ........................ 12,771 $8,109 $7,162 Cable ..................... 8,133 Other ..................... 70 --------- ------ ------ Total net revenues ......... 35,610 8,109 7,162 --------- ------ ------ Location operating expenses: TV ........................ 9,694 DBS ........................ 9,738 7,970 6,364 Cable ..................... 4,365 Other ..................... 13 Incentive compensation ...... 521 Corporate expenses ......... 904 333 343 Depreciation and amortization ............... 10,854 616 523 --------- ------ ------ Income (loss) from operations ............... (479) (810) (68) Interest expense ............ (6,024) (151) (283) Other income (expense), net 452 68 22 Provision (benefit) for income taxes ..................... 50 (40) 26 Dividends on Series A Preferred Stock ............ (5,313) --------- ------ ------ Income (loss) applicable to common shares before extraordinary items ......... ($ 11,414) ($ 853) ($ 355) ========= ====== ====== Other Data: Location Cash Flow(r) ...... $ 11,800 $ 139 $ 798 Operating Cash Flow(r) ...... 10,896 (194) 455 Capital Expenditures ......... 5,233 2,191 746 RESTUBBED TABLE The NH Senior Cable Previous Sub- Notes Pro Adjustments Sale(e) Offerings(f) total Offering Forma Income Statement Data: ------------------ ------------ -------------- ------------- ------------- ----------- Net Revenues: TV ........................ $ 14,636 $ 14,636 DBS ........................ 28,042 28,042 Cable ..................... ($ 135) 7,998 7,998 Other ..................... 70 70 ----------- ------- --------- --------- ---------- --------- Total net revenues ......... (135) 50,746 50,746 ----------- ------- --------- --------- ---------- --------- Location operating expenses: TV ........................ 9,694 9,694 DBS ........................ ($ 2,918)(i) 21,154 21,154 Cable ..................... (68) 4,297 4,297 Other ..................... 13 13 Incentive compensation ...... 521 521 Corporate expenses ......... (676)(k) 904 904 Depreciation and amortization ............... 4,705(l) (52) 16,646 $ 400(p) 17,046 ----------- ------- --------- --------- ---------- --------- Income (loss) from operations ............... (1,111) (15) (2,483) (400) (2,883) Interest expense ............ (7,105)(m) $ 3,600 (9,963) (495)(q) (10,458) Other income (expense), net (90)(n) 452 452 Provision (benefit) for income taxes ..................... 14(o) 50 50 Dividends on Series A Preferred Stock ............ (1,062) (6,375) (6,375) ----------- ------- --------- --------- ---------- --------- Income (loss) applicable to common shares before extraordinary items ......... ($ 8,320) ($ 15) $ 2,538 ($ 18,419) ($ 895) ($19,314) =========== ======= ========= ========= ========== ========= Other Data: Location Cash Flow(r) ...... $ 2,918 ($ 67) $ 15,588 $ 15,588 Operating Cash Flow(r) ...... 3,594 (67) 14,684 14,684 Capital Expenditures ......... (5) 8,165 8,165
F-74 Pro Forma Consolidated Statement of Operations Twelve Months Ended June 30, 1997 (Dollars in thousands)
Acquisitions ------------------------------------------------ Completed Pending DBS DBS Actual Cable(b) Acquisitions(c) Acquisitions(d) Income Statement Data: ------------ ---------- ----------------- ----------------- Net Revenues: TV ..................... $ 31,192 DBS ..................... 17,032 $20,429 $13,593 Cable .................. 16,003 $ 866 Other .................. 130 --------- ------- -------- ------- Total net revenues . 64,357 866 20,429 13,593 --------- ------- -------- ------- Location operating expenses: TV ..................... 20,149 DBS ..................... 13,435 20,858 12,328 Cable .................. 8,470 637 Other .................. 32 Incentive compensation ............ 1,076 Corporate expenses ...... 1,624 88 922 567 Depreciation and amorti- zation 18,010 164 1,449 1,044 --------- ------- -------- ------- Income (loss) from operations ............ 1,561 (23) (2,800) (346) Interest expense ......... (12,909) (69) (499) (574) Other income (expense), net ..................... 424 201 64 Provision (benefit) for income taxes ............ 63 (313) (48) (82) Dividends on Series A Preferred Stock ......... (5,313) --------- ------- -------- ------- Income (loss) applicable to common shares before extraordinary items .................. ($ 16,300) $ 221 ($ 3,050) ($ 774) ========= ======= ======== ======= Other Data: Location Cash Flow(r) . $ 22,271 $ 229 ($ 429) $1,265 Operating Cash Flow(r) 20,647 141 (1,351) 698 Adjusted Operating Cash Flow(s) .................. Capital Expenditures ... 8,779 3,407 1,516 RESTUBBED TABLE The NH Senior Cable Previous Sub- Notes Pro Adjustments Sale(e) Offerings(f) total Offering Forma Income Statement Data: ------------------ ------------ -------------- ------------ ------------- ----------- Net Revenues: TV ..................... $ 31,192 $ 31,192 DBS ..................... 51,054 51,054 Cable .................. ($ 1,039) 15,830 15,830 Other .................. 130 130 ------------- -------- --------- --------- ---------- --------- Total net revenues . (1,039) 98,206 98,206 ------------- -------- --------- --------- ---------- --------- Location operating expenses: TV ..................... 20,149 20,149 DBS ..................... ($ 7,335)(i) 39,286 39,286 Cable .................. (83)(j) (552) 8,472 8,472 Other .................. 32 32 Incentive compensation ............ (66) 1,010 1,010 Corporate expenses ...... (1,577)(k) 1,624 1,624 Depreciation and amorti- zation 12,678(l) (358) $ 32 33,019 $ 800(p) 33,819 ------------- -------- --------- --------- ---------- --------- Income (loss) from operations ............ (3,683) (63) (32) (5,386) (800) (6,186) Interest expense ......... (17,314)(m) 11,330 (20,035) (882)(q) (20,917) Other income (expense), net ..................... (286)(n) 403 403 Provision (benefit) for income taxes ............ 443(o) 63 63 Dividends on Series A Preferred Stock ......... (7,437) (12,750) (12,750) ------------- -------- --------- --------- ---------- --------- Income (loss) applicable to common shares before extraordinary items .................. ($ 21,726) ($ 63) $ 3,861 ($ 37,831) ($ 1,682) ($ 39,513) ============= ======== ========= ========= ========== ========= Other Data: Location Cash Flow(r)...... $ 7,418 ($ 487) $ 30,267 $30,267 Operating Cash Flow(r)..... 8,995 (487) 28,643 28,643 Adjusted Operating Cash Flow(s) .................. 30,372 Capital Expenditures ... (62) 13,640 13,640
F-75 Notes to Pro Forma Consolidated Statements of Operations (a) Financial results of Portland Broadcasting, Inc. and WTLH, Inc. for the beginning of the period to the date of acquisition by the Company. (b) Financial results of Dom's Tele Cable, Inc. for the beginning of the period to the date of acquisition by the Company. (c) Represents the combined financial results of the Completed DBS Acquisitions for the beginning of the period to the date of acquisition by the Company or the end of the period. (d) Represents the combined financial results of the Pending DBS Acquisitions for the period presented. (e) Financial results of the New Hampshire operations of Pegasus Cable Television. (f) To remove interest expense on the debt retired with the proceeds of the Initial Public Offering and the Unit Offering, to eliminate amortization of deferred costs related to an old credit facility, to record amortization of costs incurred in connection with an existing credit facility and to record dividends on Pegasus' Series A Preferred Stock. (g) To reduce the commissions paid by WPXT and WTLH to their national advertising sales representative to conform to the Company's contract. (h) To eliminate payroll expense related to staff reductions and rent expenses incurred from prior acquisitions. (i) Represents elimination of costs associated with 32 call centers that were not acquired and to conform accounting policies with respect to subscriber acquisition costs, net of the Company adding additional customer service representatives. (j) To reflect expense reductions, such as redundant staff, rent, professional fees and utilities implemented in connection with acquisitions and interconnection of its Puerto Rico cable systems. (k) To eliminate corporate expenses charged by prior owners. (l) To record additional depreciation and amortization resulting from the purchase accounting treatment of the acquisitions and to conform accounting policies with respect to subscriber acquisition costs. Such amounts are based on a preliminary allocation of the total consideration. The actual depreciation and amortization may change based upon the final allocation of the total consideration to be paid to the tangible and intangible assets acquired. (m) To record the increase in net interest expense associated with the borrowings incurred in connection with the acquisitions described above. (n) To eliminate certain nonrecurring expenses, primarily comprised of legal and professional expenses incurred by the prior owners of the businesses in connection with the acquisitions. (o) To eliminate the net tax benefit in connection with the acquisitions. (p) To record additional amortization resulting from the Senior Notes Offering and the New Credit Facility. (q) Interest expense is adjusted for the Senior Notes Offering and the use of proceeds therefrom and gives effect to the Completed DBS Acquisitions, the New Hampshire Cable Sale, the Unit Offering, the Pending DBS Acquisitions, the Subsidiaries Combination and the New Credit Facility (Dollars in thousands):
Six Months Twelve Months Year Ended Ended Ended 12/31/96 6/30/97 6/30/97 ------------ ------------ -------------- Interest expense: PM&C Notes .............................. $10,625 $ 5,313 $10,625 Senior Notes ........................... 9,750 4,875 9,750 Other debt .............................. 542 270 542 -------- -------- -------- Total ................................. 20,917 10,458 20,917 Interest expense previously recorded ...... 19,929 9,963 20,035 -------- -------- -------- Adjustment ................................. $ 988 $ 495 $ 882 ======== ======== ========
(r) Location Cash Flow is defined as net revenues less location operating expenses. Location operating expenses consist of programming, barter programming, general and administrative, technical and operations, marketing and selling expenses. Operating Cash Flow is defined as income (loss) from operations plus (i) depreciation and amortization and (ii) non-cash incentive compensation. The difference between Location Cash Flow and Operating Cash Flow is that Operating Cash Flow includes cash incentive compensation and corporate expenses. Although Location Cash Flow and Operating Cash Flow are not measures of performance under generally accepted accounting principles, the Company believes that Location Cash Flow and Operating Cash Flow are accepted within the Company's businesses as generally recognized measures of performance and are used by analysts who report publicly on the performance of companies operating in such businesses. Nevertheless, these measures should not be considered in isolation or as a substitute for income from operations, net income, net cash provided by operating activities or any other measure for determining the Company's operating performance or liquidity which is calculated in accordance with generally accepted accounting principles. (s) Adjusted Operating Cash Flow is defined as Operating Cash Flow for the four most recent fiscal quarters less DBS cash flow for the most recent four-quarter period plus DBS cash flow for the most recent quarterly period multiplied by four. F-76 EXHIBIT INDEX Exhibit Description - ---------- ------------------------------------ 99.1 Press release dated October 8, 1997 EX-99.1 2 PRESS RELEASE DATED OCTOBER 8, 1997 FOR IMMEDIATE RELEASE - --------------------- PEGASUS COMMUNICATIONS CORPORATION ANNOUNCES PRIVATE OFFERING OF $100 MILLION OF SENIOR NOTES RADNOR, PA October 8, 1997 -- Pegasus Communications Corporation (Nasdaq: PGTV) announced today that it is privately offering approximately $100 million of senior notes. The Company commenced the offering today and anticipates using the proceeds of the offering to finance DBS acquisitions and repay borrowings under an existing credit facility. The terms of the offering have not been finalized. The securities being offered in the private offering will not be and have not been registered under the Securities Act of 1933 and may not be offered or sold in the United States without registration or an applicable exemption from registration requirements. In connection with the offering, Pegasus would reorganize its DBS operating subsidiaries as subsidiaries of Pegasus Media & Communications, Inc., a wholly-owned subsidiary of Pegasus, and would consolidate its existing credit facilities into a new single $180 million credit facility. Pegasus Communications Corporation operates in two growing areas of television - direct broadcast satellite television (DBS) and broadcast televison (TV). In DBS, Pegasus Satellite Television is the largest independent provider of DIRECTV services in the US. Pegasus owns the exclusive right to provide DIRECTV to approximately 2.3 million households in 27 states and serves approximately 126,000 DBS subscribers, giving effect to pending acquisitions. Pegasus Broadcast Television operates eight TV stations serving approximately 1.9 million households in six TV markets, giving effect to the pending launch of two TV stations. Pegasus' TV stations are affiliated with FOX, UPN and WB. Pegasus also serves approximately 42,000 cable subscribers in New England and Puerto Rico. This press release contains information about pending transactions,and there can be no assurance that these transactions will be completed. ### For further information, contact: Robert N. Verdecchio, CFO - --------------------------------- Pegasus Communications Corporation 610-341-1801 -----END PRIVACY-ENHANCED MESSAGE-----