UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 1999
or
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934 For the
transition period from _______to ______.
Commission file number 333-64367
---------
GOLDEN SKY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 43-1749060
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No.)
4700 BELLEVIEW, SUITE 300
KANSAS CITY, MO 64112
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code, (816) 753-5544
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (Section 229.405 of the chapter) is not contained herein, and
will not be contained, to the best of registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K [ X ].
As of December 31, 1999, the Registrant's outstanding common stock consisted of
1,000 shares of Common Stock. The Registrant is a wholly-owned subsidiary of
Golden Sky DBS, Inc., which is a wholly-owned subsidiary of Golden Sky Holdings,
Inc. The aggregate market value of the voting stock held by non-affiliates of
the Registrant as of December 31, 1999 was $0.
<PAGE>
TABLE OF CONTENTS
PART I
Item 1. Business............................................................. 1
Item 2. Properties...........................................................13
Item 3. Legal Proceedings....................................................13
Item 4. Submission of Matters to a Vote of Security Holders..................14
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters..............................................................15
Item 6. Selected Financial Data..............................................15
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk...........27
Item 8. Financial Statements and Supplementary Data..........................27
Item 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.................................................27
PART III
Item 10. Directors and Executive Officers of the Registrant...................28
Item 11. Executive Compensation...............................................30
Item 12. Security Ownership of Certain Beneficial Owners and Management.......33
Item 13. Certain Relationships and Related Transactions.......................37
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....38
SOURCES OF MATERIAL INFORMATION
Information in this report concerning the National Rural Telecommunications
Cooperative, or the NRTC, and its arrangements with DIRECTV is based upon
information that has been made available to us by the NRTC or is otherwise
publicly available. Unless otherwise indicated, information in this report
regarding numbers of households in rural DIRECTV markets is based upon
information compiled by Claritas, Inc. Other industry-related information is
derived from SkyREPORT. We have not independently verified this data.
The following trademarks owned by third parties are used in this Report:
DIRECTV(R), USSB(R), Total Choice(R), NFL SUNDAY TICKET(TM), NHL(R) CENTER
ICE(R), MLB EXTRA INNINGS SM , ESPN FULL COURT TM, ESPN GamePlan TM and
DirecPC(R).
<PAGE>
PART I
ITEM 1. BUSINESS
This report contains forward-looking statements. We have based these
forward-looking statements on our current expectations and projections about
future events. The words "may," "expect," "believe," "could," "anticipate,"
"project," "estimate," their opposites and similar expressions are intended to
identify forward-looking statements. We caution readers that these statements
are not guarantees of future performance or events and are subject to a number
of risks, uncertainties and assumptions that may influence the accuracy of the
statements and the projections on which they are based. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
report might not occur. We undertake no obligation to publicly update or revise
any forward-looking statements, whether from new information, future events or
otherwise. These risks, uncertainties and other factors include, among other
things: a decrease in subscriber growth; an increase in subscriber acquisition
costs; an equipment shortage; impediments to the retransmission of distant
broadcast network signals; an increase in competition from cable television
system operators, other direct broadcast satellite system operators, and other
providers of subscription television services; the introduction of new
technologies and competitors into the subscription television business; general
business and economic conditions; and other risk factors described from time to
time in our reports filed with the Securities and Exchange Commission. All
statements herein other than statements of historical fact, including, without
limitation, the statements under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business" regarding our
profitability, financial position, liquidity and capital requirements, are
forward-looking statements. Although we believe that the expectations reflected
in such forward-looking statements are reasonable, we can give no assurances
that those expectations will prove to be correct. Certain other important
factors, or cautionary statements, that could cause our actual results to differ
materially from our expectations are disclosed in this report. All written
forward-looking statements by or attributable to us or persons acting on our
behalf contained in this report are expressly qualified in their entirety by the
risk factors and the cautionary statements referred to above.
GENERAL
We are the second largest independent provider of DIRECTV programming in
rural markets in the United States. As of December 31, 1999, approximately
345,200 subscribers in 57 rural markets located in 24 states received DIRECTV
service through us.
DIRECTV, a division of Hughes Electronics Corporation, is one of two
high-power direct broadcast satellite companies in the United States. Hughes
Electronics Corporation is a subsidiary of General Motors Corporation. Direct
broadcast satellite providers deliver digital television programming and related
services to subscribers via satellite. In order to receive this programming,
subscribers must install a satellite antenna, or dish, activate a digital
set-top receiver and pay a monthly fee.
We provide DIRECTV programming services in rural markets in the United
States as a non-voting affiliate of the National Rural Telecommunications
Cooperative, commonly known as the NRTC. Under a 1992 agreement with DIRECTV, as
amended in 1994, the NRTC acquired exclusive rights for participating members
and affiliates to distribute DIRECTV programming services in approximately 250
rural markets in the United States, representing approximately 9.0 million
households, or about 9% of total U.S. television households. According to the
NRTC, these markets accounted for approximately 1.4 million, or approximately
21%, of DIRECTV's direct broadcast satellite subscribers as of December 31,
1999.
Under our agreements with the NRTC, we generally have the exclusive right to
provide DIRECTV programming to subscribers in our rural markets and to receive
related monthly service revenues from those subscribers, regardless of the
subscribers' original point of purchase. Our exclusive rural DIRECTV markets are
located in the following areas of the United States:
<PAGE>
<TABLE>
<CAPTION>
NUMBER OF RURAL
GEOGRAPHICAL AREA DIRECTV MARKETS TOTAL HOUSEHOLDS STATES REPRESENTED
<S> <C> <C> <C>
Southeast................. 6 210,000 AL, FL, GA, NC, TN
Southwest................. 13 520,000 AR, OK, TX
Midwest................... 21 547,000 IA, KS, MI, MN, MO, ND, NE, WI
Rocky Mountain............ 10 227,000 CO, ID, MT, UT, WY
Pacific................... 7 357,000 CA, NV, OR
--------------------- -------------------
Total.................. 57 1,861,000
===================== ===================
-------------------
Total households are based on estimates of primary residences by Claritas,
Inc.
</TABLE>
Our subscriber base has increased rapidly due to acquisitions, internal
growth and a low rate of subscriber disconnects, or churn. During 1999, we added
104,900 new subscribers, net of disconnects, in our rural markets through
internal growth. Our churn rate for the twelve-month period ended December 31,
1999 approximated 15.9%.
Merger with Pegasus Communications Corporation
On January 10, 2000, we entered into a definitive merger agreement
with Pegasus Communications Corporation. Pegasus is the largest independent
provider of DIRECTV subscription television services in the United States. The
combined operations of Pegasus and Golden Sky Holdings, Inc. ("Golden Sky
Holdings") will serve in excess of 1.1 million subscribers in 41 states and have
exclusive rights to serve approximately 7.2 million rural households. Under the
terms of the agreement, Pegasus will issue up to 6.5 million shares of its Class
A common stock to shareholders of Golden Sky Holdings. Golden Sky Holdings is
the parent company of Golden Sky DBS, Inc. ("Golden Sky DBS"), which is the
parent company of Golden Sky Systems, Inc. ("Golden Sky Systems" and, together
with Golden Sky Holdings and Golden Sky DBS, "Golden Sky"). Golden Sky Systems
is the primary operating subsidiary of Golden Sky. Upon completion of the
merger, Golden Sky Holdings will become a wholly-owned subsidiary of Pegasus.
The transaction is expected to close during the first or second quarter of 2000.
Except as otherwise provided, all information in this report does not give
effect to the merger.
SALES AND DISTRIBUTION
We offer DIRECTV programming to consumer and business segments in our rural
DIRECTV markets through two separate but complementary sales and distribution
channels.
DIRECT SALES FORCE AND DEALER NETWORK. We have established direct sales
forces in our rural DIRECTV markets to market our DIRECTV programming services.
Since inception we have opened approximately 70 full service retail stores in
our rural DIRECTV markets and operated 68 of these stores as of December 31,
1999. During 2000, we plan to close approximately 30 of these stores. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources." Our direct sales force currently
consists of approximately 225 direct salespeople who are compensated on a
commission basis. We also have close relationships with approximately 450
independent dealers of direct broadcast satellite, commonly known as DBS,
equipment to whom we provide marketing, subscriber authorization, and
installation and customer service support. Wherever possible, our arrangements
with dealers are exclusive. In connection with the sale of a DBS unit and a
subscription to DIRECTV programming offered by us, a dealer retains the proceeds
from the sale of the equipment and earns a one-time commission paid by us. We
retain the ongoing monthly subscription revenue from the subscriber. For
equipment sold through the indirect dealer network, we generally provide a
subsidy, thus lowering the price of the equipment for the consumer.
<PAGE>
OTHER DISTRIBUTION CHANNELS. In addition to our direct sales force, we
utilize other distribution channels to offer DIRECTV programming to potential
subscribers in our rural DIRECTV markets, including:
o national retailers selected by DIRECTV;
o consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming; and
o satellite dealers and consumer electronics dealers authorized by five
regional sales management agents selected by DIRECTV.
In a similar fashion to our indirect dealer network, we pay a one-time
commission to these distribution channels for the sale of DIRECTV programming to
a subscriber located in our rural DIRECTV markets and we receive all associated
monthly programming revenue associated therewith, regardless of what outlet
originally sold DIRECTV programming to the subscriber.
MARKETING
We believe that DBS services compete favorably with medium and low-power
direct-to-home, cable and other subscription television services on the basis of
superior signal quality, channel capacity, programming choice and price. We
complement the existing marketing effort of DIRECTV and its other national
distribution partners through focused local marketing and sales, including local
print and radio advertising.
We also implement support-advertising programs for our indirect distribution
channels. We have implemented specific promotions, like offering new subscribers
an initial month's service at no charge, to motivate customers to purchase these
plans. We also have incentive-based sales compensation for both our direct and
dealer sales forces to promote and sell premium subscription plans.
A key element of our marketing strategy is to lower the up-front costs to
consumers of becoming Golden Sky subscribers by subsidizing the costs of DBS
equipment and installation. We offer various types of DBS equipment and
accessories through our direct sales force and retail locations. We are able to
take advantage of volume discounts in purchasing this equipment from the NRTC
and other vendors. In addition, dealers are motivated to lower the prices at
which they offer DBS equipment and installation by our volume-based commission
structure.
CUSTOMER SERVICE
We provide customer service from each of our local offices. Generally, our
offices are staffed from 9 a.m. to 7 p.m., six days a week. Local managers are
responsible for managing customer accounts receivable and churn. Overflow and
after hours assistance is provided 24 hours a day, seven days a week, by our
national call center located in Kansas City, Missouri and, beginning in February
2000, by a third-party provider of call center services. We also provide
professional installation services and technical assistance in each of our
offices.
OVERVIEW OF THE DIRECT-TO-HOME TELEVISION INDUSTRY
Direct-to-home television services encompass all types of television
transmission from satellites directly to the home. The FCC has authorized two
types of satellite services for transmission of television programming: direct
broadcast satellite services, commonly referred to as "DBS", and fixed satellite
service, commonly referred to as low-power and medium-power satellite services.
DBS services operate at high power or 120 to 240 watts per frequency channel, in
the Ku-band. Fixed satellite services include low-power services transmitting in
the C-band, as well as medium-power services transmitting in the Ku-band at 20
to 100 watts per frequency channel. Both DBS and medium-power direct-to-home
satellites are used for digital satellite television services. DBS provides high
quality video and audio signals and can be received by an 18-inch dish. Medium
and low-power direct-to-home signals require satellite dishes of 27 inches to
six feet in diameter, depending on the geographical location of the dish and
wattage per frequency channel. See "-- DIRECTV."
<PAGE>
DIRECTV and EchoStar Communications Corporation are currently the only
domestic providers of DBS services. All other direct-to-home domestic satellite
television providers currently provide medium or low-power direct-to-home
services. See "-- Competition."
A DBS system consists of an uplink center, one or more orbiting satellites
and the subscriber's reception equipment. The uplink center collects programming
from on-site video equipment and from the direct feeds of programmers. Through
antennae located at the uplink center, the operator transmits, or uplinks, the
programming to transponders located on its geostationary satellite. The
transponders receive and amplify the digital signal and transmit it to receiving
dishes within the service area covered by the satellite. The digital signal is
then transmitted via coaxial cable to the subscriber's receiver, where it is
converted into an analog signal, which allows it to be received by the
subscriber's televisions. System security is maintained through the use of
reprogrammable access cards that must be inserted into each subscriber's
integrated receiver decoder, sometimes referred to as a digital set-top box, to
unscramble programming signals.
DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
U.S. television households in 1994. DIRECTV currently offers in excess of 200
channels of digital quality video and audio programming, and transmits via
high-power Ku-band satellites. As of December 31, 1999, DIRECTV had over 8.0
million subscribers (including those acquired as a result of Hughes' acquisition
of Primestar), which represented approximately 70.3% of the DBS and medium-power
direct-to-home market.
Major manufacturers under brand names including RCA, Sony, Hughes, and
others produce DBS equipment. DBS equipment is currently sold at retail outlets
throughout the U.S. for prices typically ranging from $79 to $199, depending
upon the generation of the equipment, the features offered and the retail
outlet.
Programming
DIRECTV programming includes:
o cable networks, broadcast networks and audio services available for
purchase in tiers for a monthly subscription fee;
o premium services available a-la-carte or in tiers for a monthly
subscription fee;
o sports programming, including major professional league sports packages
like the exclusive NFL SUNDAY TICKET, regional sports networks and
seasonal college sports packages, which is available for a yearly,
seasonal or monthly subscription fee; and
o movies from all major Hollywood studios and special events available for
purchase on a pay-per-view basis.
Satellite and premium services available a-la-carte or for a monthly
subscription are priced comparably to cable. Pay-per-view movies are available
for viewing on multiple channels at staggered starting times so that a viewer
does not have to wait more than 30 minutes to view a particular pay-per-view
movie.
DIRECTV periodically adjusts its programming packages in an attempt to
provide the best channel mix possible at various price points. The following is
a summary of some of the more popular DIRECTV programming packages we currently
offer:
o Total Choice: Package of 60 video channels, including two Disney channels
and an in-market regional sports network, 31 CD audio channels and access
to up to 55 channels of pay-per-view movies and events. Total Choice is
DIRECTV's most popular offering. Total Choice Platinum, Gold, Silver and
Plus Encore offer additional programming at higher retail prices;
<PAGE>
o Select Choice: Package of 40 video channels, 31 CD audio channels and
access to up to 55 channels of pay-per-view movies and events; and
o NFL SUNDAY TICKET: All out-of-market NFL Sunday games.
Other sports programming packages include:
o NHL CENTER ICE: Approximately 500 out-of-market NHL games;
o MLB EXTRA INNINGS: Approximately 800 out-of-market major league baseball
games;
o ESPN FULL COURT: Hundreds of college basketball games; and
o ESPN GamePlan: Up to ten college football games every Saturday.
DIRECTV recently began offering subscribers in selected markets programming
packages containing local broadcast stations affiliated with the NBC, CBS, ABC
and FOX national broadcast television networks. Subscribers in markets where
these local network packages are not offered may be able to receive their local
network affiliates by means of over-the-air reception using equipment that
allows for seamless switching between satellite-delivered programming and
broadcast television programming. Seamless switching between over-the-air
programming and satellite programming is possible with all DBS units. In
addition, DIRECTV offers distant NBC, CBS, ABC and FOX affiliates to subscribers
who are unable to receive the signal of a local affiliate using a conventional
roof-top antenna or who otherwise meet other specific eligibility requirements.
See "___ Regulation."
RELATIONSHIP WITH THE NRTC AND DIRECTV
The NRTC is a cooperative whose members are engaged in the distribution of
telecommunications and other services in predominantly rural areas of the United
States. The NRTC acquired the right to provide DIRECTV programming to
residential households and commercial establishments located in rural DIRECTV
markets under a 1992 agreement, as amended in 1994, with Hughes and DIRECTV as
successor to Hughes ("the Hughes Agreement"). The NRTC subdivided its rights to
provide these services into approximately 250 geographically-based rural DIRECTV
markets and then sold its rights to the individual rural DIRECTV markets to NRTC
members and affiliates under agreements between the NRTC and its individual
members and affiliates (the "NRTC Agreements"). We have acquired the exclusive
rights generally to provide DIRECTV programming in each of our rural DIRECTV
markets from various NRTC members through assignment of their NRTC Agreements.
Each NRTC Agreement was assigned to us with the consent of the NRTC and DIRECTV.
Because we do not qualify as a member of the NRTC, we act as a non-voting
affiliate.
Under the NRTC Agreements, we are obligated to promote, market and sell
DIRECTV programming and to take all reasonable steps to ensure that DIRECTV
programming is not received at any unauthorized locations or in any unauthorized
manner. We also purchase customer authorization, billing services and
centralized remittance-processing services from the NRTC under the NRTC
Agreements. The NRTC Agreements also contain customary provisions regarding
payment terms, compliance with laws and indemnification and provide that both
the NRTC and DIRECTV must consent prior to any assignment or transfer of our
rights or obligations under the NRTC Agreements, which consent shall not be
unreasonably withheld.
The NRTC Agreements also contain termination provisions that allow the NRTC
to terminate the agreements:
o as a result of a termination of the Hughes Agreement, with the NRTC
remaining responsible for paying to us its pro rata portion of any refunds
that the NRTC receives from DIRECTV under the Hughes Agreement;
o if we fail to make any payment due to the NRTC or otherwise breach a
material obligation in the NRTC Agreements and this failure or breach
continues for more than 30 days after written notice from the NRTC; or
<PAGE>
o if we fail to keep and maintain any letter of credit required to be
provided to the NRTC in full force and effect or to adjust the amount of
the letter of credit as required by the NRTC Agreements.
The NRTC Agreements also require us to comply with policies of the NRTC
promulgated from time to time. We, along with other NRTC-affiliated DIRECTV
providers, have disputed some of the policies proposed by the NRTC in the past
that we believed did not comply with the NRTC Agreements and applicable law. For
example, the NRTC has adopted a policy regarding its own interests in the
subscriber information of NRTC members and affiliates. The NRTC Agreements
provide that NRTC members and affiliates, including us, have "substantial
proprietary interests" in and rights to the information and data with respect to
their subscribers. The NRTC and its affiliates, including us, have differed over
the import of these rights and interests, which may have consequences in the
event that our rights to offer DIRECTV programming through the NRTC are
terminated or expire.
Under the NRTC Agreements, we have, among other things, the exclusive right
in our rural DIRECTV markets to market and sell all programming transmitted by
the DIRECTV satellites over 27 frequencies licensed to DIRECTV and the right to
retain all of the revenue from subscribers derived from these sales and
marketing activities. We pay the NRTC for the wholesale cost of this
programming. We also pay a fee to DIRECTV based upon 5% of the programming
revenue and certain shared satellite costs. The NRTC has the right to choose to
provide some non-select services, like NFL SUNDAY TICKET, as DIRECTV and the
content providers enter into new agreements. "Non-select services" are services
not generally included in the DIRECTV programming we provide because providers
of the programming require minimum subscriber guarantees, advance payments or
other similar commitments that the NRTC declines to give. We retain 5% of the
revenue from non-select services purchased by our subscribers and remit the
balance to DIRECTV.
The NRTC Agreements and the Hughes Agreement expire when the satellites that
broadcast the specified programming covered by the agreements reach the end of
their useful lives and are removed from their assigned orbital locations.
According to Hughes, the DIRECTV satellites have estimated orbital lives of at
least 12 to 15 years from their respective launches in December 1993, August
1994 and June 1995. The NRTC is currently in litigation with Hughes and DIRECTV
over some aspects of the NRTC's rights to distribute direct broadcast satellite
services under the Hughes Agreement. We and Pegasus also filed a lawsuit in
federal court in Los Angeles against DIRECTV, seeking various monetary and
declaratory relief based upon DIRECTV's failure to provide the NRTC with premium
programming and DIRECTV's position with respect to the NRTC's rights under the
Hughes Agreement, among other things. For more information about these lawsuits,
see "Legal Proceedings."
As part of their counterclaim in their lawsuit with the NRTC, DIRECTV and
Hughes are seeking a declaratory judgment that the term of the NRTC's agreement
with Hughes, and therefore the term of our rights under the NRTC Agreements, is
measured only by the orbital life of DBS-1 and not the orbital lives of any
other satellites subsequently launched by Hughes. According to Hughes, DBS-1
suffered a failure of its primary spacecraft control processor in July 1998 and,
since that time, has been operating normally using the spare control processor.
If DIRECTV and Hughes were to prevail on their counterclaim, the end of DBS-1's
life could have a material adverse effect on our DIRECTV programming rights.
There are numerous risks associated with satellite transmission technology
in general and DIRECTV's delivery of direct broadcast services in particular.
Satellite transmission of video, audio and other data is highly complex and
requires the manufacture and integration of diverse and advanced components that
may not function as expected. The useful life of a direct broadcast satellite
also may be adversely affected by acts of war, electrostatic storms or
collisions with space debris. We cannot assure you as to the longevity of the
satellites that are required to broadcast our DIRECTV programming or that we
will continue to have access to any or all of our DIRECTV programming upon the
expiration of the useful life of DBS-1 or any other DIRECTV satellite.
<PAGE>
The Hughes Agreement provides the NRTC with a right of first refusal to
obtain specified DBS distribution services from any successor satellite launched
by Hughes. Hughes launched a new satellite in October 1999, which it claims was
necessary in order to prevent a disruption of service in the event of any
failure of DBS-1. As part of its counterclaim in the pending lawsuit with the
NRTC, DIRECTV is asking the court to declare this satellite as the successor
satellite to which the right of first refusal relates under the Hughes
Agreement. DIRECTV is also seeking to limit the programming services and
transponder capacity that it is obligated to provide under the right of first
refusal as described more fully below. If DIRECTV and Hughes prevail on their
counterclaim, our cost of securing programming and other DBS services could
increase substantially. The NRTC Agreements do not expressly provide an
equivalent right of first refusal for NRTC members or affiliates to acquire DBS
services through the NRTC should the NRTC exercise its right of first refusal
under the Hughes Agreement. If we are unable for any reason to acquire DBS
distribution services on satisfactory terms upon the expiration of the Hughes
Agreement or the NRTC Agreements, we would be required to acquire these services
from others, or to attempt to sell our subscriber base to one or more other DBS
providers. If we are unable to do this for contractual or other reasons, we may
be forced to cease or fundamentally change our business operations. Any material
adverse change in our relationship with the NRTC or the NRTC's relationship with
DIRECTV could have a material adverse effect on our business, financial
condition and results of operations.
Prior to April 1999, DIRECTV, United States Satellite Broadcasting Company,
Primestar and EchoStar were the principal domestic satellite television
operators, serving over 80% of satellite television subscribers in the United
States. In April 1999, Hughes acquired Primestar's medium-power direct-to-home
business for approximately $1.8 billion. In May 1999, Hughes acquired USSB for
approximately $1.6 billion. Prior to its acquisition by Hughes, Primestar
offered a full range of satellite television programming to approximately 2.3
million subscribers nationwide, approximately 100,000 of which we believe were
located within our rural DIRECTV markets. As a result of our exclusive
distribution rights, former Primestar subscribers who are located in our rural
markets and choose to receive DIRECTV programming will become our subscribers.
COMPETITION
We face competition for acquisitions of rural DIRECTV markets from one other
company. We also face competition for subscribers within our exclusive rural
DIRECTV markets from a broad range of companies offering communications and
entertainment services, including cable operators, other satellite service
providers, wireless cable operators, telephone companies, television networks
and home video product companies. Many of our competitors have greater financial
and marketing resources than we do and the business of providing subscription
and pay television programming is highly competitive. We believe that quality
and variety of programming, signal quality, service and cost will be the key
bases of competition.
Competition for Acquisition of Rural DIRECTV Markets
Historically, both we and Pegasus have been pursuing the same goal of
consolidating rural DIRECTV markets. Pegasus is currently the largest
independent provider of DIRECTV services and has substantially greater financial
resources than we do. Pegasus had approximately 702,100 subscribers and 4.9
million households in 36 states as of December 31, 1999. As a result of our
announced merger with Pegasus, we have suspended evaluation of future
acquisition opportunities. To the extent we resume our acquisition activities,
our pace of any future acquisitions may be slower than our historical experience
due to, among other factors, a reduction in the number of attractive acquisition
opportunities and capital constraints. In addition, Pegasus' competing
acquisition strategy could have a material adverse effect on our ability to
execute our acquisition strategy.
<PAGE>
Competing Subscription Television Providers
Cable Television Providers
Cable operators in the United States serve approximately 65 million
subscribers, representing over 65% penetration of television households passed
by cable systems. Cable operators typically offer 30 to 80 channels of
programming at an average monthly subscription price of approximately $36. While
cable companies currently serve a majority of the U.S. television market, we
believe many may not be able to provide the quality and variety of programming
offered by DIRECTV until they significantly upgrade their coaxial systems. Many
cable television providers are in the process of upgrading their systems and
other cable operators have announced their intentions to make significant
upgrades. Many proposed upgrades, like conversion to digital format, fiber optic
cabling, advanced compression technology and other technological improvements,
when fully completed, will permit cable companies to increase channel capacity,
thereby increasing programming alternatives, and to deliver a better quality
signal. Although cable systems with adequate channel capacity may offer digital
service without major rebuilds, we believe that other cable systems that have
limited channel capacity, like those in most of our rural DIRECTV markets, will
have to be upgraded to add bandwidth in order to provide digital service. We
believe that these upgrades will require substantial investments of capital and
time to complete industry-wide. As a result, we believe that there will be a
substantial delay before cable systems in the rural DIRECTV markets can offer
programming services equivalent to DBS satellite providers and that some cable
systems in those markets may never be upgraded, subject to advances in digital
compression technology currently under development.
Other Direct-To-Home Television Providers
EchoStar, the only other remaining DBS provider in the United States, began
national broadcasting of programming in March 1996 and currently broadcasts
approximately 500 channels of digital television programming and CD quality
audio programming services to the entire continental United States. EchoStar has
21 licensed channel frequencies at the 119 degrees W.L. orbital position and 29
licensed channel frequencies at the 110 degrees W. L. orbital position. The 110
degrees and 119 degrees W.L. orbital positions are two of the three DBS orbital
locations that can serve the entire continental United States. These three
orbital locations are sometimes referred to as full "CONUS." EchoStar also has
69 frequencies in other partial CONUS orbital locations. EchoStar reported
approximately 3.4 million subscribers as of December 31, 1999. In June 1999,
EchoStar acquired its license for 29 DBS frequencies at 110 degrees W.L., two
satellites to be delivered in orbit and a direct broadcast operations facility
from The News Corporation Limited and MCI WorldCom Inc. EchoStar expects to
significantly expand its DBS and other programming offerings as a result of this
acquisition, which will potentially strengthen its competitive strength relative
to DIRECTV and us.
Low-power C-band direct-to-home operators reported approximately 1.6 million
subscribers as of December 31, 1999. C-band direct-to-home operators provide
subscription television services primarily to subscribers who live in markets
not served by cable television. C-band equipment, including the
six-to-eight-foot dish necessary to receive the low-power signal, currently
costs approximately $2,000 and is distributed by local TVRO satellite dealers.
During 1998 and 1999, the number of C-band customers decreased by approximately
465,000 subscribers.
Other Competitors
Regional telephone companies and other long distance companies could become
significant competitors in the future, as they have expressed an interest in
becoming subscription multichannel video programming distributors. Furthermore,
the Telecommunications Act of 1996 (the "1996 Act") removes barriers to entry
that previously inhibited local telephone companies from competing, or made it
more difficult for telephone companies to compete, in the provision of video
programming and information services. Several telephone companies have received
authorization to test market video and other services in specified geographic
areas using fiber optic cable and digital compression over existing telephone
lines. Estimates for the timing of wide-scale deployment of these multi-channel
video services vary, as several telephone companies have pushed back or
cancelled originally announced deployment schedules. In addition, mergers, joint
ventures and alliances among franchise, wireless or private cable television
operators and regional telephone companies may result in competitors capable of
offering bundled cable television and telecommunications services. For example,
the merger of AT&T and Tele-Communications, Inc. resulted in a large, integrated
<PAGE>
communications provider with significantly greater technical, financial and
marketing resources than we have.
As more telephone companies begin to provide multichannel video programming
and other information and communications services to their customers, additional
significant competition for subscribers will develop. Among other things,
telephone companies have an existing relationship with substantially every
household in their service area, substantial financial resources and an existing
infrastructure. Further, telephone companies may be able to subsidize the
delivery of programming through their position as the sole source of local
wireline telephone service to the home.
Most areas of the United States are covered by traditional terrestrial
over-the-air VHF/UHF television broadcasters. Consumers can receive from three
to ten channels of over-the-air programming in most markets. These stations
provide local, network and syndicated programming free of charge, but each major
market is generally limited in the number of programming channels. On August 5,
1997, Congress approved the release of additional digital spectrum for use by
VHF/UHF broadcasters.
REGULATION
Unlike a cable operator, DBS operators like DIRECTV are free to set prices
and serve customers according to their business judgment, without rate of return
or other regulation or the obligation not to discriminate among customers.
However, there are laws and regulations that affect DIRECTV and, therefore, us.
As an operator of a privately owned United States satellite system, DIRECTV is
subject to the regulatory jurisdiction of the FCC, primarily with respect to:
o the licensing of individual satellites, including a requirement that
DIRECTV meet minimum financial, legal and technical standards;
o avoidance of interference with radio stations; and
o compliance with rules that the FCC has established specifically for DBS
licenses, including rules that the FCC is in the process of adopting to
govern the retransmission of broadcast television stations by DBS
operators.
As a distributor of television programming, DIRECTV also is affected by
numerous other laws and regulations. The 1996 Act clarifies that the FCC has
exclusive jurisdiction over direct-to-home satellite services and that criminal
penalties may be imposed for piracy of direct-to-home satellite services. The
1996 Act also offers direct-to-home operators relief from private and local
government-imposed restrictions on the placement of receiving antennae. In some
instances, direct-to-home operators have been unable to serve areas due to laws,
zoning ordinances, homeowner association rules, or restrictive property
covenants banning the installation of antennae on or near homes. In August 1996,
the FCC promulgated rules designed to implement Congress' intent by prohibiting
any restriction, including zoning, land use or building regulation, or any
private covenant, homeowners' association rule or similar restriction on
property within the exclusive use or control of the antenna user where the user
has a direct or indirect ownership interest in the property, to the extent that
the restriction impairs the installation, maintenance or use of a DBS receiving
antenna that is one meter or less in diameter or diagonal measurement, except
where the restriction is necessary to accomplish a clearly defined safety
objective or to preserve a recognized historic district. Local governments and
associations may apply to the FCC for a waiver of this rule based on local
concerns of a highly specialized or unusual nature. In November 1998, the FCC
amended its rules to extend these protections to rental property in those areas
under the exclusive use or control of the renter. The 1996 Act also preempted
local, but not state, governments from imposing taxes or fees on direct-to-home
services, including DBS. Finally, the 1996 Act required that multi-channel video
programming distributors, including direct-to-home operators, fully scramble or
block channels providing indecent or sexually explicit adult programming. If a
multi-channel video programming distributor cannot fully scramble or block this
programming, it must restrict transmission to those hours of the day when
children are unlikely to view the programming, as determined by the FCC. On
December 30, 1998, a three-judge federal court in Delaware held that this
provision was unconstitutional. The United States Supreme Court is currently
reviewing the judgment of the Delaware Court and a decision is expected this
year.
<PAGE>
In addition to regulating pricing practices and competition within the cable
television industry, the Cable Television Consumer Protection and Competition
Act of 1992 (the "Cable Act") was intended to establish and support existing and
new multi-channel video services, including wireless cable and direct-to-home,
to provide subscription television services. We and DIRECTV have benefited from
the programming access provisions of the Cable Act and implementing rules in
that DIRECTV has been able to gain access to previously unavailable programming
services and, in some circumstances, has obtained programming services at
reduced cost. Any amendment to, or interpretation of, the Cable Act or the FCC's
rules that would permit cable companies or entities affiliated with cable
companies to discriminate against competitors like DIRECTV in making programming
available or to discriminate in the terms and conditions of its programming
could adversely affect DIRECTV's ability to acquire programming on a
cost-effective basis, which would have an adverse impact on us. Some of the
restrictions on cable-affiliated programmers will expire in 2002 unless the FCC
or Congress extends these restrictions.
The Cable Act also required the FCC to conduct a rule-making proceeding to
impose public interest requirements for providing video programming on
direct-to-home licensees. In November 1998, the FCC adopted rules requiring
direct-to-home licensees to provide reasonable and non-discriminatory access by
qualified candidates for elective office. These rules also require
direct-to-home licensees to set aside four percent of the licensee's channel
capacity for non-commercial programming of an educational or informational
nature. Petitions for reconsideration seeking the imposition of additional
regulatory obligations on direct-to-home licensees are pending at the FCC.
The Satellite Home Viewer Improvement Act of 1999, or SHVIA, enacted by
Congress late last year, amends the Copyright Act and the Communications Act in
order to clarify the terms and conditions under which a direct-to-home operator
may retransmit local and distant broadcast television stations to subscribers.
The new law was intended to promote the ability of satellite services to compete
with cable television systems and to resolve disputes that had arisen between
broadcasters and satellite carriers regarding the delivery of broadcast
television station programming to satellite service subscribers.
The SHVIA permits direct-to-home operators like DIRECTV to retransmit the
signal of a broadcast television station to subscribers who reside in the
station's local market. Until May 29, 2000, a direct-to-home operator can
retransmit a local broadcast television station without the station's consent.
However, in order to retransmit a local broadcast television station to a
satellite service subscriber after May 29, 2000, the satellite provider must
have obtained the station's express consent; failure to comply with this
requirement could subject a satellite provider to substantial liability. The FCC
is currently considering the adoption of rules governing the retransmission
consent process, including rules prohibiting a broadcast television station from
entering into exclusive retransmission consent agreements or from failing to
engage in good faith negotiations for retransmission consent.
Beginning January 1, 2002, a satellite provider that retransmits a broadcast
television station to subscribers residing in the station's local television
market will be subject to a "must carry" obligation under which the carrier will
be required to retransmit any other broadcast television station that is located
in that market and that has elected to demand mandatory carriage rather than
negotiate a retransmission consent agreement with the satellite carrier. The FCC
is required to adopt rules implementing the provisions of the SHVIA regarding a
local broadcast television stations must carry rights and the station's election
between must carry and retransmission consent. The increased use of channel
capacity to fulfill this "must carry" obligation may have a limiting effect on
the number of markets in which DBS providers offer packages of local broadcast
television stations. Congress has indicated that it intends to consider
legislation that would promote the retransmission of local broadcast stations to
satellite service subscribers in all markets. It is not possible to predict how
such legislation, if enacted, will impact Golden Sky's ability to offer local
broadcast television signals to customers in the territories that it serves.
SHVIA also creates a new compulsory copyright license applicable to the
retransmission of local broadcast television stations to satellite service
subscribers. Although there is no royalty payment obligation associated with
this new compulsory copyright license, eligibility for the compulsory copyright
license is conditioned on the satellite carrier's compliance with the applicable
Communications Act provisions and FCC rules governing the delivery of local
broadcast television stations by a satellite carrier. Noncompliance with the
Communications Act and/or FCC requirements could subject a satellite carrier to
liability for copyright infringement.
<PAGE>
A number of provisions contained in the SHVIA address the retransmission by
a satellite service provider of a broadcast television station to subscribers
who reside outside the local market of the station being retransmitted. A DBS
provider may retransmit such "distant" broadcast stations affiliated with the
four major national broadcast television networks (ABC, CBS, NBC and FOX) to
those subscribers that meet certain specified eligibility criteria, which the
FCC is directed to implement. The primary determinant of a subscriber's
eligibility to receive a distant affiliate of a particular network is whether
the subscriber is able to receive a "Grade B" strength signal from an affiliate
of that network using a conventional rooftop broadcast television antenna. The
SHVIA also contains a waiver provision and a "grandfathering" provision, each of
which allows DBS providers to offer distant network stations to certain
subscribers that would otherwise be ineligible to receive such programming. The
number of distant affiliates of a particular network that a satellite carrier
can provide to eligible subscribers is capped at two per network. The SHVIA
contains additional provisions describing the terms and conditions under which a
DBS provider can retransmit distant broadcast television stations that are
affiliated with emerging national broadcast television networks (such as WB, UPN
and PAX) or that are unaffiliated with any network. In particular, the SHVIA
directs the FCC to adopt rules that would subject the retransmission of such
stations to certain "blackout" rules similar to rules currently applicable to
the retransmission of distant broadcast television stations by cable systems.
The SHVIA also makes a number of revisions to the compulsory copyright license
provisions that apply to the retransmission of distant broadcast television
stations to satellite service subscribers. These changes include reducing the
monthly per subscriber royalty rate payable under the distant signal compulsory
copyright license from 27 cents per distant signal for all types of stations to
14.85 cents per signal for those stations that are affiliated with a national
broadcast network and 18.9 cents per signal for "superstations" (stations that
are not affiliated with a national broadcast television network). The SHVIA also
creates a new compulsory copyright license applicable to the retransmission of a
national PBS programming feed (with a monthly per subscriber royalty rate of
14.85 cents). The compulsory copyright license applicable to the retransmission
of distant broadcast signals to satellite service subscribers will expire on
January 1, 2005 unless it is extended by Congress. If the license expires,
direct-to-home operators will be required to negotiate in the marketplace to
obtain the copyright clearances necessary for the retransmission of distant
broadcast signals to satellite service subscribers.
MANAGEMENT AND EMPLOYEES
As of January 31, 2000, we had approximately 580 full-time and 191 part-time
employees. We are not a party to any collective bargaining agreement and
consider our relations with our employees to be good.
ITEM 2. PROPERTIES
We are currently headquartered in approximately 35,000 square feet of leased
office space in Kansas City, Missouri. Annual rent under this lease approximates
$570,000 and the lease will terminate in August 2002. We also lease
approximately 70 local sales and customer service offices in our rural DIRECTV
markets. We expect these facilities to be adequate for our needs in the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
On June 3, 1999, the NRTC filed a lawsuit in federal court against DIRECTV
seeking a court order to enforce the NRTC's contractual rights to obtain from
DIRECTV certain premium programming formerly distributed by United States
Satellite Broadcasting Company, Inc. for exclusive distribution by the NRTC's
members and affiliates in their rural markets. The NRTC also sought a temporary
restraining order preventing DIRECTV from marketing the premium programming in
such markets and requiring DIRECTV to provide the NRTC with the premium
programming for exclusive distribution in those areas. The court, in an order
dated June 17, 1999, denied the NRTC a preliminary injunction on such matters,
without deciding the underlying claims. On July 22, 1999, DIRECTV responded to
the NRTC's continuing lawsuit by denying the NRTC's claims to exclusive rights
and by filing a counterclaim seeking judicial clarification of certain
provisions of DIRECTV's contract with the NRTC. In particular, DIRECTV contends
in its counterclaim that the term of DIRECTV's contract with the NRTC is
measured solely by the orbital life of DBS-1, the first DIRECTV satellite
launched into orbit at the 101(0) WL orbital location, without regard to the
orbital lives of the other DIRECTV satellites at the 101(0) WL orbital location.
DIRECTV also alleges in its counterclaim that the NRTC's right of first refusal,
which is effective at the end of the term of DIRECTV's contract with the NRTC,
<PAGE>
does not provide for certain programming and other rights comparable to those
provided under the contract. On September 8, 1999, the court denied a motion by
DIRECTV to dismiss certain of the NRTC's claims, leaving all of the causes of
action asserted by the NRTC at issue.
On September 9, 1999, the NRTC filed a response to DIRECTV's counterclaim
contesting DIRECTV's interpretations of the end of term and right of first
refusal provisions. On August 26, 1999, the NRTC filed a separate lawsuit in
federal court against DIRECTV claiming that DIRECTV had failed to provide to the
NRTC its share of launch fees and other benefits that DIRECTV and its affiliates
have received relating to programming and other services. On November 15, 1999,
the court granted a motion by DIRECTV and dismissed the tort claim asserted by
the NRTC, but left in place the remaining claims asserted by the NRTC. The court
also consolidated that lawsuit with the other pending NRTC/DIRECTV lawsuit. The
court set various discovery and motion deadlines for the spring and summer of
2000 but did not set a trial date.
On December 29, 1999, DIRECTV filed a motion for partial summary judgment.
The motion seeks a court order that the NRTC's right of first refusal, effective
at the termination of DIRECTV's contract with the NRTC, does not include
programming services and is limited to 20 program channels of transponder
capacity. The hearing date on DIRECTV's motion was vacated by the court pending
resolution of certain procedural issues raised by a new lawsuit we and Pegasus
filed against DIRECTV (discussed below). The court has not yet set a trial date
on the merits of the claims.
On January 10, 2000, we and Pegasus filed a class action lawsuit in federal
court in Los Angeles against DIRECTV as representatives of a proposed class that
would include all members and affiliates of the NRTC that are distributors of
DIRECTV. The complaint contains causes of action for various torts, common
counts and declaratory relief based on DIRECTV's failure to provide the NRTC
with premium programming, thereby preventing the NRTC from providing this
programming to the class members. The claims are also based on DIRECTV's
position with respect to launch fees and other benefits, term and rights of
refusal. The complaint seeks monetary damages and a court order regarding the
rights of the NRTC and its members and affiliates.
On February 10, 2000, we and Pegasus filed an amended complaint which added
new tort claims against DIRECTV for interference with plaintiff's relationships
with manufacturers, distributors and dealers of direct broadcast satellite
equipment. We and Pegasus also withdrew the class action allegations to allow a
new class action to be filed on behalf of the members and affiliates of the
NRTC.
On February 22, 2000, DIRECTV refiled its motion for summary judgment first
filed on December 29, 1999. Again, the hearing date on DIRECTV's motion was
vacated by the court pending resolution of certain procedural issues raised by
the new class action complaint recently filed (discussed below). The court has
not yet set a trial date on the merits of the claims.
On February 29, 2000, certain NRTC Members filed a class action lawsuit in
federal court in Los Angeles against DIRECTV as representatives of a proposed
class that would include all members and affiliates of the NRTC that are
distributors of DIRECTV. The complaint contains causes of action for various
torts, common counts and declaratory relief based on DIRECTV's failure to
provide the NRTC with premium programming, thereby preventing the NRTC from
providing this programming to the class members. The claims are also based on
DIRECTV's position with respect to launch fees and other benefits, term and
rights of refusal. The complaint seeks monetary damages and a court order
regarding the rights of the NRTC and its members and affiliates.
The outcome of the litigation described above could have a material adverse
effect on the scope and duration of our right to provide DIRECTV programming in
our rural markets, our capital requirements and our costs of operations. Thus,
if determined adversely, this matter could have a material adverse effect upon
our business, financial condition and results of operations.
In addition to the matters discussed above, from time to time we are
involved with claims that arise in the normal course of our business. In our
opinion, the ultimate liability with respect to these claims will not have a
material adverse effect on our business, financial condition or results of
operations.
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No items were submitted to a vote of security holders during the fourth
quarter of 1999.
<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
As of December 31, 1999, all 1,000 authorized, issued and outstanding shares
of our Common Stock ($.01 par value) were held by Golden Sky DBS. There is
currently no established public trading market for our Common Stock. All of the
outstanding capital stock of Golden Sky DBS is owned by Golden Sky Holdings.
There is no established public trading market for the common stock ($.01 par
value) of Golden Sky Holdings.
We have never declared or paid any cash dividends on our common stock and do
not expect to do so in the foreseeable future. Payment of any future dividends
will depend upon our earnings and capital requirements, our debt facilities, and
other factors the Board of Directors considers appropriate. We currently intend
to retain our earnings, if any, to support future growth and expansion. Our
ability to declare dividends is affected by covenants in our debt facilities
that prohibit us from declaring dividends and our subsidiaries from transferring
funds in the form of cash dividends, loans or advances to Golden Sky DBS or
Golden Sky Holdings.
ITEM 6. SELECTED FINANCIAL DATA
The following table presents our financial and operating information for the
periods indicated. The historical financial information presented below was
taken from our audited consolidated financial statements. Household and
subscriber data presented below reflect 100% of the households and subscribers
comprising our rural DIRECTV markets, including one rural DIRECTV market in
which we acquired less than 100% ownership. In that market, we acquired
approximately 76% ownership. We receive 100% of the revenue generated by all
subscribers in our rural DIRECTV markets. The following should be read in
conjunction with our consolidated financial statements and the notes to those
financial statements and other financial information, and Management's
Discussion and Analysis of Financial Condition and Results of Operations,
appearing elsewhere herein.
<TABLE>
<CAPTION>
INCEPTION
THROUGH YEARS ENDED DECEMBER 31,
DECEMBER 31, -----------------------------------------------
1996 1997 1998 1999
--------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
DBS services.......................... $ 219 $ 16,452 $ 74,910 $ 139,933
Lease and other....................... 36 944 1,014 640
--------------- --------------- --------------- ---------------
Total revenue............................ 255 17,396 75,924 140,573
Costs and Expenses:
Costs of DBS services................. 130 9,304 45,291 88,690
System operations..................... 26 3,796 11,021 19,733
Sales and marketing................... 73 7,316 32,201 64,933
General and administrative............ 1,035 2,331 7,431 15,703
Depreciation and amortization......... 97 7,300 23,166 35,963
--------------- --------------- --------------- ---------------
Total costs and expenses................. 1,361 30,047 119,110 225,022
--------------- --------------- --------------- ---------------
Operating loss........................... (1,106) (12,651) (43,186) (84,449)
Net interest expense..................... (61) (3,133) (18,964) (30,048)
Other non-operating expenses............. -- -- -- (402)
--------------- --------------- -------------------------------
Loss before extraordinary charge......... (1,167) (15,784) (62,150) (114,899)
Extraordinary charge on early
retirement of debt.................... -- -- (2,577) (2,935)
--------------- --------------- --------------- ---------------
Net loss................................. $ (1,167) $ (15,784) $ (64,727) $ (117,834)
=============== =============== =============== ===============
<PAGE>
INCEPTION
THROUGH
DECEMBER 31, YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1997 1998 1999
--------------- --------------- --------------- ---------------
(in thousands)
OTHER FINANCIAL DATA
EBITDA................................... $(1,009) $ (5,351) $(20,020) $ (48,332)
Net cash used in operating activities.... (790) (3,099) (36,588) (61,096)
Net cash used in investing activities.... (3,231) (120,729) (159,921) (12,232)
Net cash provided by financing
activities............................ 4,500 136,981 187,337 72,104
Capital expenditures..................... 105 998 3,317 3,452
Aggregate purchase price of
acquisitions.......................... 5,256 129,725 124,844 35,339
OPERATING DATA
Households at end of period.............. 22,000 1,135,000 1,727,000 1,861,000
Subscribers acquired in acquisitions..... 3,000 65,300 54,900 18,300
Subscribers added in existing rural
DIRECTV markets....................... 100 21,500 77,200 104,900
Subscribers at end of period............. 3,100 89,900 222,000 345,200
SAC per gross subscriber added........... $290 $280 $320 $380
Penetration at end of period............. 14.1% 7.9% 12.9% 18.5%
DECEMBER 31,
---------------------------------------------------------------
1996 1997 1998 1999
--------------- --------------- --------------- ---------------
(in thousands)
BALANCE SHEET DATA
Cash and cash equivalents................ $ 479 $ 13,632 $ 4,460 $ 3,236
Restricted cash:
Current............................... -- -- 28,083 23,731
Long-term............................. -- -- 23,534 --
Working capital.......................... (1,948) 3,827 15,204 (1,753)
Total assets............................. 6,383 156,236 328,071 296,016
Total debt............................... 4,450 69,113 278,204 257,283
Stockholder's equity (deficit)........... (1,166) 70,449 15,922 (6,367)
- --------------------
Restricted cash represents the amount placed in escrow to fund the first
four scheduled interest payments on our 12 3/8% senior subordinated notes due
2006. It also includes $5.3 million as of December 31, 1998 that was deposited
with the administrative agent under our credit facility to fund a contingent
reduction of availability under the term loan facility. This contingent
reduction did not occur as a result of an amendment to our credit facility.
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, we believe that EBITDA is a commonly
recognized measure of performance in the communications industry and is the
basis for many of our financial covenants. As a result, investors may use this
data to analyze and compare other communications companies with us in terms of
operating performance, leverage and liquidity. Further, we believe that EBITDA
provides useful information regarding an entity's ability to incur and/or
service debt. Changes in our EBITDA may indicate changes in our free cash flows
available to incur and service debt and cover fixed charges. However, EBITDA is
not intended to represent cash flows for the period and should not be considered
in isolation or as a substitute for measures of performance determined in
accordance with generally accepted accounting principles. EBITDA, as we
calculate it, is not necessarily comparable to similarly captioned amounts of
other companies.
SAC per gross subscriber added represents subscriber acquisition costs on a
per gross new subscriber activation basis. This excludes acquired subscribers
and does not net out disconnected subscribers.
</TABLE>
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following is a discussion of our historical consolidated results of
operations, liquidity and capital resources without giving effect to the pending
merger with Pegasus. See "Business - General - Merger with Pegasus
Communications Corporation." This discussion should be read in conjunction with
our consolidated financial statements and the related notes appearing elsewhere
in this report.
OVERVIEW
Company History
We are the second largest independent provider of DIRECTV programming in
rural markets in the United States. As of December 31, 1999, we were the
exclusive provider of DIRECTV programming services to approximately 345,200
subscribers in our rural markets.
DIRECTV, a division of Hughes Electronics Corporation, is one of two direct
broadcast satellite companies in the United States. Direct broadcast satellite
providers deliver digital television programming and related services to
subscribers via satellite. We provide DIRECTV programming services in rural
markets in the United States as a non-voting affiliate of the National Rural
Telecommunications Cooperative, commonly known as the NRTC. The NRTC is a
cooperative organization whose members are engaged in the distribution of
telecommunications and other services in rural America. Under a 1992 agreement
with DIRECTV, as amended in 1994, the NRTC acquired exclusive rights for its
members and affiliates to distribute DIRECTV programming services in
approximately 250 rural markets in the United States, representing approximately
9.0 million households, or about 9% of total U.S. television households. Since
our formation in June 1996, we have acquired the exclusive right to provide
DIRECTV programming in 57 rural markets in 24 states serving approximately 1.9
million households and 141,500 subscribers. The aggregate purchase price for
these acquisitions totaled approximately $298.5 million, or about $160 per
household.
We have sought to create a strong local presence in each of our markets and
attempt to increase our subscriber base through increased penetration of our
rural DIRECTV markets. Since inception, we have opened approximately 70 full
service retail stores in our rural DIRECTV markets and operated 68 of these
stores as of December 31, 1999. In addition, we have established dealer
relationships with approximately 450 local retailers of direct broadcast
satellite equipment.
During 1999, we acquired ten rural DIRECTV markets. These markets included
approximately 134,000 households and served approximately 18,300 subscribers as
of the dates of acquisition. The aggregate purchase price for these
acquisitions, including direct acquisition costs, approximated $35.3 million.
Also during 1999, we acquired certain minority ownership interests in our rural
DIRECTV markets for aggregate consideration of $3.4 million. As a result of our
announced merger with Pegasus, we have suspended evaluation of future
acquisition opportunities. To the extent we resume our acquisition activities,
our pace of any future acquisitions may be slower than our historical experience
due to, among other factors, a reduction in the number of attractive acquisition
opportunities and capital constraints.
EBITDA
EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges, extraordinary items and non-recurring charges.
EBITDA is not a measure of performance under generally accepted accounting
principles and should not be construed as a substitute for consolidated net
income or loss as a measure of performance, or as a substitute for cash flow as
a measure of liquidity. Nevertheless, we believe that EBITDA is a commonly
recognized measure of performance in the communications industry. Many of our
financial covenants are also based upon EBITDA. As a result, investors may use
this data to analyze and compare other communications companies with us in terms
of operating performance, leverage and liquidity. Further, we believe that
EBITDA provides useful information regarding an entity's ability to incur and
service debt. Changes in our EBITDA may indicate changes in our free cash flows
available to incur and service debt and cover fixed charges. However, EBITDA is
<PAGE>
not intended to represent cash flows for the period and should not be considered
in isolation or as a substitute for measures of performance determined in
accordance with generally accepted accounting principles. EBITDA, as we
calculate it, is not necessarily comparable to similarly captioned amounts of
other companies.
During the year ended December 31, 1999, we:
o used net cash of $61.1 million in operating activities;
o used net cash of $12.2 million in investing activities; and
o provided net cash of $72.1 million from financing activities.
During the year ended December 31, 1998 we:
o used net cash of $36.6 million in operating activities;
o used net cash of $159.9 million in investing activities; and
o provided net cash of $187.4 million from financing activities.
During the year ended December 31, 1997 we:
o used net cash of $3.1 million in operating activities;
o used net cash of $120.7 million in investing activities; and
o provided net cash of $137.0 million from financing activities.
Churn
Our rate of subscriber disconnect, or churn, has increased in recent periods
on both an average monthly and last twelve months basis. During 1999, our
average monthly churn approximated 1.8%, compared to 0.8% during 1998. For the
twelve-month periods ended December 31, 1999 and 1998, our churn rate
approximated 15.9% and 7.5%, respectively. Our increased churn rate has resulted
from several factors, many of which are non-recurring and external in nature.
Those factors have included, but are not limited to, the following:
o involuntary disconnects for non-payment of subscribers attracted to our
service during the first half of 1999 by DIRECTV's free-programming
promotions;
o voluntary disconnects by disenchanted subscribers who were adversely
affected by the termination of delivery of certain distant broadcast
network services in January and July 1999 as a result of an agreement
between DIRECTV and the National Association of Broadcasters;
o higher subscriber turnover among former Primestar subscribers; and
o decreases in up-front equipment and installation costs to new subscribers,
which has had the effect of making our service more affordable for
potentially less credit-worthy customers.
As a result of the factors described above, we anticipate that we may
experience higher churn rates for at least the next six months. However, as
previously described, many of the factors that have contributed to our recent
higher churn are not expected to recur. Consequently, while there can be no
assurance, we expect that our rate of subscriber churn will approach historical
levels during the latter half of 2000.
As a result of our historical and anticipated significant growth rate, our
historical operating results may not be comparable from period to period.
<PAGE>
RESULTS OF OPERATIONS
The following table presents some of the items from our consolidated
statements of operations as a percentage of total revenue for the periods noted.
<TABLE>
<CAPTION>
INCEPTION TO YEARS ENDED DECEMBER 31,
DECEMBER 31, -------------------------------------------------
1996 1997 1998 1999
---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Revenue:
DBS services........................ 85.9 % 94.6 % 98.7 % 99.5%
Lease and other..................... 14.1 5.4 1.3 0.5
---------------- --------------- ---------------- ----------------
Total revenue.......................... 100.0 100.0 100.0 100.0
Costs and Expenses:
Costs of DBS services............... 51.0 53.5 59.7 63.1
System operations................... 10.2 21.8 14.5 14.0
Sales and marketing................. 28.6 42.0 42.4 46.2
General and administrative.......... 405.9 13.4 9.8 11.2
Depreciation and amortization....... 38.0 42.0 30.5 25.6
---------------- --------------- ---------------- ----------------
Total costs and expenses............... 533.7 172.7 156.9 160.1
---------------- --------------- ---------------- ----------------
Operating loss......................... (433.7) (72.7) (56.9) (60.1)
Net interest expense and other......... (23.9) (18.0) (25.0) (21.6)
---------------- --------------- ---------------- ----------------
Loss before extraordinary charge....... (457.6)% (90.7)% (81.9)% (81.7)%
================ =============== ================ ================
</TABLE>
Revenue. We earn revenue by providing DIRECTV programming services to
subscribers within our rural DIRECTV markets. DBS services revenue includes any
combination of various monthly program service plans, additional monthly premium
channel program upgrades, seasonal sports programming packages, one-time event
programming on a pay-per-view basis and miscellaneous fee revenue related to
providing programming to subscribers. Lease and other revenue principally is
comprised of revenue from the rental of DBS equipment to subscribers.
Costs of DBS Services. Our largest cost of providing service to our
subscribers is the wholesale cost of DIRECTV programming and related services.
The principal components of programming costs include miscellaneous service fees
and programming costs paid to the NRTC and a 5% royalty based on programming
revenue paid to DIRECTV.
System Operations. System operations expenses include costs of our national
call center operations, field office operations and other subscriber service
expenses. We expect that these expenses will increase to the extent we continue
to make acquisitions and open additional, or expand existing, field offices.
However, many of these costs are fixed in nature and we do not expect that these
expenses will increase in direct proportion to revenue.
Sales and Marketing. Sales and marketing expenses include advertising,
promotional expenses, marketing personnel expenses, commissions paid to our
employees and outside sales agents, net equipment and installation costs and
other marketing overhead costs. We subsidize the cost to the consumer of DBS
equipment and the cost of installation of DBS equipment. Equipment and
installation revenues and related expenses are recognized upon the delivery and
installation of DBS equipment. Net transaction costs associated with the sale
and installation of DBS equipment are reported as a component of sales and
marketing expenses in our statement of operations. We invest significantly to
develop our sales and distribution systems and to acquire new subscribers. A
large part of our sales and marketing expense is comprised of costs related to
the addition of new subscribers. Although we anticipate continuing to incur
these costs as we build our subscriber base, these costs are not expected to
increase in direct proportion to revenue.
<PAGE>
General and Administrative. General and administrative expenses include
corporate general office and administration expenses incurred primarily at our
Kansas City corporate office. We expect that these expenses will increase as we
grow and continue to expand our infrastructure. However, since many of these
expenses are fixed in nature, general and administrative expenses are not
expected to increase in direct proportion to increases in subscribers and
revenue.
Depreciation and Amortization. Depreciation and amortization includes
amortization of intangible assets associated with acquisitions and depreciation
of property and equipment.
Income Taxes. We are subject to income taxation under Subchapter C of the
Internal Revenue Code. To date, we have not recognized any income tax benefit
for financial reporting purposes because we have incurred operating losses in
all periods, and realization of future tax benefits is uncertain. As of December
31, 1999, we had net operating loss carryforwards for federal income tax
purposes of approximately $166.5 million. These net operating loss carryforwards
expire beginning in 2011.
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenue. DBS services revenue for the year ended December 31, 1999 totaled
$139.9 million, which represented an 87% increase as compared to the prior year.
These higher revenues resulted from the increase in the number of subscribers to
our DIRECTV service, offset somewhat by lower revenues per subscriber. The
average number of subscribers in our rural DIRECTV markets during 1999 increased
to approximately 285,400, compared to approximately 151,100 during 1998. Average
monthly revenue per subscriber approximated $41.00 and $41.75 during those same
periods. The decrease in revenue per subscriber resulted primarily from lower
revenues from distant broadcast network services and lower sports programming
revenues. Distant broadcast network services revenue decreased as a result of an
agreement between DIRECTV and the National Association of Broadcasters. Pursuant
to that agreement, provision of certain distant broadcast network services to a
number of our subscribers was terminated during January and July 1999. The
termination of these distant broadcast network services adversely impacted our
revenues and contributed to our increased churn. We do not anticipate any
further termination of these services to our existing subscribers as a result of
federal legislation that was enacted in November 1999.
Costs of DBS Services. Costs of DBS services increased $43.4 million, or
96%, during 1999 to $88.7 million. This increase resulted from the 89% increase
in the average number of subscribers previously described, and from higher fees
charged by DIRECTV for satellite and ground service operations. As a percentage
of total revenue, the costs of DBS services increased to 63.1% during 1999,
compared to 59.7% during 1998. This increase resulted from the higher fees
charged by DIRECTV previously described.
System Operations. System operations expenses totaled $19.7 million during
the year ended December 31, 1999, an $8.7 million increase, or 79%, over 1998.
These costs rose as a result of the increased number of field offices and
related activity resulting from our acquisitions of rural DIRECTV markets, as
well as from subscriber growth. As a percentage of total revenue, system
operations expenses decreased to 14.0% during 1999, from 14.5% during 1998. This
decrease in system operations expenses as a percentage of total revenues
resulted primarily from scale economies realized from our larger subscriber
base.
Sales and Marketing. Sales and marketing expenses totaled $64.9 million
during the year ended December 31, 1999, an increase of $32.7 million, or 102%,
compared to the year ended December 31, 1998. Sales and marketing costs per new
subscriber activation approximated $380 and $320 during the years ended December
31, 1999 and 1998, respectively. The increase in sales and marketing expenses
resulted from:
o an 82% increase in the number of new subscriber activations during 1999;
o higher subscriber acquisition costs associated with our conversions of
Primestar subscribers to our DIRECTV service;
o increased equipment and installation subsidies provided to our
subscribers; and
o increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions.
<PAGE>
In April 1999, Hughes acquired Primestar's medium-power broadcast satellite
business and high-powered DBS assets. Subsequent to Hughes' announcement of its
proposed acquisition of Primestar, EchoStar Communications Corporation began to
offer increased promotional and other incentives to Primestar customers, as well
as to EchoStar retailers, to entice the conversion of Primestar subscribers to
EchoStar's competing DBS service, the DISH Network. EchoStar is the second
largest provider of DBS service in the United States. Consequently, beginning in
February 1999 we increased our marketing efforts with respect to Primestar
subscribers. Our increased Primestar conversion efforts include, among other
things, an offer of free equipment and installation to current Primestar
subscribers, as well as higher sales commission incentives to both our internal
and external sales forces. Approximately 30% of our gross subscriber additions
during 1999 were conversions of former Primestar subscribers. While we believe
that opportunities continue to exist to convert additional Primestar subscribers
to our DIRECTV programming service, we expect to accomplish such conversions at
a slower rate in future periods. Consequently, while there can be no assurance,
we anticipate that our subscriber acquisition costs per new subscriber
activation will decrease in future periods.
General and Administrative. During the year ended December 31, 1999, general
and administrative expenses totaled $15.7 million, compared to $7.4 million
during 1998. As a percentage of total revenue, general and administrative
expenses increased to 11.2% during 1999, from 9.8% during 1998. These increases
in general and administrative expenses resulted from the addition of
administrative resources necessary to support our growth and increased bad debts
expenses. Our bad debts expenses increased from $1.5 million, or 2.0% of total
revenue, during 1998, to $4.1 million, or 2.9% of total revenue, during 1999.
This increase in bad debts expense resulted from the increases in subscribers
and revenues previously described, as well as from higher bad debts associated
with former Primestar subscribers and subscribers attracted to our service
during the first half of 1999 by DIRECTV's free programming promotions.
EBITDA. EBITDA for the year ended December 31, 1999 totaled negative $48.3
million, compared to EBITDA of negative $20.0 million during the year ended
December 31, 1998. This increase in negative EBITDA primarily resulted from the
higher sales and marketing expenses and related new subscriber activations
previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $12.8 million to $36.0 million during the year ended December 31,
1999, compared to $23.2 million during the year ended December 31, 1998. This
increase reflects the amortization of higher intangible asset balances resulting
from our acquisitions of rural DIRECTV markets.
Interest Expense. Interest expense totaled $32.4 million during the year
ended December 31, 1999 and $20.5 million during 1998. This increase of $11.9
million resulted from higher outstanding debt balances and an increase in our
weighted-average interest rate. Our weighted-average interest rate increased due
to the issuance of our 12 3/8% senior subordinated notes due 2006 in July 1998.
Year Ended December 31, 1998 Compared to the Year Ended December 31, 1997
Revenue. DBS services revenue for the year ended December 31, 1998 totaled
$74.9 million, which represented a 355% increase as compared to the prior year.
This increase was principally attributable to the increase in the number of
subscribers. The average number of subscribers during 1998 increased to
approximately 151,100, compared to approximately 33,200 during 1997. Average
monthly revenue per subscriber approximated $41.75 and $43.75 during these same
periods. The decrease in average monthly revenue per subscriber principally
resulted from lower lease and other revenues during 1998.
Costs of DBS Services. Costs of DBS services increased $36.0 million, or
387%, during 1998, to $45.3 million. This increase is consistent with the
increase in the average number of subscribers. As a percentage of total revenue,
the costs of DBS services increased to 59.7% during 1998, compared to 53.5% in
1997. This increase resulted largely from increased programming costs.
<PAGE>
System Operations. System operations costs totaled $11.0 million for the
year ended December 31, 1998, a $7.2 million increase, or 190%, over 1997. These
costs rose as a result of the increased number of field offices and related
activity resulting from our continued acquisition of rural DIRECTV markets, as
well as from subscriber growth. As a percentage of total revenue, system
operations expenses declined to 14.5% for the year ended December 31, 1998, from
21.8% during the year ended December 31, 1997. The decrease in system operations
expenses as a percentage of total revenues resulted from the increases in
subscribers and revenues previously described.
Sales and Marketing. Sales and marketing expenses totaled $32.2 million
during the year ended December 31, 1998, an increase of $24.9 million compared
to the previous year. This increase principally resulted from the 265% increase
in new subscriber activations during 1998, as compared to 1997. Sales and
marketing costs per new subscriber activation approximated $320 during the year
ended December 31, 1998 and $280 during the year ended December 31, 1997.
General and Administrative. During the year ended December 31, 1998, general
and administrative expenses totaled $7.4 million, compared to $2.3 million
during 1997. The increase in general and administrative expenses resulted from
the addition of administrative resources necessary to support our growth. As a
percentage of total revenue, general and administrative expenses decreased to
9.8% during the year ended December 31, 1998, from 13.4% during 1997. This
decrease reflects the continued leveraging of these costs, which are partially
fixed in nature, over increased subscribers and revenues.
EBITDA. EBITDA for the year ended December 31, 1998 totaled negative $20.0
million, compared to EBITDA of negative $5.4 million during the same period in
1997. This increase in negative EBITDA principally resulted from the increases
in sales and marketing activities and related new subscriber activations
previously described.
Depreciation and Amortization. Depreciation and amortization expenses
increased $15.9 million to $23.2 million during the year ended December 31,
1998, compared to $7.3 million during the year ended December 31, 1997. This
increase resulted from higher intangible assets balances, which resulted from
our acquisition of additional rural DIRECTV markets.
Interest Expense. Interest expense totaled $20.5 million during the year
ended December 31, 1998, as compared to $3.2 million during 1997. This increase
of $17.3 million primarily resulted from higher outstanding debt balances and,
to a lesser degree, from an increase in weighted-average interest costs.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced net losses as well as negative EBITDA and cash flows
from operations since our inception. These shortfalls are primarily the result
of our rapid subscriber growth and acquisitions of rural DIRECTV markets. In
particular, we have incurred significant sales and marketing expenses in our
effort to rapidly build our subscriber base. Many of these expenses, which are
expensed as incurred and include advertising and promotional expenses, sales
commissions and DBS equipment and installation subsidies, are incurred at or
before the time a new subscriber is activated. As a result, revenue attributable
to new subscribers lags behind the expense incurred in acquiring them. The
impact of this lag generally increases with the rate at which we add
subscribers. We believe that our subscriber acquisition costs will continue to
negatively affect our operating results for at least the next year as we
continue to add new subscribers. However, as long as a subscriber remains in
service, future operating results benefit from a recurring monthly revenue
stream with minimal additional sales and marketing expense. Provided churn
remains relatively low, we believe that our investment in building our
subscriber base rapidly will enhance our cash flow and operating results in the
longer term.
Improvement in our results of operations is principally dependent upon our
ability to cost effectively expand our subscriber base, control subscriber churn
and effectively manage our operating and overhead costs. We plan to reduce our
future operating and overhead costs by transitioning from a principally direct
sales distribution model to a largely indirect, retail sales distribution model.
Accordingly, during the year ending December 31, 2000 we plan, among other
things, to:
<PAGE>
o close approximately 30 of our local sales offices;
o reduce our corporate overhead expenses through headcount and other expense
reductions; and
o increase the number of third-party retailers of our direct broadcast
satellite television service in our rural DIRECTV markets.
We estimate that we will incur aggregate, non-recurring costs of approximately
$1.5 million in connection with these actions. These costs are expected to
primarily consist of employee severance and lease termination costs.
Our operations require substantial capital for:
o financing subscriber growth (including DBS equipment and installation
subsidies and marketing and selling expenses);
o investments in, and maintenance of, field offices in our rural DIRECTV
markets;
o financing infrastructure development costs necessary to support the growth
of our business; and
o funding of start-up losses and other working capital requirements.
Historically, we also have utilized substantial capital to acquire rural
DIRECTV markets. Our capital expenditures, inclusive of acquisitions of rural
DIRECTV markets and related minority interests, totaled $40.2 million during
1999, $107.8 million during 1998 and $121.0 million during 1997. Net cash used
in operations totaled $61.1 million in 1999, $36.6 million in 1998 and $3.1
million in 1997.
To date, our acquisitions, subscriber growth and operations have been
financed from borrowings under our bank credit facility, proceeds from the
offering of our 12 3/8% Notes, proceeds from the offering of Golden Sky DBS's 13
1/2% Notes, proceeds from the issuance of Golden Sky Holding's capital stock,
and to a lesser extent, the issuance of promissory notes to sellers of rural
DIRECTV markets.
During the year ended December 31, 1999, our net cash flows from financing
activities totaled $72.1 million. This was comprised of:
o a capital contribution by Golden Sky DBS of approximately $95.4 million;
o net repayments of $15.0 million under our bank credit facility;
o repayments of other debt totaling $8.8 million;
o increased deferred financing costs of $869,000 resulting from the
amendment of our bank credit facility; and
o capital contributions of $1.4 million received from certain minority
interest holders.
In 1998, our net cash flows from financing activities of $187.3 million were
comprised of:
o net proceeds of $189.2 million from the offering of our 12 3/8% Notes;
o net borrowings of $7.0 million under our bank credit facility;
o deferred financing costs of $5.2 million resulting from the amendment of
our bank credit facility and the offering of our 12 3/8% Notes; and
o $3.7 million of repayments on other debt.
In 1997, our net cash flows from financing activities of $137.0 million were
comprised of:
o $81.1 million from the issuance of preferred stock;
o deferred financing costs of $3.3 million resulting from the execution of
our bank credit facility; and
o $59.2 million of net borrowings under our bank credit facility and other
indebtedness.
Credit Facility
We have a credit facility with a group of banks that provides for a $150.0
million line of credit to fund acquisitions and working capital requirements. Of
this amount, $35.0 million is in the form of a term loan facility and $115.0
million is in the form of a revolving credit facility, including a letter of
credit sub-limit of $40.0 million. As of December 31, 1999, we (1) had fully
<PAGE>
utilized the entire $35.0 million of term loan availability, (2) had borrowed
$17.0 million under the revolving credit line, and (3) had utilized
approximately $19.6 million of the letter of credit sub-facility. Availability
under the revolving credit line depends upon satisfaction of various financial
and operating covenants as well as minimum subscriber base requirements.
The term loan amortizes in specified quarterly installments from March 31,
2002 through maturity on December 31, 2005. Availability of revolving loan
borrowings decreases by specified amounts over the period from March 31, 2001
through maturity on September 30, 2005. Borrowings under the credit facility
bear interest at variable rates (approximately 10.0% as of December 31, 1999)
calculated on a base rate, which is either the prime rate or LIBOR, plus an
applicable margin, with reductions under some circumstances, based on leverage.
As of September 30, 1999, we were not in compliance with certain of the
restrictive covenants prescribed by our credit facility. During January 2000, we
completed an amendment to the credit facility. The amendment, which was
effective as of December 31, 1999, waived our third quarter 1999 covenant
violations and amended certain fourth quarter 1999 and year 2000 covenant
requirements. Pursuant to the amendment, we may borrow up to an additional $20.0
million under the credit facility prior to March 31, 2000. Any such incremental
borrowings, which are secured by letters of credit provided by certain of Golden
Sky Holdings' shareholders, must be repaid by March 31, 2000 from the proceeds
of either a private or public equity offering. The required repayment date
relative to these year 2000 incremental borrowings may be deferred until May 31,
2000 under certain conditions. Upon repayment of the incremental borrowings in
March (or prior to May 31 if the repayment date is extended), we will have
potential incremental borrowing capacity during the year ending December 31,
2000 equal to the lesser of the proceeds received from either a public or
private equity offering or $20.0 million. Coincident with the amendment of the
credit facility, Golden Sky Holdings entered into stock subscription agreements
with certain of its shareholders for an aggregate of $20.0 million of its
preferred stock. Also in January 2000, our credit facility was further amended
to approve the change in ownership of Golden Sky that would result from the
merger with Pegasus. As of December 31, 1999, we were in compliance with the
credit facility's amended covenants.
12 3/8% Notes
On July 31, 1998, we completed the sale of $195.0 million aggregate
principal amount at maturity of our 12 3/8% Notes. Interest on the 12 3/8% Notes
is payable in cash semi-annually on February 1 and August 1 of each year. The 12
3/8% Notes mature on August 1, 2006. The offering of these notes resulted in net
proceeds of approximately $189.2 million after payment of underwriting discounts
and other issuance costs. In the event the merger with Pegasus is consummated,
we will be required to make an offer to the holders of the 12 3/8% Notes to
purchase those notes for 101% of their principal amount plus accrued interest.
If our offer for the 12 3/8% Notes is accepted by any of our note holders, and
we are unable to purchase those notes, we may be in default of the terms of the
12 3/8% Notes Indenture. Pegasus has entered into a commitment letter with an
investment bank under which that investment bank has agreed to purchase any and
all 12 3/8% Notes tendered in response to our offer to purchase. This commitment
is subject to the execution of definitive documentation and customary closing
conditions. There can be no assurance that Pegasus will be able to agree on
definitive documentation with the investment bank or make alternative
arrangements if necessary.
13 1/2% Notes
On February 19, 1999, Golden Sky DBS completed the sale of $193.1 million
aggregate principal amount at maturity of its 13 1/2% Notes. Interest on these
notes is payable in cash semi-annually on March 1 and September 1 of each year,
with the first cash interest payment due on September 1, 2004. The 13 1/2% Notes
mature on March 1, 2007. These notes were offered at a substantial discount and
resulted in net proceeds of approximately $95.4 million, after the payment of
underwriting discounts and other issuance costs aggregating approximately $4.7
million. In the event the merger with Pegasus is consummated, Golden Sky DBS
will be required to make an offer to the holders of its 13 1/2% Notes to
purchase those notes for 101% of their accreted value plus accrued interest. If
Golden Sky DBS's offer for the 13 1/2% Notes is accepted by any of its note
holders, and it is unable to purchase those notes, Golden Sky DBS may be in
default of the terms of the 13 1/2% Notes Indenture. Pegasus has entered into a
commitment letter with an investment bank under which that investment bank has
agreed to purchase any and all 13 1/2% Notes tendered in response to Golden Sky
DBS's offer to purchase. This commitment is subject to the execution of
<PAGE>
definitive documentation and customary closing conditions. There can be no
assurance that Pegasus will be able to agree on definitive documentation with
the investment bank or make alternative arrangements if necessary.
Future Capital Requirements
Our future capital requirements will depend upon a number of factors,
including the rate of our internal subscriber growth, the extent to which we
complete additional acquisitions, if any, and our working capital needs
necessary to accommodate such growth. We expect to continue to expand our
marketing efforts in order to increase our subscriber penetration. As previously
described, we subsidize a portion of the cost of DBS equipment and subscriber
installations. The extent of our future subsidies of DBS equipment and
installations may materially affect our liquidity and capital requirements. We
also expect that continued investment in our administrative and computer systems
will be necessary to support our increased size and continued internal growth.
Excluding any costs associated with the acquisition of additional rural DIRECTV
markets, we anticipate that our total capital expenditures, primarily related to
expanding facilities and information systems for our corporate office, customer
service operations and field offices, will not exceed $5.0 million during the
year ending December 31, 2000.
Our operating costs and working capital requirements are partly a function
of our rights and obligations under our agreements with the NRTC and the NRTC's
agreement with Hughes. The NRTC is currently in litigation with Hughes and its
subsidiary DIRECTV over the scope and extent of certain of these rights. On
January 10, 2000, we and Pegasus filed a lawsuit against DIRECTV and Hughes in
the United States District Court, Central District of California. The action
asserts various claims, including intentional interference with contractual
relations and interference with prospective economic advantage, and seeks
declaratory relief. The claims are based on DIRECTV's failure to provide the
NRTC with certain premium programming, thereby preventing the NRTC from
providing this premium programming to the class action members. The claims are
also based on DIRECTV's position with respect to launch fees and other benefits
it has received, contract term and rights of refusal. See "Business - Legal
Proceedings." The outcome of this matter could have a material adverse effect on
the scope and duration of our right to provide DIRECTV programming in our rural
markets, our capital requirements and our costs of operations. Thus, if
determined adversely, this matter could have a material adverse effect upon our
business, financial condition and results of operations.
During 1999, we acquired ten rural DIRECTV markets. These markets included
approximately 134,000 households and served approximately 18,300 subscribers as
of the dates of acquisition. The aggregate purchase price for these
acquisitions, including direct acquisition costs, approximated $35.3 million. As
noted above under "- Overview - Company History," we have suspended evaluation
of future acquisition opportunities as a result of the pending merger with
Pegasus. To the extent we resume our acquisition activities and identify
attractive acquisition candidates in the future, we may require additional
capital to complete such acquisitions.
We are highly leveraged and, to the extent we are able to borrow additional
funds under our credit facility or otherwise, our leverage will continue to
increase. The approximately $9.8 million of seller notes payable outstanding at
December 31, 1999 mature as follows: $2.9 million in 2000, $3.0 million in 2001,
$2.9 million in 2002, and $1.0 million in 2003.
Our ability to pay dividends and make other distributions and advances is
subject to, among other things, the terms of our debt instruments and applicable
law. Our credit facility and the indenture governing our 12 3/8% Notes contain
restrictive covenants that limit our ability to pay dividends or make
distributions to Golden Sky DBS, our direct parent company. We cannot assure you
that we will be in compliance with these covenants at the time of a required
interest payment on Golden Sky DBS's 13 1/2% Notes. We currently expect that it
may be difficult for us to generate the requisite dividend capacity to enable
Golden Sky DBS to make the initial cash interest payments on its 13 1/2% Notes.
Our ability to generate sufficient dividend capacity under the indenture
governing our 12 3/8% Notes to service Golden Sky DBS's 13 1/2% Notes and to
comply with the financial and other covenants in our credit facility will depend
upon the extent to which we pursue acquisitions, incur additional indebtedness,
incur operating expenses, make capital expenditures and generate adequate
subscriber revenue, among other things. To the extent these vary significantly
from our current expectations, it is likely that we will not be able to make
Golden Sky DBS's initial interest payments absent consents from our lenders and
existing bondholders. Moreover, any significant adverse developments would
<PAGE>
likely preclude Golden Sky DBS from being able to access our cash flow for these
initial interest payments.
As of December 31, 1999, we had unrestricted cash on hand of approximately
$3.2 million. While there can be no assurance, we believe we have sufficient
cash and availability under our amended bank credit facility to finance our
expected internal growth through at least December 31, 2000. There are a number
of factors, some of which may be beyond our control or ability to predict, that
could require us to raise additional capital. These factors include unexpected
increases in operating costs and expenses, subscriber growth in excess of that
currently expected, an increase in the cost of acquiring subscribers or possible
acquisitions of additional rural DIRECTV markets. Additional financing also may
be required to meet our debt service requirements. There can be no assurance
that additional financing will be available on terms acceptable to us, or at
all, and if available, that the proceeds of this financing would be sufficient
to enable us to meet our debt service requirements or completely execute our
business plan.
Year 2000 Readiness
Many existing computer systems and applications currently use two-digit date
fields to designate a particular year. Date sensitive systems and applications
may recognize the year 2000 as 1900 or not at all. The inability to recognize or
properly treat the year 2000 may cause computer systems and applications to
incorrectly process critical financial and operational information. During 1999,
we undertook an effort to identify and correct any potential year 2000 issues
that may have existed with our information systems, suppliers and facilities. As
of the date of this report, our business has not been affected by the year 2000
issue. We will continue to monitor the impact of the year 2000 issue on our
business throughout the year ending December 31, 2000. There can be no assurance
that the year 2000 issue will not adversely affect our business, financial
condition or results of operations in future periods.
The foregoing constitutes a year 2000 statement and readiness disclosure
subject to the protections afforded it by the Year 2000 Information and
Readiness Disclosure Act of 1998.
RECENT ACCOUNTING DEVELOPMENTS
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("FAS No. 133"). As a result of the
subsequent issuance of FAS No. 137, FAS No. 133 is now effective for fiscal
years beginning after June 15, 2000. FAS No. 133 establishes accounting and
reporting standards for derivative instruments and for hedging activities.
Currently, we have no derivative instruments or hedging arrangements.
Accordingly, adoption of FAS No. 133 is not expected to have a material effect
on our business, financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Information about our market sensitive financial instruments is provided
below and constitutes a "forward-looking statement." Our major market risk
exposure is changing interest rates under our credit facility. Our policy is to
manage interest rates through the use of floating rate debt. Our objective in
managing our exposure to interest rate changes is to limit the impact of
interest rate changes on earnings and cash flow and to lower our overall
borrowing costs.
We currently have $35.0 million of outstanding borrowings under the
variable rate term loan portion of our credit facility. This loan is to be
repaid in 15 consecutive quarterly installments of approximately $88,000,
beginning on March 31, 2002, with approximately $33.7 million due as a final
payment at maturity on December 31, 2005. Interest on the loan is calculated on
a base rate, which is either the lender's prime rate or LIBOR, plus an
applicable margin.
As of December 31, 1999, we had $17.0 million of borrowings outstanding
under the $115.0 million revolving loan commitment of our credit facility.
Availability of revolving loan borrowings under the credit facility reduces by
specified amounts quarterly from March 31, 2001 through maturity on September
30, 2005. Interest on revolving loan borrowings is calculated on a base rate,
which is either the lenders' prime rate or LIBOR, plus an applicable margin.
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements of Golden Sky Systems, Inc. required
by this item are included in this report beginning on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information regarding our executive
officers and directors as of December 31, 1999.
<TABLE>
<CAPTION>
NAME AGE POSITION
------------------------------ --- -----------------------------------------
<S> <C> <C>
Rodney A. Weary........................................ 49 Chairman of the Board, Chief Executive
Officer and Director
John R. Hager.......................................... 38 Chief Financial Officer
William J. Gerski...................................... 47 Senior Vice President, Sales
and Marketing
Scott R. Brown......................................... 34 Vice President, Operations
Gordon Smith........................................... 57 Vice President, Human Resources
Jo Ellen Linn.......................................... 38 Secretary and General Counsel
Robert F. Benbow(1).................................... 63 Director
William O. Charman..................................... 36 Director
William P. Collatos(1)................................. 45 Director
William A. Johnston(1)(2).............................. 47 Director
Robert B. Liepold(2)................................... 73 Director
Erik M. Torgerson(2)................................... 34 Director
(1) Member of the Compensation Committee of the Board of Directors.
(2) Member of the Audit Committee of the Board of Directors.
</TABLE>
BACKGROUND OF EXECUTIVE OFFICERS
Rodney A. Weary. Mr. Weary founded Golden Sky Systems in June 1996 and has
been its Chief Executive Officer since inception. Until 1995, he was President
of Cable Video Enterprises Inc., which he formed in 1986 by acquiring
traditional cable systems located in three states. From 1988 to December 1994,
Mr. Weary was a co-founder, officer and director of Premiere Page, a paging
company.
John R. Hager. Mr. Hager has been our Chief Financial Officer since October
1998. Mr. Hager joined us in August 1998 as Vice President, Finance and
Controller. From February 1997 until August 1998, Mr. Hager was Vice President--
Controller of EchoStar. He was the Controller of American Telecasting, Inc. from
August 1993 until February 1997. Prior to joining American Telecasting in 1993,
Mr. Hager was with Ernst & Young, where he was an Audit Senior Manager.
William J. Gerski. Mr. Gerski has been our Senior Vice President, Sales and
Marketing since July1999. Mr. Gerski joined us in May 1997 as our Vice
President, Sales and Marketing. From May 1996 to April 1997, Mr. Gerski was
Regional Director of Marketing and Sales at American Telecasting, Inc. From
December 1995 to May 1996, Mr. Gerski was Vice President of Marketing and Sales
of Bell Atlantic Video Services. From April 1990 through November 1995, Mr.
Gerski was Corporate Director of Sales at Adelphia Cable Communications.
Scott R. Brown. Mr. Brown has been our Vice President of Operations since
February 1999. Mr. Brown held the position of Vice President of Fulfillment
Operations with Primestar, Inc. from April 1998 to February 1999 and was the
Vice President of Operations with TCI Satellite Entertainment, Inc. from
November 1995 to March 1998. From May 1989 to November 1995 Mr. Brown held
several positions with Tele-Communications, Inc, including General Manager of
<PAGE>
TCI Cable of Westchester, General Manager of TCI Cablevision of Pinellas County,
Business Manager of TCI Cablevision of Dade/Broward County, and Internal Auditor
of TCI North Central Division.
Gordon G. Smith. Mr. Smith has been our Vice President of Human Resources
since May 1999. From 1998 to 1999, Mr. Smith was a Principal of Somerset
Partners, a human resources consulting firm. From 1990 to 1998 Mr. Smith was
Vice President of Human Resources, Health Care Services at Olsten Corporation.
Jo Ellen Linn. Ms. Linn has been our Secretary and General Counsel since
inception. From 1993 to 1996, Ms. Linn was General Counsel to Cable Video
Management, Inc., a communications management company and the former Cable Video
Enterprises, Inc., which owned and operated domestic cable television systems.
Ms. Linn is licensed to practice law in Kansas and Texas.
BACKGROUND OF DIRECTORS
Robert F. Benbow. Mr. Benbow has been a director since February 1997. He is
a Vice President of Burr, Egan, Deleage & Co., a private venture capital firm,
and a managing general partner of Alta Communications Inc. Prior to joining
Burr, Egan Deleage & Co. in 1990, Mr. Benbow spent 22 years with the Bank of New
England N.A., where he was Senior Vice President responsible for special
industries lending in the areas of media, project finance and energy.
Additionally, he serves as a director of Diginet Americas, Inc., a fixed
wireless local loop service provider throughout South America; Advanced Telcom
Group, Inc., a competitive local exchange carrier; and Preferred Networks, Inc.,
a public paging company.
William O. Charman. Mr. Charman has been a director since March 1997. He has
served as a Vice President of BancBoston Capital since 1995. From 1993 to 1995,
Mr. Charman was a Director and team leader for Bank of Boston's Media &
Communications Group in London.
William P. Collatos. Mr. Collatos has been a director since March 1997. He
is a managing general partner of Spectrum Equity Investors, a private equity
investment firm focused on the communication services, networking
infrastructure, electronic commerce and media industries, which he founded in
1993. He serves as a director of Galaxy Telecom, L.P., which owns, operates and
develops cable television systems; ITXC Corp., a global provider of
Internet-based voice, fax and voice-enabled services; and JazzTel, a competitive
local exchange provider based in Madrid, Spain.
William A. Johnston. Mr. Johnston has been a director since November 1997.
He is a Managing Director of HarbourVest Partners, LLC and has served in a
variety of capacities for HarbourVest Partners, LLC and its predecessor, Hancock
Venture Partners, Inc., since 1983.
Robert B. Liepold. Mr. Liepold has been a director since inception. Mr.
Liepold has been President and Chief Executive Officer of KCWE-TV, an
independent commercial television station operating in Kansas City, Missouri,
since 1994. Since 1983, Mr. Liepold also has been a consultant to the
telecommunications industry.
Erik M. Torgerson. Mr. Torgerson has been a director since November 1997. He
is a partner at Norwest Equity Partners. Prior to joining Norwest Equity
Partners in 1993, Mr. Torgerson was with Arthur Anderson & Co.'s financial
consulting and audit practice.
Each of our Directors has been elected pursuant to the terms of the
Stockholders' Agreement. See "Certain Relationships and Related Transactions --
Stockholders' Agreement."
All directors are elected annually and hold office until the next annual
meeting of stockholders and until their successors are duly elected and
qualified. Directors do not receive an annual retainer or meeting attendance
fees. However, we reimburse non-management directors for expenses incurred in
attending meetings of the Board of Directors.
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth certain compensation information for the
fiscal years ended December 31, 1997, 1998 and 1999 as to the Chief Executive
Officer and our four other highest paid executive officers whose total annual
salary and bonus exceeded $100,000 (the "Named Executive Officers"):
<TABLE>
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
--------------------
ANNUAL COMPENSATION SECURITIES
---------------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS/SARS(#) COMPENSATION ($)
- ---------------------------------------- ------------------------------------------------------- --------------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary 1999 $249,996 $ 87,500 21,884 $5,600 (1)
Chief Executive Officer, Chairman 1998 227,462 90,000 21,884 7,945 (1)
of the Board of Directors 1997 198,818 50,000 21,884 --
John R. Hager 1999 166,851 65,800 10,000 --
Chief Financial Officer 1998 43,892 50,000 10,000 47,675 (2)
William J. Gerski 1999 188,463 70,000 15,000 14,697 (3)
Senior Vice President, Sales 1998 153,270 80,000 15,000 --
and Marketing 1997 60,259 50,000 12,182 --
Jo Ellen Linn 1999 109,993 26,950 3,226 --
Secretary and General Counsel 1998 93,061 32,500 2,501 --
1997 80,926 25,000 2,501 --
Scott R. Brown (4) 1999 116,597 55,020 4,000 65,429 (2)
Vice President, Operations
(1) Represents compensation attributable to Mr. Weary's use of a company-owned vehicle.
(2) Represents compensation related to a relocation allowance provided to the named executive officer.
(3) Represents compensation attributable to a vehicle allowance provided to Mr. Gerski.
(4) Mr. Brown's employment with us began as of February 1, 1999.
</TABLE>
OPTION GRANTS
The following table sets forth certain information concerning grants of
stock options to the Named Executive Officers during the fiscal year ended
December 31, 1999:
<TABLE>
OPTION GRANTS IN LAST FISCAL YEAR
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------
POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED ANNUAL
NUMBER OF TOTAL RATES OF STOCK PRICE
SECURITIES OPTIONS/ APPRECIATION FOR OPTION
UNDERLYING SARS GRANTED EXERCISE OF TERM
OPTION/SARS TO EMPLOYEES BASE PRICE EXPIRATION ---------------------------
NAME GRANTED (#) IN FISCAL YEAR ($/SH) DATE 5% ($) 10% ($)
- --------------------------------- -------------- ------------- ----------- -------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary........................ -- -- -- -- -- --
John R. Hager.......................... -- -- -- -- -- --
William J. Gerski...................... -- -- -- -- -- --
Jo Ellen Linn.......................... 725 6.25% $ 1.00 8/16/2009 $ 1,181 $ 1,881
Scott R. Brown.........................4,000 34.48% 1.00 2/1/2009 6,516 10,376
</TABLE>
<PAGE>
<TABLE>
OPTION EXERCISES AND FISCAL YEAR-END OPTION VALUES
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
SHARES UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE OPTIONS AT FISCAL YEAR-END (#) FISCAL YEAR-END ($) (1)
EXERCISE REALIZED ------------------------------ -------------------------
NAME (#) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ----------------------------------- ------------ ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary........................ -- -- 7,294 4,864 $4,077,346 $2,718,976
John R. Hager.......................... -- -- 4,444 5,556 2,484,196 3,105,804
William J. Gerski...................... -- -- 6,252 3,334 3,494,868 1,863,706
Jo Ellen Linn.......................... -- -- 894 1,221 499,746 682,539
Scott R. Brown......................... -- -- 1,222 2,778 683,098 1,552,902
(1) Based on a value of $559.00 per share, which was the approximate fair
value of the Golden Sky Holdings common stock on January 10, 2000, the
date the merger agreement with Pegasus was executed, based upon the
value on that date of the merger consideration to be received.
</TABLE>
EMPLOYMENT AGREEMENTS
In January 1997, we entered into non-competition agreements with Mr. Weary
and Ms. Linn, the terms of which preclude each of them from competing with us
during their respective periods of employment and for two years thereafter in
any market in North America in which we operate or intend to operate.
In February 1997, we entered into an employment agreement with Mr. Weary
pursuant to which he agreed to serve as our President and Chief Executive
Officer through February 2000. Such agreement may be extended according to its
terms. Under the agreement, Mr. Weary is paid compensation in the amount of
$200,000 per year, subject to adjustments, and is eligible to participate in our
stock option plan. In the event that Mr. Weary's employment is terminated by the
Company for any reason other than for "Cause" or by Mr. Weary for "Good Reason"
following a "Change of Control," Mr. Weary shall be entitled to receive (i)
continued payment of his annual salary as in effect as of the date of his
termination, said payments to be made for the remainder of his Employment Period
(as defined in the agreement) on the same periodic dates as would have been
required had Mr. Weary not been terminated, (ii) continuation of Mr. Weary's
group health plan benefits, and (iii) a lump sum payment equal to such portion
of Mr. Weary's cash "Incentive Compensation" for the then-current fiscal year as
shall be prorated for a partial year based on the period worked for the Company
during such year and the satisfaction of any applicable objectives prior to the
date of his termination.
Also during 1997, we entered into substantially similar employment
agreements with Ms. Linn and Mr. Gerski, pursuant to which each of them agreed
to serve us in their present capacity through February 2000 for Ms. Linn and
November 2000 for Mr. Gerski. These agreements may be extended according to
their terms. Under the agreements, Ms. Linn is paid compensation in an amount
not less than $82,500 per year, and Mr. Gerski is paid compensation in an amount
not less than $100,000 per year. Each is also eligible to participate in our
stock option plan. In the event that either agreement is terminated by the
Company for any reason other than for "Cause" or by the employee for "Good
Reason" following a "Change of Control," the employee shall be entitled to
receive (i) continued payment of the employee's annual salary as in effect as of
the date of termination, said payments to be made for a period of six months
following the date of termination (or, in the event of a termination by the
employee for "Good Reason," for a period of 12 months following the date of
termination) on the same periodic dates as would have been required had the
employee not been terminated, (ii) continuation of the employee's group health
plan benefits, and (iii) a lump sum payment equal to such portion of the
employee's cash "Incentive Compensation" for the then-current fiscal year as
shall be prorated for a partial year based on the period worked for the Company
during such year and the satisfaction of any applicable objectives prior to the
date of termination. We also entered into a non-competition agreement with Mr.
Gerski in November 1997. The terms of the non-competition agreement preclude Mr.
Gerski from competing with us during the term of his employment and for a period
of two years thereafter in any market in the United States in which we operate
<PAGE>
and require Mr. Gerski to maintain the confidentiality of our proprietary
information during the period of his employment and thereafter.
In August 1998, we entered into an employment agreement with Mr. Hager
pursuant to which Mr. Hager agreed to serve us in his current capacity through
August 2001. The employment agreement may be extended in accordance with its
terms. Mr. Hager is paid compensation under the employment agreement in an
amount not less than $120,000 per year and is eligible to participate in our
stock option plan. In the event that the agreement is terminated by the Company
for any reason other than for "Cause" or by Mr. Hager for "Good Reason"
following a "Change of Control," Mr. Hager shall be entitled to receive (i)
continued payment of his annual salary as in effect as of the date of
termination, said payments to be made for a period of six months following the
date of termination (or, in the event of a termination by Mr. Hager for "Good
Reason," for a period of 12 months following the date of termination) on the
same periodic dates as would have been required had he not been terminated, (ii)
continuation of his group health plan benefits, and (iii) a lump sum payment
equal to such portion of his cash "Incentive Compensation" for the then-current
fiscal year as shall be prorated for a partial year based on the period worked
for the Company during such year and the satisfaction of any applicable
objectives prior to the date of his termination. We also entered into a
non-competition agreement and a confidentiality and proprietary rights agreement
with Mr. Hager in August 1998. The terms of the non-competition agreement
preclude Mr. Hager from competing with us during the term of his employment and
for two years thereafter in any market in the United States in which we operate
or intend to operate. The confidentiality and proprietary rights agreement
requires Mr. Hager to maintain the confidentiality of our proprietary
information during the period of his employment and thereafter.
In February 1999, we entered into an employment agreement with Mr. Brown
pursuant to which Mr. Brown agreed to serve us in his current capacity through
February 2002. The employment agreement may be extended in accordance with its
terms. Mr. Brown is paid compensation under the employment agreement in an
amount not less than $129,000 per year and is eligible to participate in our
stock option plan. In the event that the agreement is terminated by the Company
for any reason other than for "Cause" or by Mr. Brown for "Good Reason"
following a "Change of Control," Mr. Brown shall be entitled to receive (i)
continued payment of his annual salary as in effect as of the date of
termination, said payments to be made for a period of six months following the
date of termination on the same periodic dates as would have been required had
he not been terminated, (ii) continuation of his group health plan benefits,
(iii) a lump sum payment equal to such portion of his cash "Incentive
Compensation" for the then-current fiscal year as shall be prorated for a
partial year based on the period worked for the Company during such year and the
satisfaction of any applicable objectives prior to the date of his termination,
and (iv) a release from certain obligations contained in Mr. Brown's
non-competition agreement with the Company. We also entered into a
non-competition agreement with Mr. Brown in February 1999. The terms of the
non-competition agreement preclude Mr. Brown from competing with us during the
term of his employment and for six months thereafter in any market in the United
States in which we operate and require Mr. Brown to maintain the confidentiality
of our proprietary information during the period of his employment and
thereafter.
STOCK OPTION PLAN
In July 1997, our board of directors adopted our Stock Option and Restricted
Stock Purchase Plan to provide our employees, officers and directors with an
opportunity to invest in our common stock and to advance the interests of Golden
Sky Systems and its stockholders. Effective September 9, 1997, the plan was
assumed by Golden Sky Holdings.
The plan permits our board of directors to grant incentive stock options
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended, non-qualified stock options within the meaning of Treasury Regulations
Section 1.83-7 and restricted stock awards to our officers, directors and
employees. The maximum number of shares of our common stock that may be subject
to options or awards granted under the plan may not exceed, in the aggregate,
85,218 shares. Shares of our common stock that are attributable to grants or
awards that have expired or been terminated, cancelled or forfeited are
available for issuance in connection with future grants or awards. The
Compensation Committee of our Board of Directors administers the plan, makes
grants and awards under the plan and establishes the terms and conditions of the
grants and awards.
<PAGE>
401(K) PLAN
We maintain a 401(k) savings plan for our full-time employees, which permits
employee contributions up to 15% of annual compensation to the plan on a pre-tax
basis. In addition, we may make contributions on a discretionary basis as a
percentage of each participating employee's annual compensation. We may also
make additional discretionary contributions to this plan in any plan year up to
the annual 401(k) plan contribution limits as defined in the Internal Revenue
Code. This plan is administered by the Compensation Committee of our Board of
Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Mr. Benbow, Mr. Collatos and Mr. Johnston were the members of the
Compensation Committee of the Board of Directors as of December 31, 1999. No
member of the Compensation Committee was an officer or employee of Golden Sky or
its subsidiaries during 1999, or an officer of Golden Sky or its subsidiaries at
any time prior to 1999. During 1999, none of the Named Executive Officers served
as a director or member of the compensation committee of another entity, one of
whose executive officers served as a director or member of our Compensation
Committee.
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
All of our issued and outstanding capital stock is owned by Golden Sky DBS,
and all of the issued and outstanding capital stock of Golden Sky DBS is owned
by Golden Sky Holdings. The following table sets forth certain information as of
December 31, 1999, regarding the ownership of Golden Sky Holdings' common stock;
Series A Convertible Participating Preferred Stock, $.01 par value; Series B
Convertible Participating Preferred Stock, $.01 par value; and Series C Senior
Convertible Preferred Stock, $.01 par value, by (i) certain stockholders or
groups of related stockholders who, individually or as a group, are the
beneficial owners of 5% or more of any class of Golden Sky Holdings' capital
stock and (ii) our executive officers and directors. Beneficial ownership
percentages of Golden Sky Holdings' common stock presented below are
significantly affected by the securities convertible into or exercisable for
Golden Sky Holdings common stock held by each stockholder. Except as required by
law or Golden Sky Holdings' Certificates of Designation, holders of Golden Sky
Holdings' common stock are not entitled to vote as a separate class on matters
presented for stockholder approval.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY-
-------------------- -------------------- ------------------- ---------------------- DILUTED
% OF % OF % OF % OF VOTING
NAME (1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES (2) CLASS (3) POWER
- ------------------------------- ------------ ------- ----------- -------- ----------- ------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRINCIPAL STOCKHOLDERS
Alta Subordinated Debt
Partners III, L.P. (4)... 55,532.00 13.3% 11,125.24 4.9% -- --% 2,116.00 7.7% 8.9%
Alta Communications VI,
L.P. (4).................. 92,365.00 22.1 18,504.38 8.1 -- -- 3,522.00 12.2 14.8
Alta-Comm S By S, LLC (4). 2,103.00 * 421.84 * -- -- 81.00 * *
Spectrum Equity Investors
L.P. (5).................. 50,000.00 12.0 -- -- -- -- 12.00 * 6.5
Spectrum Equity Investors II
L.P. (5).................. 100,000.00 23.9 -- -- -- -- 25.00 * 13.0
BancBoston Ventures Inc. (6) 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.4
Norwest Equity Partners VI,
L.P. (7).................. -- -- 50,083.75 21.9 -- -- -- -- 6.5
Norwest Venture Partners
VI, L.P. (7)............. -- -- 25,041.87 11.0 -- -- -- -- 3.3
HarbourVest Partners
V-Direct Fund L.P. (8)... -- -- 75,125.62 32.9 -- -- -- -- 9.8
Lion Investments Limited (9) -- -- 5,010.76 2.2 -- -- -- -- *
Westpool Investment Trust
plc (9)................... -- -- 15,031.27 6.6 -- -- -- -- 2.0
General Electric Capital
Corporation (10)......... -- -- 15,000.00 6.6 -- -- -- -- 2.0
Harold Poulson (11)....... 100.00 - -- -- 21,350.76 37.0 21,450.76 45.7 2.8
Jack S. Ramirez and Carol
H. Ramirez (12).......... -- -- -- -- 7,873.10 13.6 7,873.10 26.2 1.0
Joyce Travis, Trustee of
the Travis Living Trust
Dated the 5th day of
March, 1998 (13)......... -- -- -- -- 5,337.68 9.3 5,337.68 17.4 *
James and Constance R.
Hertz (14)............... -- -- -- -- 3,754.93 6.5 3,754.93 14.0 *
Maxon R. and Kristina Davis
(15)..................... -- -- -- -- 3,385.89 5.9 3,385.89 11.8 *
Louise A. Davis (16)...... -- -- -- -- 3,308.68 5.7 3,308.68 11.5 *
Jay and Marla Downen (17). -- -- -- -- 3,088.10 5.4 3,088.10 10.8 *
Chris J. Downen (19)...... -- -- -- -- 4,628.01 8.0 4,628.01 15.4 *
<PAGE>
SHARES BENEFICIALLY OWNED
------------------------------------------------------------------------------------
SERIES A SERIES B SERIES C
PREFERRED STOCK PREFERRED STOCK PREFERRED STOCK COMMON STOCK FULLY-
-------------------- -------------------- ------------------- ---------------------- DILUTED
% OF % OF % OF % OF VOTING
NAME (1) SHARES CLASS SHARES CLASS SHARES CLASS SHARES (2) CLASS (3) POWER
- ------------------------------- ------------ ------- ----------- -------- ----------- ------- ----------- ---------- ---------
EXECUTIVE OFFICERS AND
DIRECTORS
Rodney A. Weary (20) (21). 16,030.00 3.8 -- -- -- -- 18,240.00 53.8 4.5
John R. Hager (21) (22)... -- -- -- -- -- -- 5,000.00 16.4 *
William J. Gerski (21) (23) -- -- -- -- -- -- 12,500.00 38.5 1.6
Scott R. Brown (21) (31).. -- -- -- -- -- -- 1,444.00 5.4 *
Gordon G. Smith (21) (32). -- -- -- -- -- -- 666.00 2.6 *
Jo Ellen Linn (21) (24)... 430.00 * -- -- -- -- 2,184.00 8.3 *
Robert F. Benbow (25)..... 150,000.00 35.9 30,051.45 13.2 -- -- 5,719.00 20.2 24.2
William O. Charman (26)... 75,000.00 17.9 12,521.44 5.5 -- -- 19.00 * 11.4
William P. Collatos (27).. 150,000.00 35.9 -- -- -- -- 37.00 * 19.5
William A. Johnston (28).. -- -- 75,125.62 32.9 -- -- -- -- 9.8
Robert B. Liepold (21) (29) 1,000.00 * -- -- -- -- 3,009.00 11.2 *
Erik M. Torgerson (30).... -- -- 75,125.62 32.9 -- -- -- -- 9.8
All executive officers and
directors as a group
(twelve persons)......... 392,460.00 93.9 192,824.13 84.4 -- -- 48,818.00 100.00 82.5
* Less than 1%
(1) Except as otherwise noted below, the persons named in the table have
sole voting power and investment power with respect to all shares set
forth in the table.
(2) Includes shares issuable upon exercise of warrants and options
exercisable within 60 days of the date hereof, as well as shares of
Golden Sky Holdings common stock issuable upon conversion of
beneficially-owned shares of Series C Preferred Stock.
(3) The percent of class beneficially owned by each listed holder of Golden
Sky Holdings common stock appears unusually large, because there is a
small number of shares of Golden Sky Holdings common stock outstanding
relative to the number of shares of Golden Sky Holdings common stock
owned and subject to options, warrants or conversion privileges held by
such person.
(4) The address is c/o Alta Communications, Inc., One Embarcadero Center,
Suite 4050, San Francisco, California 94111, Attn: Robert Benbow. Alta
Subordinated Debt Partners III, L.P. ("Alta Sub Debt III") is managed by
Burr, Egan, Deleage & Co. Alta Communications VI, L.P. ("Alta VI") and
Alta Comm S by S, LLC ("S by S") are managed by Alta Communications,
Inc. The general partner of Alta Sub Debt III and the general partner of
Alta VI exercise sole voting and investment powers with respect to the
securities held by their respective funds. The general partners of Alta
Subordinated Debt Management III, L.P., which is the general partner of
Alta Sub Debt III, include Messrs. Craig Burr, William P. Egan, Brian
McNeill, Robert Benbow, Timothy Dibble, Jean Deleage and Jonathan Flint
and Ms. Eileen McCarthy. These general partners may be deemed to share
voting and investment powers for the shares held by Alta Sub Debt III.
The general partners of Alta Communications VI Management Partners,
L.P., which is the general partner of Alta VI, include Messrs. William
P. Egan, Brian McNeill, Robert Benbow, Timothy Dibble and David Retik
and Ms. Eileen McCarthy. These general partners may be deemed to share
voting and investment powers for the shares held by Alta VI. These
general partners disclaim beneficial ownership of all such securities
held by the funds except to the extent of their proportionate pecuniary
interests in the shares. Some of the principals of Burr, Egan, Deleage &
Co. and Alta Communications, Inc. (including some of the individuals
identified above) are members of S by S, which invests alongside Alta
VI. As members of S by S, they may be deemed to share voting and
investment power for the shares held by S by S. These principals
disclaim beneficial ownership of all such shares except to the extent of
their proportionate pecuniary interest in the shares.
Common stock ownership includes warrants to purchase 2,103, 3,499 and 80
shares of Common Stock owned by Alta Sub Debt III, Alta VI and S by S,
respectively.
<PAGE>
(5) The address is One International Place, 29th Floor, Boston,
Massachusetts 02110, Attn: William P. Collatos. The sole general partner
of Spectrum Equity Investors, L.P. is Spectrum Equity Associates, L.P.,
a limited partnership whose general partners are Messrs. Brion B.
Applegate and William P. Collatos. The sole general partner of Spectrum
Equity Investors II, L.P. is Spectrum Equity Associates II, L.P., a
limited partnership whose general partners are Messrs. Brion B.
Applegate, William P. Collatos and Kevin J. Maroni. Messrs. Applegate
and Collatos may be deemed to share beneficial ownership of the shares
owned by Spectrum Equity Investors, L.P., and Messrs. Applegate,
Collatos and Maroni may be deemed to share beneficial ownership of the
shares owned by Spectrum Equity Investors II, L.P. These individuals
disclaim beneficial ownership of all of these shares except to the
extent of their respective pecuniary interests in the shares.
(6) The address is 175 Federal Street, 10th Floor, Boston, Massachusetts
02110, Attn: William O. Charman. The shares of Series A Preferred Stock
and Series B Preferred Stock beneficially owned by BancBoston Ventures
Inc. are controlled by its President, Frederick M. Fritz, and by its
Managing Director, Sanford Anstey, and by William O. Charman, who is a
director of our company.
(7) The address is c/o Norwest Venture Capital Management, Inc., 2800 Piper
Jaffray Tower, 222 South Ninth Street, Minneapolis, Minnesota 55402,
Attn: Erik M. Torgerson. The shares of Series B Preferred Stock
beneficially owned by Norwest Equity Partners VI, LP are controlled by
its general partner, Itasca LBO Partners VI, LLP, which is controlled by
John E. Lindahl, Managing Partner, and by John P. Whaley, Managing
Administrative Partner. The shares of Series B Preferred Stock
beneficially owned by Norwest Venture Partners VI, LP are controlled by
its general partner, Itasca VC Partners, LLP, which is controlled by its
Managing Partner, George J. Still, Jr., and by John P. Whaley, Managing
Administrative Partner.
(8) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111, Attn: William A. Johnston. The sole
general partner of HarbourVest Partners V-- Direct Fund L.P.
("HarbourVest V") is a limited liability company whose managing member
is HarbourVest Partners, LLC. The managing directors of HarbourVest
Partners, LLC are Messrs. George Anson, John M. Begg, Philip M. Bilden,
Theodore A. Clark, Kevin S. Delbridge, William A. Johnston, Edward W.
Kane, Frederick C. Maynard, Ofer Nernirovsky, Robert M. Wadsworth and D.
Brooks Zug, and Ms. Martha D. Vorlicek. These individuals may be deemed
to share beneficial ownership of the shares held by HarbourVest V, and
disclaim beneficial ownership of all of these shares except to the
extent of their respective pecuniary interest in the shares.
(9) The address is c/o London Merchant Securities, Carlton House, 33 Robert
Adam Street, London WIM 5AH, England, Attn: Iain MacPhail. Each of Lion
Investments Limited and Westpool Investment Trust plc is a wholly-owned
subsidiary of London Merchant Supplies plc, a publicly traded company in
the U.K.
(10) The address is 120 Long Ridge Road, 3rd Floor, Stamford, Connecticut
06927, Attn: Peter Foley. General Electric Capital Corporation is a
wholly-owned subsidiary of General Electric Corporation.
(11) The address is P.O. Box 1376, Great Falls, Montana 59403.
(12) The address is 2061 Norwich Ct., Glenview, Illinois 60025.
(13) The address is Escalon Avenue Apt. 2117, Sunnyvale, California 94086.
(14) The address is 7444 Molt Road, Billings, Montana 59106.
(15) The address is 163 Woodland Estates Rd., Great Falls, Montana 59404.
(16) The address is 242 East 87th Street, Apt. 1K, New York, New York 10128.
(17) The address is 511 Fortress Circle, Leesburg, Virginia 21075.
<PAGE>
(18) The address is 2105 Noble Avenue, Springfield, Illinois 62704.
(19) The address is 1617 Outer Park, Springfield, Illinois 62704.
(20) 16,030 shares of Series A Preferred Stock and 4 shares of Golden Sky
Holdings common stock are held by the Rodney A. Weary Revocable Trust
Dated 10/25/95 and may be deemed to be beneficially owned by Mr. Weary.
In addition, Mr. Weary owns 9,726 shares of Golden Sky Holdings common
stock, and through our stock option plan, Mr. Weary has the right to
acquire 8,510 shares of Golden Sky Holdings common stock pursuant to
options exercisable within 60 days.
(21) The address is c/o Golden Sky Systems, Inc., 4700 Belleview Avenue,
Suite 300, Kansas City, Missouri 64112.
(22) Through our stock option plan, Mr. Hager has the right to acquire 5,000
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
(23) Mr. Gerski beneficially owns 5,414 shares of common stock. In addition,
through our stock option plan, Mr. Gerski has the right to acquire 7,086
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
(24) Ms. Linn beneficially owns 430 shares of Series A Preferred Stock and
1,111 shares of Golden Sky Holdings common stock. In addition, through
our stock option plan, Ms. Linn has the right to acquire 973 shares of
Golden Sky Holdings common stock pursuant to options exercisable within
60 days.
(25) The address is c/o Alta Communications, Inc., One Embarcadero Center,
Suite 4050, San Francisco, California 94111. The shares are held of
record by Alta Subordinated Debt Partners III, L.P., Alta Communications
VI, L.P. and Alta-Comm S By S, LLC. Mr. Benbow is a general partner of
the respective general partners of Alta Subordinated Debt Partners III,
L.P. and Alta Communications VI, L.P. As a general partner, he may be
deemed to share voting and investment power with respect to the shares
held by the funds. Mr. Benbow disclaims beneficial ownership of the
shares held by these funds except to the extent of his proportionate
pecuniary interest therein. Mr. Benbow also disclaims beneficial
ownership of all shares held by Alta Comm S by S, LLC, of which he is
not a member.
(26) The address is c/o BancBoston Ventures, Inc., 175 Federal Street, 10th
Floor, Boston, Massachusetts 02110. The shares are held of record by
BancBoston Ventures Inc., which may be deemed to be beneficially owned
by Mr. Charman.
(27) The address is c/o Spectrum Equity Investors, One International Place,
29th Floor, Boston, Massachusetts 02110. The shares are held of record
by Spectrum Equity Investors L.P. and Spectrum Equity Investors II L.P.,
which may be deemed to be beneficially owned by Mr. Collatos.
(28) The address is c/o HarbourVest Partners, LLC, One Financial Center, 44th
Floor, Boston, Massachusetts 02111. The shares are held of record by
HarbourVest Partners V-Direct Fund L.P., which may be deemed to be
beneficially owned by Mr. Johnston.
(29) Mr. Liepold beneficially owns 1,000 shares of Series A Preferred Stock
and 1,425 shares of Golden Sky Holdings common stock. In addition,
through our stock option plan, Mr. Liepold has the right to acquire 609
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
(30) The address is c/o Norwest Equity Partners, 2800 Piper Jaffray Tower,
222 South Ninth Street, Minneapolis, Minnesota 55402-3388. The shares
are held of record by Norwest Equity Partners VI, LP, which may be
deemed to be beneficially owned by Mr. Torgerson.
(31) Through our stock option plan, Mr. Brown has the right to acquire 1,222
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
<PAGE>
(32) Through the stock option plan, Mr. Smith has the right to acquire 666
shares of Golden Sky Holdings common stock pursuant to options
exercisable within 60 days.
</TABLE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
TRANSFER OF GOLDEN SKY SYSTEMS' CAPITAL STOCK
On February 19, 1999, Golden Sky Holdings transferred all of Golden Sky
Systems' outstanding capital stock (together with $100 in cash) to Golden Sky
DBS in exchange for 100 shares of common stock, $.01 par value, of Golden Sky
DBS.
CONSULTING ARRANGEMENT WITH ROBERT B. LIEPOLD
Golden Sky Systems has an oral consulting agreement with Robert B. Liepold,
a director of Golden Sky Systems, to provide expertise on an "as needed" basis.
Golden Sky Systems paid to Mr. Liepold an aggregate of $84,000 in 1999 in
connection with these services.
PAYMENTS TO AFFILIATES OF RODNEY A. WEARY
Golden Sky Systems utilizes the air transportation services of a company
owned by Rodney A. Weary, Golden Sky Systems' Chief Executive Officer. Golden
Sky Systems paid approximately $300,000 to this entity in 1999 in connection
with these services.
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Report:
(1) Financial Statements
PAGE
----
Independent Auditors' Report .................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999..F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999............................F-4
Consolidated Statements of Stockholder's Equity (Deficit) for
the years ended December 31, 1997, 1998 and 1999..........F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999............................F-6
Notes to Consolidated Financial Statements....................F-7
(2) Financial Statement Schedules
None. All schedules have been included in the Consolidated
Financial Statements or Notes thereto.
(3) Exhibits
The following documents are filed as Exhibits to this
report on Form 10-K or incorporated by reference herein.
Each document incorporated by reference is identified by a
parenthetical referencing the prior filing in which it was
included.
2.1 Stock Purchase Agreement, dated as of July 11,
1997, among Golden Sky Systems, Inc., Argos Support
Services Company and the several shareholders named
therein. (Exhibit 2.1 to Registration Statement on
Form S-4 No. 333-64367)
2.2 Asset Purchase Agreement, dated as of July 19,
1998, by and between Golden Sky Systems, Inc. and
Volcano Vision, Inc. (Exhibit 2.2 to Registration
Statement on Form S-4 No. 333-64367)
2.3 Agreement and Plan of Merger, dated as of September
1, 1998, among Golden Sky Holdings, Inc., Golden
Sky Systems, Inc., Western Montana DBS, Inc. d/b/a
Rocky Mountain DBS and the stockholders of Western
Montana DBS, Inc. named therein. (Exhibit 2.3 to
Registration Statement on Form S-4 No. 333-64367)
3.1 Second Amended and Restated Certificate of
Incorporation of Golden Sky Systems, Inc. (Exhibit
3.1 to Registration Statement on Form S-4 No.
333-64367)
3.2 By-Laws of Golden Sky Systems, Inc., adopted as of
October 1, 1997. (Exhibit 3.2 to Registration
Statement on Form S-4 No. 333-64367)
<PAGE>
4.1 Indenture, dated as of July 31, 1998, by and among
Golden Sky Systems, Inc., as issuer, Argos Support
Services Company, as guarantor, PrimeWatch, Inc.,
as guarantor, and State Street Bank and Trust
Company of Missouri, N.A., as trustee, relating to
the 12 3/8% Senior Subordinated Notes due 2006,
Series A and 12 3/8% Senior Subordinated Notes due
2006, Series B of Golden Sky Systems, Inc. (Exhibit
4.1 to Registration Statement on Form S-4 No.
333-64367)
4.2 Form of 12 3/8% Senior Subordinated Note due 2006,
Series B of Golden Sky Systems, Inc. (Included in
Exhibit 4.1 to Registration Statement on Form S-4
No. 333-64367)
4.3 Registration Rights Agreement, dated as of July 31,
1998, by and among Golden Sky Systems, Inc.,
Merrill Lynch, Pierce, Fenner & Smith Incorporated
and NationsBanc Montgomery Securities LLC, as
initial purchasers. (Exhibit 4.3 to Registration
Statement on Form S-4 No. 333-64367)
4.4 Escrow Agreement, dated as of July 31, 1998, by and
among State Street Bank and Trust Company of
Missouri, N.A., as escrow agent and as trustee
under the Indenture, and Golden Sky Systems, Inc.
(Exhibit 4.4 to Registration Statement on Form S-4
No. 333-64367)
4.5 Account Control Agreement, dated as of July 31,
1998, by and among Golden Sky Systems, Inc., State
Street Bank and Trust Company of Missouri, N.A., as
escrow agent and as custodian and securities
intermediary. (Exhibit 4.5 to Registration
Statement on Form S-4 No. 333-64367)
10.1 Purchase Agreement, dated July 24, 1998, among
Golden Sky Systems, Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated and NationsBanc
Montgomery Securities LLC, relating to the issuance
and sale of $195,000,000 aggregate principal amount
of 12 3/8% Senior Subordinated Notes due 2006,
Series A of Golden Sky Systems, Inc. (Exhibit 10.1
to Registration Statement on Form S-4 No.
333-64367)
10.2 Amended and Restated Credit Agreement, dated as of
May 8, 1998, among Golden Sky Holdings, Inc.,
Golden Sky Systems, Inc., various banks, Paribas
(formerly known as Banque Paribas), as syndication
agent, Fleet National Bank, as administrative
agent, and General Electric Capital Corporation, as
documentation agent. (Exhibit 10.2 to Registration
Statement on Form S-4 No. 333-64367)
10.3 First Amendment to Amended and Restated Credit
Agreement, dated as of February 10, 1999, among
Golden Sky Holdings, Inc., Golden Sky Systems,
Inc., various banks, Paribas (formerly known as
Banque Paribas), as syndication agent, Fleet
National Bank, as administrative agent, and General
Electric Capital Corporation, as documentation
agent. (Exhibit 10.17 to Registration Statement on
Form S-4 No. 333-64367)
10.4 Form of NRTC/Member Agreement for Marketing and
Distribution of DBS Services, as amended. (Exhibit
10.3 to Registration Statement on Form S-4 No.
333-64367)
10.6 Employment Agreement, dated February 12, 1997,
between Golden Sky Systems, Inc. and Rodney A.
Weary. (Exhibit 10.6 to Registration Statement on
Form S-4 No. 333-64367)*
10.7 Non-Competition Agreement between Golden Sky
Systems, Inc., and Rodney A. Weary. (Exhibit 10.11
to Registration Statement on Form S-4 No.
333-64367)*
<PAGE>
10.8 Employment Agreement, dated February 12, 1997,
between Golden Sky Systems, Inc. and Jo Ellen Linn.
(Exhibit 10.7 to Registration Statement on Form S-4
No. 333-64367)*
10.9 Non-Competition Agreement between Golden Sky
Systems, Inc. and Jo Ellen Linn. (Exhibit 10.12 to
Registration Statement on Form S-4 No. 333-64367)*
10.10 Employment Agreement, dated as of November 3, 1997,
between Golden Sky Systems, Inc. and William J.
Gerski. (Exhibit 10.8 to Registration Statement on
Form S-4 No. 333-64367)*
10.11 Employment Agreement, dated August 24, 1998,
between Golden Sky Systems, Inc. and John R. Hager.
(Exhibit 10.10 to Registration Statement on Form
S-4 No. 333-64367)*
10.12 Non-Competition Agreement, dated August 24, 1998,
between Golden Sky Systems, Inc. and John R. Hager.
(Exhibit 10.13 to Registration Statement on Form
S-4 No. 333-64367)*
10.13 Confidentiality and Proprietary Rights Agreements,
dated August 24, 1998, between Golden Sky Systems,
Inc. and John R. Hager. (Exhibit 10.15 to
Registration Statement on Form S-4 No. 333-64367)*
10.14 Form of Director Indemnification Agreement, dated
February 12, 1997, between Golden Sky Systems, Inc.
and each of the members of its Board of Directors.
(Exhibit 10.14 to Registration Statement on Form
S-4 No. 333-64367)
10.15 Exchange Agency Agreement, dated as of November 24,
1998, between Golden Sky Systems, Inc. and State
Street Bank and Trust Company of Missouri, N.A., as
exchange agent. (Exhibit 10.16 to Registration
Statement on Form S-4 No. 333-64367)
10.16 Office Building Lease, dated January 27, 1999,
between Belletower Partners, L.L.C. and Golden Sky
Systems, Inc. (Exhibit 10.18 to Registration
Statement on Form S-4 No. 333-64367)
10.17 Amendment and Waiver, dated as of June 14, 1999,
among Golden Sky Holdings, Inc., Golden Sky
Systems, Inc., various banks, Paribas (formerly
known as Banque Paribas), as Syndication Agent,
Fleet National Bank, as Administrative Agent and
General Electric Capital Corporation, as
Documentation Agent. (Exhibit 10.24 to Registration
Statement on Form S-4 No. 333-76413)
10.18 Employment Agreement, dated as of February 1, 1999,
between Golden Sky Systems, Inc. and Scott R.
Brown.* **
10.19 Noncompetition Agreement, dated as of February 1,
1999, between Golden Sky Systems, Inc. and Scott R.
Brown.* **
10.20 Noncompetition Agreement, dated as of November 3,
1997, between Golden Sky Systems, Inc. and William
J. Gerski.* **
10.21 Stock and Warrant Purchase Agreement, dated as of
January 4, 2000, by and among Golden Sky Holdings,
Inc. and the investors identified therein.**
<PAGE>
10.22 Agreement and Plan of Merger, dated as of January
10, 2000, among Pegasus Communications Corporation
and certain of its shareholders, Pegasus GSS Merger
Sub, Inc., Golden Sky Holdings, Inc. and certain of
its shareholders. (Exhibit 2.1 to Registration
Statement on Form S-4 No. 333-31080)
10.23 Second Amendment, Consent and Waiver, dated as of
January 4, 2000, among Golden Sky Holdings, Inc.,
Golden Sky Systems, Inc., the Banks party thereto
from time to time, Paribas (formerly known as
Banque Paribas), as Syndication Agent, Fleet
National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation
Agent.**
10.24 Third Amendment, Consent and Waiver, dated as of
January 20, 2000, among Golden Sky Holdings, Inc.,
Golden Sky Systems, Inc., the Banks party thereto
from time to time, Paribas (formerly known as
Banque Paribas), as Syndication Agent, Fleet
National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation
Agent.**
21.1 Subsidiaries of Golden Sky Systems, Inc. (Exhibit
21.1 to Registration Statement on Form S-4 No.
333-64367)
24.1 Powers of Attorney of the members of the Board of
Directors of Golden Sky Systems, Inc. (Included in
the signature pages of this report)**
27.1 Financial Data Schedule. **
99.1 Stock Purchase Agreement, dated as of February 12,
1997, among Golden Sky Systems, Inc., Rodney A.
Weary and the investors named therein. (Exhibit
99.3 to Registration Statement on Form S-4 No.
333-64367)
99.2 Stock Purchase Agreement, dated as of November 24,
1997, by and among Golden Sky Holdings, Inc.,
Golden Sky Systems, Inc., Rodney A. Weary, and the
investors named therein. (Exhibit 99.4 to
Registration Statement on Form S-4 No. 333-64367)
99.3 Stockholders Agreement, dated as of November 24,
1997, by and among Golden Sky Holdings, Inc. and
the investors and other stockholders named therein.
(Exhibit 99.5 to Registration Statement on Form S-4
No. 333-64367)
-------------
* Management contract or compensatory plan or arrangement.
** Filed herewith.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
December 31, 1999. On January 18, 2000, we filed a Form 8-K
reporting, under Item 5, that Golden Sky Holdings, Inc. had
entered into a definitive merger agreement with Pegasus
Communications Corporation.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
GOLDEN SKY SYSTEMS, INC.
By: /s/ John R. Hager
John R. Hager
Chief Financial Officer
Date: March 20, 2000
The undersigned directors and officers of Golden Sky Systems, Inc.
hereby appoint Rodney A. Weary and John R. Hager, or either of them
individually, as attorney-in-fact for the undersigned, with full power of
substitution for, and in the name, place and stead of the undersigned, to sign
and file with the Securities and Exchange Commission under the Securities
Exchange Act of 1934, as amended, any and all amendments to this Report on Form
10-K, and Exhibits to this Report on Form 10-K, with full power and authority to
do and perform any and all acts and things whatsoever requisite and necessary or
desirable, hereby ratifying and confirming all that said attorney-in-fact, or
his substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ RODNEY A. WEARY Chairman of the Board, March 20, 2000
- ------------------------------------- Chief Executive Officer
Rodney A. Weary and Director (Principal
Executive Officer)
/s/ JOHN R. HAGER Chief Financial Officer March 20, 2000
- ------------------------------------------ (Principal Financial and
John R. Hager Accounting Officer)
/s/ ROBERT F. BENBOW Director March 20, 2000
- ------------------------------------
Robert F. Benbow
/s/ WILLIAM O. CHARMAN Director March 20, 2000
- ----------------------------------
William O. Charman
/s/ WILLIAM P. COLLATOS Director March 20, 2000
- -----------------------------------
William P. Collatos
/s/ WILLIAM A. JOHNSTON Director March 20, 2000
- ----------------------------------
William A. Johnston
/s/ ROBERT B. LIEPOLD Director March 20, 2000
- --------------------------------------
Robert B. Liepold
/s/ ERIK M. TORGERSON Director March 20, 2000
- ------------------------------------
Erik M. Torgerson
</TABLE>
SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO
SECTION 15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES
PURSUANT TO SECTION 12 OF THE ACT.
No annual report to security holders covering the registrant's last
fiscal year or proxy statement, form of proxy or other proxy soliciting material
has been sent to any security holders.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Report..............................................F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999..............F-3
Consolidated Statements of Operations for the years ended
December 31, 1997, 1998 and 1999.......................................F-4
Consolidated Statements of Stockholder's Equity (Deficit) for the
years ended December 31, 1997, 1998 and 1999 ..........................F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1998 and 1999.......................................F-6
Notes to Consolidated Financial Statements................................F-7
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Investors
Golden Sky Systems, Inc.:
We have audited the accompanying consolidated balance sheets of Golden Sky
Systems, Inc. as of December 31, 1998 and 1999 and the related consolidated
statements of operations, stockholder's equity (deficit) and cash flows for
each of the years in the three-year period ended December 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Golden
Sky Systems, Inc. as of December 31, 1998 and 1999 and the results of their
operations and their cash flows for each of the years in the three-year
period ended December 31, 1999, in conformity with generally accepted
accounting principles.
KPMG LLP
February 14, 2000
Kansas City, Missouri
<PAGE>
<TABLE>
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1998 1999
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...................................... $ 4,460 $ 3,236
Restricted cash, current portion............................... 28,083 23,731
Subscriber receivables (net of allowance for uncollectible
accounts of $293 and $973, respectively)..................... 8,632 12,333
Other receivables.............................................. 2,465 1,599
Inventory...................................................... 10,146 3,108
Prepaid expenses and other..................................... 1,859 1,652
--------------------- ---------------------
Total current assets.............................................. 55,645 45,659
Restricted cash, net of current portion........................... 23,534 --
Property and equipment (net of accumulated depreciation of
$3,214 and $5,918, respectively)............................... 4,994 5,853
Intangible assets, net............................................ 233,139 236,926
Deferred financing costs ......................................... 10,541 7,318
Other assets...................................................... 218 260
--------------------- ---------------------
Total assets................................................. $ 328,071 $ 296,016
===================== =====================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable......................................... $ 13,539 $ 22,893
Interest payable............................................... 11,009 11,659
Current maturities of long-term obligations.................... 8,916 3,248
Unearned revenue............................................... 5,574 8,669
Accrued payroll and other...................................... 1,403 943
--------------------- ---------------------
Total current liabilities......................................... 40,441 47,412
Long-term obligations, net of current maturities:
12 3/8% Notes................................................. 195,000 195,000
Bank debt...................................................... 67,000 52,000
Seller notes payable........................................... 6,912 6,932
Other notes payable and obligations under capital leases....... 376 103
Minority interest.............................................. 2,420 936
--------------------- ---------------------
Total long-term obligations, net of current maturities............ 271,708 254,971
--------------------- ---------------------
Total liabilities................................................. 312,149 302,383
Commitments and contingencies
Stockholder's Equity (Deficit):
Common Stock, par value $.01; 1,000 shares authorized,
issued and outstanding....................................... -- --
Additional paid-in capital..................................... 97,600 193,145
Accumulated deficit............................................ (81,678) (199,512)
--------------------- ---------------------
Total stockholder's equity (deficit).............................. 15,922 (6,367)
--------------------- ---------------------
Total liabilities and stockholder's equity (deficit)......... $ 328,071 $ 296,016
===================== =====================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
----------------------------------------------------
<S> <C> <C> <C>
Revenue:
DBS services........................................ $ 16,452 $ 74,910 $ 139,933
Lease and other..................................... 944 1,014 640
----------------------------------------------------
Total revenue.......................................... 17,396 75,924 140,573
Costs and expenses:
Costs of DBS services............................... 9,304 45,291 88,690
System operations................................... 3,796 11,021 19,733
Sales and marketing................................. 7,316 32,201 64,933
General and administrative.......................... 2,331 7,431 15,703
Depreciation and amortization....................... 7,300 23,166 35,963
----------------------------------------------------
Total costs and expenses............................... 30,047 119,110 225,022
----------------------------------------------------
Operating loss......................................... (12,651) (43,186) (84,449)
Non-operating items:
Interest and investment income...................... 40 1,573 2,393
Interest expense.................................... (3,173) (20,537) (32,441)
Other non-operating expenses ....................... -- -- (402)
----------------------------------------------------
Total non-operating items.............................. (3,133) (18,964) (30,450)
----------------------------------------------------
Loss before income taxes............................... (15,784) (62,150) (114,899)
Income taxes........................................... -- -- --
----------------------------------------------------
Loss before extraordinary charge....................... (15,784) (62,150) (114,899)
Extraordinary charge on early retirement of debt....... -- (2,577) (2,935)
----------------------------------------------------
Net loss............................................... $ (15,784) $ (64,727) $ (117,834)
====================================================
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Balance at December 31, 1996................................. $ -- $ 1 $ (1,167) $ (1,166)
Cancellation of originally issued Golden Sky Systems,
Inc. Common Stock.......................................... -- (1) -- (1)
Contribution from Golden Sky Holdings, Inc................... -- 87,400 -- 87,400
Net loss..................................................... -- -- (15,784) (15,784)
------------- ------------- ------------- -----------
Balance at December 31, 1997................................. -- 87,400 (16,951) 70,449
Contribution from Golden Sky Holdings, inc................... -- 10,200 -- 10,200
Net loss..................................................... -- -- (64,727) (64,727)
------------- ------------- ------------- -----------
Balance at December 31, 1998................................. -- 97,600 (81,678) 15,922
Deferred compensation pursuant to issuance of Golden Sky
Holdings, Inc. common stock options ....................... -- 154 -- 154
Contribution from Golden Sky DBS, Inc........................ -- 95,391 -- 95,391
Net loss..................................................... -- -- (117,834) (117,834)
------------- ------------- ------------- -----------
Balance at December 31, 1999................................. $ -- $ 193,145 $(199,512) $(6,367)
============= ============= ============= ===========
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<TABLE>
GOLDEN SKY SYSTEMS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------------
1997 1998 1999
--------------- ---------------- -----------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................................... $ (15,784) $ (64,727) $ (117,834)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 7,300 23,166 35,963
Amortization of debt discount, deferred financing
costs and other........................................ 215 977 1,126
Deferred compensation pursuant to issuance of Common
Stock options.......................................... -- -- 154
Extraordinary charge on early retirement of debt......... -- 2,577 2,935
Change in operating assets and liabilities, net of
acquisitions:
Subscriber receivables, net of unearned revenue........ (2,501) (1,757) (541)
Other receivables...................................... (161) (2,130) 1,188
Inventory.............................................. (1,604) (8,049) 7,038
Prepaid expenses and other............................. (203) (1,228) 207
Trade accounts payable................................. 7,515 5,068 9,354
Interest payable....................................... 733 10,223 650
Accrued payroll and other.............................. 1,391 (708) (1,336)
--------------- ---------------- -----------------
Net cash used in operating activities....................... (3,099) (36,588) (61,096)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets....................... (120,051) (104,487) (35,339)
Purchases of minority interests............................. -- -- (1,439)
Proceeds from interest escrow account ...................... -- (51,617) 24,224
Release of amounts reserved for contingent reduction of
bank debt................................................ -- -- 5,449
Investment earnings placed in escrow ....................... -- -- (1,787)
Purchases of property and equipment......................... (998) (3,317) (3,452)
Other....................................................... 320 (500) 112
--------------- ---------------- -----------------
Net cash used in investing activities....................... (120,729) (159,921) (12,232)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A preferred stock ......... 34,289 -- --
Contribution from Golden Sky Holdings, Inc ................. 46,800 -- --
Net proceeds from issuance of 12 3/8% Notes................. -- 189,150 --
Contribution from Golden Sky DBS, Inc. ..................... -- -- 95,391
Borrowings on bank debt..................................... 75,000 90,000 38,000
Principal payments on bank debt............................. (15,000) (83,000) (53,000)
Proceeds from issuance of notes payable..................... 2,115 -- --
Principal payments on notes payable and obligations under
capital leases........................................... (2,902) (3,675) (8,846)
Increase in deferred financing costs........................ (3,321) (5,138) (869)
Capital contribution from minority partner ................. -- -- 1,428
--------------- ---------------- -----------------
Net cash provided by financing activities................... 136,981 187,337 72,104
--------------- ---------------- -----------------
Net increase (decrease) in cash and cash equivalents..... 13,153 (9,172) (1,224)
Cash and cash equivalents, beginning of period........... 479 13,632 4,460
--------------- ---------------- -----------------
Cash and cash equivalents, end of period................. $ 13,632 $ 4,460 $ 3,236
=============== ================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ..................................... $ 2,225 $ 9,337 $ 30,014
Property and equipment acquired under capitalized lease 554 609 78
obligations..............................................
Retirement of Credit Agreement from borrowings under the
Credit Facility.......................................... -- 88,000 --
Issuance of seller notes payable in acquisitions............ 8,600 10,157 --
Conversion of notes payable and subscriptions to Series A
preferred stock ......................................... 6,311 -- --
Issuance of note payable in purchase of minority interest... -- -- 2,925
Series C preferred stock issued in acquisition.............. -- 10,200 --
See accompanying Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF OPERATIONS
Principal Business
Golden Sky Systems, Inc. ("Systems," and together with its subsidiaries
"Golden Sky") is the second largest independent provider of DIRECTV subscription
television services. DIRECTV is the leading direct broadcast satellite ("DBS")
company serving the continental United States. Systems, a Delaware corporation
formed on June 25, 1996 ("Inception"), is a non-voting affiliate of the National
Rural Telecommunications Cooperative (the "NRTC"). The NRTC has contracted with
Hughes Communications Galaxy, Inc. ("Hughes") for the exclusive right to
distribute DIRECTV programming to homes in certain rural territories of the
United States ("Rural DIRECTV Markets"). As of December 31, 1999, Systems had
acquired 57 Rural DIRECTV Markets in 24 states with approximately 1.9 million
households. As of that same date, Systems served approximately 345,200
subscribers.
Organization and Legal Structure
Until February 1999, Systems was a wholly-owned subsidiary of Golden Sky
Holdings, Inc. ("Holdings"). Holdings is a Delaware corporation formed on
September 9, 1997 for the purpose of holding all the common and preferred stock
of Systems. Upon the formation of Holdings, Systems issued 1,000 shares of its
common stock to Holdings and all the shareholders of the then outstanding
preferred stock of Systems were issued equivalent shares of Holdings stock with
identical features to Systems' preferred stock (the "Exchange"). The Exchange
was accounted for as a reorganization of entities under common control and the
historical cost basis of consolidated assets and liabilities was not affected by
the transaction. Holdings has no significant assets or liabilities other than
its investment in Systems.
On February 2, 1999, Golden Sky DBS, Inc. ("Golden Sky DBS") was formed for
the purpose of effecting an offering of senior discount notes. Upon formation,
Golden Sky DBS issued 100 shares of its common stock to Holdings in exchange for
$100 and the subsequent transfer of all of the capital stock of Systems to
Golden Sky DBS. Upon completion of the aforementioned transfer, Systems became a
wholly-owned subsidiary of Golden Sky DBS.
Pegasus Merger
Holdings entered into a definitive merger agreement with Pegasus
Communications Corporation ("Pegasus") on January 10, 2000. Pegasus is the
largest independent provider of DIRECTV subscription television services in the
United States. The combined operations of Pegasus and Golden Sky will serve in
excess of 1.1 million subscribers in 41 states and have the exclusive right to
serve approximately 7.2 million rural households. Under the terms of the
agreement, Pegasus will issue up to 6.5 million shares of its Class A common
stock to Holdings shareholders. The value of the Pegasus shares to be issued to
Holdings shareholders approximated $632 million as of the date of execution of
the definitive merger agreement. Upon completion of the merger, Holdings will
become a wholly owned subsidiary of Pegasus. Consummation of the merger, which
is subject to certain conditions and approvals, is expected in the first or
second quarter of 2000.
Significant Risks and Uncertainties
Substantial Leverage. Golden Sky is highly leveraged, making it vulnerable
to changes in general economic conditions and interest rates. As of December 31,
1999, Golden Sky had outstanding long-term debt (including current portion)
totaling approximately $257.3 million. Substantially all of Golden Sky's assets
are pledged as collateral on its long-term debt. Further, the terms associated
with Golden Sky's long-term debt obligations significantly restrict its ability
to incur additional indebtedness. Thus, it may be difficult for Golden Sky and
its subsidiaries to obtain additional debt financing if desired or required in
order to further implement Golden Sky's business strategy.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Expected Operating Losses. Due to the substantial expenditures required to
acquire Rural DIRECTV Markets and subscribers, Golden Sky has sustained
significant losses since Inception. Golden Sky's operating losses were $12.7
million, $43.2 million, and $84.5 million for the years ended December 31, 1997,
1998 and 1999 respectively. Golden Sky's net losses during those same periods
aggregated $15.8 million, $64.7 million, and $117.8 million respectively.
Improvement in Golden Sky's results of operations is principally dependent upon
its ability to cost effectively expand its subscriber base, control subscriber
churn (i.e., the rate at which subscribers terminate service), and effectively
manage its operating and overhead costs. Golden Sky plans to reduce its future
operating and overhead costs by transitioning its direct sales distribution
model to an indirect (i.e., retail) distribution model. Accordingly, during the
year ending December 31, 2000 Golden Sky plans, among other things, to: (i)
close approximately 30 of its 68 local sales offices; (ii) reduce its corporate
overhead expenses through headcount and other expense reductions; and (iii)
increase the number of third-party retailers in its Rural DIRECTV Markets.
Golden Sky estimates that it will incur aggregate, non-recurring costs of
approximately $1.5 million in connection with these actions. These costs are
expected to primarily consist of employee severance and lease termination
expenses. There can be no assurance that Golden Sky will be effective with
regard to these plans. Golden Sky incurs significant costs to acquire DIRECTV
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber churn. Golden Sky anticipates that it will continue to
experience operating losses through at least 2000. There can be no assurance
that such operating losses will not continue beyond 2000 or that Golden Sky's
operations will generate sufficient cash flows to pay its obligations, including
its obligations on its long-term debt.
Restrictions on Dividends and Other Distributions. The ability of Systems
and its subsidiaries to pay dividends and make other distributions and advances
is subject to, among other things, the terms of its long-term debt obligations
and applicable law. As a result, Systems may be limited in its ability to make
dividend payments and other distributions to Golden Sky DBS or Holdings at the
time such distributions are needed by Golden Sky DBS or Holdings to meet their
obligations.
Reliance on DIRECTV/NRTC. Golden Sky obtains substantially all of its
revenue from the distribution of DIRECTV programming services. As a result,
Golden Sky would be materially adversely affected by any material change in the
assets, financial condition, programming, technological capabilities or services
of DIRECTV or Hughes. Further, Golden Sky relies upon DIRECTV to continue to
provide programming services on a basis consistent with its past practice. Any
change in such practice due to, for example, a failure to replace a satellite
upon the expiration of its useful orbital life or a delay in launching a
successor satellite may prevent Golden Sky from continuing to provide DBS
services and could have a material adverse effect on Golden Sky's financial
condition and results of operations. Additionally, Golden Sky's ability to offer
DIRECTV programming services depends upon agreements between the NRTC and Hughes
and between Golden Sky and the NRTC. The NRTC's interests may differ from Golden
Sky's interests. Golden Sky would be materially and adversely affected by the
termination of the NRTC's agreement with Hughes and/or the termination of Golden
Sky's agreements with the NRTC. Golden Sky's agreements with the NRTC require
that it use the NRTC for certain support services including subscriber
information and data reporting capability, retail billing services and central
office subscriber services. Such services are critical to the operation and
management of Golden Sky's business.
On January 10, 2000, Pegasus and Golden Sky filed a lawsuit in federal court
in Los Angeles against DIRECTV (see Note 10). The outcome of this litigation and
similar litigation filed by the NRTC against DIRECTV could have a material
adverse effect on the scope and duration of Golden Sky's right to provide
DIRECTV programming in its Rural DIRECTV Markets, its capital requirements and
its costs of operations.
Competition. The subscription television industry is highly competitive.
Golden Sky faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than Golden Sky. Golden
Sky's ability to effectively compete in the subscription television industry
will depend on a number of factors, including competitive factors (such as the
introduction of new technologies or the entry of additional strong competitors)
and the level of consumer demand for such services.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the financial statements of
Systems and its majority-owned, direct subsidiaries. All significant
intercompany transactions and balances have been eliminated. Minority interest
represents the cumulative earnings and losses, after capital contributions,
attributable to minority partners and stockholders.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make a number of
estimates and assumptions which affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenue and expenses during the
period. Actual results could differ from these estimates.
Cash and Cash Equivalents
Golden Sky considers all highly liquid investments with original maturities
of three months or less to be cash equivalents. As of December 31, 1998 and
1999, cash and cash equivalents consisted of cash on hand, demand deposits and
money market accounts.
Restricted Cash
Restricted cash, as reflected in the accompanying consolidated balance
sheets, includes cash restricted by the indenture associated with Systems' 12
3/8% Notes (see Note 5), plus investment earnings thereon. Restricted cash,
which is held in escrow, is invested in certain permitted debt and other
marketable investment securities until disbursed for the express purposes
identified in the indenture. As of December 31, 1998 and 1999, restricted cash
was composed entirely of U.S. treasury notes.
Inventory
Inventory is stated at the lower of cost (first-in, first-out) or market and
consists of receivers, satellite dishes and accessories ("DBS Equipment").
Golden Sky subsidizes the cost to the consumer of such equipment, which is
required to receive DIRECTV programming services. Additionally, Golden Sky
subsidizes the cost to the consumer of installation of DBS Equipment. Equipment
and installation revenues and related expenses are recognized upon delivery and
installation of DBS Equipment. Net transaction costs associated with the sale
and installation of DBS Equipment are reported as a component of sales and
marketing expenses in the accompanying consolidated statements of operations.
During the periods ended December 31, 1997, 1998 and 1999, aggregate proceeds
from the sale and installation of DBS Equipment totaled $3.8 million, $11.0
million, and $9.3 million respectively; related cost of sales totaled $4.6
million, $25.8 million, and $44.3 million during those same periods.
Long-lived Assets
Golden Sky reviews its long-lived assets (e.g., property and equipment) and
certain identifiable intangible assets to be held and used for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. For assets that are held and used in
operations, the asset would be impaired if the book value of the asset exceeded
the undiscounted future cash flows related to the asset. For those assets that
are to be disposed of, the assets would be impaired to the extent the fair value
does not exceed the book value. Golden Sky considers relevant cash flow,
estimated future operating results, trends and other available information
including the fair value of DIRECTV distribution rights owned, in assessing
whether the carrying value of assets can be recovered.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Property and Equipment
Property and equipment, consisting of computer hardware and software,
furniture, vehicles, and office and other equipment, is recorded at cost.
Depreciation is recognized on a straight-line basis over the related estimated
useful lives, which range from two to five years.
DIRECTV Distribution Rights
DIRECTV distribution rights, which represent the excess of the purchase
price over the fair value of net assets acquired, are amortized on a
straight-line basis over the periods expected to be benefited. The expected
period to be benefited corresponds to the remaining estimated orbital lives of
the satellites used by Hughes for distribution of DIRECTV programming services.
Deferred Financing Costs
Deferred financing costs represent fees and other costs incurred in
conjunction with the issuance of long-term debt. These costs are amortized over
the term of the related debt using the effective interest method. Amortization
of these costs totaled $215,000, $977,000, and $1,660,000 during 1997, 1998 and
1999, respectively.
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to estimate
that value:
Cash and cash equivalents: The carrying value approximates fair value
as a result of the short maturity of these instruments.
Receivables and payables: These assets are carried at cost, which
approximates fair value as a result of the short-term nature of the
instruments.
Long-term debt and notes payable: Fair value of Golden Sky's
publicly-traded debt securities is based on quoted market prices. The
carrying value of Golden Sky's bank debt and other notes payable
approximates fair value, as interest rates are variable or approximate
market rates. As of December 31, 1999, the carrying and fair values of
Golden Sky's 12 3/8% Notes were $195.0 million and $211.6 million,
respectively.
Revenue Recognition
DBS services revenue is recognized in the month service is provided.
Unearned revenue represents subscriber advance billings for one or more months;
related revenue recognition is deferred until service is provided.
System Operations Expense
System operations expense includes payroll and other administrative costs
related to Golden Sky's local offices and national call center.
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $1.4
million, $5.1 million, and $5.9 million during the years ended December 31,
1997, 1998 and 1999, respectively.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming, generally
for up to three months of service, to new subscribers. The cost of such free
programming is expensed as sales and marketing expense in the period the
services are provided. During 1999, sales and marketing expenses attributable to
such promotions totaled $2.5 million.
Income Taxes
Golden Sky uses the asset and liability method of accounting for income
taxes. Under the asset and liability method, deferred tax assets and liabilities
are recognized for the estimated future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. This method also requires the
recognition of future tax benefits, such as net operating loss carryforwards, to
the extent that realization of such benefits is more likely than not.
Effects of Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
FAS No. 133, "Accounting for Derivative Instruments and Hedging Activities"
("FAS No. 133"). As a result of the subsequent issuance of FAS No. 137, FAS No.
133 is now effective for fiscal years beginning after June 15, 2000. FAS No. 133
establishes accounting and reporting standards for derivative instruments and
for hedging activities. Currently, Golden Sky has no derivative instruments or
hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to
have a material effect on Golden Sky's financial position or results of
operations.
Comprehensive Income
Golden Sky has no components of comprehensive income other than net loss.
3. ACQUISITIONS
Golden Sky accounts for its acquisitions using the purchase method. Golden
Sky's consolidated statements of operations for the periods ended December 31,
1997, 1998 and 1999 include the results of operations of acquired Rural DIRECTV
Markets from the respective acquisition dates.
The aggregate purchase price (including direct acquisition costs) for the
acquisitions completed during 1997, 1998 and 1999 were allocated as follows
(dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
-----------------------------------------------
<S> <C> <C> <C>
DIRECTV distribution rights................... $ 116,394 $114,747 $31,809
Customer lists................................ 9,450 7,114 --
Non-compete agreements........................ 4,879 2,587 4,869
Property and equipment........................ 1,953 204 --
Minority interest............................. (2,931) -- --
Working capital, net.......................... (20) 192 100
--------------- --------------- ---------------
$ 129,725 $124,844 $36,778
=============== =============== ===============
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following summarizes Golden Sky's acquisitions of Rural DIRECTV Markets
consummated during 1997, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Deep East Texas Telecommunications, Inc....... February 7, 1997 Texas $ 1,919
Images DBS Kansas, L.C., Images DBS Oklahoma,
L.C. and Total Communications, Inc......... February 12, 1997 Kansas/Oklahoma 12,702
Direct Satellite TV, LTD...................... February 28, 1997 Texas 3,746
Thunderbolt Systems, Inc...................... March 11, 1997 Missouri 6,127
Western Montana DBS, Inc. dba Rocky Mountain
DBS........................................ May 1, 1997 Colorado 4,774
TEG DBS Services, Inc......................... June 12, 1997 Nevada 5,237
GVEC Rural TV, Inc............................ July 8, 1997 Texas 5,176
Satellite Entertainment, Inc.................. July 14, 1997 Minnesota/Michigan 9,640
Direct Vision................................. July 15, 1997 Minnesota 7,452
Argos Support Services Company................ August 8, 1997 Florida/Texas/Utah 18,217
JECTV, a segment of Jackson Electric August 26, 1997 Texas 9,453
Cooperative................................
Lakes Area TV................................. September 2, 1997 Minnesota 1,355
DCE Satellite Entertainment, LLC.............. October 13, 1997 Wisconsin 313
Direct Broadcast Satellite, a segment of CTS
Communication Corporation.................. November 7, 1997 Michigan 4,293
DBS, L.C...................................... November 17, 1997 Iowa 1,911
Panora Telecommunications, Inc................ November 20, 1997 Iowa 1,131
Souris River Television, Inc.................. November 21, 1997 North Dakota 7,276
Cal-Ore Digital TV, Inc....................... December 8, 1997 California/Oregon 5,095
NRTC System No. 0093, a segment of Cable and
Communications Corporation................. December 17, 1997 Montana 3,876
Western Montana Entertainment Television, Inc. December 22, 1997 Montana 7,067
South Plains DBS.............................. December 23, 1997 Texas 9,143
Lakeland DBS.................................. December 24, 1997 Oklahoma 3,822
-----------------
TOTAL 1997 ACQUISITIONS.................... $129,725
=================
Direct Broadcast Satellite, a segment of
Nemont Communications Inc.................. January 14, 1998 Montana/Wyoming $ 8,284
Triangle Communications System, Inc........... January 20, 1998 Montana 9,765
Wyoming Mutual Telephone...................... January 21, 1998 Iowa 527
North Willamette Telephone.................... March 10, 1998 Oregon 6,015
Northwest Communications...................... March 10, 1998 North Dakota 1,363
Beulahland Communications, Inc................ March 19, 1998 Colorado 835
Direct Broadcast Satellite, a segment of SCS
Communications & Security, Inc............. April 20, 1998 Oregon 5,386
PrimeWatch, Inc............................... May 8, 1998 North Carolina 7,988
Mega TV....................................... May 11, 1998 Georgia 2,103
Direct Broadcast Satellite, a division of
Baldwin County Electric Membership June 29, 1998 Alabama 11,769
Corporation................................
Frontier Corporation.......................... July 8, 1998 Wisconsin 734
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
- ------------------------------------------------------------------------------------------------------------------
North Texas Communications.................... August 6, 1998 Texas $ 3,118
SEMO Communications Corporation............... August 26, 1998 Missouri 2,918
DBS Segment of Cumby Cellular, Inc............ August 31, 1998 Texas 7,553
Minburn Telephone............................. September 18, 1998 Iowa 447
Western Montana DBS, Inc. dba Rocky Mountain
DBS........................................ October 2, 1998 Idaho/Montana 20,740
Direct Broadcast Satellite, a segment of
Volcano Vision, Inc........................ October 9, 1998 California 31,425
North Central Missouri Electric Coop.......... November 2, 1998 Missouri 1,745
Star Search Rural Television, Inc............. November 5, 1998 Oklahoma 2,129
-----------------
TOTAL 1998 ACQUISITIONS.................... $124,844
=================
Breda Telephone Corporation................... January 11, 1999 Iowa/Nebraska $ 8,605
Thunderbolt Systems January 15, 1999 Missouri 2,731
Inc.......................
Siskiyou Ruralvision, Inc..................... February 28, 1999 California 4,735
Baraga Telephone Co........................... March 31, 1999 Michigan 4,546
E. Ritter Communications...................... April 2, 1999 Arkansas 2,689
Yelcot Telephone Co........................... April 2, 1999 Arkansas 6,246
Van Buren DBS................................. April 14, 1999 Iowa 2,914
Kertel Communications, Inc.................... June 24, 1999 California 2,033
Mutual Telephone Company...................... August 5, 1999 Iowa 620
Dubois Telephone.............................. December 8, 1999 Montana 220
-----------------
TOTAL 1999 ACQUISITIONS.................... $ 35,339
=================
</TABLE>
Golden Sky's 1999 acquisitions of Rural DIRECTV Markets were not material
and, accordingly, the pro forma impact of those acquisitions has not been
presented. Unaudited pro forma total revenue and unaudited pro forma loss before
extraordinary charge for the year ended December 31, 1998 approximated $87.9
million and $79.8 million, respectively. This unaudited pro forma information
reflects Golden Sky's significant acquisitions of Rural DIRECTV Markets
consummated during 1998 as if each such acquisition had occurred as of the
beginning of 1998. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated as of that date.
During 1997, Golden Sky acquired a controlling interest in DCE Satellite
Entertainment, LLC ("DCE"). In June 1999, Golden Sky acquired the remaining
ownership interest in DCE that it did not hold in exchange for cash of $1.0
million and the issuance of seller notes payable totaling the $2.9 million. Also
during 1999, Golden Sky acquired certain other minority interests for $496,000.
4. INTANGIBLE ASSETS
Intangible assets, which are amortized using the straight-line method over
the related estimated useful lives, consist of the following (dollars in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- ESTIMATED
1998 1999 USEFUL LIFE
---------------------------------------------------
<S> <C> <C> <C>
DIRECTV distribution rights.............. $236,531 $266,874 9 -12 years
Customer lists........................... 17,018 18,603 5 years
Non-compete agreements................... 7,501 12,370 3 years
----------------------------------
261,050 297,847
Less accumulated amortization............ (27,911) (60,921)
----------------------------------
Intangible assets, net............... $233,139 $236,926
==================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1999
----------------------------------
<S> <C> <C>
12 3/8% Notes................................................. $ 195,000 $ 195,000
Bank debt..................................................... 67,000 52,000
Seller notes payable.......................................... 15,407 9,823
Other notes payable and obligations under capital leases...... 797 460
Minority interest............................................. 2,420 936
----------------------------------
Total long-term obligations................................... 280,624 258,219
Less current maturities....................................... (8,916) (3,248)
----------------------------------
Long-term obligations, net of current maturities......... $ 271,708 $ 254,971
==================================
</TABLE>
12 3/8% Notes
On July 31, 1998, Systems consummated an offering (the "12 3/8% Notes
Offering") of 12 3/8% Senior Subordinated Notes due 2006 (the "12 3/8% Notes").
Interest on the 12 3/8% Notes is payable in cash semi-annually in arrears on
February 1 and August 1 of each year, commencing February 1, 1999. The 12 3/8%
Notes mature on August 1, 2006. The 12 3/8% Notes Offering resulted in net
proceeds to Golden Sky of approximately $189.2 million (after payment of
underwriting discounts and other issuance costs aggregating approximately $5.8
million). Approximately $45.2 million of the net proceeds of the 12 3/8% Notes
Offering were placed in escrow to fund the first four semi-annual interest
payments (through August 1, 2000) on the 12 3/8% Notes. Additionally, $5.3
million was reserved to fund a portion of a then contingent reduction of Golden
Sky's availability under its Credit Facility.
The 12 3/8% Notes are unsecured senior subordinated obligations and are
subordinated in right of payment to all existing and future senior indebtedness
of Systems. The 12 3/8% Notes rank pari passu in right of payment with all other
existing and future senior subordinated indebtedness, if any, of Systems and
senior in right of payment to all existing and future subordinated indebtedness,
if any, of Systems. The 12 3/8% Notes are guaranteed on a full, unconditional,
joint and several basis by Argos Support Services Company ("Argos") and
PrimeWatch, Inc. ("PrimeWatch"). Both Argos and PrimeWatch are wholly-owned
subsidiaries of Golden Sky.
The 12 3/8% Notes are redeemable, in whole or in part, at Systems' option on
or after August 1, 2003, at redemption prices decreasing from 112% during the
year commencing August 1, 2003 to 108% on or after August 1, 2005, plus accrued
and unpaid interest, if any, to the date of redemption. In addition, on or prior
to August 1, 2001, Systems may, at its option, redeem up to 35% of the
originally issued aggregate principal amount of the 12 3/8% Notes, at a
redemption price equal to 112.375% of the principal amount thereof, plus accrued
and unpaid interest thereon, if any, to the date of redemption solely with the
net proceeds of a public equity offering of Systems or Holdings yielding gross
proceeds of at least $40.0 million and any subsequent public equity offerings
(provided that, in the case of any such offering or offerings by Holdings, all
the net proceeds thereof are contributed to Systems); provided, further that
immediately after any such redemption the aggregate principal amount of Notes
outstanding must equal at least 65% of the originally issued aggregate principal
amount of the 12 3/8% Notes.
The indenture related to the 12 3/8% Notes (the "12 3/8% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
Systems' ability to incur additional indebtedness, pay dividends or make certain
other restricted payments, consummate certain asset sales, enter into certain
transactions with affiliates, incur indebtedness that is subordinate in right of
payment to any senior indebtedness and senior in right of payment to the 12 3/8%
Notes, incur liens, permit restrictions on the ability of subsidiaries to pay
dividends or make certain payments to Systems, merge or consolidate with any
other person or sell, assign, transfer, lease, convey or otherwise dispose of
all or substantially all of Systems' assets.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
In the event of a change of control, as defined in the 12 3/8% Notes
Indenture, each holder of 12 3/8% Notes will have the right to require Systems
to purchase all or a portion of such holder's 12 3/8% Notes at a price equal to
101% of the principal amount thereof, plus accrued and unpaid interest, if any,
to the date of purchase. Golden Sky's merger with Pegasus will constitute a
change of control as defined in the 12 3/8% Notes Indenture. Accordingly, upon
closing of the merger with Pegasus, Golden Sky will be required to make an offer
to the holders of the 12 3/8% Notes to purchase those notes consistent with the
terms described above. If Golden Sky's offer for the 12 3/8% Notes is accepted
by any of its note holders, and it is unable to purchase those notes, Golden Sky
may be in default of the terms of the 12 3/8% Notes Indenture. Pegasus has
entered into a commitment letter with an investment bank under which that
investment bank has agreed to purchase any and all 12 3/8% Notes tendered in
response to Golden Sky's offer to purchase. This commitment is subject to the
execution of definitive documentation and customary closing conditions. There
can be no assurance that Pegasus will be able to agree on definitive
documentation with the investment bank or make alternative arrangements if
necessary.
The 12 3/8% Notes were issued in a private placement pursuant to Rule 144A
of the Securities Act of 1933, as amended (the "Securities Act"). During 1998,
Systems filed a registration statement with the Securities and Exchange
Commission (the "SEC") relating to the exchange of the privately issued notes
for publicly registered notes with substantially identical terms (including
principal amount, interest rate, maturity, security and ranking). Because the
registration statement was not declared effective within the time period
required under the registration rights agreement associated with the 12 3/8%
Notes Offering, from December 29, 1998 through March 22, 1999 (the date the
registration statement was declared effective), Systems was required to pay
liquidated damages of $18,750 per week to holders of the 12 3/8% Notes.
13 1/2% Notes
On February 19, 1999, Golden Sky DBS consummated an offering of 13 1/2%
senior discount notes (the "13 1/2% Notes"), which resulted in net proceeds to
Golden Sky DBS of approximately $95.4 million (after initial purchasers'
discount and other offering expenses). The 13 1/2% Notes have an aggregate
balance due at stated maturity of $193.1 million. Cash interest on the 13 1/2%
Notes will not accrue prior to March 1, 2004. Thereafter, cash interest will
accrue at a rate of 13 1/2% per annum and be payable in arrears on March 1 and
September 1 of each year, commencing September 1, 2004. The 13 1/2% Notes mature
on March 1, 2007. Golden Sky DBS contributed the net proceeds from the offering
of the 13 1/2% Notes to Golden Sky Systems, of which $53.0 million was used to
repay existing revolving credit indebtedness.
Systems is not obligated for repayment of the 13 1/2% Notes and is
restricted as to its ability to make payments to Golden Sky DBS. However, Golden
Sky DBS is dependent on Systems for dividends or other cash distributions in
amounts sufficient to enable Golden Sky DBS to meet its debt service
requirements.
Bank Debt
During 1997, Systems entered into a credit agreement (the "Credit
Agreement") with a group of financial institutions, which provided for
borrowings of $100.0 million. Loans outstanding under the Credit Agreement bore
interest at variable rates (prime rate or LIBOR plus an applicable margin).
During May 1998, Systems entered into a seven-year, $150.0 million amended
credit facility (the "Credit Facility") with a syndicate of lenders. Upon
execution of the Credit Facility, Systems recognized an extraordinary charge of
approximately $2.6 million to write-off unamortized deferred financing costs
associated with the Credit Agreement. In February 1999, Systems' Credit Facility
was amended to permit, among other things, the 13 1/2% Notes Offering. Upon
execution of the February 1999 amendment to the Credit Facility, Systems
recognized an extraordinary charge of approximately $2.9 million to write off
unamortized deferred financing costs associated with the Credit Facility.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The Credit Facility provides for a term loan commitment of $35.0 million and
a revolving loan commitment of $115.0 million. The Credit Facility's term loan
commitment amortizes in specified quarterly installments from March 31, 2002
through maturity on December 31, 2005. The availability of revolving loan
borrowings under the Credit Facility reduces by specified amounts over the
period from March 31, 2001 through maturity on September 30, 2005.
Borrowings under the Credit Facility bear interest at variable rates
(approximately 10% as of December 31, 1999) calculated on a base rate, such as
the prime rate or LIBOR, plus an applicable margin. Commitment fees are payable
on unused amounts available under the Credit Facility. Such commitment fees,
which are payable quarterly in arrears, range from 0.50% per annum to 1.25% per
annum based on Systems' utilization of such commitments. As of December 31,
1999, aggregate borrowings outstanding under the Credit Facility totaled $52.0
million, including $35.0 million borrowed pursuant to the Credit Facility's term
loan commitment.
The Credit Facility contains a number of restrictive covenants that, among
other things, limit Systems' ability to incur additional indebtedness and
guaranty obligations, create liens and other encumbrances, make certain
payments, investments, loans and advances, pay dividends or make other
distributions in respect of Systems' capital stock, sell or otherwise dispose of
assets, make capital expenditures, merge or consolidate with another entity,
create subsidiaries, make amendments to its organizational documents or transact
with affiliates. As of each of December 31, 1997, 1998 and 1999, no amounts were
available for distribution to Holdings.
The Credit Facility also contains a number of financial covenants that
require Systems to meet certain financial ratios and financial condition tests.
These financial covenants, in certain instances, become effective at different
points in time and vary over time. The covenants include limitations on
indebtedness per subscriber, limitations on subscriber acquisition costs,
maintenance of a minimum fixed charge coverage ratio, maintenance of minimum
interest coverage ratios, and limitations on indebtedness to pro forma EBITDA
(earnings before interest, taxes, depreciation and amortization) ratios.
Revolving credit availability under the Credit Facility depends upon
satisfaction of the various covenants as well as minimum subscriber base
requirements.
As of September 30, 1999, Systems was not in compliance with certain of the
restrictive covenants prescribed by the Credit Facility. During January 2000,
the Credit Facility was amended to modify certain fourth quarter 1999 and year
2000 covenant requirements. Further, in conjunction with the amendment, Golden
Sky's third quarter 1999 covenant violations were waived. Pursuant to the
amendment, which was effective as of December 31, 1999, Golden Sky may borrow up
to an additional $20.0 million under the Credit Facility prior to March 31,
2000. Any such incremental borrowings, which are secured by letters of credit
provided by certain of Golden Sky Holdings' shareholders, must be repaid by
March 31, 2000 from the proceeds of either a private or public equity offering.
The required repayment date relative to these year 2000 incremental borrowings
may be deferred until May 31, 2000 under certain conditions. Upon repayment,
systems will have potential incremental borrowing capacity during the year
ending December 31, 2000 equal to the lesser of the proceeds received from
either a public or private equity offering or $20.0 million. Coincident with the
amendment of the Credit Facility, Holdings entered into stock subscription
agreements with certain of its shareholders for an aggregate of $20.0 million of
its preferred stock. Also in January 2000, the Credit Facility was further
amended to approve the change in ownership of Holdings that would result from
the merger with Pegasus. As of December 31, 1999, Systems was in compliance with
the Credit Facility's amended covenants.
Seller Notes Payable
Seller notes payable bear interest at rates ranging from 7% to 10% and are
collateralized by bank letters of credit.
Other Notes Payable
In November 1996, Golden Sky issued $2.0 million in promissory notes to a
group of lenders under a bridge financing agreement. The notes bore interest at
the rate of 10% per annum. In February 1997, these notes, along with $1.8
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
million in additional promissory notes issued in January 1997, were exchanged
for Systems' Series A Convertible Participating Preferred Stock. In connection
with the bridge agreement, Systems' issued warrants exercisable for 5,682 shares
of its Common Stock at an exercise price of $.01 per share. These warrants were
immediately exercisable and expire on February 12, 2007. At the date of
issuance, the fair value of the warrants was not material. These warrants were
assumed by Holdings after its formation and remain outstanding as of December
31, 1999.
Future maturities of amounts outstanding under Golden Sky's long-term
obligations as of December 31, 1999 are summarized as follows (dollars in
thousands):
<TABLE>
<CAPTION>
SELLER
12 3/8% BANK NOTES
NOTES DEBT PAYABLE OTHER TOTAL
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Year Ending December 31,
2000......................... $ -- $ -- $ 2,891 $357 $ 3,248
2001......................... -- -- 2,970 76 3,046
2002......................... -- 263 2,962 23 3,248
2003......................... -- 350 1,000 4 1,354
2004......................... -- 350 -- -- 350
Thereafter................... 195,000 51,037 -- -- 246,037
-----------------------------------------------------------
Total debt.................. $195,000 $52,000 $9,823 $460 $257,283
===========================================================
</TABLE>
6. STOCKHOLDER'S EQUITY (DEFICIT)
During 1996, Systems issued 1,000 shares of Common Stock, par value $.01,
for aggregate consideration of $1,000 cash. In February 1997, Systems (i)
amended its certificate of incorporation to cancel its outstanding shares of
Common Stock; (ii) created new classes of common and preferred stock and (iii)
exchanged all of the canceled shares of Systems' Common Stock for an aggregate
of ten shares of Systems' Series A Convertible Participating Preferred Stock
(the "Series A Preferred Stock").
In February 1997, Systems issued 24,990 shares of Series A Preferred Stock
in fulfillment of an investor's subscription to purchase Series A Preferred
Stock that was outstanding at December 31, 1996 (aggregate consideration of
$2,499,000). During that same month, Systems issued 100 shares of its Common
Stock (par value $.01) for aggregate consideration of $100 cash and a total of
38,107 shares of Series A Preferred Stock upon the conversion of convertible
promissory notes (plus accrued interest of approximately $62,000) issued in
November 1996 ($2.0 million) and January 1997 ($1.8 million). In February and
March 1997, Systems issued 342,893 additional shares of Series A Preferred Stock
for cash totaling $34.3 million. Upon the formation of Holdings in September
1997, all shareholders of Systems' Common Stock and Series A Preferred Stock
were issued equivalent shares of Holdings stock. Concurrent therewith, Systems
issued 1,000 shares of its Common Stock (par value $0.01) to Holdings for cash
proceeds of $10 and all previously outstanding shares of Systems' Common Stock
and Series A Preferred Stock were canceled.
7. STOCK INCENTIVE PLAN
In July 1997 Systems adopted the Golden Sky Systems, Inc. Stock Option and
Restricted Stock Purchase Plan (the "Stock Incentive Plan") to provide incentive
to attract and retain certain officers, directors and key employees. Options
issued pursuant to the Stock Incentive Plan are exercisable during a period of
up to ten years after grant and vest over a three-year period. Effective
September 9, 1997, Holdings assumed the Stock Incentive Plan. Participants in
the Holdings' Stock Incentive Plan received options with terms identical to
those under Systems' Stock Incentive Plan and all previously outstanding options
were canceled.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The following summarizes incentive stock option activity during the
three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
1997 1998 1999
---------------------------------------------------------------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year... -- $-- 62,525 $ 1.00 48,745 $1.00
Granted.................................. 62,525 1.00 18,693 1.00 11,600 1.00
Exercised................................ -- -- (24,831) 1.00 (468) 1.00
Forfeited................................ -- -- (7,642) 1.00 (1,025) 1.00
---------------------------------------------------------------------------
Options outstanding, end of year......... 62,525 $1.00 48,745 $1.00 58,852 $1.00
===========================================================================
Options exercisable, end of year......... 8,684 $1.00 5,595 $1.00 30,165 $1.00
===========================================================================
</TABLE>
Accounting for Stock-Based Compensation
Golden Sky has elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
interpretations in accounting for the Stock Incentive Plan. Under APB 25, if the
exercise price of employee stock options granted pursuant to the Stock Incentive
Plan is equal to or greater than the fair value of the underlying stock on the
date of grant, no compensation expense is recognized. In October 1995, the FASB
issued FAS No. 123, "Accounting for Stock-Based Compensation" ("FAS No. 123"),
which established an alternative method of expense recognition for stock-based
compensation awards to employees based on fair values. Golden Sky elected to not
adopt FAS No. 123 for expense recognition purposes.
For options granted during 1999, the estimated aggregate fair value of
Holdings' common stock on the respective grant dates exceeded the related
aggregate exercise price by approximately $462,000. This amount will be
recognized as compensation expense over the vesting period of the related stock
options. Accordingly, compensation cost of $154,000 was recorded during the year
ended December 31, 1999. For options granted in 1998 and 1997, the exercise
prices of the related stock options was not less than the fair value of
Holdings' common stock as of the respective grant dates and, accordingly, no
compensation expense was recognized relative to those options. The fair value of
Holdings' common stock was estimated by management using trading prices for
other similar publicly-traded companies, as adjusted for specific factors and
differences deemed relevant to the valuation of Holdings' common stock.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if Golden Sky had accounted for its stock-based
compensation using the fair value method prescribed by that statement. For
purposes of pro forma disclosures, the estimated fair value of the options is
amortized to expense over the corresponding vesting period. All options are
initially assumed to vest. Compensation previously recognized is reversed to the
extent applicable to forfeitures of unvested options. The fair value of each
option grant was estimated at the date of the grant using a Black-Scholes option
valuation model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1997 1998 1999
----------------------------------------------------
<S> <C> <C> <C>
Risk-free interest rate........................................ 6.0% 6.0% 6.0%
Dividend yield................................................. 0.0% 0.0% 0.0%
Volatility factor.............................................. 0.0% 0.0% 0.0%
Expected term of options....................................... 10 years 10 years 10 years
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Using the preceding assumptions, there was no pro forma effect on Golden
Sky's net loss from applying the fair value method under FAS No. 123.
8. 401(K) RETIREMENT PLAN
Golden Sky sponsors a 401(k) Retirement Plan (the "401(k) Plan") for
eligible employees. Employer matching contributions to the 401(k) Plan, which
became effective as of January 1, 1997, are discretionary. During the years
ended December 31, 1997, 1998 and 1999, Golden Sky made no discretionary
employer matching contributions to the 401(k) Plan. Administrative expenses
associated with the 401(k) Plan during those same periods were not material.
9. INCOME TAXES
The components of Golden Sky's (provision for) benefit from income taxes
are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1997 1998 1999
-----------------------------------------------
<S> <C> <C> <C>
Current (provision) benefit:
Federal......................................... $ 3,777 $ 16,325 $ 32,420
State........................................... 717 3,097 6,152
Increase in valuation allowance................. (4,494) (19,422) (38,572)
-----------------------------------------------
Total current (provision) benefit................. -- -- --
Deferred benefit:
Federal......................................... 1,148 3,103 3,122
State........................................... 218 615 592
Increase in valuation allowance................. (1,366) (3,718) (3,714)
-----------------------------------------------
Total deferred benefit............................ -- -- --
-----------------------------------------------
Total benefit (provision).................... $ -- $ -- $ --
===============================================
</TABLE>
As of December 31, 1999, Golden Sky had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $166.5 million. The
NOLs expire beginning in the year 2011. Use of the NOLs is subject to statutory
and regulatory limitations regarding changes in ownership. FAS No. 109,
"Accounting for Income Taxes" ("FAS No. 109"), requires that the potential
future tax benefit of NOLs be recorded as an asset. FAS No. 109 also requires
that deferred tax assets and liabilities be recorded for the estimated future
tax effects of temporary differences between the tax basis and book value of
assets and liabilities. Deferred tax assets are offset by a valuation allowance
if deemed necessary.
In 1999, Systems increased its valuation allowance sufficient to fully
offset net deferred tax assets arising during the year. Realization of net
deferred tax assets is not assured and is principally dependent on generating
future taxable income prior to expiration of the NOLs. Management frequently
reviews the adequacy of its valuation allowance. Future decreases to the
valuation allowance will be made only as changes in circumstances indicate that
it is more likely than not the additional benefits will be realized. Any future
adjustments to the valuation allowance will be recognized as a separate
component of Systems' provision for income taxes.
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1998 and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------
1998 1999
-----------------------------------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts................................. $ 115 $ 383
Accrued expenses................................................ 104 337
-----------------------------------
Gross current deferred tax assets.................................. 219 720
Valuation allowance................................................ (219) (720)
-----------------------------------
Net current deferred tax assets.................................... -- --
Non-current deferred tax assets:
Depreciation.................................................... 92 139
Amortization of intangible assets............................... 5,931 8,255
Partnerships................................................... -- 841
Net operating loss carryforwards................................ 28,147 66,701
Other......................................................... -- 19
-----------------------------------
Total non-current deferred tax assets.............................. 34,170 75,955
Valuation allowance................................................ (34,170) (75,955)
-----------------------------------
Net non-current deferred tax assets................................ -- --
-----------------------------------
Net deferred tax assets............................................ $ -- $ --
===================================
</TABLE>
The actual income tax benefit (provision) for 1997, 1998 and 1999 reconciles
to the amounts computed by applying the statutory federal tax rate to income
before income taxes as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1997 1998 1999
--------------------------------------------------------------
TAX Rate TAX RATE TAX RATE
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory rate....................................... $ 5,367 34.0% $21,131 34.0 % $39,358 34.0 %
State income taxes, net of federal benefit........... 617 3.9 2,450 3.9 4,450 3.8
Non-deductible amortization of intangible assets..... (291) (1.8) (0.7) (1,507) (1.3)
(415)
Other................................................ (12) (0.1) -- (15) --
(26)
Increase in valuation allowance...................... (5,681) (36.0) (23,140) (37.2) (42,286) (36.5)
--------------------------------------------------------------
Income taxes......................................... $ -- -- % $ -- -- % $ -- -- %
==============================================================
</TABLE>
10. COMMITMENTS AND CONTINGENCIES
DIRECTV Litigation
In May 1999, Hughes acquired United States Satellite Broadcasting Company,
Inc. ("USSB"). Prior to its acquisition by Hughes, USSB offered premium
programming packages consisting of HBO, Showtime, Cinemax and The Movie Channel
to subscribers throughout the United States, including those within the NRTC's
rural DIRECTV markets. After completing its acquisition of USSB, Hughes combined
its DIRECTV business with USSB's assets to expand its programming lineup through
the addition of HBO, Showtime, Cinemax and The Movie Channel.
On June 3, 1999, the NRTC filed suit against DIRECTV and Hughes alleging
breach of contract and seeking a court order requiring DIRECTV to provide NRTC
members and affiliates with HBO, Showtime, Cinemax and The Movie Channel
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
programming for exclusive distribution in the NRTC's rural DIRECTV markets and a
temporary restraining order and preliminary injunction preventing DIRECTV from
providing, marketing, selling or billing for this programming in the NRTC's
rural markets. On June 17, 1999, the court denied the NRTC's request for a
temporary restraining order and preliminary injunction. On July 12, 1999, the
NRTC amended its complaint to add a second claim for breach of contract and to
seek a declaratory judgment that, if the court determines that the NRTC does not
have the exclusive right to provide HBO, Showtime, Cinemax and The Movie Channel
programming in its rural markets, then the NRTC has the non-exclusive right to
distribute this programming in its rural markets. In July 1999, DIRECTV and
Hughes filed a motion to dismiss this portion of the NRTC's complaint on the
grounds that it fails to state a claim upon which relief may be granted because
DIRECTV is in the process of negotiating USSB programming distribution rights
with the NRTC and the DBS Distribution Agreement requires the parties to
arbitrate any claims regarding the terms and conditions of these rights. The
Court denied the motion to dismiss on September 8, 1999.
In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC. In
the counterclaim, DIRECTV seeks the following declaratory judgments:
1. That DBS-1, the first satellite launched by Hughes, is the only relevant
satellite for determining the term of the DBS Distribution Agreement;
and
2. That the DIRECTV-1R satellite, which was launched in October 1999, is a
successor satellite to DBS-1 within the scope and meaning of the DBS
Distribution Agreement; that DIRECTV appropriately and prudently
exercised its discretion, including its sole discretion to determine
when and under what conditions a successor satellite should be launched,
in determining to launch DIRECTV-1R in order to prevent a disruption in
service; that the NRTC's right of first refusal under the DBS
Distribution Agreement will be based on the satellite expiration date of
DBS-1; and that pursuant to its right of first refusal, the NRTC has no
right to specified programming services currently required to be
provided under the DBS Distribution Agreement or more than 20 program
channels of transponder capacity.
On August 26, 1999, the NRTC filed a separate lawsuit against DIRECTV and
Hughes in the United States District Court for the Central District of
California. In this suit, the NRTC alleges that DIRECTV and Hughes have breached
their fiduciary duty to the NRTC as well as the NRTC's agreement with Hughes and
have engaged in unfair business practices in violation of California law by
withholding from the NRTC various revenues, cost savings, discounts and other
benefits belonging to the NRTC under its agreement with Hughes. On October 15,
1999 DIRECTV moved to have the NRTC's breach of fiduciary duty (and related
breach of confidential relationship claims) dismissed. The court granted
DIRECTV's motion on November 15, 1999.
A trial date has not been set on the merits of any of the claims made by the
NRTC or DIRECTV and Hughes in either lawsuit. We are unable to predict the
outcome of these matters or how they will impact the business relationship
between the NRTC and DIRECTV.
On January 10, 2000, Golden Sky and Pegasus filed a lawsuit against DIRECTV
and Hughes in the United States District Court, Central District of California.
The action asserts various claims, including intentional interference with
contractual relations and interference with prospective economic advantage, and
seeks declaratory relief. The claims are based on DIRECTV's failure to provide
NRTC with certain premium programming, thereby preventing NRTC from providing
said premium programming to the class action members. The claims are also based
on DIRECTV's position with respect to launch fees and other benefits it has
received, contract term and rights of refusal. We are unable to predict the
outcome of this matter or how it will impact our business, financial condition
or results of operations.
<PAGE>
Other Litigation
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Golden Sky is subject to various other legal proceedings and claims which
arise in the ordinary course of its business. In the opinion of management, the
amount of ultimate liability with respect to those actions will not materially
affect Golden Sky's financial position or results of operations.
Operating Leases
Golden Sky has non-cancelable operating leases for office, warehouse and
storage space and equipment that expire at various dates. Future minimum lease
payments as of December 31, 1999 are summarized as follows (dollars in
thousands):
2000......................................................... $2,116
2001......................................................... 1,611
2002......................................................... 1,050
2003......................................................... 255
2004 and thereafter.......................................... 79
-----------------
Total.............................................. $5,111
=================
11. RELATED PARTY TRANSACTIONS
In 1997, Systems paid $66,000 to a company affiliated with Systems'
president for consulting services received by Systems. Additionally, during
1997, 1998 and 1999 Systems paid $77,000, $159,000 (including $75,000 paid in
connection with a 1998 acquisition) and $84,000, respectively, to one of its
directors for consulting services.
During 1996, Golden Sky's president provided Systems with a short-term loan
in the amount of $381,000. In 1997, Golden Sky received an additional $150,000
short-term loan from its president and a $215,000 short-term loan from a
shareholder. Each of these loans bore interest at an annual rate of 10% and was
repaid during 1997.
Through December 31, 1999, Golden Sky contracted with an entity owned by its
president for air transportation services, including the lease of an aircraft.
This lease, which was canceled effective December 31, 1999, required monthly
payments equal to the greater of $20,000 or an aggregate fixed hourly operating
charge. The fixed hourly operating charge was based on prevailing market prices.
The total cost of such services approximated $109,000, $506,000 and $300,000
during 1997, 1998 and 1999, respectively.
12. VALUATION AND QUALIFYING ACCOUNTS
Golden Sky's valuation and qualifying accounts as of December 31, 1997, 1998
and 1999 are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
----------------------------------------------
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of period.... $ 4 $ 138 $ 293
Charged to costs and expenses........................... 417 1,537 3,909
Deductions.............................................. (283) (1,382) (3,229)
----------------------------------------------
Allowance for doubtful accounts, end of period.......... $ 138 $ 293 $ 973
==============================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS
Consolidating financial information for Golden Sky, Golden Sky's guarantor
subsidiaries, and Golden Sky's non-guarantor subsidiaries is as follows (dollars
in thousands):
Consolidating Statement of Operations - Year Ended December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services...................... $ 13,356 $ 2,787 $ 309 $ -- $ 16,452
Lease and other................... 931 -- 13 -- 944
--------------------------------------------------------------------------
Total revenue...................... 14,287 2,787 322 -- 17,396
Costs and expenses:
Costs of DBS services............. 7,514 1,601 189 -- 9,304
System operations................. 2,830 876 100 (10) 3,796
Sales and marketing............... 6,597 693 26 -- 7,316
General and administrative........ 2,260 59 12 -- 2,331
Depreciation and amortization..... 6,312 109 79 800 7,300
--------------------------------------------------------------------------
Total costs and expenses............ 25,513 3,338 406 790 30,047
--------------------------------------------------------------------------
Operating loss...................... (11,226) (551) (84) (790) (12,651)
Non-operating items:
Interest and investment income.... 30 10 -- -- 40
Interest expense.................. (3,170) (3) -- -- (3,173)
--------------------------------------------------------------------------
Total non-operating items........... (3,140) 7 -- -- (3,133)
--------------------------------------------------------------------------
Loss before income taxes............ (14,366) (544) (84) (790) (15,784)
Income taxes........................ -- -- -- -- --
--------------------------------------------------------------------------
Net loss.......................... $(14,366) $ (544) $ (84) $(790) $(15,784)
==========================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Cash Flows - Year Ended December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................$ (14,366) $ (544) $ (84) $ (790) $(15,784)
Adjustments to reconcile net loss to net
cash provided by (used in) operating
activities:
Depreciation and amortization........... 6,312 109 79 800 7,300
Amortization of debt discount, deferred
financing costs and other............. 215 -- -- -- 215
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue................... (1,827) (615) (59) -- (2,501)
Other receivables..................... (185) 24 -- -- (161)
Inventory............................. (1,499) (34) (71) -- (1,604)
Prepaid expenses and other............ (201) 8 (10) -- (203)
Trade accounts payable................ 7,683 (320) 152 -- 7,515
Interest payable...................... 733 -- -- -- 733
Accrued payroll and other............. (1,461) 2,460 402 (10) 1,391
--------------------------------------------------------------------------
Net cash provided by (used in) operating
activities.............................. (4,596) 1,088 409 -- (3,099)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets...... (120,051) -- -- -- (120,051)
Purchases of property and equipment........ (992) (6) -- -- (998)
Other...................................... 320 -- -- -- 320
--------------------------------------------------------------------------
Net cash used in investing activities...... (120,723) (6) -- -- (120,729)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of Series A
Preferred Stock......................... 34,289 -- -- -- 34,289
Borrowings under the Credit Agreement...... 75,000 -- -- -- 75,000
Principal payments on the Credit Agreement. (14,995) (5) -- -- (15,000)
Proceeds from issuance of notes payable 2,115 __ -- -- 2,115
Principal payments on notes payable
and obligations under capital leases.... (2,902) -- -- -- (2,902)
Contribution from Holdings................. 46,800 -- -- -- 46,800
Increase in deferred financing costs ...... (3,321) -- -- -- (3,321)
--------------------------------------------------------------------------
Net cash provided by (used in)
financing activities.................... 136,986 (5) -- -- 136,981
Net increase in cash and cash equivalents.. 11,667 1,077 409 -- 13,153
Cash and cash equivalents, beginning
of period............................... 479 -- -- -- 479
--------------------------------------------------------------------------
Cash and cash equivalents, end of period... $ 12,146 $ 1,077 $ 409 $ -- $ 13,632
==========================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Balance Sheet -- December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 827 $..1,189 $2,444 $ -- $4,460
Restricted cash, current portion.... 28,083 .-- -- -- 28,083
Subscriber receivables, net......... 6,815 1,043 774 -- 8,632
Other receivables................... 2,360 87 18 -- 2,465
Intercompany receivables............ 11,521 -- -- (11,521) --
Inventory........................... 9,255 583 308 -- 10,146
Prepaid expenses and other.......... 1,819 37 3 -- 1,859
--------------------------------------------------------------------------
Total current assets................... 60,680 2,939 3,547 (11,521) 55,645
Restricted cash, net of current portion 23,534 -- -- -- 23,534
Property and equipment, net............ 4,418 381 195 -- 4,994
Investment in subsidiaries............. 22,518 -- -- (22,518) --
Intangible assets, net................. 199,867 25,051 3,525 4,696 233,139
Deferred financing costs............... 10,541 -- -- -- 10,541
Other assets........................... 133 85 -- -- 218
--------------------------------------------------------------------------
Total assets...................... $ 321,691 $ 28,456 $7,267 $(29,343) $ 328,071
==========================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable.............. $ 13,482 $ 49 $ 8 $ -- $13,539
Interest payable.................... 11,009 -- -- -- 11,009
Current maturities of long-term 8,916 -- -- -- 8,916
obligations.......................
Unearned revenue.................... 4,380 789 405 -- 5,574
Accrued payroll and other........... 1,028 6,263 5,633 (11,521) 1,403
--------------------------------------------------------------------------
Total current liabilities.............. 38,815 7,101 6,046 (11,521) 40,441
Long-term obligations, net of current maturities:
12 3/8% Notes....................... 195,000 -- -- -- 195,000
Bank debt........................... 67,000 -- -- -- 67,000
Seller notes payable................ 6,912 -- -- -- 6,912
Other notes payable and
obligations under capital leases.. 318 58 -- -- 376
Minority interest................... -- -- -- 2,420 2,420
--------------------------------------------------------------------------
Total long-term obligations, net of
current maturities................... 269,230 58 -- 2,420 271,708
--------------------------------------------------------------------------
Total liabilities...................... 308,045 7,159 6,046 (9,101) 312,149
Stockholder's Equity (Deficit):
Common Stock........................ -- 896 -- (896) --
Additional paid-in capital.......... 97,600 1,967 -- (1,967) 97,600
Retained earnings (accumulated
deficit)............................. (83,954) 18,434 1,221 (17,379) (81,678)
--------------------------------------------------------------------------
Total Stockholder's equity (deficit).... 13,646 21,297 1,221 (22,518) 15,922
---------------------------------------------------------------------------
Total liabilities and Stockholder's
equity (deficit)........................ $ 321,691 $28,456 $7,267 $(29,343) $ 328,071
===========================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Operations - Year Ended December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services...................... $ 57,437 $ 11,172 $ 6,301 $ -- $ 74,910
Lease and other................... 982 22 10 -- 1,014
---------------------------------------------------------------------------
Total revenue....................... 58,419 11,194 6,311 -- 75,924
Costs and Expenses:
Costs of DBS services............. 34,640 6,813 3,838 -- 45,291
System operations................. 7,683 2,533 1,318 (513) 11,021
Sales and marketing............... 23,753 5,045 3,403 -- 32,201
General and administrative........ 7,000 267 164 -- 7,431
Depreciation and amortization..... 19,336 996 340 2,494 23,166
---------------------------------------------------------------------------
Total costs and expenses............ 92,412 15,654 9,063 1,981 119,110
---------------------------------------------------------------------------
Operating loss...................... (33,993) (4,460) (2,752) (1,981) (43,186)
Non-operating items:
Interest and investment income.... 1,571 2 -- -- 1,573
Interest expense.................. (20,497) (28) (12) -- (20,537)
---------------------------------------------------------------------------
Total non-operating items........... (18,926) (26) (12) -- (18,964)
---------------------------------------------------------------------------
Loss before income taxes............ (52,919) (4,486) (2,764) (1,981) (62,150)
Income taxes........................ -- -- -- -- --
---------------------------------------------------------------------------
Loss before extraordinary charge.... (52,919) (4,486) (2,764) (1,981) (62,150)
Extraordinary charge on early (2,577) -- -- -- (2,577)
retirement of debt................
---------------------------------------------------------------------------
Net loss.......................... $(55,496) $(4,486) $(2,764) $(1,981) $(64,727)
===========================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Cash Flows - Year Ended December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss.................................. $(55,496) $(4,486) $(2,764) $(1,981) $(64,727)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and amortization.......... 19,336 996 340 2,494 23,166
Amortization of debt discount,
deferred financing and other......... 977 -- -- -- 977
Extraordinary charge on early
retirement of debt................... 2,577 -- -- -- 2,577
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue................... (1,283) (222) (252) -- (1,757)
Other receivables.................... (2,144) 32 (18) -- (2,130)
Inventory............................ (7,335) (477) (237) -- (8,049)
Prepaid expenses and other........... (1,189) (36) (3) -- (1,228)
Trade accounts payable............... 5,357 (145) (144) -- 5,068
Interest payable..................... 10,223 -- -- -- 10,223
Accrued payroll and other............ (10,253) 4,827 5,231 (513) (708)
--------------------------------------------------------------------------
Net cash provided by (used in)
operating activities.................... (39,230) 489 2,153 -- (36,588)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets..... (104,487) -- -- -- (104,487)
Offering proceeds and investment
earnings placed in escrow.............. (51,617) -- -- -- (51,617)
Purchases of property and equipment....... (2,858) (341) (118) -- (3,317)
Other..................................... (500) -- -- -- (500)
--------------------------------------------------------------------------
Net cash used in investing activities..... (159,462) (341) (118) -- (159,921)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of 12 3/8%
Notes ................................. 189,150 -- -- -- 189,150
Borrowings under bank debt................ 90,000 -- -- -- 90,000
Principal payments on bank debt........... (83,000) -- -- -- (83,000)
Principal payments on notes payable
and obligations under capital leases... (3,639) (36) -- -- (3,675)
Increase in deferred financing costs...... (5,138) -- -- -- (5,138)
--------------------------------------------------------------------------
Net cash provided by (used in)
financing activities................... 187,373 (36) -- -- 187,337
--------------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents........................ (11,319) 112 2,035 -- (9,172)
Cash and cash equivalents, beginning
of period................................. 12,146 1,077 409 -- 13,632
--------------------------------------------------------------------------
Cash and cash equivalents, end of period.. $ 827 $ 1,189 $ 2,444 $ -- $ 4,460
==========================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Balance Sheet -- December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.............. $ 2,850 $ 132 $ 254 $ -- $ 3,236
Restricted cash, current portion....... 23,731 -- -- -- 23,731
Subscriber receivables, net............ 10,118 1,445 770 -- 12,333
Other receivables...................... 1,599 -- -- -- 1,599
Intercompany receivables............... 5,555 -- -- (5,555) --
Inventory.............................. 2,525 331 252 -- 3,108
Prepaid expenses and other............. 1,642 8 2 -- 1,652
--------------------------------------------------------------------------
Total current assets...................... 48,020 1,916 1,278 (5,555) 44,659
Property and equipment, net............... 5,459 256 138 -- 5,853
Investment in subsidiaries................ 17,144 -- -- (17,144) --
Intangible assets, net.................... 213,229 22,930 767 -- 236,926
Deferred financing costs.................. 7,318 -- -- -- 7,318
Other assets.............................. 173 87 -- -- 260
--------------------------------------------------------------------------
Total assets......................... $ 291,343 $25,189 $2,183 $ (22,699) $ 296,016
==========================================================================
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable................. $ 22,858 $ 18 $ 17 $ -- $ 22,893
Interest payable....................... 11,659 -- -- -- 11,659
Current maturities of long-term obligations 3,248 -- -- -- 3,248
Unearned revenue...................... 7,146 1,065 458 -- 8,669
Accrued payroll and other............. 734 7,032 1,638 (8,461) 943
--------------------------------------------------------------------------
Total current liabilities................ 45,645 8,115 2,113 (8,461) 47,412
Long-term obligations, net of current maturities:
12 3/8% Notes......................... 195,000 -- -- -- 195,000
Bank debt............................. 52,000 -- -- -- 52,000
Seller notes payable.................. 6,932 -- -- -- 6,932
Other notes payable and obligations under
capital leases...................... 103 -- -- -- 103
Minority interest..................... -- -- -- 936 936
--------------------------------------------------------------------------
Total long-term obligations, net of
current maturities..................... 254,035 -- -- 936 254,971
--------------------------------------------------------------------------
Total liabilities........................ 299,680 8,115 2,113 (7,525) 302,383
Stockholder's Equity (Deficit):
Common Stock.......................... -- 896 -- (896) --
Additional paid-in capital............ 193,145 1,967 -- (1,967) 193,145
Retained earnings (accumulated deficit) (201,482) 14,211 70 (12,311) (199,512)
--------------------------------------------------------------------------
Total Stockholder's equity (deficit).... (8,337) 17,074 70 (15,174) (6,367)
--------------------------------------------------------------------------
Total liabilities and Stockholder's equity
(deficit)........................ $ 291,343 $25,189 $2,183 $ (22,699) $ 296,016
==========================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Operations - Year Ended December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services...................... $112,714 $ 18,130 $ 9,089 $ -- $ 139,933
Lease and other................... 636 3 1 -- 640
------------------------------------------------------------------
Total revenue....................... 113,350 18,133 9,090 -- 140,573
Costs and expenses:
Costs of DBS services............. 71,510 11,516 5,664 -- 88,690
System operations................. 14,349 3,495 2,155 (266) 19,733
Sales and marketing............... 58,452 4,142 2,339 -- 64,933
General and administrative........ 15,703 -- -- -- 15,703
Depreciation and amortization..... 32,562 3,054 347 -- 35,963
------------------------------------------------------------------
Total costs and expenses............ 192,576 22,207 10,505 (266) 225,022
------------------------------------------------------------------
Operating income (loss)............. (79,226) (4,074) (1,415) 266 (84,449)
Non-operating items:
Interest and investment income.... 2,393 -- -- -- 2,393
Interest expense.................. (32,434) (5) (2) -- (32,441)
Other non-operating expenses ..... (258) (144) -- -- (402)
------------------------------------------------------------------
Total non-operating items........... (30,299) (149) (2) -- (30,450)
------------------------------------------------------------------
Income (loss) before income taxes... (109,525) (4,223) (1,417) 266 (114,899)
Income taxes........................ -- -- -- -- --
------------------------------------------------------------------
Income (loss) before extraordinary (109,525) (4,223) (1,417) 266 (114,899)
charge............................
Extraordinary charge on early (2,935) -- -- -- (2,935)
retirement of debt................
------------------------------------------------------------------
Net income (loss)................. $(112,460) $(4,223) $(1,417) $ 266 $(117,834)
==================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS - CONTINUED
Consolidating Statement of Cash Flows - Year Ended December 31, 1999
<TABLE>
<CAPTION>
CONSOLIDATING
AND
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss).......................$(112,460) $(4,223) $(1,417) $266 $(117,834)
Adjustments to reconcile net loss to
net cash used in operating
activities:
Depreciation and amortization........ 32,562 3,054 347 -- 35,963
Amortization of debt discount,
deferred financing costs and other. 1,126 -- 266 (266) 1,126
Earned stock compensation............ 154 -- -- -- 154
Extraordinary charge on early
retirement of debt................. 2,935 -- -- -- 2,935
Change in operating assets and
liabilities, net of acquisitions:
Subscriber receivables, net of
unearned revenue................. (472) (126) 57 -- (541)
Other receivables.................. 236 87 18 847 1,188
Inventory.......................... 6,730 252 56 -- 7,038
Prepaid expenses and other......... 177 29 1 -- 207
Trade accounts payable............. 9,376 (31) 9 -- 9,354
Interest payable................... 650 -- -- -- 650
Accrued payroll and other.......... 1,106 (97) (1,498) (847) (1,336)
------------------------------------------------------------------
Net cash used in operating activities... (57,880) (1,055) (2,161) -- (61,096)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets... (35,339) -- -- -- (35,339)
Purchases of minority interests......... (1,439) -- -- -- (1,439)
Proceeds from interest escrow account... 24,224 -- -- -- 24,224
Release of amounts reserved for
contingent reduction of bank debt.... 5,449 -- -- -- 5,449
Investment earnings placed in escrow ... (1,787) -- -- -- (1,787)
Purchases of property and equipment..... (3,423) -- (29) -- (3,452)
Other................................... 114 (2) -- -- 112
------------------------------------------------------------------
Net cash used in investing activities... (12,201) (2) (29) -- (12,232)
CASH FLOWS FROM FINANCING ACTIVITIES
Bank borrowing.......................... 38,000 -- -- -- 38,000
Principal payments on bank debt......... (53,000) -- -- -- (53,000)
Principal payments on notes payable
and obligations under capital leases. (8,846) -- -- -- (8,846)
Increase in deferred financing costs.... (869) -- (869)
Capital contribution from minority
partner ............................. 1,428 -- -- -- 1,428
Capital contribution from Golden Sky
DBS, Inc............................. 95,391 -- -- -- 95,391
------------------------------------------------------------------
Net cash provided by financing
activities............................ 72,104 -- -- -- 72,104
------------------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents...................... 2,023 (1,057) (2,190) -- (1,224)
Cash and cash equivalents, beginning
of period............................ 827 1,189 2,444 -- 4,460
------------------------------------------------------------------
Cash and cash equivalents, end of
period............................... $ 2,850 $ 132 $ 254 $ -- $ 3,236
==================================================================
</TABLE>
<PAGE>
GOLDEN SKY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Golden Sky's quarterly results of operations are summarized as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-----------------------------------------------------------------
<S> <C> <C> <C> <C>
Period Ended December 31, 1998:
Total revenue.................................. $ 14,129 $ 16,849 $ 19,912 $ 25,034
Operating loss................................. (6,034) (8,806) (11,462) (16,884)
Loss before extraordinary charge.............. (8,287) (11,761) (17,354) (24,748)
Net loss....................................... (8,287) (14,338) (17,354) (24,748)
Period Ended December 31, 1999:
Total revenue.................................. $ 29,036 $ 31,389 $ 36,732 $ 43,416
Operating loss................................. (16,734) (19,166) (29,930) (18,619)
Loss before extraordinary charge.............. (24,260) (26,547) (37,448) (26,644)
Net loss....................................... (27,195) (26,547) (37,448) (26,644)
</TABLE>
<PAGE>
EXHIBIT INDEX
2.1 Stock Purchase Agreement, dated as of July 11, 1997, among
Golden Sky Systems, Inc., Argos Support Services Company and the
several shareholders named therein. (Exhibit 2.1 to Registration
Statement on Form S-4 No. 333-64367)
2.2 Asset Purchase Agreement, dated as of July 19, 1998, by and
between Golden Sky Systems, Inc. and Volcano Vision, Inc.
(Exhibit 2.2 to Registration Statement on Form S-4 No.
333-64367)
2.3 Agreement and Plan of Merger, dated as of September 1, 1998,
among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
Western Montana DBS, Inc. d/b/a Rocky Mountain DBS and the
stockholders of Western Montana DBS, Inc. named therein.
(Exhibit 2.3 to Registration Statement on Form S-4 No.
333-64367)
3.1 Second Amended and Restated Certificate of Incorporation of
Golden Sky Systems, Inc. (Exhibit 3.1 to Registration Statement
on Form S-4 No. 333-64367)
3.2 By-Laws of Golden Sky Systems, Inc., adopted as of October 1,
1997. (Exhibit 3.2 to Registration Statement on Form S-4 No.
333-64367)
4.1 Indenture, dated as of July 31, 1998, by and among Golden Sky
Systems, Inc., as issuer, Argos Support Services Company, as
guarantor, PrimeWatch, Inc., as guarantor, and State Street Bank
and Trust Company of Missouri, N.A., as trustee, relating to the
12 3/8% Senior Subordinated Notes due 2006, Series A and 12 3/8%
Senior Subordinated Notes due 2006, Series B of Golden Sky
Systems, Inc. (Exhibit 4.1 to Registration Statement on Form S-4
No. 333-64367)
4.2 Form of 12 3/8% Senior Subordinated Note due 2006, Series B of
Golden Sky Systems, Inc. (Included in Exhibit 4.1 to
Registration Statement on Form S-4 No. 333-64367)
4.3 Registration Rights Agreement, dated as of July 31, 1998, by and
among Golden Sky Systems, Inc., Merrill Lynch, Pierce, Fenner &
Smith Incorporated and NationsBanc Montgomery Securities LLC, as
initial purchasers. (Exhibit 4.3 to Registration Statement on
Form S-4 No. 333-64367)
4.4 Escrow Agreement, dated as of July 31, 1998, by and among State
Street Bank and Trust Company of Missouri, N.A., as escrow agent
and as trustee under the Indenture, and Golden Sky Systems, Inc.
(Exhibit 4.4 to Registration Statement on Form S-4 No.
333-64367)
4.5 Account Control Agreement, dated as of July 31, 1998, by and
among Golden Sky Systems, Inc., State Street Bank and Trust
Company of Missouri, N.A., as escrow agent and as custodian and
securities intermediary. (Exhibit 4.5 to Registration Statement
on Form S-4 No. 333-64367)
10.1 Purchase Agreement, dated July 24, 1998, among Golden Sky
Systems, Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated and NationsBanc Montgomery Securities LLC, relating
to the issuance and sale of $195,000,000 aggregate principal
amount of 12 3/8% Senior Subordinated Notes due 2006, Series A
of Golden Sky Systems, Inc. (Exhibit 10.1 to Registration
Statement on Form S-4 No. 333-64367)
10.2 Amended and Restated Credit Agreement, dated as of May 8, 1998,
among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
various banks, Paribas (formerly known as Banque Paribas), as
syndication agent, Fleet National Bank, as administrative agent,
and General Electric Capital Corporation, as documentation
agent. (Exhibit 10.2 to Registration Statement on Form S-4 No.
333-64367)
10.3 First Amendment to Amended and Restated Credit Agreement, dated
as of February 10, 1999, among Golden Sky Holdings, Inc., Golden
Sky Systems, Inc., various banks, Paribas (formerly known as
<PAGE>
Banque Paribas), as syndication agent, Fleet National Bank, as
administrative agent, and General Electric Capital Corporation,
as documentation agent. (Exhibit 10.17 to Registration Statement
on Form S-4 No. 333-64367)
10.4 Form of NRTC/Member Agreement for Marketing and Distribution of
DBS Services, as amended. (Exhibit 10.3 to Registration
Statement on Form S-4 No. 333-64367)
10.6 Employment Agreement, dated February 12, 1997, between Golden
Sky Systems, Inc. and Rodney A. Weary. (Exhibit 10.6 to
Registration Statement on Form S-4 No. 333-64367)*
10.7 Non-Competition Agreement between Golden Sky Systems, Inc., and
Rodney A. Weary. (Exhibit 10.11 to Registration Statement on
Form S-4 No. 333-64367)*
10.8 Employment Agreement, dated February 12, 1997, between Golden
Sky Systems, Inc. and Jo Ellen Linn. (Exhibit 10.7 to
Registration Statement on Form S-4 No. 333-64367)*
10.9 Non-Competition Agreement between Golden Sky Systems, Inc. and
Jo Ellen Linn. (Exhibit 10.12 to Registration Statement on Form
S-4 No. 333-64367)*
10.10 Employment Agreement, dated as of November 3, 1997, between
Golden Sky Systems, Inc. and William J. Gerski. (Exhibit 10.8 to
Registration Statement on Form S-4 No. 333-64367)*
10.11 Employment Agreement, dated August 24, 1998, between Golden Sky
Systems, Inc. and John R. Hager. (Exhibit 10.10 to Registration
Statement on Form S-4 No. 333-64367)*
10.12 Non-Competition Agreement, dated August 24, 1998, between Golden
Sky Systems, Inc. and John R. Hager. (Exhibit 10.13 to
Registration Statement on Form S-4 No. 333-64367)*
10.13 Confidentiality and Proprietary Rights Agreements, dated August
24, 1998, between Golden Sky Systems, Inc. and John R. Hager.
(Exhibit 10.15 to Registration Statement on Form S-4 No.
333-64367)*
10.14 Form of Director Indemnification Agreement, dated February 12,
1997, between Golden Sky Systems, Inc. and each of the members
of its Board of Directors. (Exhibit 10.14 to Registration
Statement on Form S-4 No. 333-64367)
10.15 Exchange Agency Agreement, dated as of November 24, 1998,
between Golden Sky Systems, Inc. and State Street Bank and Trust
Company of Missouri, N.A., as exchange agent. (Exhibit 10.16 to
Registration Statement on Form S-4 No. 333-64367)
10.16 Office Building Lease, dated January 27, 1999, between
Belletower Partners, L.L.C. and Golden Sky Systems, Inc.
(Exhibit 10.18 to Registration Statement on Form S-4 No.
333-64367)
10.17 Amendment and Waiver, dated as of June 14, 1999, among Golden
Sky Holdings, Inc., Golden Sky Systems, Inc., various banks,
Paribas (formerly known as Banque Paribas), as Syndication
Agent, Fleet National Bank, as Administrative Agent and General
Electric Capital Corporation, as Documentation Agent. (Exhibit
10.24 to Registration Statement on Form S-4 No. 333-76413)
10.18 Employment Agreement, dated as of February 1, 1999, between
Golden Sky Systems, Inc. and Scott R. Brown.* **
10.19 Noncompetition Agreement, dated as of February 1, 1999, between
Golden Sky Systems, Inc. and Scott R. Brown.* **
<PAGE>
10.20 Noncompetition Agreement, dated as of November 3, 1997, between
Golden Sky Systems, Inc. and William J. Gerski.* **
10.21 Stock and Warrant Purchase Agreement, dated as of January 4,
2000, by and among Golden Sky Holdings, Inc. and the investors
identified therein.**
10.22 Agreement and Plan of Merger, dated as of January 10, 2000,
among Pegasus Communications Corporation and certain of its
shareholders, Pegasus GSS Merger Sub, Inc., Golden Sky Holdings,
Inc. and certain of its shareholders. (Exhibit 2.1 to
Registration Statement on Form S-4 No. 333-31080)
10.23 Second Amendment, Consent and Waiver, dated as of January 4,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
the Banks party thereto from time to time, Paribas (formerly
known as Banque Paribas), as Syndication Agent, Fleet National
Bank, as Administrative Agent and General Electric Capital
Corporation, as Documentation Agent.**
10.24 Third Amendment, Consent and Waiver, dated as of January 20,
2000, among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
the Banks party thereto from time to time, Paribas (formerly
known as Banque Paribas), as Syndication Agent, Fleet National
Bank, as Administrative Agent and General Electric Capital
Corporation, as Documentation Agent.**
21.1 Subsidiaries of Golden Sky Systems, Inc. (Exhibit 21.1 to
Registration Statement on Form S-4 No. 333-64367)
24.2 Powers of Attorney of the members of the Board of Directors of
Golden Sky Systems, Inc. (Included in the signature pages of
this report)**
27.1 Financial Data Schedule. **
99.1 Stock Purchase Agreement, dated as of February 12, 1997, among
Golden Sky Systems, Inc., Rodney A. Weary and the investors
named therein. (Exhibit 99.3 to Registration Statement on Form
S-4 No. 333-64367)
99.2 Stock Purchase Agreement, dated as of November 24, 1997, by and
among Golden Sky Holdings, Inc., Golden Sky Systems, Inc.,
Rodney A. Weary, and the investors named therein. (Exhibit 99.4
to Registration Statement on Form S-4 No. 333-64367)
99.3 Stockholders Agreement, dated as of November 24, 1997, by and
among Golden Sky Holdings, Inc. and the investors and other
stockholders named therein. (Exhibit 99.5 to Registration
Statement on Form S-4 No. 333-64367)
-------------
* Management contract or compensatory plan or arrangement
** Filed herewith.
EXHIBIT 10.18
EMPLOYMENT AGREEMENT
--------------------
EMPLOYMENT AGREEMENT made and entered into as of the 1st day of
February, 1999 by and between Golden Sky Systems, Inc., a Delaware corporation
(the "Company"), and Scott Brown (the "Executive").
WHEREAS, the Executive is currently providing strategic direction and
managerial services to the Company, and the Company desires to secure the
continued employment of the Executive in accordance herewith;
WHEREAS, the Executive is willing to commit himself to be employed by
the Company on the terms and conditions herein set forth and forego
opportunities elsewhere; and
WHEREAS, the parties desire to enter into this Agreement as of the
Effective Date (as hereinafter defined), setting forth the terms and conditions
for the employment relationship of the Executive with the Company during the
Employment Period (as hereinafter defined).
NOW, THEREFORE, IN CONSIDERATION of the mutual premises, covenants and
agreements set forth below, it is hereby agreed as follows:
1. Employment and Term.
(a) Employment. The Company agrees to employ the Executive,
and the Executive agrees to be employed by the Company, in accordance with the
terms and provisions of this Agreement during the Employment Period.
(b) Term and Extension. The term of this Agreement shall
commence as of the date hereof (the "Effective Date") and shall continue until
the third anniversary of the Effective Date (such term being referred to
hereinafter as the "Employment Period"). The Employment Period shall
automatically be extended for one year on the second anniversary of the
Effective Date, and each anniversary thereafter, unless either party gives the
other written notice of its intention not to extend the Employment Period at
least 30 days prior to such automatic extension, in which case no further
extensions will occur.
(c) Non-Competition Agreement. As a condition precedent to the
execution of this Agreement by the Company, the Executive shall simultaneously
enter into a Non-Competition Agreement in form and substance satisfactory to the
Company (the "Non-Competition Agreement").
2. Duties and Powers of Executive.
(a) Position; Location. During the Employment Period, the
Executive shall serve as Vice President of Operations of the Company, and shall
provide such services as are from time to time requested by the Chief Executive
Officer of the Company. The title, authority, duties, and responsibilities of
the Executive may be increased from time to time, but only with the mutual
written agreement of the Executive and the Company. The Executives services
shall be performed primarily at the Company's headquarters in the Kansas City
metropolitan area.
(b) Attention. During the Employment Period, and excluding any
periods of vacation and sick leave to which the Executive is entitled, the
Executive shall devote his full business time, best efforts and business
judgement to the business and affairs of the Company and, to the extent
necessary to discharge the responsibilities assigned to the Executive under this
Agreement, use the Executive's best efforts to carry out such responsibilities
faithfully and efficiently. The Executive shall not engage in any other business
activity, except as may be approved by the Board of Directors; provided,
however, that nothing herein shall prevent the Executive from:
(i) investing his assets in a manner not prohibited
by the Non- Competition Agreement, and in such form or manner
as shall not require the Executive to render any material
services with respect to the operations or affairs of any
company or other entity in which such investments are made;
(ii) engaging in religious, charitable or other
community or non-profit activities which do not impair his
ability to fulfill his duties and responsibilities under this
Agreement;
(iii) serving on the board of directors of any
company, other than the Company, in a manner not prohibited by
the Non-Competition Agreement; or
(iv) engaging in any trade and/or industry
organizations or activities, provided that such activities do
not impair his ability to fulfill his duties and
responsibilities under this Agreement.
3. Compensation. The Executive shall receive the following compensation
for his services hereunder to the Company:
(a) Salary. During the Employment Period, the Executive's
annual base salary (the "Annual Base Salary"), payable in accordance with the
Company's general payroll practices and subject to withholding for federal,
state and local taxes, in effect from time to time, shall be at the annual rate
established by the Board, but in no event less than $129,000. The Board may from
time to time direct such upward adjustments in Annual Base Salary as the Board
deems to be necessary or desirable, including, without limitation, adjustments
in order to reflect increases in the cost of living. The Annual Base Salary
shall not be reduced after any increase thereof. Any increase in the Annual Base
Salary shall not serve to limit or reduce any other obligation of the Company
under this Agreement.
(b) Incentive Compensation. During the Employment Period, the
Executive shall be entitled to participate in short-term incentive compensation
plans and long-term incentive compensation plans (the latter to consist of plans
offering stock options and other long-term incentive compensation) providing him
with the opportunity to earn, on a year-by-year basis, short-term and long-term
incentive compensation (the "Incentive Compensation"). Specifically, in 1999,
the short term cash incentive compensation shall be up to 38% of the Executive's
Base Salary. Additionally, the Executive shall be entitled to participate in the
Company's 1997 Stock Option and Restricted Stock Purchase Plan as reflected in
the Notice of Grant (including the Notice of Grant dated the date hereof and any
subsequent Notices) issued by the Company pursuant to such plan.
(c) Retirement, Incentive and Welfare Benefit Plans. During
the Employment Period and so long as the Executive is employed by the Company,
he shall be eligible to participate in all other incentive, stock option,
restricted stock, performance unit, savings, retirement and welfare plans,
practices, policies, and programs applicable generally to employees or executive
officers of the Company and its subsidiaries, except with respect to any
benefits under any plan, practice, policy, or program to which the Executive has
waived his rights in writing.
(d) Expenses. The Company shall reimburse the Executive for
all expenses, including those for travel and entertainment, properly incurred by
him in the performance of his duties hereunder in accordance with policies
established from time to time by the Board.
(e) Fringe Benefits. During the Employment Period and so long
as the Executive is employed by the Company, he shall be entitled to receive
fringe benefits in accordance with the plans, practices, programs and policies
of the Company from time to time in effect, commensurate with this position and
at least the same as those received by any executive officer of the Company.
4. Termination of Employment.
(a) Death or Disability. The Executive's employment shall
terminate automatically during the Employment Period upon the Executive's death
or a determination by a majority of the Board of Directors that, due to physical
or mental disability or illness, the Executive is unable to perform
substantially all of his duties and responsibilities under this Agreement.
(b) By the Company for Cause. The Company may terminate the
Executive's employment during the Employment Period for Cause without further
liability on the part of the Company effective immediately by a vote of a
majority of the Board of Directors of the Company after written notice to the
Executive setting forth in reasonable detail the nature of such Cause. For
purposes of this Agreement, "Cause" shall mean: (i) willfully dishonest and
material statements or acts of the Executive with respect to the Company or any
subsidiary thereof; (ii) conviction of the Executive of a crime involving moral
turpitude, deceit, dishonesty or fraud; (iii) willful and substantial failure to
perform his duties and obligations under this Agreement, which failure continues
after the Executive is given written notice and a reasonable opportunity to
cure; or (iv) material breach by the Executive of any obligations hereunder or
under the Non-Competition Agreement; provided, however, that other than with
respect to a material breach of the Non-Competition Agreement, the Executive
shall first be given written notice from the Board of Directors of the breach
and a reasonable opportunity to cure such breach.
(c) By the Company without Cause. Notwithstanding any other
provision of this Agreement, the Company may terminate the Executive's
employment other than by a termination for Cause during the Employment Period.
(d) By the Executive for Good Reason. The Executive may
terminate his employment during the Employment Period for Good Reason. For
purposes of this Agreement, "Good Reason" shall mean:
(i) the Company's failure to pay the Executive's
Annual Base Salary as specified in Section 3 (a) of this Agreement, or
to reduce the Executive's total compensation of Annual Base Salary plus
Incentive Compensation below $180,000 annually, or to fulfill any other
material obligations under this Agreement;
(ii) a material adverse change in the Executive's
title, authority, duties, or responsibilities as specified in Section 2
(a) of this Agreement, which such change constitutes a demotion; or
(iii) the Company's requiring the Executive, without
his consent, to be based at any office or location is beyond a
reasonable commuting distance from the Kansas City metropolitan area.
(e) Notice of Termination. Any termination by the Company for
Cause or by the Executive for Good Reason, shall be communicated by Notice of
Termination to the other party hereto given in accordance with Section 9 (b) of
this Agreement. For purposes of this Agreement, a "Notice of Termination" means
a written notice indicating the specific termination provision in this Agreement
relied upon, to the extent applicable, setting forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Executive's employment under the provision so indicated, and if the Date of
Termination (as defined in Section 4 (f)) is other than the date of receipt of
such notice, specifying the termination date (which date shall not be more than
30 days after the giving of such notice). The failure by the Executive or the
Company to set forth in the Notice of Termination any fact or circumstances that
contributes to a showing of Good Reason or Cause shall not waive any right of
the Executive or the Company hereunder or preclude the Executive or the Company
from asserting such fact or circumstance in enforcing the Executive's or the
Company's rights hereunder.
(f) Date of Termination. "Date of Termination" means, if the
Executive's employment is terminated by the Company for Cause or by the
Executive for Good Reason, the date of receipt of the Notice of termination or
any later date specified therein, as the case may be. If the Executive's
employment is terminated by the Company other than for Cause, the Date of
Termination shall be the date on which the Company notifies the Executive of
such termination. If the Executive's employment is terminated by reason of death
or disability, the Date of Termination shall be the date of the death or the
date the determination of disability is first made.
5. Obligations of the Company Upon Termination.
(a) Termination by Company other than for Cause or by the
Executive for Good Reason. If the Executive's employment with the Company is
terminated (A) by the Company for any reason other than for Cause or the
Executive's death or disability, or (B) by the Executive for Good Reason, the
Executive shall be entitled to the following benefits:
(i) Continued payment of the Executive's Annual
Salary at the rate in effect on the Date of Termination, said payments
to be made for six (6) months following the Date of Termination or, in
the event of termination of the Executive for Good Reason, for six (6)
months following the Date of Termination, such payments to be made on
the same periodic dates as salary payments would have been made to the
Executive had the Executive not been terminated;
(ii) Continuation of group health plan benefits to
the extent authorized by and consistent with 29 U.S.C.ss.1161 et seq.
(commonly known as "COBRA"), with -- --- the cost of such benefits
shared in the same relative proportion by the Company and the Executive
as in effect on the Date of Termination; and
(iii) A lump sum payment equal to such portion of the
Executive's cash Incentive Compensation for the then current fiscal
year as shall be pro-rated for a partial year based on the period
worked for the Company during such year and the satisfaction of any
applicable milestones or objectives prior to the Date of Termination;
and
(iv) A release from Section 7 of the Executive's
Non-Competition Agreement.
Except as otherwise specifically provided above or otherwise required
by law, all compensation and benefits to the Executive under this Agreement
shall terminate on the date of the termination.
(b) Termination by Reason of Death or Disability. During the
Employment Period, if the Executive's employment shall terminate by reason of
death or disability, the Company shall pay to the Executive or the Executive's
estate, as appropriate, a lump sum amount in cash equal to the sum of (i) the
Executive's Annual Base Salary through the Date of Termination to the extent not
theretofore paid, (ii) such position of the Executive's cash Incentive
Compensation for the then current fiscal year as shall be pro-rated for a
partial year based on the period worked for the Company during such year and the
satisfaction of any applicable milestones or objectives prior to the Date of
Termination, and (iii) any compensation previously deferred by the Executive
(together with any accrued interest or earnings thereon) an any accrued vacation
pay, in each case to the extent not theretofore paid.
(c) Termination by the Company for Cause or by the Executive
other than for Good Reason. If the Executive's employment shall be terminated
for Cause during the Employment Period, or if the Executive terminates
employment during the Employment Period other than for Good Reason, the Company
shall have no further obligations to the Executive under this Agreement other
than the obligation to pay to the Executive the Annual Base Salary through the
Date of Termination plus the amount of any compensation previously deferred by
the Executive (together with any accrued interest or earnings thereon), and any
accrued vacation pay, in each case to the extent theretofore unpaid.
6. Nonexclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit plan,
program, policy or practice provided by the Company and for which the Executive
may qualify (except with respect to any benefit to which the Executive has
waived his rights in writing), nor shall anything herein limit or otherwise
affect such rights as the Executive may have under any other contract or
agreement entered into after the Effective Date with the Company. Amounts that
are vested benefits or that the Executive is otherwise entitled to receive under
any benefit plan, policy, practice or program of, or any agreement entered into
with, the Company shall be payable in accordance with such benefit plan, policy,
practice or program or agreement except as explicitly modified by this
Agreement.
7. Mitigation; Miscellaneous. Notwithstanding any other provision of
this Agreement, nothing in this Section 7 shall be construed to (i) impose any
obligation on the Executive to seek or accept any employment after termination
of employment with the Company for any reason, or (ii) affect the Executive's
right to receive COBRA benefits at his cost after the expiration of the benefits
provided for herein. Notwithstanding anything in this Agreement to the contrary,
if any portion of any payments to the Executive by the Company under this
Agreement and any other present or future benefit plan of the Company or other
present or future agreement between the Executive and the Company would not be
deductible by the Company for federal income tax purposes by reason of
application of section 162 (m) of the Code, then payment of that portion to the
Executive may be deferred by the Company until the earliest date upon which
payment thereof can be made to the Executive without being non-deductible
pursuant to section 162 (m) of the Code. In the event of such deferral, the
Company shall pay interest to the Executive on the deferred amount at 120% of
the applicable federal rate provided for in section 1274 (d) (2) of the Code.
8. Successors.
(a) Assignment by Executive. This Agreement is personal to the
Executive and without the prior written consent of the Company shall not be
assignable by the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be enforceable by
the Executive's legal representatives.
(b) Successors and Assigns of Company. This Agreement shall
inure to the benefit of an be binding upon the Company, its successors and
assigns.
(c) Assumption. The Company shall require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business or assets of the Company to assume
expressly and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used in this Agreement, "Company" shall mean the Company, as
previously defined, and any successor to its businesses and/or assets as
aforesaid that assumes and agrees to perform this Agreement by operation of law,
or otherwise.
9. Miscellaneous.
(a) Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Missouri, without
reference to its principles of conflict of laws. The captions of this Agreement
are not part of the provisions hereof and shall have no force or effect. This
Agreement may not be amended, modified, repealed, waived, extended, or
discharged except by an agreement in writing signed by the party against whom
enforcement of such amendment, modification, repeal, waiver, extension or
discharge is sought. No person, other than pursuant to a resolution of the Board
or the appropriate committee thereof, shall have authority on behalf of the
Company to agree to amend, modify, repeal, waive, extend, or discharge any
provision of this Agreement or anything in reference thereto.
(b) Notices. All notices and other communications hereunder
shall be in writing and shall be given by hand delivery to the other party or by
registered or certified mail, return receipt requested, postage prepaid,
addressed, in either case, to the Company's headquarters or to such other
address as either party shall have stated to the other in writing in accordance
herewith. Notice and communications shall be effective when actually received by
the addressee.
(c) Severability. The invalidity or uneforceability of any
provision of this Agreement shall not affect the validity or enforceability of
any other provision of this Agreement.
(d) Taxes. The Company may withhold from any amounts payable
under this Agreement such federal, state, or local taxes as shall be required to
be withheld pursuant to any applicable law or regulation.
(e) No Waiver. The Executive's or the Company's failure to
insist upon strict compliance with any provision hereof or any other provision
of this Agreement or the failure to assert any right the Executive or the
Company may have hereunder, including, without limitation, the right of the
Executive to terminate employment for Good Reason pursuant to Section 4 (d) of
this Agreement, or the right of the Company to terminate the Executive's
employment for Cause pursuant to Section 4 (b) of this Agreement shall not be
deemed to be a waiver of such provision or right or any other provision or right
of this Agreement.
(f) Entire Agreement. This instrument, together with the
Non-Competition Agreement, contains the entire agreement of the Executive and
the Company with respect to the subject matter hereof, and all promises,
representations, understandings, arrangements and prior agreements are merged
herein and superseded hereby.
IN WITNESS WHEREOF, the Executive and the Company, have caused this
Agreement to be executed as of the day and year first above written.
GOLDEN SKY SYSTEMS, INC.
-------------------------------
Rodney A. Weary, President
EXECUTIVE
--------------------------------------
Scott Brown
EXHIBIT 10.19
GOLDEN SKY SYSTEMS, INC.
NON-COMPETITION AGREEMENT
-------------------------
Employee Name: Scott Brown
Date: February 1, 1999
In consideration of my employment by Golden Sky Systems, Inc. (the
"Company"), I, Scott Brown, hereby agree with the Company as follows.
1. Definitions.
(a) Proprietary Information. As used in this Agreement,
"Proprietary Information" means information which the Company possesses or to
which the Company has rights which has commercial value. Proprietary Information
includes, by way of example and without limitation, trade secrets, product
ideas, designs, configurations, processes, techniques, formulas, software,
improvements, inventions, data, know-how, copyrightable materials, marketing
plans and strategies, sales and financial reports and forecasts, and customer
lists. Proprietary Information includes information developed by me in the
course of my employment by the Company or otherwise relating to Inventions which
belong to the Company under Section 4 below, as well as other information to
which I may have access in connection with my employment.
(b) Inventions and Developments. As used in this Agreement,
"Inventions and Developments" means any and all inventions, developments,
creative works and useful ideas of any description whatsoever, whether or not
patentable. Inventions and improvements which consist of or relate to any from
of Proprietary Information.
(c) Company-Related Inventions and Developments. For purposes
of this Agreement, "Company-Related Inventions and Developments" means all
Inventions and Developments which either (a) relate at the time of conception or
development to the actual or demonstrably anticipated business of the Company or
to its actual or demonstrably anticipated research and development; (b) result
from or relate to any work performed for the Company, whether or not during
normal business hours; (c) are developed on Company time; or (d) are developed
through the use of the Company's Proprietary Information, equipment and
software, or other facilities or resources.
(d) Company. For purposes of this Agreement, all references to
the "Company" will be deemed to include the Company and its direct or indirect
subsidiaries and affiliates.
2. Confidentiality. I understand and agree that my employment creates a
relationship of confidence and trust between me and the Company with respect to
(a) all Proprietary Information, and (b) the confidential information of others
with which the Company has a business relationship. The information referred to
in clauses (a) and (b) of the preceding sentence is referred to in this
Agreement, collectively, as "Confidential Information." At all times, both
during my employment with the Company and after its termination, I will keep in
confidence and trust all such Confidential Information, and will not use or
disclose any such Confidential Information without the written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties to the Company. The restrictions set forth in this Section 2 will not
apply to information which is generally known to the public or in the trade,
unless such knowledge results from an unauthorized disclosure by me, but this
exception will not affect the application of any other provision of this
Agreement to such information in accordance with the terms of such provision.
3. Documents, Records, etc. All documents, records, apparatus,
equipment and other physical property, whether or not pertaining to Proprietary
Information, which are furnished to me by the Company or are produced by me in
connection with my employment will be and remain the sole property of the
Company. I will return to the Company all such materials and property as and
when requested by the Company. In any event, I will return all such materials
and property immediately upon termination of my employment for any reason. I
will not take with me any such material or property or any copies thereof upon
such termination.
4. Ownership of Inventions and Developments. I agree that all
Company-Related Inventions and Development which I conceive or develop, in whole
or in part, either alone or jointly with others, during the term of my
employment with the Company will be the sole property of the Company. The
Company will be the sole owner of all patents, copyrights and other proprietary
rights in and with respect to such Company-Related Inventions and Developments.
To the fullest extent permitted by law, such Company-Related Inventions and
Developments will be deemed works made for hire. I hereby transfer and assign to
the Company and proprietary rights which I may have or acquire in any such
Company-Related Inventions and Developments, and I waive any moral rights or
other special rights which I may have or accrue therein. I agree to execute any
documents and take any actions that may be required to effect and confirm such
transfer and assignment and waiver. The provisions of this Section 4 will apply
to all Company-Related Inventions and Developments which are conceived or
developed during the term of my employment with the Company, whether before or
after the date of this Agreement, and whether or not further development or
reduction to practice may take place after termination of my employment, for
which purpose it will be presumed that any Company-Related Inventions and
Developments conceived by me which are reduced to practice within one year after
termination of my employment were conceived during the term of my employment
with the Company unless I am able to establish a later conception date by clear
and convincing evidence. The provisions of this Section 4 will not apply,
however, to any Inventions and Developments which may be disclosed in a separate
Schedule attached to this Agreement prior to its acceptance by the Company,
representing Inventions and Developments made by me prior to my employment by
the Company.
5. Disclosure of Inventions and Developments. I agree promptly to
disclose to the Company, or any persons designated by it, all Company-Related
Inventions and Developments which are or may be subject to the provisions of
Section 4.
6. Obtaining and Enforcing Proprietary Rights. I agree to assist the
Company, at the Company's request from time to time and at the Company's
expense, to obtain and enforce patents, copyrights or other proprietary rights
with respect to Company- Related Inventions and Developments in any and all
countries. I will execute all documents reasonably necessary or appropriate for
this purpose. This obligation will survive the termination of my employment,
provided that the Company will compensate me at a reasonable rate after such
termination for time actually spent by me at the Company's request on such
assistance. In the event that the Company is unable for any reason whatsoever to
secure my signature to any document reasonably necessary or appropriate for any
of the foregoing purposes (including renewals, extensions, continuations,
divisions or continuations in part), I hereby irrevocably designate and appoint
the Company and its duly authorized officers and agents as my agents and
attorneys-in-fact to act for me and on my behalf, but only for the purpose of
executing and filing any such document and doing all other lawfully permitted
acts to accomplish the foregoing purposes with the same legal force and effect
as if executed by me.
7. Competitive Activities. During the term of my employment with the
Company, and for a period of six months thereafter (the "Non-Competition
Period"), I will not, directly or indirectly, whether as owner, partner,
shareholder, consultant, agent, employee, co-venturer or otherwise, engage,
participate or invest in any "Business Activity" in any market in which the
Company then operates or any market in which the Company is obligated under
contract to purchase in the United States. For purposes of this Agreement,
"Business Activity" shall be defined as the direct-to-home satellite video
delivery business or in the cable television business. In addition, and without
limitation of the foregoing, I agree that during the Non-Competition Period, I
will not, directly or indirectly, either as principal, or as agent or employee
for any other person or entity, (a) hire or solicit for employment any
individual who is then an employee of the Company or was an employee of the
Company at any time within six months prior to such hiring or solicitation; (b)
solicit from any of the Company's customers any business of a kind now or at any
time during my employment carried on by the Company; or (c) offer to perform as
an employee for such customers any services now or at any time during my
employment offered by the Company. I understand that the restrictions set forth
in this Section 7 are intended to protect the Company's interest in its
Proprietary Information and established customer relationships and goodwill, and
agree that such restrictions are reasonable and appropriate for this purpose.
8. Third-Party Agreements and Rights. I hereby confirm that I am not
bound by the terms of any agreement with any previous employer or other party
which restricts in any way my use or disclosure of information or my engagement
in any business, except as is disclosed in a separate Schedule attached to this
Agreement. I have delivered to the Company true and complete copies of any
agreements listed on said Schedule. I represent to the Company that my execution
of this Agreement, my employment with the Company and the performance of my
proposed duties for the Company will not violate any obligations I may have to
any such previous employer or other party. In my work for the Company, I will
not disclose or make use of any information in violation of any agreements with
or rights of any such previous employer or other party, and I will not bring to
the premises of the Company any copies or other tangible embodiments of
non-public information belonging to or obtained from any such previous
employment or other party.
9. Injunction. I agree that it would be difficult to measure any
damages caused to the Company which might result from any breach by me of the
promises set forth in this Agreement, and that in any event money damages would
be an inadequate remedy for any such breach. Accordingly, I agree that if I
breach any portion of this Agreement, the Company shall be entitled, in addition
to all other remedies that it may have, to an injunction or other appropriate
equitable relief to restrain any such breach without showing or proving any
actual damage to the Company.
10. Binding Effect. This Agreement will be binding upon me and my
heirs, executors, administrators and legal representatives and will inure to the
benefit of the Company, any subsidiary of the Company, and its and their
respective successors and assigns.
11. Enforceability. If any portion or provision of this Agreement is to
any extent declared illegal or unenforceable by a court of competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal or unenforceable, will not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law. In the event that any provision of this
Agreement is determined by any court of competent jurisdiction to be
unenforceable by reason of excessive scope as to geographic, temporal or
functional coverage, such provision will be deemed to extend only over the
maximum geographic, temporal and functional scope as to which it may be
enforceable.
12. Entire Agreement. This Agreement constitutes the entire agreement between
the Company and myself with respect to the subject matter hereof, and supersedes
all prior representations and agreements with respect to such subject matter.
This Agreement may not be amended, modified or waived except by a written
instrument duly executed by the person against whom enforcement of such
amendment, modification or waiver is sought. The failure of any party to require
the performance of any term or obligation of this Agreement, or the waiver by
any party of any breach of this Agreement, in any particular case will not
prevent any subsequent enforcement of such term or obligation or to be deemed a
waiver of any separate or subsequent breach.
13. Notices. Any notices, requests, demands and other communications
provided for by this Agreement will be sufficient if in writing and delivered in
person or sent by registered or certified mail, postage prepaid, to me at the
last address which I have filed in writing with the Company or, in the case of
any notice to the Company, at its main offices, to the attention of its Chief
Executive Officer.
14. Governing Law. This is a Missouri contract and shall be construed
under and be governed in all respects by the laws of the State of Missouri.
I UNDERSTAND THAT THIS AGREEMENT AFFECTS IMPORTANT RIGHTS. I HAVE READ
IT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY.
----------------------------------------
Scott Brown
ACCEPTED AND AGREED TO BY
GOLDEN SKY SYSTEMS, INC.
By:
----------------------------
Name: Rodney A. Weary
Title: President
Date: February 1, 1999
<PAGE>
SCHEDULE OF PRIOR INVENTIONS
----------------------------
Employee Name: Scott Brown
Date: February 1, 1999
NONE
----------------------------------------
Scott Brown
ACCEPTED BY
GOLDEN SKY SYSTEMS, INC.
By:
--------------------------
Name: Rodney A. Weary
Title: President
Date: February 1, 1999
<PAGE>
SCHEDULE OF THIRD-PARTY AGREEMENTS
----------------------------------
Employee Name: Scott Brown
Date: February 1, 1999
NONE
----------------------------------------
Scott Brown
ACCEPTED BY
GOLDEN SKY SYSTEMS, INC.
By:
------------------------
Name: Rodney A. Weary
Title: President
Date: February 1, 1999
EXHIBIT 10.20
GOLDEN SKY SYSTEMS, INC.
NON-COMPETITION AGREEMENT
-------------------------
Employee Name: William J. Gerski
Date: November 3, 1997
In consideration of my employment by Golden Sky Systems, Inc. (the
"Company"), I, the above-named Employee, hereby agree with the Company as
follows:
1. Definitions.
-----------
(a) Proprietary Information. As used in this Agreement,
"Proprietary Information" means information which the Company possesses or to
which the Company has rights which has commercial value. Proprietary Information
includes, by way of example and without limitation, trade secrets, product
ideas, designs, configurations, processes, techniques, formulas, software,
improvements, inventions, data, know-how, copyrightable materials, marketing
plans and strategies, sales and financial reports and forecasts, and customer
lists. Proprietary Information includes information developed by me in the
course of my employment by the Company or otherwise relating to Inventions and
Developments (as hereinafter defined) which belong to the Company under Section
4 below, as well as other information to which I may have access in connection
with in employment.
(b) Inventions and Developments. As used in this Agreement,
"Inventions and Developments" means any and all inventions, developments,
creative works and useful ideas of any description whatsoever, whether or not
patentable. Inventions and Developments include, by way of example and without
limitation, discoveries and improvements which consist of or relate to any form
of Proprietary Information.
(c) Company-Related Inventions and Developments. For purposes
of this Agreement, "Company-Related Inventions and Developments" means all
Inventions and Developments which either (a) relate at the time of conception or
development to the actual or demonstrably anticipated business of the Company or
to its actual or demonstrably anticipated research and development; (b) result
from or relate to any work performed for the Company, whether or not during
normal business hours; (c) are developed on Company time; or (d) are developed
through the use of the Company's Proprietary Information, equipment and
software, or other facilities or resources.
(d) Company. For purposes of this Agreement, all references to
the "Company" will be deemed to include the Company and its direct or indirect
subsidiaries and affiliates.
2. Confidential. I understand and agree that my employment creates a
relationship of confidence and trust between me and the Company with respect to
(a) all proprietary Information, and (b) the confidential information of others
with which the Company has a business relationship. The information referred to
in clauses (a) and (b) of the preceding sentence is referred to in this
Agreement, collectively, as "Confidential Information." At all times, both
during my employment with the Company and after its termination, I will keep in
confidence and trust all such Confidential Information, and will not use or
disclose any such Confidential Information without the written consent of the
Company, except as may be necessary in the ordinary course of performing my
duties to the Company. The restrictions set forth in this Section 2 will not
apply to information which is generally known to the public or in the trade,
unless such knowledge results from an unauthorized disclosure by me, but this
exception will not affect the application of any other provision of this
Agreement to such information in accordance with the terms of such provision.
3. Documents, Records, etc. All documents, records, apparatus,
equipment and other physical property, whether or not pertaining, to Proprietary
Information, which are furnished to me by the Company or are produced by me in
connection with my employment will be and remain the sole property of the
Company. I will return to the Company all such materials and property as and
when requested by the Company. In any event, I will return all such materials
and property immediately upon termination of my employment for any reason. I
will not take with me any such material or property or any copies thereof upon
such termination.
4. Ownership of Inventions and Developments. I agree that all
Company-Related Inventions and Developments which I conceive or develop, in
whole or in part, either alone or jointly with others, during the term of my
employment with the Company will be the sole property of the Company. The
Company will be the sole owner of all patents, copyrights and other proprietary
rights in and with respect to such Company-Related Inventions and Developments.
To the fullest extent permitted by law, such Company-Related Inventions and
Developments will be deemed works made for hire. I hereby transfer and assign to
the Company any proprietary rights which I may have or acquire in any such
Company-Related Inventions and Developments, and I waive any moral rights or
other special rights which I may have or accrue therein. I agree to execute any
documents and take any actions that may be required to effect and confirm such
transfer and assignment and waiver. The provisions of this Section 4 will apply
to all Company-Related Inventions and Developments which are conceived or
developed during the term of my employment with the Company, whether before or
after the date of this Agreement, and whether or not further development or
reduction to practice may take place after termination of my employment, for
which purpose it will be presumed that any Company-Related Inventions and
Developments conceived by me which are reduced to practice within one year after
termination of my employment were conceived during the term of my employment
with the Company unless I am able to establish a later conception date by clear
and convincing evidence. The provisions of this Section 4 will not apply,
however, to any Inventions and Developments which may be disclosed in a separate
Schedule attached to this Agreement prior to its acceptance by the Company,
representing Inventions and Developments made by me prior to my employment by
the Company.
5. Disclosure of Inventions and Developments. I agree promptly to
disclose to the Company, or any persons designated by it, all Company-Related
Inventions and Developments which are or may be subject to the provisions of
Section 4.
6. Obtaining and Enforcing Proprietary Rights. I agree to assist the
Company, at the Company's request from time to time and at the Company's
expense, to obtain and enforce patents, copyrights or other proprietary rights
with respect to Company-Related Inventions and Developments in any and all
countries. I will execute all documents reasonably necessary or appropriate for
this purpose. This obligation will survive the termination of my employment,
provided that the Company will compensate me at a reasonable rate after such
termination for time actually spent by me at the Company's request on such
assistance. In the event that the Company is unable for any reason whatsoever to
secure my signature to any document reasonably necessary or appropriate for any
of the foregoing purposes (including renewals, extensions, continuations,
divisions or continuations in part), I hereby irrevocably designate and appoint
the Company and its duly authorized officers and agents as my agents and
attorneys-in-fact to act for me and on my behalf, but only for the purpose of
executing and filing, any such document and doing all other lawfully permitted
acts to accomplish the foregoing purposes with the same legal force and effect
as if executed by me.
7. Competitive Activities. During the term of my employment with the
Company, and for a period of two years thereafter (the "Non-Competition
Period"), I will not, directly or indirectly, whether as owner, partner,
shareholder, consultant, agent, employee, co-venturer or otherwise, engage,
participate or invest in any business activity in any market in which the
Company then operates or intends to operate anywhere in North America which
develops, manufacturers or markets products or performs services which are
competitive with or similar to the products or service of the Company, or
products or services which the Company has under development or which are the
subject of active planning at any time during the term of my employment. In
addition, and without limitation of the foregoing, I agree that during the
Non-Competition Period, I will not, directly or indirectly, either as principal,
or as agent or employee for any other person or entity, (a) hire, or solicit for
employment with any person other than the Company, any individual who is then an
employee of the Company or was an employee of the Company at any time within one
year prior to such hiring or solicitation; (b) solicit from any of the Company's
customers business of a kind now or at any time during my employment carried on
by the Company; or (c) offer to perform as an employee for such customers any
services now or at any time during my employment offered by the Company. I
understand that the restrictions set forth in this Section 7 are intended to
protect the Company's interest in its Proprietary Information and established
customer relationships and goodwill, and agree that such restrictions are
reasonable and appropriate for this purpose.
8. Third-Party Agreements and Rights. I hereby confirm that I am not
bound by the terms of any agreement with any previous employer or other party
which restricts in any way my use or disclosure of information or my engagement
in any business, except as may be disclosed in a separate Schedule attached to
this Agreement prior to its acceptance by the Company. I have delivered to the
Company true and complete copies of any agreements listed on said Schedule. I
represent to the Company that my execution of this Agreement, my employment with
the Company and the performance of my proposed duties for the Company will not
violate any obligations I may have to any such previous employer or other party.
In my work for the Company, I will not disclose or make use of any information
in violation of any agreements with or rights of any such previous employer or
other party, and I will not bring to the premises of the Company any copies or
other tangible embodiments of non-public information belonging to or obtained
from any such previous employment or other party.
9. Injunction. I agree that it would be difficult to measure any
damages caused to the Company which might result from any breach by me of the
promises set forth in this Agreement, and that in any event money damages would
be an inadequate remedy for any such breach. Accordingly, I agree that if I
breach, or propose to breach, any portion of this Agreement, the Company shall
be entitled, in addition to all other remedies that it may have, to an
injunction or other appropriate equitable relief to restrain any such breach
without showing or province any actual damage to the Company.
10. Binding Effect. This Agreement will be binding upon me and my
heirs, executors, administrators and legal representatives and will inure to the
benefit of the Company, any subsidiary of the Company, and its and their
respective successors and assigns.
11. Enforceability. If any portion or provision of this Agreement is to
any extent declared illegal or unenforceable by a court or competent
jurisdiction, then the remainder of this Agreement, or the application of such
portion or provision in circumstances other than those as to which it is so
declared illegal and unenforceable, will not be affected thereby, and each
portion and provision of this Agreement shall be valid and enforceable to the
fullest extent permitted by law. In the event that any provision of this
Agreement is determined by any court of competent jurisdiction to be
unenforceable by reason of excessive scope as to geographic, temporal or
functional coverage, such provision will be deemed to extend only over the
maximum geographic, temporal and functional scope as to which it may be
enforceable.
12. Entire Agreement. This Agreement constitutes the entire agreement
between the Company and myself with respect to the subject matter hereof, and
supersedes all prior representations and agreements with respect to such subject
matter. This Agreement may not be amended, modified or waived except by a
written instrument duly executed by the person against whom enforcement of such
amendment, modification or waiver is sought. The failure of any party to require
the performance of any term or obligation of this Agreement, or the waiver by
any party of any breach of this Agreement, in any particular case will not
prevent any subsequent enforcement of such term or obligation or to be deemed a
waiver of any separate or subsequent breach.
13. Notices. Any notices, requests, demands and other communications
provided for by this Agreement will be sufficient if in writing and delivered in
person or sent by registered or certified mail, postage prepaid, to me at the
last address which I have filed in writing with the Company or, in the case of
any notice to the Company, at its main offices, to the attention of its Chief
Executive Officer.
14. Governing Law. This is a Missouri contract and shall be construed
under and be governed in all respect s by the laws of the State of Missouri.
I UNDERSTAND THAT THIS AGREEMENT AFFECTS IMPORTANT RIGHTS. I HAVE READ
IT CAREFULLY AND AM SATISFIED THAT I UNDERSTAND IT COMPLETELY.
------------------------------
Signature of Employee
Accepted and Agreed to by GOLDEN SKY SYSTEMS, INC.
By: ______________________________
Name: Rodney A. Weary
Title: President
Date: November 3, 1997
<PAGE>
SCHEDULE OF PRIOR INVENTIONS
----------------------------
Employee Name: William J. Gerski
Date: November 3, 1997
NONE
------------------------------
Employee Signature
Accepted and Agreed to by
GOLDEN SKY SYSTEMS, INC.
By: ______________________________
Name: Rodney A. Weary
Title: President
<PAGE>
SCHEDULE OF THIRD-PARTY AGREEMENTS
----------------------------------
Employee Name: William J. Gerski
Date: November 3, 1997
NONE
------------------------------
Employee Signature
Accepted by
GOLDEN SKY SYSTEMS, INC.
By: ______________________________
Name: Rodney A. Weary
Title: President
TABLE OF CONTENTS
PAGE
EXHIBIT 10.21
SECTION 1 TERMS OF PURCHASE AND ISSUANCE.....................................1
1.1 Description of Series D Redeemable Preferred Stock and Funding
Warrants.............................................................1
1.2 Sale and Purchase....................................................1
1.3 Letters of Credit....................................................1
1.4 Subscription Warrants................................................1
1.5 Closing..............................................................2
1.6 Offset of Purchase Price Payment Obligation..........................2
1.7 Use of Proceeds......................................................2
SECTION 2 REPRESENTATIONS AND WARRANTIES OF THE COMPANY......................3
2.1 Organization and Corporate Power.....................................3
2.2 Authorization........................................................4
2.3 Non-contravention....................................................4
2.4 Capitalization of the Company........................................4
2.5 Financial Statements.................................................6
2.6 Absence of Undisclosed Liabilities...................................6
2.7 Accounts Receivable..................................................7
2.8 Title to Properties..................................................7
2.9 Tax Matters..........................................................7
2.10 Contracts and Commitments............................................8
2.11 Proprietary Rights; Employee Restrictions............................8
2.12 Litigation...........................................................9
2.13 Offeree..............................................................9
2.14 Business; Compliance with Laws......................................10
2.15 Information Supplied to Series D Investors..........................10
2.16 Investment Banking; Brokerage.......................................10
2.17 Solvency............................................................11
2.18 Environmental Matters...............................................11
2.19 Employee Benefit Programs...........................................12
2.20 Product and Services Claims.........................................13
2.21 Employees; Labor Matters............................................14
2.22 Corporate Records; Copies of Documents..............................14
2.23 Affiliate Transactions..............................................14
2.24 Investments Related to Certain Foreign Countries....................14
2.25 Small Business Concern, Etc.........................................15
2.26 Insurance...........................................................15
2.27 Absence of Certain Developments.....................................15
SECTION 3 CONDITIONS OF PURCHASE............................................16
3.1 Satisfaction of Conditions..........................................16
3.2 Opinion of Counsel..................................................16
3.3 Authorization.......................................................16
3.4 Effectiveness of Preferred Stock Terms..............................16
3.5 Delivery of Documents...............................................16
3.6 SBIC Deliveries.....................................................17
3.7 Execution of Agreement and Providing Letters of Credit..............17
3.8 Compliance with Law.................................................17
SECTION 4 CONDITIONS OF SALE................................................18
4.1 Satisfaction of Conditions..........................................18
4.2 Compliance With Law.................................................18
4.3 Execution of Agreement and Providing Letters of Credit..............18
SECTION 5 COVENANTS OF THE COMPANY..........................................18
5.1 Financial Statements; Minutes.......................................18
5.2 Budget and Operating Forecast.......................................19
5.3 Conduct of Business.................................................19
5.4 Access to Books and Records.........................................19
5.5 Sales of Additional Securities......................................19
5.6 Stockholders' Agreement.............................................20
5.7 Distributions on, and Redemptions of, Capital Stock.................20
5.8 Merger, Consolidation, Sale of Assets, Acquisitions and Other
Actions.............................................................21
5.9 Annual Updates; Number of Stockholders; Use of Proceeds; Regulatory
Violation; Economic Impact Information; Amendment...................21
5.10 June and December Warrants..........................................23
SECTION 6 CONFIDENTIALITY...................................................23
SECTION 7 INVESTOR REPRESENTATIONS..........................................24
SECTION 8 INDEMNIFICATION...................................................25
8.1 Indemnification for Vicarious Liability.............................25
8.2 Notice; Defense of Claims...........................................27
8.3 Satisfaction of Indemnification Obligations.........................28
SECTION 9 GENERAL...........................................................28
9.1 Amendments, Waivers and Consents....................................28
9.2 Survival of Representations, Warranties and Covenants;
Assignability of Rights.............................................29
9.3 Governing Law.......................................................29
9.4 Section Headings; Counterparts......................................29
9.5 Notices and Demands.................................................29
9.6 Severability........................................................29
9.7 Expenses............................................................30
9.8 Integration.........................................................30
9.9 Certain Provisions Applicable to SBIC Investors.....................30
9.10 No Assignment.......................................................30
APPENDICES
Appendix A (Form of Warrant)
Appendix B Securities Acquired
Appendix C (Form of Legal Opinion)
Appendix D (Form of Certificate of Designations, Preferences and Rights of
(Series D Redeemable Preferred Stock)
SCHEDULES
Schedule 2.1 Certain Violations
Schedule 2.4 Capitalization and Beneficial Ownership
Schedule 2.6 Undisclosed Liabilities
Schedule 2.7 Accounts Receivable
Schedule 2.8 Title to Properties
Schedule 2.9 Tax Matters
Schedule 2.10 Material Contracts
Schedule 2.11 Proprietary Rights
Schedule 2.12 Litigation
Schedule 2.14 Business; Compliance with Laws
Schedule 2.18 Environmental Matters
Schedule 2.20 Product and Services Claims
Schedule 2.21 Employees; Labor Matters
Schedule 2.23 Affiliate Transactions
Schedule 2.27 Absence of Certain Developments
<PAGE>
- --------------------------------------------------------------------------------
GOLDEN SKY HOLDINGS, INC.
Shares of Series D
Redeemable Preferred Stock
and Common Stock Warrants
STOCK AND WARRANT PURCHASE AGREEMENT
Dated as of January 4, 2000
- --------------------------------------------------------------------------------
<PAGE>
STOCK AND WARRANT PURCHASE AGREEMENT
AGREEMENT made as of this 4th day of January, 2000 by and among Golden
Sky Holdings, Inc., a Delaware corporation (the "Company"), and the investors
identified on the signature page hereto, who are herein collectively referred
to, where no distinction is required, as the "Investors" and individually as an
"Investor."
SECTION 1. TERMS OF PURCHASE AND ISSUANCE
1.1 Description of Series D Redeemable Preferred Stock and Funding
Warrants. The Company has authorized the issuance and sale to the Investors of
an aggregate of 100,000 shares of its authorized but unissued Series D
Redeemable Preferred Stock, par value $.01 per share (the "Series D Redeemable
Preferred Stock"), along with warrants substantially in the form of and
containing the terms set forth in Appendix A hereto (each a "Funding Warrant")
exercisable for an aggregate of 3,500 shares of the Company's common stock, $.01
par value (the "Common Stock"), for a collective purchase price of $200 per
share for the Series D Redeemable Preferred Stock and the associated Funding
Warrants.
1.2 Sale and Purchase. At the Closing (as defined in Section 1.5
hereof) and subject to the terms and conditions herein set forth, the Company
shall issue and sell to each of the Investors, and each Investor severally and
not jointly shall purchase from the Company, the number of shares of Series D
Redeemable Preferred Stock and the Funding Warrants set forth opposite the name
of such Investor in Appendix B hereto for the aggregate purchase price set forth
opposite the name of such Investor in Appendix B (the "Purchase Price").
1.3 Letters of Credit. The Investors each intend severally to
cause Fleet National Bank (the "LC Bank") to issue for the benefit of Paribas
(formerly known as Banque Paribas) as Syndication Agent (the "Agent") on behalf
of Paribas, Fleet National Bank, General Electric Capital Corporation, PAMCO
Caymen Ltd., PAM Capital Funding, L.P., Citizen's Bank (formerly known as State
Street Bank and Trust Company), Union Bank of California, IBJ Whitehall
Financial Group, Fremont Financial Corporation and DLJ Capital Funding, Inc.
(the "Lenders") under the Amended and Restated Credit Agreement, dated as of
July 7, 1997 and amended and restated as of May 8, 1998, and further amended as
of January 4, 2000, among the Company, Golden Sky Systems, Inc. ("GSS"), Banque
Paribas, Fleet National Bank and General Electric Capital Corporation (the
"Credit Facility"), letters of credit in the respective amounts set forth
opposite each Investor's name under the heading "Purchase Price" in Appendix B
hereof (collectively the "Letters of Credit" and each individually a "Letter of
Credit") to be used as security for an advance under the Credit Facility in the
principal amount of up to $20,000,000 from the Lenders to GSS (the "Loan"), with
the Letters of Credit being on terms and conditions acceptable to the Lenders
and the Investors.
1.4 Subscription Warrants. Upon the later to occur of (i) the
execution and delivery of this Agreement by the Company and all the Investors,
and (ii) the issuance of all of the Letters of Credit in a form acceptable to
the Lenders, and in consideration of the execution and delivery of this
Agreement by the Investors, the Company shall issue to each Investor warrants
substantially in the form of and containing the terms set forth in Appendix A
hereto (each a "Subscription Warrant" and, together with the Funding Warrants,
the "Warrants") exercisable for the number of shares of Common Stock set forth
opposite such Investor's name on Appendix B attached hereto.
1.5 Closing. The closing (the "Closing") of the sale and purchase
of the Series D Redeemable Preferred Stock and the Funding Warrants shall take
place upon the request of the Company only in the event that either (i) the
Lenders have asserted that the Loan or credit facility is in default, or (ii) a
principal payment is due under the terms of the Loan within ten days (the
"Notice Condition"). Upon occurrence of a Notice Condition, the Company may
provide written notice (the "Closing Notice") to the Investors of the date of
the Closing, which shall in no event be earlier than two business days after
receipt of the Closing Notice. The Closing shall take place at the offices of
McDermott, Will & Emery, 600 13th Street, N.W., Washington, D.C. 20005, at 10:00
A.M., on the date specified in the Closing Notice, or such other date, time and
place as shall be mutually agreed upon by the Company and a majority in interest
of the Investors (the "Closing Date"). At the Closing, the Company will deliver
the Series D Redeemable Preferred Stock and Funding Warrants being acquired by
each Investor in the form of a stock certificate and a warrant certificate
issued in such Investor's name or in the name of its nominee (of which the
Investor shall notify the Company not less than one business day prior to the
Closing), against payment of the full Purchase Price therefor by check or wire
transfer by or on behalf of each Investor to the Company. The obligations of the
Investors to consummate the purchase of the Series D Redeemable Preferred Stock
and Funding Warrants are several, not joint, and the failure of any one or more
of the Investors to fulfill their obligations hereunder shall not relieve any
other Investor of its obligations hereunder.
1.6 Offset of Purchase Price Payment Obligation. Notwithstanding
anything herein to the contrary, in the event that (i) the Agent prior to the
Closing Date draws upon a Letter of Credit provided by any of the Investors, or
(ii) any Investor makes a payment to reduce the amount outstanding under the
Loan, the amount so drawn under the Letter of Credit or so paid to reduce the
amount outstanding under the Loan shall be credited against such Investor's
payment obligations to the Company under Sections 1.2 and 1.5 hereof.
1.7 Use of Proceeds.
(a) It is the intention of the parties that proceeds received
by the Company from the sale of Series D Redeemable Preferred Stock and
Funding Warrants to the Investors pursuant to this Agreement shall be
used for the purpose of repaying the Loan and terminating all
obligations imposed by the Lender to maintain Letters of Credit
provided by Investors who have purchased the shares of Series D
Redeemable Preferred Stock specified in Appendix B.
(b) Immediately upon receipt by the Company of a notice that
(i) the Loan or Credit Facility is in default, or (ii) a principal
payment is due under the terms of the Loan, the Company shall provide
such notice to each Investor by means set forth in Section 9.5 below.
(c) In the event that an Investor purchases the shares of
Series D Redeemable Preferred Stock specified in Appendix B at the
Closing as provided herein, and if the Letter of Credit provided by
such Investor has not been drawn upon by the Agent, the Company shall
cause Golden Sky DBS, Inc., a Delaware corporation and wholly-owned
subsidiary of the company ("DBS") to cause GSS, a wholly-owned
subsidiary of DBS, to promptly pay the proceeds of such sale to the
Agent to be applied against payment obligations under the Loan and
shall cause the Agent to terminate the obligation to continue the
Letter of Credit provided by such Investor.
(d) In the event that an Investor purchases the shares of
Series D Redeemable Preferred Stock specified in Appendix B at the
Closing as provided herein, and if subsequently the Letter of Credit
provided by such Investor is drawn upon by the Agent to satisfy part of
the Company's payment obligation under the Loan, the Company shall
promptly pay such Investor the amount of the draw under the Letter of
Credit, not to exceed the amount of the Purchase Price paid by such
Investor.
(e) Notwithstanding anything herein to the contrary, in the
event that prior to the Closing Date (i) the Agent draws upon a Letter
of Credit provided by any of the Investors, or (ii) an Investor makes a
payment to the Company as full or partial consideration for shares of
Series D Redeemable Preferred Stock, the Company shall promptly request
that the Agent terminate or reduce the applicable Letter(s) of Credit
by the amount so drawn or the amount so paid (as referenced in Section
12 of the Second Amendment, Consent and Waiver to the Amended and
Restated Credit Agreement, dated as of the date hereof, among the
Company, GSS, the Banks party thereto, Paribas, as Syndication Agent,
Fleet National Bank, as Administrative Agent, and General Electric
Capital Corporation, as Documentation Agent).
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
In order to induce the Investors to enter into this Agreement, the
Company (which term shall be deemed to include, for purposes of this Section 2,
any subsidiary or subsidiaries of the Company existing at the date of this
Agreement, including without limitation GSS), subject to Section 9.2 hereof,
hereby represents and warrants to the Investors that as of the date hereof:
2.1 Organization and Corporate Power. The Company is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, and is qualified to do business as a foreign corporation in
each jurisdiction in which such qualification is required, except where failure
to so qualify would not have a material adverse effect on the business, assets,
operations or condition (financial or otherwise) of the Company. The Company has
all required corporate power and authority to own its property, to carry on its
business as presently conducted or contemplated, to enter into and perform this
Agreement and the agreements contemplated hereby, and generally to carry out the
transactions contemplated hereby and thereby. The copies of the Company's
Amended and Restated Certificate of Incorporation (the "Certificate of
Incorporation") and its By-laws, each as amended to date, which have been
furnished to counsel for the Investors, are correct and complete at the date
hereof. The Company is not in violation of any term of its Certificate of
Incorporation or By-laws or, except as set forth in Schedule 2.1, any material
agreement, instrument, judgment, decree, order, statute, rule or government
regulation applicable to the Company.
2.2 Authorization. This Agreement and all documents and
instruments executed pursuant hereto or contemplated hereby are valid and
binding obligations of the Company, enforceable in accordance with their terms
against the Company, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium and other laws or court decisions of general
application affecting enforcement of creditors' rights generally, and (ii) as
limited by laws or court decisions relating to the availability of specific
performance, injunctive relief or other equitable remedies or to equitable
principles of general applicability. The execution, delivery and performance of
this Agreement and all documents and instruments contemplated hereby and the
delivery and issuance of the Series D Redeemable Preferred Stock and the
Warrants have been duly authorized by all necessary corporate or other action of
the Company. Assuming the accuracy of the Investor representations set forth in
Section 7 hereof, no consent, approval or authorization of, or designation,
declaration or filing with, any governmental authority is required of the
Company in connection with the execution, delivery and performance of this
Agreement, or the issuance and delivery by the Company of the Series D
Redeemable Preferred Stock or the Warrants in accordance with the terms of this
Agreement, or the performance or consummation of any other transaction
contemplated hereby.
2.3 Non-contravention. The execution, delivery and performance by
the Company of this Agreement and each of the other agreements and instruments
to which it is a party and which are contemplated hereby will not: (a) conflict
with or result in any default under any contract, obligation or commitment of
the Company or any charter provision, by-law or corporate restriction of the
Company, other than such conflicts or defaults that have been waived in writing
prior to the date hereof; (b) result in the creation of any lien, charge or
encumbrance of any nature upon any of the properties or assets of the Company;
or (c) violate any instrument, agreement, judgment, decree, order, statute, rule
or regulation of any federal, state or local government or agency applicable to
the Company or to which the Company is a party.
2.4 Capitalization of the Company. The authorized capital stock of
the Company consists of: (a) 1,000,000 shares of Common Stock, of which 25,399
shares are, and will be as of the Closing, duly and validly issued, outstanding,
fully paid, and nonassessable; (b) 1,593,000 shares of designated preferred
stock, par value $.01 per share, of which (i) 418,000 shares have been
designated as Series A Convertible Participating Preferred Stock, par value $.01
(the "Series A Convertible Preferred Stock"), and all of which are duly and
validly issued, outstanding, fully paid, and nonassessable, (ii) 228,500 shares
have been designated as Series B Convertible Preferred Stock, par value $.01
(the "Series B Convertible Preferred Stock"), 228,442 of which are duly and
validly issued, outstanding, fully paid, and non assessable, (iii) 51,000 shares
have been designated as Series C Senior Convertible Preferred Stock, par value
$.01 (the "Series C Convertible Preferred Stock") all of which are duly and
validly issued, outstanding, fully paid and nonassessable, (iv) 100,000 shares
have been designated as Series D Redeemable Preferred Stock, all of which will
be as of the Closing, and upon satisfaction of the obligations of the Investors
hereunder, duly and validly issued, outstanding, fully paid and nonassessable,
and (v) 418,000 shares have been designated as Series A Redeemable Preferred
Stock, par value $.01 per share (the "Series A Redeemable Preferred Stock), and
228,500 shares have been designated as Series B Redeemable Preferred Stock, par
value $.01 per share (the "Series B Redeemable Preferred Stock"), none of which
are outstanding; and (c) 149,000 shares of undesignated preferred stock, par
value $.01 per share. Except for 58,852 shares of Common Stock reserved for
issuance under the Company's Stock Option Plan adopted on July 24, 1997 (the
"Stock Option Plan"), 5,682 shares of Common Stock issuable upon the exercise of
warrants (the "Alta Warrants") issued to certain investment funds affiliated
with Alta Communications, Inc. in connection with loans extended by such
investment funds to the Company, 7,000 shares of Common Stock issuable upon
exercise of the Warrants, 7,000 shares issuable upon exercise of the June and
December Warrants (if applicable, as described in Section 5.10 hereof) or as
otherwise disclosed in Schedule 2.4, the Company has not issued any other shares
of its capital stock and there are no outstanding warrants, options or other
rights to purchase or acquire any of such shares, nor any outstanding securities
convertible into such shares or outstanding warrants, options or other rights to
acquire any such convertible securities. As of the Closing, all of the
outstanding shares of capital stock of the Company will have been offered,
issued, sold and delivered in compliance with applicable federal and state
securities laws.
The Series A Convertible Preferred Stock is currently convertible into
418,000 shares of Series A Redeemable Preferred Stock and 418,000 shares (the
"Series A Conversion Shares") of Common Stock, together representing 52.2% of
the Common Stock on a fully-diluted basis after giving effect to the issuance of
the 58,852 shares reserved for issuance under the Stock Option Plan and the
exercise, exchange or conversion of any other securities exercisable or
exchangeable for or convertible into Common Stock (including the Series B
Convertible Preferred Stock, the Series C Convertible Preferred Stock, the Alta
Warrants and the Warrants). The Series B Convertible Preferred Stock is
currently convertible into 228,442 shares of Series B Redeemable Convertible
Preferred Stock and 228,442 shares (the "Series B Conversion Shares") of Common
Stock, together representing 28.6% of the Common Stock on a fully diluted basis
after giving effect to the issuance of the 58,852 shares reserved for issuance
under the Stock Option Plan and the exercise, exchange or conversion of any
other securities exercisable or exchangeable for or convertible into Common
Stock (including the Series A Convertible Preferred Stock, the Series C
Convertible Preferred Stock, the Alta Warrants and the Warrants). The Series C
Convertible Preferred Stock is convertible, as of November 30, 1999, into 57,233
shares (the "Series C Conversion Shares" and, together with the Series A and B
Conversion Shares, the "Conversion Shares") of Common Stock representing 7.2% of
the Common Stock of the Company on a fully diluted basis after giving effect to
the issuance of the 58,852 shares reserved for issuance under the Stock Option
Plan and the exercise, exchange or conversion of any other securities
exercisable or exchangeable for or convertible into Common Stock (including the
Series A Convertible Preferred Stock, the Series B Convertible Preferred Stock,
the Alta Warrants and the Warrants). The relative rights, preferences,
restrictions and other provisions relating to the Company's capital stock are as
set forth in the Certificate of Incorporation. The Company has authorized and
reserved for issuance (i) upon conversion of the Series A Convertible Preferred
Stock, 418,000 shares of Series A Redeemable Preferred Stock and 418,000 shares
of Common Stock, (ii) upon conversion of the Series B Convertible Preferred
Stock, 228,442 shares of Series B Redeemable Preferred Stock and 228,442 shares
of Common Stock, and (iii) upon conversion of the Series C Convertible Preferred
Stock, as of November 30, 1999, 57,233 shares of Common Stock. The Conversion
Shares issuable upon such conversions will be, when issued in accordance with
the Certificate of Incorporation, duly and validly authorized and issued, fully
paid and nonassessable. The Company has authorized and reserved for issuance
upon exercise of the Warrants and the Alta Warrants not less than 12,682 shares
of Common Stock and such shares will be, when issued in accordance with the
Certificate of Incorporation, duly and validly authorized and issued, fully paid
and nonassessable.
Except as set forth in the Certificate of Incorporation or the
Stockholders' Agreement, dated as of November 24, 1997, by and among Golden Sky
Holdings, Inc. and the Investors identified therein (the "Stockholders'
Agreement"), there are no preemptive rights or rights of first refusal with
respect to the issuance or sale of the Company's capital stock. No officer,
director or employee of the Company or any other person or entity has, or to the
best knowledge of the Company claims to have or has any right to claim to have
any interest in the Company's capital stock other than (i) as disclosed in
Schedule 2.4 hereof, (ii) options to acquire certain of the 58,852 shares of
Common Stock granted pursuant to the Stock Option Plan, (iii) the Alta Warrants,
or (iv) as an Investor hereunder. There are no restrictions on the transfer of
the Company's capital stock other than those arising from federal and state
securities laws or under this Agreement or the Stockholders' Agreement. Except
as set forth in the Stockholders' Agreement, there are no rights, obligations or
restrictions on the voting of any of the Company's capital stock or the
registration of such capital stock for offering to the public pursuant to the
Securities Act of 1933, as amended (the "Securities Act").
Except as set forth in Schedule 2.4, the Company has no subsidiaries or
investments in any other corporation or business organization and does not own
or have any direct or indirect interest in, a loan or advance to, or control
over any corporation, partnership, joint venture or other entity of any kind.
2.5 Financial Statements. The Company has heretofor furnished to
the Investors the following unaudited financial statements of the Company: (i)
an income statement for the year ended December 31, 1998; (ii) a balance sheet,
and related footnotes, as of December 31, 1998 (the "1998 Balance Sheet"); (iii)
an income statement for the nine months ended September 30, 1999; and (iv) a
balance sheet, and related footnotes, as of September 30, 1999 (the "Third
Quarter Balance Sheet"). Such financial statements and schedules have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis, except that such unaudited financial statements have been
prepared without footnote disclosures and year-end audit adjustments, which will
not, in any event, be material. Such financial statements contain notations for
all significant accruals or contingencies, fairly represent the financial
condition of the Company in all material respects as of the date thereof, and
are true and correct as of the date thereof in all respects. Nothing has come to
the attention of management of the Company since such dates that would indicate
that the financial statements were not true and correct in all material respects
as of the date thereof.
2.6 Absence of Undisclosed Liabilities. The Company does not have
any material liability or liabilities of any nature, whether accrued, absolute,
contingent or otherwise, asserted or unasserted, known or unknown, which are or
would be required to be disclosed in accordance with generally accepted
accounting principles, except as and to the extent disclosed in Schedule 2.6 or
as otherwise set forth in the 1998 Balance Sheet or the Third Quarter Balance
Sheet, and, to the best knowledge of the Company, there exists no set of facts
or circumstances which should be reasonably anticipated to form the basis for
any such material liabilities.
2.7 Accounts Receivable. To the best knowledge of the Company, all
of the accounts receivable of the Company represent bona fide completed sales
made in the ordinary course of business and are valid and enforceable claims,
subject to no express set-off or counterclaim. Except as disclosed on Schedule
2.7, the Company has no material accounts receivable from any person, firm or
corporation which is affiliated with it or from any of its directors, officers,
employees or shareholders or any affiliates of any of the foregoing.
2.8 Title to Properties. The Company has good and marketable title
to all of its material properties and assets, free and clear of all liens,
restrictions or encumbrances, except as disclosed in Schedule 2.8, and such
properties and assets constitute all of the assets necessary for the conduct of
the Company's business as presently conducted. All machinery and equipment
included in such properties which is necessary to the business of the Company is
in good condition and repair and all leases of real or personal property to
which the Company is a party are fully effective and afford the Company peaceful
and undisturbed possession of the subject matter of the lease. The Company is
not in violation, in any material respect, of any zoning, building or safety
ordinance, regulation or requirement or other law or regulation applicable to
the operation of its owned or leased properties, nor has the Company received
any notice of violation with which it has not complied.
2.9 Tax Matters. Except as set forth in Schedule 2.9 attached
hereto:
(a) The Company has paid or caused to be paid all federal,
state, local, foreign, and other taxes, including without limitation, income
taxes, estimated taxes, alternative minimum taxes, excise taxes, sales taxes,
franchise taxes, employment and payroll-related taxes, withholding taxes,
transfer taxes, and all deficiencies, or other additions to tax, interest, fines
and penalties owed by it (collectively, "Taxes"), required to be paid by it
through the date hereof whether disputed or not, other than possible sales and
use tax obligations which in the aggregate are not material to the Company. All
taxes and other assessments and levies which the Company is required to withhold
or collect have been withheld and collected and have been paid over to the
proper governmental authorities. The Company has, in accordance with applicable
law, timely and properly filed all federal, state, local and foreign tax returns
required to be filed by it through the date hereof, all such returns correctly
and accurately set forth the amount of any Taxes relating to the applicable
period and any deductions from, or credits against any Taxes or taxable income
relating to such returns are valid and proper items of deduction or credit.
(b) Neither the Internal Revenue Service ("IRS") nor any other
governmental authority is now asserting or, to the knowledge of the Company is
threatening to assert against the Company, any deficiency or claim for
additional Taxes. No claim has ever been made by an authority in a jurisdiction
where the Company does not file reports and returns that the Company is or may
be subject to taxation by that jurisdiction. There are no security interests on
any of the assets of the Company that arose in connection with any failure (or
alleged failure) to pay any Taxes. The Company is not and never has been a
"personal holding company" as defined under Section 541 of the Internal Revenue
Code of 1986, as amended (the "Code"). Except as set forth on Schedule 2.9
hereto, there has not be any audit of any tax return filed by the Company, no
audit of any tax return of the Company or any subsidiary, as the case may be, is
in progress and, to the Company's best knowledge, no tax authority is
contemplating any such audit, nor is any such audit pending. No extension of
time with respect to any date on which a tax return was or is to be filed by the
Company is in force, and no waiver or agreement by the Company is in force for
the extension of time for the assessment or payment of any Taxes. The Company
does not have any liability for the Taxes of any person or entity other than the
Company.
(c) For purposes of this Agreement, all references to Sections
of the Code shall include any predecessor provisions to such Sections and any
similar provisions of federal, state, local or foreign law.
2.10 Contracts and Commitments. Except as set forth in Schedule
2.10, the Company does not know of any basis for the termination, expiration or
modification of any material contract, obligation or commitment prior to the
expiration date thereof, nor, to the Company's best knowledge, does any other
party to any such contract, obligation or commitment plan or intend to so
terminate, modify or fail to renew on substantially similar terms any such
contract, obligation or commitment, which termination, expiration or
modification, in any such case, or failure to renew, may have an adverse effect
on the assets, liabilities, business, prospects or financial condition of the
Company. Except as set forth in Schedule 2.10, the Company is not in default,
nor to the Company's best knowledge, is any other party thereto in default,
under any material contract, obligation or commitment, and to the best knowledge
of the Company there is no state of facts which upon notice or lapse of time or
both would constitute such a default. The Company is not a party to any material
contract or arrangement the performance of which under circumstances now
foreseeable is likely to have an adverse effect on the assets, liabilities,
business or condition (financial or otherwise) of the Company. The Company does
not have any liability for renegotiation of any government contracts or
subcontracts. Without limiting the generality of the foregoing, all key
employees of the Company and each of its subsidiaries listed on Schedule 2.10
hereof have entered into non-competition agreements with the Company containing
non-competition, non-solicitation and confidentiality provisions, which
agreements continue in full force and effect.
2.11 Proprietary Rights; Employee Restrictions. The Company owns or
possesses exclusive licenses to use, free and clear of claims or rights of any
other person, all patents, patent applications, trademarks, trademark
applications, service marks, service mark applications, trade names, copyrights,
licenses, sublicenses, trade secrets and know how (collectively "Intellectual
Property") necessary to the conduct of its business as presently conducted and
as proposed to be conducted. The Company is not aware of any infringement by any
other person of any rights of the Company under any Intellectual Property. No
claim is pending or currently, or during the past 12 months, threatened against
the Company, nor has the Company received any notice from any third parties, to
the effect that any Intellectual Property owned or licensed by the Company, or
which the Company otherwise has the right to use, or the operation, products or
services of the Company infringe upon or conflict with the asserted rights of
any other person under any Intellectual Property, and, to the best knowledge of
the Company, there is no basis for any such claim (whether or not pending or
threatened). No claim is pending or, to the best knowledge of the Company, is
threatened against the Company, nor has the Company received any notice from any
third parties to the effect that any Intellectual Property owned or licensed by
the Company, or which the Company otherwise has the right to use, is invalid or
unenforceable by the Company, as the case may be, and, to the best knowledge of
the Company, there is no basis for any such claim (whether or not pending or
threatened).
All technical information developed by or belonging to the Company
which has not been patented and which is material to the business of the Company
has been kept confidential. To the best knowledge of the Company, the Company is
not making unlawful use of any Intellectual Property of any other person,
including without limitation any former employer of any past or present
employees of the Company. Except as disclosed in Schedule 2.11, neither the
Company nor, to the best knowledge of the Company, any of its employees,
officers or consultants has any agreements or arrangements with former employers
of such employees, officers or consultants relating to any Intellectual Property
of such employers, which interfere or conflict with the performance of such
employee's duties for the Company or results in any former employers of such
employees having any rights in, or claims on, the Company's Intellectual
Property. To the best knowledge of the Company, the activities of the Company's
employees and officers do not violate any agreements or arrangements which any
such employees have with former employers. The Company has taken all
commercially reasonable steps required to establish and preserve its ownership
of all of the Intellectual Property.
Without limitation of any of the foregoing and except as otherwise
expressly disclosed in Schedule 2.11 hereto: (a) the Company has taken
reasonable security measures to guard against unauthorized disclosure or use of
any of the Intellectual Property; and (b) the Company has no reason to believe
that any person (including without limitation any former employee of the
Company) has unauthorized possession of any of the Intellectual Property, or any
part thereof, or that any person has obtained unauthorized access to any of the
Intellectual Property.
2.12 Litigation. Except as disclosed in Schedule 2.12, there is no
litigation or governmental proceeding or investigation pending or, to the best
knowledge of the Company, currently, or, during the past 12 months, threatened
against the Company, or any officer or key employee of the Company, which (a)
may call into question the validity or hinder the enforceability or performance
of this Agreement or the agreements and transactions contemplated hereby, or (b)
relates to the Company or its business or affairs and could be reasonably
expected to have material adverse effect on the assets, liabilities, business or
condition (financial or otherwise) of the Company, nor, to the best knowledge of
the Company, has there occurred any event nor does there exist any condition on
the basis of which any such litigation, proceeding or investigation might
properly be instituted.
2.13 Offeree. Neither the Company nor anyone acting on its behalf
has in the past or will in the future sell, offer for sale or solicit offers to
buy any securities of the Company so as to bring the offer, issuance or sale of
the Series D Redeemable Stock, the Warrants or the June or December Warrants (if
applicable, as described in Section 5.10 hereof) as contemplated by this
Agreement, within the provisions of Section 5 of the Securities Act, unless such
offer, issuance or sale was or will be eligible for one or more of the
registration exemptions under the Securities Act. The Company has in the past
complied and will continue to comply in all material respects with all
applicable state "blue-sky" or securities laws in connection with the issuance
and sale of its Common Stock, preferred stock and all other securities
heretofore issued and to be issued upon the closing of the Agreement. The
Company has in the past complied in all material respects with all applicable
federal and state securities laws in connection with the offer, solicitation of
offers and sales of its securities.
2.14 Business; Compliance with Laws. Except as disclosed in
Schedule 2.14, the Company has all material franchises, permits, licenses and
other rights and privileges necessary to permit it to own its property and to
conduct its business as it is presently conducted. The Company is not in
violation, in any material respect, of any law, regulation, authorization or
order of any public authority. The Company is in compliance, in all material
respects, with all federal (including all laws and regulations of the Federal
Communications Commission), state and local laws and regulations (including all
applicable environmental laws and regulations) relating to its business as
presently conducted, except as disclosed in Schedule 2.14. The Company has been
approved as an NRTC affiliate member and DBS participant. Neither the Company
nor any of its affiliates has been: (a) subject to a voluntary or involuntary
petition under the federal bankruptcy laws or any state insolvency law or the
appointment of a receiver, fiscal agent or similar officer by a court for his
business or property; (b) convicted in a criminal proceeding or named as a
subject of a pending criminal proceeding (excluding traffic violations and other
minor offenses); (c) subject to any order, judgment, or decree (not subsequently
reversed, suspended or vacated) of any court of competent jurisdiction
permanently or temporarily enjoining it, him or her from, or otherwise imposing
limits or conditions on its, his or her, engaging in any securities, investment
advisory, banking, insurance or other type of business or acting as an officer
or director of a public company; or (d) found by a court of competent
jurisdiction in a civil action or by the Securities and Exchange Commission or
the Commodity Futures Trading Commission to have violated any federal or state
commodities, securities or unfair trade practices law or regulations of any
regulatory agency, which such judgment or finding has not been subsequently
reversed, suspended or vacated.
2.15 Information Supplied to Series D Investors. This Agreement and
the Schedules, taken as a whole, do not contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements contained therein not misleading. There is no material fact directly
relating to the assets, liabilities, business, prospects or condition (financial
or otherwise) of the Company (other than facts which relate to general economic
or industry trends or conditions) presently known to the Company which has not
been disclosed to the Investors that materially adversely affects or in the
future may reasonably be expected to materially adversely affect the same.
2.16 Investment Banking; Brokerage. No broker, finder, agent or
similar intermediary has acted on behalf of the Company in connection with this
Agreement or the transactions contemplated hereby and there are no brokerage
commissions, finders fees or similar fees or commissions payable in connection
therewith. The Company agrees to indemnify and hold the Investors harmless from
any losses, damages, costs or expenses they may suffer or incur as a result of a
breach of this representation (including any dilution or diminution in value of
their investment in the Company).
2.17 Solvency. The Company has not: (a) made a general assignment
for the benefit of creditors; (b) filed any voluntary petition in bankruptcy or
suffered the filing of any involuntary petition by its creditors; (c) suffered
the appointment of a receiver to take possession of all, or substantially all,
of its assets; (d) suffered the attachment or other judicial seizure of all, or
substantially all, of its assets; (e) admitted in writing its inability to pay
its debts as they come due; or (f) made an offer of settlement, extension or
composition to its creditors generally.
2.18 Environmental Matters.
(a) Except as set forth in Schedule 2.18, (i) the Company has
never generated, transported, used, stored, treated, disposed of, or managed any
Hazardous Waste (as defined below); (ii) to the best knowledge of the Company,
no Hazardous Material (as defined below) has ever been or is threatened to be
spilled, released, or disposed of by the Company, at any site presently or
formerly owned, operated, leased, or used by the Company, or has ever come to be
located in the soil or groundwater at any such site; (iii) to the best knowledge
of the Company, no Hazardous Material of the Company has ever been transported
from any site presently or formerly owned, operated, leased, or used by the
Company for treatment, storage, or disposal at any other place; (iv) to the best
knowledge of the Company, the Company presently does not own, operate, lease, or
use, nor has the Company previously owned, operated, leased, or used, any site
on which underground storage tanks are or were located; and (v) to the best
knowledge of the Company, no lien has ever been imposed by any governmental
agency on any property, facility, machinery, or equipment owned, operated,
leased, or used by the Company with the presence of any Hazardous Material and
based upon any action or inaction of the Company.
(b) Except as set forth in Schedule 2.18, (i) the Company has
no liability under, nor has it ever violated in any material respect, any
Environmental Law (as defined below); (ii) the Company, any property owned,
operated, leased, or used by the Company and any facilities and operations
thereon are presently in compliance in all material respects with all applicable
Environmental Laws; (iii) the Company has never entered into or been subject to
any judgment, consent decree, compliance order, or administrative order with
respect to any environmental or health and safety matter or received any request
for information, notice, demand letter, administrative inquiry, or formal or
informal complaint or claim with respect to any environmental or health and
safety matter or the enforcement of any Environmental Law; and (iv) to the best
knowledge of the Company, none of the items enumerated in clause (iii) of this
paragraph will be forthcoming.
(c) Except as set forth in Schedule 2.18, to the best
knowledge of the Company, no site owned, operated, leased or used by the Company
contains any asbestos or asbestos-containing material, any polychlorinated
biphenyls ("PCBs") or equipment containing PCBs, or any urea formaldehyde foam
insulation.
(d) The Investors have been provided with copies of all
documents, records, and information available concerning any environmental or
health and safety matter relevant to the Company, whether generated in
connection with the Company's business or otherwise, including, without
limitation, environmental audits, environmental risk assessments, site
assessments, documentation regarding off-site disposal of Hazardous Materials,
spill control plans, and reports, correspondence, permits, licenses, approvals,
consents, and other authorizations related to environmental or health and safety
matters issued by any governmental agency.
(e) For purposes of this Section 2.18, (i) "Hazardous
Material" shall mean and include any hazardous waste, hazardous material,
hazardous substance, petroleum product, oil, toxic substance, pollutant,
contaminant, or other substance which may pose a threat to the environment or to
human health or safety, as defined or regulated under any Environmental Law;
(ii) "Hazardous Waste" shall mean and include any hazardous waste as defined or
regulated under any Environmental Law; (iii) "Environmental Law" shall mean any
environmental or health and safety-related law, regulation, rule, ordinance, or
by-law at the federal, state, or local level, whether existing as of the date
hereof, or subsequently enacted; and (iv) "Company" shall include the Company,
and any predecessor to the Company.
2.19 Employee Benefit Programs.
(a) The Company has never maintained (as defined below) an
Employee Program (as defined below) which has at any time been intended to
satisfy the requirements under Section 501(c)(9) of the Code.
(b) Each Employee Program that has ever been maintained by the
Company has been maintained in compliance in all material respects with all
applicable laws. With respect to any Employee Program ever maintained by the
Company, there has occurred no "prohibited transaction," as defined in Section
406 of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or Section 4975 of the Code (for which there exists neither a
statutory nor regulatory exception), or material breach of any duty under ERISA
or other applicable law (including, without limitation, any health care
continuation requirements or any other tax law requirements, or conditions to
favorable tax treatment, applicable to such plan or to any person in regard to
such plan), which could result, directly or indirectly (including, without
limitation, through any obligation of indemnification or contribution), in any
taxes, penalties or other liability to the Company or any of its affiliates. No
litigation, arbitration or governmental administrative proceeding (or
investigation) or other proceeding (other than those relating to routine claims
for benefits) is pending or, to the best knowledge of the Company, threatened
with respect to any such Employee Program.
(c) Neither the Company nor any Affiliate (as defined below)
(i) has ever maintained any Employee Program which has been subject to Title IV
of ERISA or Section 412 of the Code (including, but not limited to, any
Multiemployer Plan (as defined below)) or (ii) has ever provided health care or
any other non-pension benefits to any employees after their employment is
terminated (other than as required by part 6 of subtitle B of Title I of ERISA)
or has ever promised to provide such post-termination benefits.
(d) With respect to each Employee Program maintained by or on
behalf of the Company or any affiliate since November 24, 1997, complete and
correct copies of the following documents (if applicable to such Employee
Program) have previously been delivered to the Investors: (i) all documents
embodying or governing such Employee Program, and any funding medium for the
Employee Program (including, without limitation, trust agreements), as they may
have been amended to the date hereof; (ii) the most recent IRS determination or
approval letter with respect to such Employee Program under Code Section 401 or
501(c)(9), and any applications for determination or approval subsequently filed
with the IRS; (iii) the three most recently filed IRS Forms 5500, with all
applicable schedules and accountants' opinions attached thereto; (iv) the
summary plan description for such Employee Program (or other descriptions of
such Employee Program provided to employees) and all modifications thereto; (v)
any insurance policy (including any fiduciary liability insurance policy and any
excess loss policy) related to such Employee Program; (vi) any documents
evidencing any loan to an Employee Program that is a leveraged employee stock
ownership plan; and (vii) all other materials reasonably necessary for the
Company to perform any of its responsibilities with respect to any Employee
Program subsequent to the Closing (including, without limitation, health care
continuation requirements).
(e) For purposes of this Section 2.19:
(i) "Employee Program" means (A) all employee benefit
plans within the meaning of ERISA Section 3(3), including, but not
limited to, employer welfare arrangements (within the meaning of ERISA
Section 3(40)), plans to which more than one unaffiliated employer
contributes and employee benefit plans (such as foreign or excess
benefit plans) which are not subject to ERISA; and (B) all stock or
cash option plans, restricted stock plans, bonus or incentive award
plans, severance pay policies or agreements, deferred compensation
agreements, supplemental income arrangements, vacation plans, and all
other employee benefit plans, agreements, and arrangements not
described in (A) above. In the case of an Employee Program funded
through an organization described in Code Section 501(c)(9), each
reference to such Employee Program shall include a reference to such
organization.
(ii) An entity "maintains" an Employee Program if
such entity sponsors, contributes to, or provides (or has promised to
provide) benefits under such Employee Program, or has any obligation
(by agreement or under applicable law) to contribute to or provide
benefits under such Employee Program, or if such Employee Program
provides benefits to or otherwise covers employees of such entity (or
their spouses, dependents, or beneficiaries).
(iii) An entity is an "Affiliate" of the Company if
it would have ever been considered a single employer with the Company
or any Entity under ERISA Section 4001(b) or part of the same
"controlled group" as the Company for purposes of ERISA Section
302(d)(8)(C).
(iv) "Multiemployer Plan" means a (pension or
non-pension) employee benefit plan to which more than one employer
contributes and which is maintained pursuant to one or more collective
bargaining agreements.
2.20 Product and Services Claims. Except as set forth on Schedule
2.20, (i) there are no pending or, to the best knowledge of the Company,
threatened material product or service claims with respect to any products or
services provided by the Company prior to the date hereof nor are there any
facts upon which a claim of such nature could reasonably be anticipated to be
based and (ii) the Company does not have any contractual liability for breach of
warranty or service claims. No claims have been made against the Company for
renegotiation or price redetermination of any business transaction resulting
from or relating to defective products or services, and, to the best knowledge
of the Company, there are no facts upon which any such claim should reasonably
be anticipated to be based.
2.21 Employees; Labor Matters. The Company is not delinquent in
payments to any of its employees for any material amount of wages, salaries,
commissions, bonuses or other direct compensation for any services performed for
it to the date hereof or amounts required to be reimbursed to such employees.
The Company does not have any policy, or practice, plan or program of paying
severance pay or any form of severance compensation in connection with the
termination of employment, except as set forth in Schedule 2.21. The Company is
in compliance in all material respects with all applicable laws and regulations
respecting labor, employment, fair employment practices, work place safety and
health, terms and conditions of employment, and wages and hours. Except as set
forth in Schedule 2.21, there are no material charges of employment
discrimination or unfair labor practices, nor are there any strikes, slowdowns,
stoppages of work or any other concerted interference with normal operations
which are existing, pending or, to the best knowledge of the Company threatened
against or involving the Company. The Company has not received any information
indicating that any of its employment policies or practices is currently being
audited or investigated by any federal, state or local government agency. The
Company is, and at all times since November 24, 1997 has been, in material
compliance with the requirements of the Immigration Reform Control Act of 1986.
Schedule 2.21 sets forth a complete list of each officer, employee and sales
representative who is scheduled to receive total remuneration from the Company
on an annualized basis in excess of $100,000 for the calendar year ending
December 31, 1999.
2.22 Corporate Records; Copies of Documents. The corporate record
books of the Company accurately record all corporate action taken by its
stockholders and board of directors and committees. The copies of the corporate
records of the Company, as made available to the Investors for review, are true
and complete copies of the originals of such documents.
2.23 Affiliate Transactions. Except as set forth in Schedule 2.23
hereto, neither the Company nor any officer, employee or director of the Company
or any of their respective spouses or family members or any of their affiliates,
owns, directly or indirectly, on an individual or joint basis, any material
interest in, or serves as an officer, director, partner or in another similar
capacity of, any competitor of the Company, or any organization which has a
contract or arrangement with the Company.
2.24 Investments Related to Certain Foreign Countries. Neither the
Company nor any affiliate of the Company has participated in, or is
participating in, an anti-Israeli boycott within the scope of Chapter 7 of Part
2 of Division 4 of Title 2 of the California Government Code, as in effect from
time to time.
2.25 Small Business Concern, Etc.
(a) The Company, together with its "affiliates" (as that term
is defined in 13 CFR Section 121.103), is a "smaller enterprise" within the
meaning of SBIC Regulations, including 13 CFR Section 107.710. The information
regarding the Company and its affiliates set forth in SBA Form 480, Form 652 and
Section A of Form 1031 delivered on or prior to the date hereof is accurate and
complete. The Company does not presently engage in, nor shall hereafter engage
in, any activities, and the Company shall not use the proceeds of the sale of
the Series D Redeemable Preferred Stock hereunder directly or indirectly for any
purpose, for which an SBIC is prohibited from providing funds by SBIC
Regulations (including 13 CFR Section 107.720).
(b) As of the date hereof, the Company, together with its
"affiliates," has a net worth of not more than $6.0 million and average net
income after federal income taxes (excluding any carryover losses) for the
preceding two years no greater than $2.0 million.
(c) For all purposes of this Agreement, the following terms
shall have the following meanings:
(i) "SBA" means the United States Small Business
Administration, and any successor agency performing the functions
thereof;
(ii) "SBIC" means a Small Business Investment Company
licensed by the SBA under the SBIC Act;
(iii) "SBIC Act" means the Small Business Investment
Act of 1958, as amended; and
(iv) "SBIC Regulations" means the SBIC Act and the
regulations issued by the SBA thereunder, codified at Title 13 of the
Code of Federal Regulations ("13 CFR"), Parts 107 and 121.
2.26 Insurance. The Company maintains insurance which is adequate
to protect the Company against the risks involved in the business conducted by
the Company.
2.27 Absence of Certain Developments. Except as disclosed in
Schedule 2.27, since the date of the 1998 Balance Sheet there has been (i) no
adverse change in the condition, financial or otherwise, of the Company or in
the assets, liabilities, business or prospects of the Company, (ii) no
declaration, setting aside or payment of any dividend or other distribution with
respect to, or any direct or indirect redemption or acquisition of, any of the
capital stock of the Company, (iii) no loan by the Company to any officer,
director, employee or stockholder of the Company, or affiliates of any of the
foregoing or any agreement or commitment therefor, excluding ordinary course of
business items such as travel advances, (v) no increase in the compensation paid
or payable to any officer, director, employee or agent of the Company or
affiliates of any of the foregoing, other than as approved by the Compensation
Committee of the Board of Directors, (vi) no material loss, destruction or
damage to any property of the Company, whether or not insured, (vii) no labor
trouble involving the Company and no material change in the personnel of the
Company or the terms and conditions of their employment and (viii) no
acquisition or disposition of any assets (or any contract or arrangement
therefor) nor any other transaction by the Company otherwise than for fair value
in the ordinary course of business.
SECTION 3. CONDITIONS OF PURCHASE
The Investors' obligation to purchase and pay for the Series D
Redeemable Preferred Stock and the Funding Warrants shall be subject to
compliance by the Company and each of its subsidiaries, including without
limitation GSS, with the Company's agreements herein contained and to the
fulfillment to the Investors' satisfaction on or before the Closing Date of the
following conditions:
3.1 Satisfaction of Conditions. The representations and warranties
of the Company contained in this Agreement (including, but not limited to, the
representations and warranties made in Section 2 hereof) shall be true and
correct in all material respects on and as of the Closing Date; each of the
conditions specified in this Section 3 shall have been satisfied or waived in
writing; and on the Closing Date, certificates to such effect executed by the
President and the principal financial officer of the Company shall be delivered
to the Investors.
3.2 Opinion of Counsel. The Investors shall have received an
opinion, dated the Closing Date, in substantially the form of Appendix C
attached hereto.
3.3 Authorization. The Board of Directors of the Company shall
have duly adopted resolutions in form reasonably satisfactory to the Investors
authorizing the Company to consummate the transactions contemplated hereby in
accordance with the terms hereof, and the Investors shall have received a duly
executed certificate of the Secretary of the Company setting forth a copy of
such resolutions, the Company's Certificate of Designations, Preferences and
Rights of Series D Redeemable Preferred Stock (the "Certificate of
Designations") and the By-laws and such other matters as may be requested by the
Investors.
3.4 Effectiveness of Preferred Stock Terms. The Board of Directors
of the Company shall have adopted a resolution establishing the terms of the
Series D Redeemable Preferred Stock as set forth in Appendix D hereto and such
action shall have been made effective by the required approval thereof, if any,
by the holders of the Series A Convertible Preferred Stock, the Series B
Convertible Preferred Stock, the Series C Convertible Preferred Stock and the
Common Stock and the filing of a certificate of designations with the Secretary
of State for the State of Delaware.
3.5 Delivery of Documents. The Company shall have executed and
delivered to the Investors (or shall have caused to be executed and delivered to
the Investors by the appropriate persons) the following:
(a) Certificates evidencing shares of the Series D Redeemable
Preferred Stock and the Funding Warrants;
(b) Certified copies of resolutions of the Board of Directors,
and any required resolutions or consents by the stockholders of the
Company, authorizing the execution and delivery of this Agreement, the
Certificate of Designations creating the Series D Redeemable Preferred
Stock and the issuance of the Series D Redeemable Preferred Stock, the
Warrants, the June and December Warrants (if applicable, as described
in Section 5.10 hereof) and the shares of Common Stock issuable upon
exercise of such warrants;
(c) A copy of the corporate charter of the Company, as
amended, certified as of a recent date by the Secretary of State of the
State of Delaware;
(d) A copy of the By-laws of the Company certified by the
Company's secretary;
(e) Certificates issued by the Secretaries of State of the
States of Delaware and Missouri, certifying that the Company and each
of its subsidiaries is in good standing in their respective states; and
(f) Such other supporting documents requested by the Investors
as may be reasonably necessary for the Investors to carry out the
transactions contemplated hereby.
3.6 SBIC Deliveries. The Company shall have delivered to Norwest Equity
Partners V ("Norwest"):
(a) duly completed and executed SBA Forms 480, 652 and Part A
of 1031;
(b) if not delivered prior to the Closing, a business plan
showing the Company's financial projections for a five-year period from
the Closing;
(c) a written statement from the Company regarding its
intended use of the proceeds from the sale of the Series D Redeemable
Preferred Stock; and
(d) a list, after giving effect to the Closing, of (i) the
name of each of the Company's directors, (ii) the name and title of
each of the Company's officers, and (iii) the name of each of the
Company's stockholders setting forth the number and class of shares
held.
3.7 Execution of Agreement and Providing Letters of Credit. Each
of the Investors shall have executed and delivered this Agreement to the Company
and shall have provided to the Agent the several Letters of Credit in the
amounts contemplated by Section 1.3 hereof and specified in Appendix B.
3.8 Compliance with Law. The issuance and sale of the Series D
Redeemable Preferred Stock, the Warrants and the June and December Warrants (if
applicable, as described in Section 5.10 hereof) to the Investors shall be made
in conformity with all applicable state and federal securities laws.
SECTION 4. CONDITIONS OF SALE
The Company's obligation to issue the Series D Redeemable Preferred
Stock and the Funding Warrants to any Investor and perform its other obligations
hereunder shall be subject to compliance by such Investor with the Investor's
agreements herein contained and to the fulfillment to the Company's satisfaction
on or before the Closing Date of the following conditions:
4.1 Satisfaction of Conditions. The representations and warranties
of each Investor contained in this Agreement (including, but not limited to, the
representations and warranties made in Section 7 hereof) shall be true and
correct in all material respects on and as of the Closing Date; each of the
conditions specified in this Section 4 shall have been satisfied or waived in
writing; and on the Closing Date, certificates to such effect executed by an
authorized officer of each Investor shall be delivered to the Company.
4.2 Compliance With Law. The issuance and sale of the Series D
Redeemable Preferred Stock to the Investors shall be made in conformity with all
applicable state and federal securities laws.
4.3 Execution of Agreement and Providing Letters of Credit. Each
of the Investors shall have executed and delivered this Agreement to the Company
and shall have provided to the Agent the several Letters of Credit in the amount
contemplated by Section 1.3 hereof and specified in Appendix B.
SECTION 5. COVENANTS OF THE COMPANY
From and after the date hereof, the Company (which term shall be deemed
to include, for purposes of this Section 5, any subsidiary or subsidiaries of
the Company existing at or formed after the date of this Agreement) shall comply
with the following covenants except as shall otherwise be expressly agreed
pursuant to a written consent or consents executed by the holders of a majority
in interest of the Series D Redeemable Preferred Stock, until such time as all
of the Series D Redeemable Preferred Stock shall have been redeemed in
accordance with their terms or upon the closing of an underwritten public
offering pursuant to an effective registration statement under the Securities
Act covering the offer and sale of Common Stock of the Company to the public in
which the proceeds received by the Company, net of underwriting discounts and
commissions, equal or exceed $35 million and the shares are offered to the
public at a price per share of no less than $600 (in each case as appropriately
adjusted for any stock split, combination, reorganization, recapitalization,
reclassification, stock distribution, stock dividend or similar event) (a
"Qualified Public Offering") or as otherwise provided in the Certificate of
Incorporation, whichever first occurs.
5.1 Financial Statements; Minutes. The Company will maintain a
comparative system of accounts in accordance with generally accepted accounting
principles, keep full and complete financial records and make available to the
Investors the following reports: (a) within 120 days after the end of each
fiscal year, a copy of the consolidated balance sheet of the Company as at the
end of such year, together with a consolidated statement of income and retained
earnings of the Company for such year, audited and certified by independent
public accountants of recognized national standing reasonably satisfactory to
the Investors, prepared in accordance with generally accepted accounting
principles and practices consistently applied; and (b) within 45 days after the
end of each quarter, a consolidated unaudited balance sheet of the Company as at
the end of such quarter and a consolidated unaudited statement of income and
retained earnings for the Company for such quarter and for the year to date; and
(c) such other financial information as the holders of a majority in interest of
the Series D Redeemable Preferred Stock may reasonably request, including
without limitation, certificates of the principal financial officer of the
Company concerning compliance with the covenants of the Company under this
Section 5.
5.2 Budget and Operating Forecast. The Company will prepare and
submit to the Board of Directors of the Company a budget for the Company for
each fiscal year of the Company at least 30 days prior to the beginning of such
fiscal year, together with management's written discussion and analysis of such
budget. The budget shall be accepted as the budget for such fiscal year when it
has been approved by a majority of the full Board of Directors of the Company
and, thereupon, a copy of such budget promptly shall be sent to the Investors.
The Company shall review the budget periodically and shall advise the Board of
Directors and the Investors of all changes therein and all material deviations
therefrom.
5.3 Conduct of Business. So long as any shares of Series D
Redeemable Preferred Stock shall remain outstanding, the Company shall conduct
its business in a manner that does not cause the Outside Investors to recognize
any item of gross income which would generate "unrelated business taxable
income" (as that term is defined in Sections 512 through 514 of the Code),
including without limitation any income derived from or on account of any
"debt-financed property" (as defined in Section 514 of the Code), or gross
income directly attributable to a "trade or business" (within the meaning of
Sections 512 and 513 of the Code).
5.4 Access to Books and Records. The Investors may examine the
books and records of the Company and inspect its facilities and may request
information at reasonable times and intervals concerning the general status of
the financial condition and operations of the Company, provided that access to
highly confidential proprietary information and facilities need not be provided.
5.5 Sales of Additional Securities.
(a) So long as any shares of Series D Redeemable Preferred
Stock shall be outstanding, the Company covenants and agrees that it
shall not accept subscriptions for or issue, sell, give away, transfer,
pledge, mortgage, assign or otherwise dispose of any shares of capital
stock or any other equity interests, or other securities convertible
into or exchangeable for capital stock or other equity interests or
options, warrants or rights carrying any rights to purchase capital
stock or other equity interests or convertible or exchangeable
securities, without the express written consent of holders of a
majority in interest of the Series D Redeemable Preferred Stock, except
as provided in Section 5.5(b) hereof.
(b) Notwithstanding the foregoing, the Company may (i) issue
shares of Common Stock, or options, warrants or other rights to
purchase or subscribe for, shares of its Common Stock to officers,
directors, employees, consultants or agents of the Company pursuant to
employee stock option or similar compensatory plans or arrangements to
the extent authorized by the Board of Directors and issue shares of its
Common Stock upon the exercise of such stock options, warrants or other
rights; (ii) issue Conversion Shares upon the conversion of shares of
the Series A, B or C Convertible Preferred Stock; (iii) issue shares of
Common Stock upon the exercise of the Warrants, the Alta Warrants and
the June and December Warrants (if applicable, as described in Section
5.10 hereof); (iv) declare, make or issue a dividend or other
distribution payable in shares of the Common Stock in respect of
outstanding shares of the Common Stock, Series A, B or C Convertible
Preferred Stock or Series A or B Redeemable Preferred Stock in
accordance with the Certificate of Incorporation; (v) issue shares of
Common Stock in connection with a Qualified Public Offering; (vi) issue
shares of Common Stock, or options, warrants or rights to purchase or
subscribe for shares of its Common Stock in connection with any debt,
equipment or capital lease or other similar financing transaction
authorized by the Board of Directors, or (vii) issue shares of capital
stock or other securities in connection with joint ventures,
acquisitions of the securities or assets of other entities, mergers,
consolidations or other strategic transactions authorized by the Board
of Directors.
5.6 Stockholders' Agreement. The Company will diligently enforce
all of its rights under the Stockholders' Agreement. The Company will not effect
any transfer of any of the outstanding capital stock of the Company on the stock
record books of the Company unless such transfer is made in accordance with the
terms of the Stockholders' Agreement. The Company will not waive or release any
rights under, or consent to the amendment of, the Stockholders' Agreement
without the requisite written approval of the parties thereto. The parties
hereto agree that the provisions of the Stockholders' Agreement shall apply,
according to the terms thereof, to the Series D Redeemable Preferred Stock, the
Warrants, the June and December Warrants (if applicable, as described in Section
5.10 hereof) and the shares of Common Stock issuable upon exercise of the
Warrants and the June and December Warrants (if applicable), except that the
registration rights provisions contained in Article IV of the Stockholders'
Agreement shall not apply with respect to the Series D Redeemable Preferred
Stock, the Warrants or the June or December Warrants (if applicable).
5.7 Distributions on, and Redemptions of, Capital Stock. So long
as any shares of Series D Redeemable Preferred Stock shall remain outstanding,
except as otherwise expressly provided in this Agreement, the Certificate of
Incorporation or the Certificate of Designations, the Company will not, without
the prior written consent of a majority in interest of all outstanding shares of
Series D Redeemable Preferred Stock, declare or pay any dividends or make any
distributions of cash, property or securities of the Company with respect to any
shares of its Common Stock or any other class of its capital stock, or directly
or indirectly redeem, purchase, or otherwise acquire for consideration any
shares of its Common Stock or any other class of its capital stock; provided,
however, that this restriction shall not apply to the repurchase of shares of
the Common Stock pursuant to stock repurchase agreements under which the Company
has the option to repurchase such shares upon the occurrence of certain events,
including the termination of employment and involuntary transfers, by operation
of law, provided that the repurchase price paid by the Company does not exceed
the purchase price paid to the Company for such shares. Any redemption,
repurchase or other acquisition by the Company of any shares of its capital
stock shall be made in compliance with all laws, including but not limited to
federal and state securities laws.
5.8 Merger, Consolidation, Sale of Assets, Acquisitions and Other
Actions. So long as any shares of Series D Redeemable Preferred Stock shall
remain outstanding, the Company will not without the prior written consent of a
majority in interest of the Series D Redeemable Preferred Stock: (a) merge or
consolidate with or into another entity (with respect to which less than a
majority of the outstanding voting power of such surviving entity is held by
stockholders of the Company immediately prior to such event), or sell, lease or
otherwise dispose of (whether in one transaction or a series of related
transactions) all, or substantially all, of the assets of the Company determined
on a consolidated basis, (b) voluntarily liquidate or wind up its operations,
(c) issue any shares of its capital stock which are senior to or on a parity
with the Series D Redeemable Preferred Stock with respect to dividends,
conversion, liquidation or redemptions or with any special voting rights, (d)
issue voting securities in a single transaction or series of related
transactions that result in securities representing a majority of the voting
power of the Company (with respect to actions to be voted on by holders of all
voting securities of the Company voting as a single class) to be beneficially
owned by a single person or group of affiliated persons, (e) increase or
decrease the size of the Board of Directors from the number of directors in
office on the date hereof, (f) adversely alter or change the preferences, rights
or privileges of the Series D Redeemable Preferred Stock with respect to
dividends, liquidation, preferences, conversion or redemption except as
contemplated by this Agreement or as expressly provided in the Certificate of
Incorporation or the Certificate of Designations, (g) increase or decrease the
authorized number of shares of any series of Preferred Stock except as
contemplated by this Agreement or as expressly provided in the Certificate of
Incorporation or the Certificate of Designations, (h) enter into any agreement
with any party which by its terms restricts the payments due the holders of the
Series D Redeemable Preferred Stock pursuant to the Certificate of Incorporation
or the Certificate of Designations.
5.9 Annual Updates; Number of Stockholders; Use of Proceeds; Regulatory
Violation; Economic Impact Information; Amendment.
(a) As long as an SBIC Investor holds any of the Securities
(as defined below), the Company shall, on an annual basis, provide to
such SBIC Investor the information required under 13 CFR Section
107.620(b) and shall provide the information and access required by 13
CFR Section 107.620(c). For purposes of this Agreement, an "SBIC
Investor" shall mean BancBoston and Norwest, an affiliate of BancBoston
or Norwest that has been licensed as an SBIC and holds the Securities
or any other Investor or any permitted transferee of an Investor that
has been licensed as an SBIC and holds the Securities.
(b) The Company has more than 50 record holders of its voting
stock.
(c) Within seventy-five (75) days after the Closing, and at
the end of each month thereafter until all of the proceeds from the
sale of Series D Preferred Redeemable Stock hereunder have been used by
the Company, the Company shall deliver to all of the Investors a
written statement certified by the Company's president or chief
financial officer describing in reasonable detail the use of the
proceeds of the purchase Series D Preferred Redeemable Stock hereunder
by the Company. In addition to any other rights granted hereunder, the
Company shall grant all of the Investors and the SBA access to the
Company's records for the purpose of verifying the use of such
proceeds.
(d) Upon the occurrence of a Regulatory Violation (as defined
below) or in the event that any SBIC Investor determines in its
reasonable good faith judgment that a Regulatory Violation has
occurred, in addition to any other rights and remedies to which it may
be entitled (whether under this Agreement or any other agreement), such
SBIC Investor shall have the right, to the extent required under SBIC
Regulations, to demand the immediate repurchase of all of the
outstanding Securities owned by such SBIC Investor at a price equal to
the purchase price paid for such Securities hereunder plus accrued
dividends by delivering written notice of such demand to the Company;
provided, however, that, in the event of a Regulatory Violation, any
SBIC Investor shall, prior to demanding the repurchase of all of the
outstanding Securities owned by such SBIC Investor, use reasonable
efforts to retain its investment in the Securities, including, without
limitation, petitioning the SBA for its approval with respect to any
unforeseen changes in the principal business activity of the Company.
The Company shall pay the purchase price for such Securities by a
cashier's or certified check or by wire transfer of immediately
available funds to such SBIC Investor within thirty (30) days after the
Company's receipt of the demand notice, and, upon such payment, such
SBIC Investor shall deliver the certificates, if any, evidencing the
Securities being repurchased duly endorsed for transfer or accompanied
by duly executed forms of assignment.
For purposes of this Agreement, "Regulatory Violation" means a change
in the principal business activity of the Company to an ineligible business
activity (within the meaning of the SBIC Regulations), if such change occurs
within one (1) year after the date of the initial purchase by the affected SBIC
Investor of Securities hereunder.
(e) Promptly after the end of each fiscal year (but in any
event prior to February 28 of each year), the Company shall deliver to
each Investor a written assessment of the economic impact of the total
investment by all SBIC Investors in the Company, specifying the
full-time equivalent jobs created or retained in connection with the
investment, the impact of the investment on the businesses of the
Company in terms of expanded revenue and taxes, and the other economic
benefits resulting from the investment, including but not limited to,
technology development or commercialization, minority business
development, urban or rural business development and expansion of
exports, together with all other information reasonably requested by
any SBIC Investor in order to provide the information required by 13
CFR Section 107.630.
(f) Notwithstanding anything herein to the contrary, the
provisions of this Section 5.9 shall not be amended without the prior
written consent of holders of a majority of the issued and outstanding
Securities of any SBIC Investors (determined on an as converted basis).
(g) For purposes of this Section 5.9, "Securities" shall refer
to the shares of Series D Preferred Stock, the Warrants, the June and
December Warrants (if applicable, as defined in Section 5.10 hereof)
and the shares of Common Stock issuable upon exercise of the Warrants
and the June and December Warrants (if applicable).
5.10 June and December Warrants. In the event that the Company does not
redeem all of the outstanding shares of Series D Preferred Stock on or before
June 30, 2000, the Company shall issue to the holders of the then outstanding
shares of Series D Preferred Stock warrants exercisable for an aggregate of
3,500 shares of Common Stock (the "June Warrants"). In the event that the
Company does not redeem all of the outstanding shares of Series D Preferred
Stock on or before December 31, 2000, the Company will issue to the holders of
the then outstanding shares of Series D Preferred Stock warrants exercisable for
3,500 shares of Common Stock (the "December Warrants"). The amount of June and
December Warrants issued under this Section 5.10 shall be proportionately
decreased for any shares of Series D Preferred Stock redeemed by the Company
prior to the above dates. The form and terms of the June and December Warrants
shall be substantially identical to those of the Warrants.
SECTION 6. CONFIDENTIALITY
Each Investor agrees to maintain the confidentiality of, and to not
make or permit any disclosure regarding the existence or substance of, any and
all Confidential Information received from the Company. For purposes of this
Agreement, "Confidential Information" includes all information, regardless of
the form in which it is communicated or maintained (whether prepared by the
Company, its financial or other advisors or otherwise), which contains or
otherwise reflects any non-public information concerning the Company and which
is provided to the Investors by or on behalf of the Company, its advisors or
their respective advisors or agents. Without limiting the foregoing in any
manner, except as set forth in this Section 6 the Investors shall not disclose
to any individual or entity their receipt of Confidential Information from the
Company, the nature or substance of such Confidential Information or their
response or plans with respect to such Confidential Information.
Notwithstanding the foregoing, the Investors shall not be required to
maintain the confidentiality of any portion of the Confidential Information to
the extent that such portion is publicly disclosed by the Company by press
release, filings with the Securities and Exchange Commission or similar manner.
In addition, the Investors may make disclosure of Confidential Information to
the extent advised, pursuant to the written opinion (a copy of which shall be
provided to the Company prior to such disclosure) of their counsel, that such
disclosure must be made in order to avoid a violation of law and, prior to such
disclosure, the Company and its legal counsel are promptly advised and consulted
with concerning the information to be disclosed (and, in such event, the
Investors shall cooperate with the Company to the extent it may seek to limit
such disclosure).
In the event that any Investor is requested or required (by deposition,
interrogatories, requests for information or documents in legal proceedings,
subpoenas, civil investigative demand or similar process), in connection with
any proceeding, to disclose any Confidential Information, such Investor shall
(i) provide the Company with prompt written notice of such request or
requirement so that the Company may seek an appropriate protective order or
other remedy, and (ii) cooperate with the Company to obtain such protective
order. In the event that such protective order or other remedy is not obtained
or the Company waives compliance with the relevant provisions of this Agreement,
such Investor shall (or shall cause such other person to whom such request is
directed to) furnish only that portion of the Confidential Information which, in
the written opinion (a copy of which shall be provided to the Company prior to
furnishing such portion) of the counsel of such Investor, is legally required to
be disclosed and, upon the Company's request, use such Investor's best efforts
to obtain assurances that confidential treatment will be accorded to such
information.
The provisions of this Section 6 shall not apply to the extent of any
communications of Confidential Information made solely among the Investors and
between the Investors and their respective agents and advisors.
SECTION 7. INVESTOR REPRESENTATIONS
It is the understanding of the Company, and each Investor hereby
severally represents with respect to such Investor's purchase of Series D
Redeemable Preferred Stock and Funding Warrants and such Investor's receipt of
Subscription Warrants (and such Investor's receipt of June and/or December
Warrants, as applicable) hereunder that:
(a) The execution of this Agreement has been duly authorized
by all necessary action on the part of the Investor, has been duly
executed and delivered by the Investor, and constitutes a valid,
binding and enforceable agreement of the Investor.
(b) The Investor is acquiring the Series D Redeemable
Preferred Stock, the Warrants (and the June and December Warrants, if
applicable) and any shares of Common Stock issued upon exercise of the
Warrants (and the June and December Warrants, if applicable) for its
own account, for investment, and not with a present view to any
"distribution" thereof within the meaning of the Securities Act. The
Investor was not formed or organized for the purpose of acquiring the
Series D Redeemable Preferred Stock, the Warrants, the June or December
Warrants (if applicable) or the shares of Common Stock issuable upon
exercise of the Warrants or the June or December Warrants (if
applicable).
(c) The Investor understands that because none of the Series D
Redeemable Preferred Stock, the Warrants, the June or December Warrants
(if applicable) or the shares of Common Stock issuable upon exercise of
the Warrants or the June or December Warrants (if applicable) have been
registered under the Securities Act, it cannot dispose of any or all of
the Series D Redeemable Preferred Stock, the Warrants, the June or
December Warrants (if applicable) or the shares of Common Stock
issuable upon exercise of the Warrants or the June or December Warrants
(if applicable) unless such securities are subsequently registered
under the Securities Act or exemptions from such registration are
available. The Investor understands that each certificate representing
the Series D Redeemable Preferred Stock, the Warrants, the June and
December Warrants (if applicable) and the shares of Common Stock
issuable upon exercise of the Warrants and the June and December
Warrants (if applicable) will bear the following legend or one
substantially similar thereto:
The securities represented by this certificate have not been
registered under the Securities Act of 1933, as amended (the
"Act"). These securities have been acquired for investment and
not with a view to distribution or resale, and may not be
sold, mortgaged, pledged, hypothecated or otherwise
transferred without an effective registration statement for
such securities under the Act or the availability of an
exemption from such registration requirements.
(d) The Investor is sufficiently knowledgeable and experienced
in the making of venture capital investments so as to be able to
evaluate the risks and merits of its investment in the Company, and is
able to bear the economic risk of loss of its investment in the
Company. The Investor acknowledges that the Company may, subject to the
restrictions set forth in this Agreement, enter into one or more
acquisitions, joint ventures or additional types of financings in the
future which could result in a valuation for the capital stock of the
Company that is significantly below the purchase price for the Series D
Redeemable Preferred Stock and Funding Warrants hereunder.
(e) The Investors have been advised that none of the Series D
Redeemable Preferred Stock, the Warrants, the June or December Warrants
(if applicable) or the shares of Common Stock issuable upon exercise of
the Warrants or the June or December Warrants (if applicable) have been
registered under the Securities Act or under the "blue sky" laws of any
jurisdiction and that the Company, in issuing the Series D Redeemable
Preferred Stock, the Warrants, the June and December Warrants (if
applicable) and the shares of Common Stock issuable upon exercise of
the Warrants and the June and December Warrants (if applicable), is
relying upon, among other things, the representations and warranties of
the Investors contained in this Section 7.
(f) No broker, finder, agent or similar intermediary has acted
on behalf of the Investor in connection with this Agreement or the
transactions contemplated hereby and there are no brokerage
commissions, finder's fees or similar fees or commissions payable in
connection therewith.
(g) The Investor is a "qualified institutional buyer" as
defined in Rule 144A under the Securities Act.
SECTION 8. INDEMNIFICATION
8.1 Indemnification for Vicarious Liability. Subject to Section 9.2
hereof, the Company shall, to the full extent permitted by law, and in addition
to any such rights that the Investors and persons serving as officers,
directors, partners, employees or agents of each Investor may have pursuant to
statute, the Certificate of Incorporation or By-laws, or otherwise, indemnify
and hold harmless each Investor (including its respective directors, officers,
partners, employees and agents, an "Indemnified Investor") and each person (a
"Controlling Person") (collectively with the Indemnified Investors, the
"Indemnified Parties" and individually an "Indemnified Party") who controls any
of them within the meaning of Section 15 of the Securities Act, or Section 20 of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"), from and
against any and all losses, claims, damages, expenses and liabilities, joint or
several, including any investigation, legal and other expenses incurred in
connection with the investigation, defense, settlement or appeal of, and any
amount paid in settlement of, any action, suit or proceeding or any claim
asserted ("Losses" or "Loss"), to which they, or any of them, may become subject
by reason of their status as a security holder, creditor, director, agent,
representative or controlling person of the Company (including, without
limitation, any and all Losses under the Securities Act, the Exchange Act or
other federal or state statutory law or regulation, at common law or otherwise,
which relates directly or indirectly to the registration, purchase, sale or
ownership of any securities of the Company or any of its subsidiaries or to any
fiduciary obligation owed with respect thereto); provided, however, that the
Company will not be liable to the extent that such Loss arises from and is based
on an untrue statement or omission or alleged untrue statement or omission in a
registration statement or prospectus which is made in reliance on and in
conformity with written information furnished to the Company in an instrument
duly executed by or on behalf of such Indemnified Party specifically stating
that it is for use in the preparation thereof. The indemnification and
contribution provided for in this Section 8.1 will remain in full force and
effect regardless of any investigation made by or on behalf of the Indemnified
Parties or any officer, director, employee, agent or Controlling Person of the
Indemnified Parties.
If the indemnification provided for in this Section 8.1 is for any
reason held by a court of competent jurisdiction to be unavailable to an
Indemnified Party in respect of any Losses referred to therein, then the
Company, in lieu of indemnifying such Indemnified Party thereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a result
of such Losses (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Investor relating to such Indemnified
Party or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company and the Investor relating to such Indemnified Party in connection
with the action or inaction which resulted in such Losses, as well as any other
relevant equitable considerations. In connection with any registration of the
Company's securities, the relative benefits received by the Company and the
Investors shall be deemed to be in the same respective proportions as the net
proceeds from the offering (before deducting expenses) received by the Company
and the Investors, in each case as set forth in the table on the cover page of
the applicable prospectus, bear to the aggregate public offering price of the
securities so offered. The relative fault of the Company and the Investors shall
be determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company or the Investors
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company and the Investors agree that it would not be just and
equitable if contribution pursuant to the foregoing paragraph were determined by
pro rata or per capita allocation or by any other method of allocation which
does not take account of the equitable considerations referred to in the
immediately preceding paragraph. In connection with any registration of the
Company's securities, in no event shall an Investor be required to contribute
any amount under this Section 8.1 in excess of the lesser of (i) that proportion
of the total of such Losses indemnified against equal to the proportion of the
total securities sold under such registration statement which is being sold by
such Investor or (ii) the proceeds received by such Investor from its sale of
securities under such registration statement. No person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
found guilty of such fraudulent misrepresentation.
8.2 Notice; Defense of Claims. Promptly after receipt by an Indemnified
Party of notice of any third party or other claim, liability or expense to which
the indemnification obligations hereunder would apply, including in connection
with any governmental proceeding, the Indemnified Party shall give notice
thereof in writing to the Company, but the omission to so notify the Company
promptly will not relieve the Company from any liability except, and only to the
extent, that the Company shall have been materially prejudiced as a result of
the failure or delay in giving such notice. Such notice shall state the
information then available regarding the amount and nature of such claim,
liability or expense.
In the case of any third party claim, if within 20 days after receiving
the notice described in the preceding paragraph the Company (i) gives written
notice to the Indemnified Party or Parties stating that it intends to defend in
good faith against such claim, liability or expense at its own cost and expense
and (ii) provides assurance and security reasonably acceptable to such
Indemnified Party or Parties that such indemnification will be paid fully and
promptly if required and such Indemnified Party or Parties will not incur cost
or expense during the proceeding, then counsel for the defense shall be selected
by the Company (subject to the consent of such Indemnified Party or Parties,
which consent shall not be unreasonably withheld) and such Indemnified Party or
Parties shall not be required to make any payment with respect to such claim,
liability or expense as long as the Company is conducting a good faith and
diligent defense at its own expense; provided, however, that the assumption of
defense of any such matters by the Company shall relate solely to the claim,
liability or expense that is subject or potentially subject to indemnification.
If the Company assumes such defense in accordance with the preceding sentence,
it shall have the right, with the consent of such Indemnified Party or Parties,
which consent shall not be unreasonably withheld, to settle all indemnifiable
matters related to claims by third parties which are susceptible to being
settled provided the Company's obligation to indemnify such Indemnified Party or
Parties therefor will be fully satisfied and the settlement includes a complete
release of such Indemnified Party or Parties. The Company shall keep such
Indemnified Party or Parties apprised of the status of the claim, liability or
expense and any resulting suit, proceeding or enforcement action, shall furnish
such Indemnified Party or Parties with all documents and information that such
Indemnified Party or Parties shall reasonably request and shall consult with
such Indemnified Party or Parties prior to acting on major matters, including
settlement discussions. Notwithstanding anything herein stated, such Indemnified
Party or Parties shall at all times have the right to fully participate in such
defense at its or their own expense directly or through counsel; provided,
however, if the named parties to the action or proceeding include both the
Company and the Indemnified Party or Parties and representation of both parties
by the same counsel would be inappropriate under applicable standards of
professional conduct, the expense of separate counsel for such Indemnified Party
or Parties shall be paid by the Company. The Indemnified Party or Parties shall
make available all information and assistance that the Company may reasonably
request and shall cooperate with the Company in such defense.
If the Company does not give notice of its intent to defend against any
third party or other claim, liability or expense in accordance with the
foregoing paragraph, or if such diligent good faith defense is not being or
ceases to be conducted, the Indemnified Party or Parties will have the right to
retain its or their own counsel in any such action and all fees, disbursements
and other charges incurred in the investigation, defense and/or settlement of
such action shall be advanced and reimbursed by the Company promptly as they are
incurred and shall have the right to compromise or settle such claim, liability
or expense; provided, however, that the Indemnified Party or Parties shall agree
to repay any expenses so advanced hereunder if it is ultimately determined by a
court of competent jurisdiction that the Indemnified Party or Parties to whom
such expenses are advanced is or are not entitled to be indemnified as a matter
of law or under the terms of this Agreement.
8.3 Satisfaction of Indemnification Obligations. Any indemnity payable
pursuant to this Section 8 shall be paid within the later of (a) ten days after
the Indemnified Party's request therefor or (b) ten days prior to the date on
which the Loss upon which the indemnity is based is required to be satisfied by
the Indemnified Party.
SECTION 9. GENERAL
9.1 Amendments, Waivers and Consents. For the purposes of this
Agreement and all agreements, documents and instruments executed pursuant
hereto, except as otherwise specifically set forth herein or therein, no course
of dealing between the Company and any Investor and no delay on the part of any
party hereto in exercising any rights hereunder or thereunder shall operate as a
waiver of the rights hereof and thereof. No covenant or other provision hereof
or thereof may be waived otherwise than by a written instrument signed by the
party so waiving such covenant or other provision; provided, however, that
except as otherwise provided herein or therein, changes in or additions to, and
any consents required by, this Agreement may be made, and compliance with any
term, covenant, condition or provision set forth herein may be omitted or waived
(either generally or in a particular instance and either retroactively or
prospectively) with respect to the holders of the Series D Redeemable Preferred
Stock by a consent or consents in writing signed by the holders of a majority in
interest of such series; provided, however, that the amendment, modification or
waiver of any provision which by its terms requires the consent or approval of
holders of more than a majority in interest of such series shall only be
effective if it is signed by holders of such requisite percentage. Any amendment
or waiver effected in accordance with this Section 9.1 shall be binding upon
each holder of the Series D Redeemable Preferred Stock at the time outstanding,
each future holder of all such securities and the Company.
9.2 Survival of Representations, Warranties and Covenants;
Assignability of Rights. All covenants, agreements, representations and
warranties of the Company made herein and in the certificates, lists, exhibits,
schedules or other written information delivered or furnished by or on behalf of
the Company to any Investor in connection herewith or therewith shall be deemed
material and to have been relied upon by such Investor, and, except as otherwise
provided in this Agreement, shall survive the delivery of the Series D
Redeemable Preferred Stock regardless of any instruction and shall not merge in
the performance of any obligation and shall bind the Company's successors,
assigns and heirs, whether so expressed or not, and, except as otherwise
provided in this Agreement, all such covenants, agreements, representations and
warranties shall inure to the benefit of such Investor's successors and assigns
and to transferees of the Series D Redeemable Preferred Stock of such Investor,
whether so expressed or not. The representations and warranties made by the
Investors in Section 7 of this Agreement shall survive the delivery of the
Series D Redeemable Preferred Stock and shall bind the Investors' successors and
assigns and shall inure to the benefit of the Company's successors and assigns.
9.3 Governing Law. This Agreement shall be deemed to be a contract made
under, and shall be construed in accordance with, the laws of the State of New
York (without giving effect to principles of conflicts of law the effect of
which would cause the application of domestic substantive laws of any other
jurisdiction).
9.4 Section Headings; Counterparts. The descriptive headings in this
Agreement have been inserted for convenience only and shall not be deemed to
limit or otherwise affect the construction of any provision thereof or hereof.
This Agreement may be executed simultaneously in any number of counterparts,
each of which when so executed and delivered shall be taken to be an original;
but such counterparts shall together constitute but one and the same document.
9.5 Notices and Demands. Any notice or demand which, by any provision
of this Agreement or any agreement, document or instrument executed pursuant
hereto or thereto, except as otherwise provided therein, is required or provided
to be given shall be deemed to have been sufficiently given or served and
received for all purposes when delivered or five days after being sent by
certified or registered mail, postage and charges prepaid, return receipt
requested, or, in the case of a nationally recognized overnight courier service,
on the day following the date of such mailing, or by express delivery providing
receipt of delivery, to the following addresses: if to the Company, at its
address as shown on the signature page hereof, or at any other address
designated by the Company to each of the Investors in writing; if to a Investor,
at its mailing address as shown on the records of the Company, or at any other
address designated by such Investor to the Company and the other Investors in
writing; and if to an assignee of a Investor, at its address as designated to
the Company and the other Investor in writing.
9.6 Severability. Whenever possible, each provision of this Agreement
shall be interpreted in such a manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be deemed
prohibited or invalid under such applicable law, such provision shall be
ineffective to the extent of such prohibition or invalidity, and such
prohibition or invalidity shall not invalidate the remainder of such provision
or the other provisions of this Agreement.
9.7 Expenses. The Company shall pay the reasonable costs and expenses
of one special counsel for the Investors in connection with the negotiation,
execution, delivery and performance of this Agreement and any amendments hereto
and the agreements, documents and instruments contemplated hereby or executed
pursuant hereto, not to exceed $25,000. In addition to the foregoing, the
Company shall pay the fees charged by the LC Bank for issuing and maintaining
the Letters of Credit, including attorney's fees and other fees and expenses
incurred in connection with the application for such letters of credit and the
preparation, execution and delivery of any reimbursement agreement or similar
document.
9.8 Integration. This Agreement together with the Stockholders'
Agreement, including the exhibits, documents and instruments referred to herein
or therein, constitute all of the agreements and supersede all other prior
agreements and understandings, both written and oral, among the parties with
respect to the subject matter hereof.
9.9 Certain Provisions Applicable to SBIC Investors. Sections 2.25, 3.6
and 5.9 hereof contain certain provisions that are included herein solely for
the benefit of SBIC Investors. A stockholder of the Company may not assert any
rights or claims with respect to such provisions arising at any time after it
has ceased to be an SBIC.
9.10 No Assignment. Except as otherwise provided herein, this Agreement
may not be assigned, pledged, hypothecated or otherwise transferred by the
Company without the consent of all of the parties hereto.
[Signature page follows]
<PAGE>
IN WITNESS WHEREOF, the undersigned have executed this Agreement as a
sealed instrument as of the day and year first above written.
GOLDEN SKY HOLDINGS, INC.
605 W. 47th Street, Suite 300
Kansas City, MO 64112
By_______________________________________
Name:
Title:
ALTA SUBORDINATED DEBT PARTNERS III, L.P.
By: Alta Subordinated Debt Management
III, L.P.
By:_______________________________________
Name:
Title:
ALTA COMMUNICATIONS VI, L.P.
By: Alta Communications VI
Management Partners, L.P.
By:_______________________________________
Name:
Title:
ALTA-COMM S BY S, LLC
By:_______________________________________
Name:
Title:
HARBOURVEST PARTNERS V-DIRECT FUND L.P.
By: HVP V-Direct Associates, LLC
Its General Partner
By: HarbourVest Partners, LLC
Its Managing Member
By:_______________________
Name:
Title:
SPECTRUM EQUITY INVESTORS L.P.
By: Spectrum Equity Associates, L.P.,
General Partner
By:_______________________________________
Name:
Title:
SPECTRUM EQUITY INVESTORS II, L.P.
By: Spectrum Equity Associates II, L.P.,
General Partner
By:_______________________________________
Name:
Title:
NORWEST EQUITY PARTNERS VI,
A MINNESOTA LIMITED PARTNERSHIP
By: Itasca Partners V, L.L.P.
General Partner
By:_______________________________________
Name:
Title:
BANCBOSTON VENTURES INC.
By:_______________________________________
Name:
Title:
GENERAL ELECTRIC CAPITAL CORPORATION
By:_______________________________________
Name:
Title:
<PAGE>
APPENDIX A
(Form of Warrant)
<PAGE>
APPENDIX B
Securities Acquired
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Shares of Series D Number of Number of
Purchase Redeemable Funding Warrants Subscription
Investor Price Preferred Stock Warrants
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alta Communications VI, L.P. $3,804,739.07 19,023.70 665.83 665.83
- ---------------------------------------------------------------------------------------------------------------------
Alta Subordinated Debt Partners III,
L.P. 2,287,468.87 11,437.34 400.31 400.31
- ---------------------------------------------------------------------------------------------------------------------
Alta-Comm S by S, LLC 86,662.06 433.31 15.17 15.17
- ---------------------------------------------------------------------------------------------------------------------
HarbourVest Partners V - Direct Fund
L.P. 2,577,574.60 12,887.87 451.08 451.08
- ---------------------------------------------------------------------------------------------------------------------
Spectrum Equity Investors II L.P.
3,431,877.16 17,159.39 600.58 600.58
- ---------------------------------------------------------------------------------------------------------------------
Spectrum Equity Investors, L.P. 1,715,921.42 8,579.61 300.29 300.29
- ---------------------------------------------------------------------------------------------------------------------
Norwest Equity Partners VI, L.P.
2,577,574.60 12,887.87 451.08 451.08
- ---------------------------------------------------------------------------------------------------------------------
BancBoston Ventures Inc. 3,003,529.31 15,017.65 525.62 525.62
- ---------------------------------------------------------------------------------------------------------------------
General Electric Capital Corporation 514,652.92 2,573.26 90.06 90.06
- ---------------------------------------------------------------------------------------------------------------------
Totals: $20,000,000 100,000.00 3,500.00 3,500.00
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
APPENDIX C
(Form of Legal Opinion)
<PAGE>
APPENDIX D
(Form of Certificate of Designations, Preferences and Rights of
Series D Redeemable Preferred Stock)
<PAGE>
SCHEDULE 2.1
Certain Violations
1. Golden Sky was in violation of certain covenants under its credit
facility for the quarter ended September 30, 1999.
2. While the Company has exclusive DIRECTV distribution rights in its
markets, it is not allowed to have customers outside its markets.
Further, DIRECTV and the Company are prohibited by law from providing
DIRECTV programming outside the United States. Despite our customers'
assurances that they receive programming within one or our markets, a
portion of our subscribers may, in fact, be receiving DIRECTV
programming outside our markets. If we must disconnect a significant
portion of our subscribers because they receive services outside our
markets, our business could be adversely affected.
3. The Company makes no representation with respect to the possible
application of state law to the Company's DBS equipment service
agreement program.
<PAGE>
SCHEDULE 2.4
Capitalization and Beneficial Ownership
1. Holders of the Series A, B and C Convertible Preferred Stock are
entitled to receive shares of Common Stock upon conversion of their
shares of preferred stock, as provided in the Certificate of
Incorporation.
2. See attached list of equity holders.
3. GSS owns a 76.25% interest in South Plains DBS, L.P. GSS funds the
operating losses of South Plains and is periodically reimbursed by the
minority interest of South Plains for its portion of such losses.
4. The Company owns all of the outstanding capital stock of DBS, which
owns all of the outstanding capital stock of GSS. GSS owns all of the
outstanding capital stock of Argos Support Services Company,
Primewatch, Inc. and DCE Satellite Entertainment, LLC. The Company
makes advances to fund the operations of its subsidiaries, from time to
time.
<PAGE>
SCHEDULE 2.6
Undisclosed Liabilities
1. See Schedule 2.1.
2. See Schedule 2.10.
3. See Schedule 2.12.
<PAGE>
SCHEDULE 2.7
Accounts Receivable
None.
<PAGE>
SCHEDULE 2.8
Title to Properties
1. GSS' credit facility is secured by a lien against all of the assets of
GSS.
2. Certain promissory notes issued as consideration in Golden Sky's
acquisitions have been secured by liens against the assets of the
acquired entity.
3. Golden Sky has entered into equipment capital leases whereby the
related capital lease obligations are secured by liens on the equipment
that is the subject of the leases. The aggregate outstanding balance of
capital lease obligations secured by such liens on equipment under
capital leases approximated $550,000 at September 30, 1999. The
original cost of the equipment under capital leases subject to such
liens approximated $1.2 million as of the same date.
4. Golden Sky has entered into various operating leases providing the
leased premises for its approximate 72 local sales and customer service
offices, its national call center, its corporate office, warehouse and
storage locations and various equipment. The future minimum
non-cancelable lease payments related to these operating leases
approximate $1.2 million in 2000; $700,000 in 2001; $450,000 in 2002;
and $121,000 in 2003.
5. GSS owns a 76.25% interest in South Plains DBS, L.P. and, therefore,
the assets of South Plains are partially owned by the minority
interest.
<PAGE>
SCHEDULE 2.9
Tax Matters
1. Golden Sky was audited by the Missouri Department of Revenue in 1999
with respect to sales and use taxes and payroll taxes. The field work
on the audit was completed in late October 1999. Golden Sky has been
informally advised that no additional taxes, penalties or interest will
be owed, however, a final report has not been issued.
2. Golden Sky is currently in the process of being audited by the Texas
Comptroller of Public Accounts with respect to sales and use taxes. The
field work on the audit is still in progress. Golden Sky has not
received any notice of findings to date.
<PAGE>
SCHEDULE 2.10
Material Contracts
1. See Schedule 2.1.
2. See Schedule 2.12.
3. Golden Sky has entered into non-competition agreements with the
following key employees:
o Rodney A. Weary
o Jo Ellen Linn
o John R. Hager
o William J. Gerski
o Eric Tucker
o Dennis O'Hara
o Gordon Smith
o Scott Brown
o Laquita Allen
4. The Company makes no representation with respect to the possible effect
on the Company of the NRTC/DIRECTV litigation described in
Schedule 2.12.
<PAGE>
SCHEDULE 2.11
Proprietary Rights
None.
<PAGE>
SCHEDULE 2.12
Litigation
1. The ongoing NRTC/DIRECTV litigation may have an adverse effect on
Golden Sky.
2. On October 15, 1999, Schaller Telephone Company filed a Petition at Law
in the Iowa District Court for Woodbury County naming Golden Sky
Systems, Rodney A. Weary and Jo Ellen Linn as defendants. In the
Petition, Schaller alleges that the named defendants represented to
Schaller that Golden Sky intended to purchase Schaller's rights to
provide satellite television services to homes located in Woodbury,
Monona, Plymouth and Ida counties in Iowa, and that Golden Sky entered
into an agreement with Schaller to purchase these rights for
$13,500,000. Schaller further alleges, among other things, that the
representations of the named defendants were fraudulent and that Golden
Sky breached the agreement. Schaller seeks an unspecified amount of
damages in the Petition. Golden Sky removed the lawsuit to the United
States District Court for the Northern District of Iowa. On December
17, 1999, Golden Sky timely filed its Pre-answer Motion to Dismiss all
counts where appropriate and answered Schaller's count for breach of
contract by specifically denying the allegations.
3. In the ordinary course of business, the Company receives, from time to
time, litigation threats from former employees, customers, dealers and
others.
4. During August and September 1999, three former employees of the
Company's Foley, Alabama office each filed charges of discrimination
and harassment against the Company with the Birmingham, Alabama EEOC
office following the end of their employment with the Company. The
Company has scheduled an informal mediation of these charges with the
EEOC for January 25, 2000. The Company will not be required to submit a
position statement, if at all, until after the completion of the
mediation.
5. Deborah Gay, a former employee of the Company's Rincon, Georgia office,
filed a charge of age discrimination with the Savannah, Georgia EEOC
office on July 21, 1999. The EEOC attempted to negotiate a conciliation
agreement between the Company and Ms. Gay. When that attempt failed,
the EEOC issued a "failure to conciliate" finding in late October 1999.
Under federal law, Ms. Gay has 90 days from the date of the finding to
file suit against the Company.
6. On June 28,1999, Golden Sky received a letter asserting it was engaged
in concerted activity to destroy the cable business of Roxie and Ben
Cartwright. On August 5, 1999, Golden Sky responded in writing to the
Cartwright's allegations specifically denying the same. The Cartwrights
have taken no further action to Golden Sky's knowledge.
7. On June 28, 1999, Golden Sky received a letter asserting that it had
damaged Lynn and Gary Anderson, who had been Golden Sky dealers, by
using its own sales force to market and sell equipment and programming.
On August 5, 1999, Golden Sky responded in writing to the Andersons'
allegations specifically denying the same. The Andersons have taken no
further action to Golden Sky's knowledge.
8. On February 10, 1999, the Office of the Attorney General of the State
of Minnesota notified Golden Sky of its investigation of possible
violations of Minnesota's antitrust laws. On March 4, 1999 Golden Sky
provided answers to interrogatories and responses to document requests
from the Attorney General's office. The Attorney General's office has
taken no further action to Golden Sky's knowledge.
9. Golden Sky has received and responded to a subpoena duces tecum from
the United States Department of Agriculture which is investigating the
sale of the Baldwin County Membership Cooperative Direct Broadcast
Satellite franchise rights to Golden Sky. The Department advised Golden
Sky that it is not a target of the investigation, merely a material
witness.
10. A former employee of the Las Vegas branch office has informed Golden
Sky that she believes she was subject to sexual harassment while
employed. The alleged harasser is no longer employed by Golden Sky.
Discussions are continuing with the former employee and her attorney.
11. An attorney representing three employees of the Gainesville, Texas
office asserted on September 14, 1999 that they had been subject to
sexual harassment and retaliation. Golden Sky investigated and took
responsive action. One of the employees nonetheless quit her employment
asserting that she was constructively discharged. The other two
employees remained employed by Golden Sky through December 1999, when
Golden Sky closed the Gainesville office and terminated all of the
employees in the Gainesville office. Golden Sky had previously been
advised by one of the employed women that she had withdrawn herself
from representation and did not desire to pursue a claim. The two
remaining claimants filed a charge against Golden Sky with the Houston,
Texas office of the National Labor Relations Board on December 10,
1999, alleging retaliation for their engaging in concerted activity
(the report of sexual harassment). Golden Sky denies the claimants'
allegations and is in the process of preparing its position statement.
12. On June 18, 1999, an attorney representing two former employees in
Michigan asserted that they had been subject to retaliatory discharge,
gender discrimination, and sexual harassment. The employment of these
employees ended in April 1999. Golden Sky responded to these
assertions. The attorney indicated that he was continuing to
investigate the claims, but nothing further has been heard.
<PAGE>
SCHEDULE 2.14
Business; Compliance with Laws
1. See Schedule 2.1.
2. See Schedule 2.10.
3. See Schedule 2.12.
<PAGE>
SCHEDULE 2.18
Environmental Matters
None.
<PAGE>
SCHEDULE 2.20
Product and Services Claims
1. See Schedule 2.1.
2. See Schedule 2.10.
3. See Schedule 2.12.
<PAGE>
SCHEDULE 2.21
Employees; Labor Matters
1. Golden Sky has entered into employment agreements, the terms of which
require Golden Sky to make severance payments, with the following
individuals:
o Rodney A. Weary
o Jo Ellen Linn
o John R. Hager
o William J. Gerski
o Eric Tucker
o Dennis O'Hara
o Gordon Smith
o Scott R. Brown
2. The following officers, employees and sales representatives of Golden
Sky received total remuneration from the Company on an annualized basis
in excess of $100,000 for the calendar year 1999:
o Rodney A. Weary
o John R. Hager
o William J. Gerski
o Jo Ellen Linn
o Scott R. Brown
o Laquita J. Allen
o Eric Tucker
o Randall K. Duncan
o Brad E. Behmer
3. The Company has a general practice of offering severance to employees
upon termination of employment, the amount of which is based upon the
time of service.
4. See Schedule 2.12.
<PAGE>
SCHEDULE 2.23
Affiliate Transactions
1. Rodney A. Weary is the sole shareholder of 421 Golden Eagle Gale, which
subleases a 1979 Cessna Citation to GSS pursuant to an Aircraft Lease,
dated as of October 23, 1987. This sublease was voluntarily terminated
by the parties effective December 31, 1999.
2. GSS has an oral consulting agreement with Robert B. Liepold, a director
of the Company, to provide expertise on an "as needed" basis.
<PAGE>
SCHEDULE 2.27
Absence of Certain Developments
1. See Schedule 2.6.
EXHIBIT 10.23
EXECUTION COPY
SECOND AMENDMENT, CONSENT AND WAIVER
------------------------------------
SECOND AMENDMENT, CONSENT AND WAIVER TO THE AMENDED AND
RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of January 4, 2000, among
GOLDEN SKY HOLDINGS, INC., a corporation organized and existing under the laws
of the State of Delaware ("Holdings"), GOLDEN SKY SYSTEMS, INC., a corporation
organized and existing under the laws of the State of Delaware (the "Borrower"),
the Banks party hereto from time to time, PARIBAS (formerly known as Banque
Paribas), as Syndication Agent, FLEET NATIONAL BANK, as Administrative Agent,
and GENERAL ELECTRIC CAPITAL CORPORATION, as Documentation Agent. Unless
otherwise defined herein, all capitalized terms used herein shall have the
respective meanings provided such terms in the Credit Agreement referred to
below.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Borrower, the Banks, the Agents and the
Documentation Agent are parties to an Amended and Restated Credit Agreement,
dated as of July 7, 1997, amended and restated as of May 8, 1998 (as amended,
modified and supplemented to the date hereof, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to consent to certain actions
and waive certain provisions of the Credit Agreement; and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW, THEREFORE, it is agreed:
1. Section 8.10(b) of the Credit Agreement shall be amended by
deleting the section in its entirety and inserting in lieu thereof the following
new section:
"(b) Holdings will cause the Borrower not to permit, and the
Borrower will not permit, the Annualized Churn Rate for any fiscal quarter
ending on a date set forth below to exceed the percentage set forth opposite
such date below:
Fiscal Quarter Ended Percentage
-------------------- ----------
December 31, 1999 18.0%
March 31, 2000 19.0%
June 30, 2000 19.0%
September 30, 2000 18.0%
December 31, 2000 18.0%
March 31, 2001 and thereafter 12.0%"
2. Section 8.12 of the Credit Agreement shall be amended by
deleting the section in its entirety and inserting in lieu thereof the following
new section:
"8.12 Annualized Adjusted Consolidated Interest Coverage
Ratio. Holdings will cause the Borrower not to permit, and the Borrower will not
permit, the ratio of Annualized Adjusted Consolidated EBITDA to Annualized
Adjusted Consolidated Interest Expense for any fiscal quarter ending on a date
set forth below to be less than the ratio set forth opposite such date below:
Fiscal Quarter Ended Ratio
-------------------- -----
December 31, 1999 2.00x
March 31, 2000 2.00x
June 30, 2000 2.00x
September 30, 2000 1.75x
December 31, 2000 1.50x
March 31, 2001 2.00x
June 30, 2001 2.00x
September 30, 2001 2.00x
December 31, 2001 2.00x"
3. Section 8.14 of the Credit Agreement shall be amended by
deleting the table appearing therein and inserting in lieu thereof the following
table:
Fiscal Quarter Ended Ratio
-------------------- -----
December 31, 1999 13.50x
March 31, 2000 10.25x
June 30, 2000 7.25x
September 30, 2000 6.55x
December 31, 2000 5.75x
March 31, 2001 4.50x
June 30, 2001 4.00x
4. Section 8.15 of the Credit Agreement shall be amended by
deleting the table appearing therein and inserting in lieu thereof the following
table:
Fiscal Quarter Ended Ratio
-------------------- -----
December 31, 1999 3.75x
March 31, 2000 through 3.00x
June 30, 2001
5. Section 8.18(ii) of the Credit Agreement shall be amended
by inserting immediately following the words "Permitted Seller Notes," the
phrase "L/C Coverage Period Letters of Credit,".
6. Section 9 of the Credit Agreement is hereby amended by (x)
inserting a semi-colon and the word "or" in lieu of the period at the end of
Section 9.11 and (y) inserting the following new Section 9.12:
"9.12 L/C Coverage Period Letter of Credit. The issuing bank
under the L/C Coverage Period Letters of Credit shall not have paid the
beneficiaries thereunder following a request by the beneficiaries pursuant to
the terms thereof (and the provisions of Section 12 of the Second Amendment) for
any reason."
7. The following definitions in Section 10 of the Credit
Agreement are amended as set forth below:
(a) The definition of "Annualized Churn Rate" shall be amended
to read in its entirety as follows:
"Annualized Churn Rate" shall mean, for any period, the net
number of disconnected subscribers for such period divided by the sum of the
number of subscribers at the beginning of such period, the number of gross
subscriber additions during such period, and the number of subscribers acquired
during such period, as measured on the last day of each fiscal quarter for the
trailing twelve-month period then ended.
(b) The definition of "Applicable Base Rate Margin" shall be
amended by (x) deleting the number "2.50" and inserting the number "3.00" in
lieu thereof and (y) deleting the number "2.75" and inserting the number "3.25"
in lieu thereof.
(c) The definition of "Applicable Eurodollar Rate Margin"
shall be amended by (x) deleting the number "3.75" and inserting the number
"4.25" in lieu thereof and (y) deleting the number "4.00" and inserting the
number "4.50" in lieu thereof.
(d) The definition of "Borrowing Base" shall be amended by (x)
deleting the phrase "and $800 thereafter" and inserting in lieu thereof the
following phrase "$800 from January 1, 2000 until and including December 31,
2000, and $700 thereafter" and (y) adding, immediately after the phrase
"pursuant to Section 5.06", the following provision:
"provided, however, that in any event the Borrowing Base shall
be deemed to be equal to zero at any time during the periods set forth below
that the ratio of Net Adjusted Consolidated Indebtedness to Annualized Adjusted
Consolidated EBITDA for the immediately preceding three-month period shall
exceed the ratio set forth opposite such period below:
Period Ratio
------ -----
January 1, 2001 to and including March 31, 4.50x
2001
April 1, 2001 to and including December 31, 4.00x;
2001
provided further, that upon the receipt by the Administrative Agent of evidence
that the Borrower has complied with the above ratios (with such evidence to be
in form and substance reasonably satisfactory to the Administrative Agent) for
two consecutive three-month periods at any time during the period from January
1, 2001 through and including December 31, 2001, the above proviso shall cease
to be in force and effect and shall be excluded from the definition of the
Borrowing Base".
(e) The definition of "Leverage Reduction Discount" shall be
amended by (x) deleting the table appearing in clause (ii) therein and inserting
in lieu thereof the following table:
Net Adjusted Consolidated Indebtedness to
Percentage Annualized Consolidated EBITDA
---------- ------------------------------
0.75% less than 7:1 but greater than or equal to 6:1
1.25% less than 6:1 but greater than or equal to 5:1
1.50% less than 5:1 but greater than or equal to 4:1
2.00% less than 4:1,
and (y) deleting the number "0.75" appearing in clause (iii) therein and
inserting the number "1.25" in lieu thereof.
(f) The definition of "Net Adjusted Consolidated Indebtedness"
shall be amended by inserting immediately following the words "Acceptable DBS
Debt" the phrase "minus the amount of outstanding and unpaid L/C Loans and the
amount of Letter of Credit Outstandings with respect to the L/C Letters of
Credit."
8. Additional Definitions. Section 10 of the Credit Agreement
is hereby amended by inserting the following new definitions in the appropriate
alphabetical order therein:
"L/C Coverage Period Letters of Credit" shall have the meaning
provided in Section 19 of the Second Amendment.
"L/C Loans" shall have the meaning provided in Section 10(a)
of the Second Amendment.
"L/C Letters of Credit" shall have the meaning provided in
Section 10(a) of the Second Amendment.
"Second Amendment" shall mean the Second Amendment, Consent
and Waiver to this Agreement, dated as of December 31, 1999.
9. Notwithstanding anything to the contrary contained in the
Credit Agreement, the Banks hereby waive, solely on a one-time basis, the
requirement of the Borrower to comply with the financial covenants contained in
Sections 8.10, 8.14 and 8.15 of the Credit Agreement for the fiscal quarter
ended September 30, 1999 (as in effect before giving effect to this Amendment).
10. To induce the Banks to agree to the waiver and amendments
described herein (and as a condition thereto), the Borrower agrees as follows:
(a) from and after the Second Amendment Effective Date (as
defined below) to and including December 31, 2000, the Borrower shall not incur
additional Borrowings under the Credit Agreement and shall not be permitted to
request the issuance of any Letters of Credit even if the Borrower is otherwise
permitted to incur such Borrowings or have such Letters of Credit issued under
the Credit Agreement, provided, however, the Borrower may incur additional
Borrowings ("L/C Loans") or have Letters of Credit issued for its account ("L/C
Letters of Credit", and together with the L/C Loans, "L/C Credit Events") in an
aggregate amount of up to $20,000,000 less the Equity Retention Amount (as
defined in Section 10 (c) hereof) during the period (the "L/C Coverage Period")
commencing on the Second Amendment Effective Date (as defined below) and ending
on March 31, 2000, unless a Sale Agreement (as defined in Section 11(a) hereof)
has been executed and delivered, in which case the period shall be extended
until the earlier of (x) May 31, 2000 or (y) the date on which the Sale
Agreement is terminated so long as (i) no Default or Event of Default shall
exist either before or after the occurrence of such L/C Credit Event, (ii) all
of the representations, warranties and agreements contained in the Credit
Documents shall be true and correct in all material respects both before and
after the occurrence of such L/C Credit Event, (iii) the L/C Coverage Period
Letters of Credit (as defined below) in the stated amount required by clause
(iv) of this Section 10(a) shall be in full force and effect, (iv) the then
effective stated amount of the L/C Coverage Period Letters of Credit shall be at
least equal to the aggregate amount of all L/C Credit Events on and after the
date hereof (including the amount of L/C Credit Events occurring on the date of
determination) less the aggregate amount of L/C Loans repaid by the Borrower and
less the stated amount of L/C Letters of Credit terminated (or, if drawn, less
the amount of such drawing by the beneficiary thereof if such drawing has been
repaid by the Borrower or the account parties on the L/C Coverage Period Letters
of Credit), (v) the proceeds from such L/C Loans are used for, and the L/C
Letters of Credit support, only working capital purposes and (vi) all other
conditions to such Credit Event set forth in the Credit Agreement shall have
been satisfied; and
(b) Notwithstanding anything to the contrary contained in
clause (a) above, upon the repayment of L/C Loans by the Borrower or through
drawings on the L/C Coverage Period Letters of Credit (and the termination of
all L/C Letters of Credit and repayment of all amounts owing with respect
thereto), the Borrower may incur additional Borrowings or have Letters of Credit
issued for its account during the period beginning on the date of such repayment
and ending on December 31, 2000, in an amount equal to the gross cash proceeds
that the Borrower has received from the issuance of Holding's capital stock;
provided, that (i) the terms and conditions of any preferred stock issued shall
be satisfactory to the Agents and the Documentation Agent, it being understood
that the terms and conditions of Holdings' Series D Redeemable Preferred Stock
and other preferred stock outstanding on the Second Amendment Effective Date (as
defined below) shall be acceptable to the Agents and the Documentation Agent,
(ii) the aggregate amount of such Borrowings or issuances of Letters of Credit
shall not exceed $20,000,000 and shall be used only for working capital
purposes, (iii) no Default or Event of Default shall exist before or after
giving effect to such Borrowings or issuances of Letters of Credit and (iv) all
other conditions to such Credit Event set forth in the Credit Agreement shall
have been satisfied.
(c) Notwithstanding anything to the contrary contained in the
Credit Agreement, including without limitation, Section 3.02(A)(d)(i) and
Section 8.05 of the Credit Agreement, Holdings may retain the cash proceeds from
the issuance of capital stock in accordance with Section 10(b) hereof (so long
as such proceeds do not exceed $20 million and are contributed as common equity
to the Borrower) and shall not be required to repay Loans or reduce Commitments;
provided, however that the $20 million amount of L/C Credit Events permitted in
accordance with Section 10(a) hereof shall be reduced by the amount (the "Equity
Retention Amount") of such proceeds not used to repay L/C Loans or cash
collateralize L/C Letters of Credit or to repay Unpaid Drawings with respect to
L/C Letters of Credit.
11. The Syndication Agent, as beneficiary of the L/C Coverage
Period Letters of Credit, agrees that it will make drawings under the L/C
Coverage Period Letters of Credit only under the following terms and conditions:
(a) Ten Business Days following the earlier of (x) March 31,
2000 and (y) the occurrence of a Default or Event of Default, the Syndication
Agent shall draw under L/C Coverage Period Letters of Credit an amount equal to
the aggregate outstanding amount of L/C Loans on the date of drawing plus the
aggregate Letter of Credit Outstandings with respect to L/C Letters of Credit
issued during the L/C Coverage Period; provided however in the event that prior
to March 31, 2000, the Borrower has executed and delivered a definitive
acquisition or merger agreement with respect to the sale of all or substantially
all of the capital stock of Holdings or the Borrower or all or substantially all
of the assets of the Borrower on terms and conditions reasonably acceptable to
each of the Agents and the Documentation Agent (the "Sale Agreement"), then the
Syndication Agent shall not be permitted to draw under the L/C Coverage Period
Letters of Credit until (and on such date the Syndication Agent shall draw) ten
Business Days after the earlier of (x) May 31, 2000, (y) the occurrence of a
Default or Event of Default or (z) termination of the Sale Agreement.
(b) The Syndication Agent agrees, as beneficiary of the L/C
Coverage Period Letters of Credit and for the benefit of the account parties
thereunder, that it shall draw under the L/C Coverage Period Letters of Credit
pro rata based on the stated amount of each such letter of credit as compared to
the aggregate stated amount of all such letters of credit.
12. The Syndication Agent agrees, as beneficiary of the L/C
Coverage Period Letters of Credit and for the benefit of the account parties
thereunder, that it will request termination or reduction of one or more of the
L/C Coverage Period Letters of Credit upon the request of the Borrower and in
amounts requested by the Borrower; provided, however, in no event may the
aggregate stated amount of the L/C Coverage Period Letters of Credit be less
than the aggregate outstanding amount of L/C Loans and Letter of Credit
Outstandings with respect to L/C Letters of Credit plus the remaining amount of
Loans and Letters of Credit which may be incurred and/or issued in accordance
with Section 10(a).
13. Each of the Borrower, the Agents, the Documentation Agent
and the undersigned Banks hereby agree that no term or condition of any L/C
Coverage Period Letter of Credit and neither Section 11(a) of this Amendment nor
the proviso contained in Section 12 of this Amendment may be amended or waived
without the written consent of those Banks for which the sum of whose
outstanding Term Loans and Revolving Loan Commitments (or after the termination
thereof, the sum of outstanding Revolving Loans and Letter of Credit
Outstandings), represent an amount equal to or greater than 90% of the sum of
all outstanding Term Loans and the Total Revolving Loan Commitment (or after the
termination thereof, the sum of the then total outstanding Revolving Loans and
Letter of Credit Outstandings).
14. Notwithstanding anything to the contrary contained in the
Credit Agreement, including without limitation Section 7.01(e) thereof, the
budget required to be delivered by the Borrower for fiscal year 2000 shall not
be required to be delivered until February 28, 2000.
15. In order to induce the Banks to enter into this Amendment,
the Borrower hereby represents and warrants that (i) no Default or Event of
Default shall exist, both before and after giving effect to this Amendment
(which has not been cured or waived by this Amendment) and (ii) all of the
representations, warranties and agreements contained in the Credit Documents
shall be true and correct in all material respects, in each case on the Second
Amendment Effective Date, both before and after giving effect to this Amendment.
16. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
17. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agents.
18. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
19. This Amendment shall become effective on the date (the
"Second Amendment Effective Date") when (i) Paribas, as Syndication Agent, shall
have received one or more standby letters of credit ("L/C Coverage Period
Letters of Credit") from Fleet National Bank, as issuing bank, for the benefit
of Paribas, on behalf of the Banks and with the account party with respect
thereto being one or more members of the Investor Group or other stockholders of
Holdings or their affiliates as of the Second Amendment Effective Date, (ii) the
L/C Coverage Period Letters of Credit shall be in form and substance
satisfactory to the each of the Agents and the Documentation Agent and shall
have an initial stated amount which shall not be less than $20,000,000, (iii)
the Agents and the Documentation Agent shall have received all agreements and
documents relating to the L/C Coverage Period Letters of Credit (including,
without limitation, any reimbursement agreements relating thereto) in form and
substance satisfactory to the Agents and the Documentation Agent, (iv) the Banks
shall have received a legal opinion in form and substance satisfactory to each
of the Agents and the Documentation Agent from counsel to Fleet National Bank,
the issuing bank, with respect to the L/C Coverage Period Letters of Credit, (v)
each Credit Party, the Agents, the Documentation Agent and the Required Banks
shall have signed a counterpart hereof (whether the same or different
counterparts) and shall have delivered (including by way of facsimile
transmission) the same to the Administrative Agent at its Notice Office, (vi)
each Bank which executes and delivers a counterpart hereof by Noon on January 4,
2000 shall have received from the Borrower a cash fee in an amount equal to
0.50% of the amount of such Bank's outstanding Term Loans and Revolving Loan
Commitment, in each case as in effect on the Second Amendment Effective Date
(after giving effect to this Amendment) and (vii) the Borrower shall have paid
all fees and expenses then owing to the Banks (including, without limitation,
legal fees and expenses) with respect to this Amendment.
20. From and after the Second Amendment Effective Date, all
references in the Credit Agreement and each of the Credit Documents to the
Credit Agreement shall be deemed to be references to such Credit Agreement as
amended hereby.
* * *
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
GOLDEN SKY HOLDINGS, INC.
By:
--------------------------------------
Name:
Title:
GOLDEN SKY SYSTEMS, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
PARIBAS,
Individually and as Syndication Agent
and Managing Agent
By:
-------------------------------------
Name:
Title:
<PAGE>
FLEET NATIONAL BANK,
Individually and as Administrative
Agent and Managing Agent
By:
-------------------------------------
Name:
Title:
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Documentation Agent
By:
--------------------------------------
Name:
Title:
<PAGE>
PAMCO CAYMEN LTD.
By: HIGHLAND CAPITAL MANAGEMENT, L.P.,
as Collateral Manager
By:
--------------------------------------
Name:
Title:
PAM CAPITAL FUNDING, L.P.
By: HIGHLAND CAPITAL MANAGEMENT, L.P.
as Collateral Manager
By:
--------------------------------------
Name:
Title:
<PAGE>
CITIZENS BANK OF MASSACHUSETTS
By:
--------------------------------------
Name:
Title:
<PAGE>
UNION BANK OF CALIFORNIA
By:
--------------------------------------
Name:
Title:
<PAGE>
IBJ WHITEHALL FINANCIAL GROUP
By:
--------------------------------------
Name:
Title:
<PAGE>
FREMONT FINANCIAL CORPORATION
By:
--------------------------------------
Name:
Title:
<PAGE>
DLJ CAPITAL FUNDING, INC.
By:
--------------------------------------
Name:
Title:
<PAGE>
The undersigned hereby
acknowledge and consent
to the execution of the foregoing
amendment and transactions provided
for herein.
GOLDEN SKY HOLDINGS, INC.
By:
-----------------------------------------
Name:
Title:
GOLDEN SKY SYSTEMS, INC.
By:
-----------------------------------------
Name:
Title:
ARGOS SUPPORT SERVICES COMPANY
By:
-----------------------------------------
Name:
Title:
PRIMEWATCH, INC.
By:
-----------------------------------------
Name:
Title:
EXHIBIT 10.24
EXECUTION COPY
THIRD AMENDMENT, CONSENT AND WAIVER
-----------------------------------
THIRD AMENDMENT, CONSENT AND WAIVER TO THE AMENDED AND
RESTATED CREDIT AGREEMENT (this "Amendment"), dated as of January 20, 2000,
among GOLDEN SKY HOLDINGS, INC., a corporation organized and existing under the
laws of the State of Delaware ("Holdings"), GOLDEN SKY SYSTEMS, INC., a
corporation organized and existing under the laws of the State of Delaware (the
"Borrower"), the Banks party hereto from time to time, PARIBAS (formerly known
as Banque Paribas), as Syndication Agent, FLEET NATIONAL BANK, as Administrative
Agent, and GENERAL ELECTRIC CAPITAL CORPORATION, as Documentation Agent. Unless
otherwise defined herein, all capitalized terms used herein shall have the
respective meanings provided such terms in the Credit Agreement referred to
below.
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Borrower, the Banks, the Agents and the
Documentation Agent are parties to an Amended and Restated Credit Agreement,
dated as of July 7, 1997, amended and restated as of May 8, 1998 (as amended,
modified and supplemented to the date hereof, the "Credit Agreement"); and
WHEREAS, the parties hereto wish to consent to certain actions
and waive certain provisions of the Credit Agreement; and
WHEREAS, the parties hereto wish to amend the Credit Agreement
as herein provided;
NOW, THEREFORE, it is agreed:
1. Section 7.20 of the Credit Agreement shall be amended by
deleting such section in its entirety and inserting in lieu thereof the
following new section:
"7.20 Corporate Separateness. Holdings will, and will cause
each of its Subsidiaries to, satisfy customary corporate formalities, including
the maintenance of corporate records. Neither Holdings nor any Subsidiary of
Holdings shall make any payment to a creditor of Pegasus or any other Subsidiary
of Pegasus in respect of any liability of Pegasus or any such Subsidiary, and no
bank account of Pegasus or any other Subsidiary of Pegasus shall be commingled
with any bank account of Holdings or any Subsidiary of Holdings. Any financial
statements distributed to any creditors of Pegasus and its Subsidiaries shall,
to the extent permitted by generally accepted accounting principles, clearly
establish the corporate separateness of Pegasus and its Subsidiaries from
Holdings and each of Holding's Subsidiaries. Neither Holdings nor any of its
Subsidiaries shall take any action, or conduct its affairs in a manner, which is
likely to result in the corporate existence of Pegasus and its Subsidiaries on
the one hand and of Holdings or any Subsidiary of the Holdings on the other hand
being ignored, or in the assets and liabilities of Holdings or any Subsidiary of
Holdings being substantively consolidated with those of Pegasus and its
Subsidiaries in a bankruptcy, reorganization or other insolvency proceeding; it
being understood that Pegasus shall be permitted to file tax returns on a
consolidated basis with its Subsidiaries."
2. Section 8.06 of the Credit Agreement is hereby amended by
inserting the following new sentence immediately after the end of such section:
"Notwithstanding anything to the contrary contained above,
Holdings will not, and will not permit any of its Subsidiaries to, enter into
any transaction with Pegasus or any Subsidiary of Pegasus (other than Holdings
and its Subsidiaries), except for cost allocation arrangements which require
each entity to pay its pro rata share of the overhead and customer care costs
based on the number of subscribers and regional dealers and support costs based
on the number of subscriber additions."
3. Section 9 of the Credit Agreement is hereby amended by (x)
inserting a semi-colon and the word "or" in lieu of the period at the end of
Section 9.12 and (y) inserting the following new Section 9.13:
"9.13 Offer to Purchase. Holdings or its Subsidiaries shall
become obligated to pay more than $25,000,000 to repurchase debt securities as a
result of any "change-in-control" offers required to be made by Holdings or any
of its subsidiaries to holders of outstanding debt securities of Holdings or any
of its subsidiaries."
4. Section 10 of the Credit Agreement is hereby amended by
inserting the following new definition in the appropriate alphabetical order
therein:
"Pegasus" shall mean the Pegasus Communications Corporation."
5. The definition of "Change in Control" in Section 10 of the
Credit Agreement is hereby amended by inserting the following phrase at the end
thereof:
"Notwithstanding the foregoing, "Change in Control" shall not
include any change in control which results from the Agreement and Plan of
Merger, dated January 10, 2000, among Pegasus and certain of its shareholders,
Pegasus GSS Merger Sub, Inc., Holdings and certain of its shareholders."
6. Notwithstanding anything to the contrary contained in the
Credit Agreement, including without limitation, Section 8.02, the Banks hereby
consent to the merger (the "Merger") of Holdings with Pegasus GSS Merger Sub,
Inc. effected in accordance with the terms of the Agreement and Plan of Merger,
dated January 10, 2000, among Pegasus Communication Corporation ("Pegasus") and
certain of its shareholders, Pegasus GSS Merger Sub, Inc., Holdings and certain
of its shareholders (the " Merger Agreement"), without waivers of any conditions
thereunder, so long as such Merger is consummated not later than June 30, 2000.
7. Notwithstanding anything to the contrary contained in
Section 8.18 of the Credit Agreement, the Banks hereby waive the restrictions
contained in Section 8.18 to the extent same would prohibit Holdings from
amending its Certificate of Incorporation, By-Laws or Shareholders' Agreement in
order to consummate the Merger, provided, that such modifications or amendments
are in form and substance satisfactory to the Agents.
8. Holdings, by its signature below, hereby confirms and
agrees that its obligations pursuant to the Credit Agreement, the Credit
Documents, Holdings Pledge Agreement and the guaranty issued by Holdings
pursuant to Section 13 of the Credit Agreement shall remain in full force and
effect after giving effect to this Third Amendment.
9. In order to induce the Banks to enter into this Amendment,
the Borrower hereby represents and warrants that (i) no Default or Event of
Default shall exist, both before and after giving effect to this Amendment
(which has not been cured or waived by this Amendment) and (ii) all of the
representations, warranties and agreements contained in the Credit Documents
shall be true and correct in all material respects, in each case on the Third
Amendment Effective Date, both before and after giving effect to this Amendment.
10. This Amendment is limited as specified and shall not
constitute a modification, acceptance or waiver of any other provision of the
Credit Agreement or any other Credit Document.
11. This Amendment may be executed in any number of
counterparts and by the different parties hereto on separate counterparts, each
of which counterparts when executed and delivered shall be an original, but all
of which shall together constitute one and the same instrument. A complete set
of counterparts shall be lodged with the Borrower and the Agents.
12. THIS AMENDMENT AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAW
OF THE STATE OF NEW YORK.
13. This Amendment shall become effective on the date (the
"Third Amendment Effective Date") when (i) the Banks shall have received true
and correct copies of the Merger Agreement in form and substance satisfactory to
the Required Banks, (ii) the Agents shall have received an opinion from
McDermott, Will & Emery, counsel to Holdings, addressed to the Agents and the
Banks, dated the Third Amendment Effective Date, in form and substance
satisfactory to the Agents, and to the effect that the execution, performance
and delivery of the Merger Agreement does not breach any material contracts that
Holdings or any of its Subsidiaries are a party to, (iii) the Agents shall have
received an opinion from Drinker Biddle & Reath LLP, counsel to Pegasus and
Pegasus GSS Merger Sub, Inc., addressed to the Agents and the Banks, dated the
Third Amendment Effective Date, in form and substance satisfactory to the
Agents, and to the effect that the execution, performance and delivery of the
Merger Agreement does not breach any material contracts that Pegasus or any of
its Subsidiaries are a party to, (iv) each Credit Party, the Agents, the
Documentation Agent and the Required Banks shall have signed a counterpart
hereof (whether the same or different counterparts) and shall have delivered
(including by way of facsimile transmission) the same to the Administrative
Agent at its Notice Office and (v) the Borrower shall have paid all fees and
expenses then owing to the Banks (including, without limitation, legal fees and
expenses) with respect to this Amendment.
14. From and after the Third Amendment Effective Date, all
references in the Credit Agreement and each of the Credit Documents to the
Credit Agreement shall be deemed to be references to such Credit Agreement as
amended hereby.
* * *
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused a
counterpart of this Amendment to be duly executed and delivered as of the date
first above written.
GOLDEN SKY HOLDINGS, INC.
By:
-------------------------------------
Name:
Title:
GOLDEN SKY SYSTEMS, INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
PARIBAS,
Individually and as Syndication Agent
and Managing Agent
By:
-------------------------------------
Name:
Title:
<PAGE>
FLEET NATIONAL BANK,
Individually and as Administrative
Agent and Managing Agent
By:
-------------------------------------
Name:
Title:
<PAGE>
GENERAL ELECTRIC CAPITAL CORPORATION,
Individually and as Documentation Agent
By:
-------------------------------------
Name:
Title:
<PAGE>
PAMCO CAYMEN LTD.
By: HIGHLAND CAPITAL MANAGEMENT, L.P.,
as Collateral Manager
By:
-------------------------------------
Name:
Title:
PAM CAPITAL FUNDING, L.P.
By: HIGHLAND CAPITAL MANAGEMENT, L.P.
as Collateral Manager
By:
-------------------------------------
Name:
Title:
<PAGE>
CITIZENS BANK OF MASSACHUSETTS
By:
-------------------------------------
Name:
Title:
<PAGE>
UNION BANK OF CALIFORNIA
By:
-------------------------------------
Name:
Title:
<PAGE>
IBJ WHITEHALL FINANCIAL GROUP
By:
-------------------------------------
Name:
Title:
<PAGE>
FREMONT FINANCIAL CORPORATION
By:
-------------------------------------
Name:
Title:
<PAGE>
DLJ CAPITAL FUNDING, INC.
By:
-------------------------------------
Name:
Title:
<PAGE>
The undersigned hereby
acknowledge and consent
to the execution of the foregoing
amendment and transactions provided
for herein.
GOLDEN SKY HOLDINGS, INC.
By:
-----------------------------------------
Name:
Title:
GOLDEN SKY SYSTEMS, INC.
By:
-----------------------------------------
Name:
Title:
ARGOS SUPPORT SERVICES COMPANY
By:
-----------------------------------------
Name:
Title:
PRIMEWATCH, INC.
By:
-----------------------------------------
Name:
Title:
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF GOLDEN SKY SYSTEMS, INC. AS OF DECEMBER 31,
1999 AND FOR THE YEAR THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 3,236
<SECURITIES> 0
<RECEIVABLES> 13,306
<ALLOWANCES> (973)
<INVENTORY> 3,108
<CURRENT-ASSETS> 45,659
<PP&E> 11,771
<DEPRECIATION> (5,918)
<TOTAL-ASSETS> 296,016
<CURRENT-LIABILITIES> 47,412
<BONDS> 195,000
0
0
<COMMON> 0
<OTHER-SE> (6,367)
<TOTAL-LIABILITY-AND-EQUITY> 296,016
<SALES> 0
<TOTAL-REVENUES> 140,573
<CGS> 0
<TOTAL-COSTS> 88,690
<OTHER-EXPENSES> 132,423
<LOSS-PROVISION> 3,909
<INTEREST-EXPENSE> 32,441
<INCOME-PRETAX> (114,899)
<INCOME-TAX> 0
<INCOME-CONTINUING> (114,899)
<DISCONTINUED> 0
<EXTRAORDINARY> (2,935)
<CHANGES> 0
<NET-INCOME> (117,834)
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
