<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 24, 1999
REGISTRATION NO. 333-82609
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------------------
AMENDMENT NO. 2
TO
FORM S-1
----------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
GOLDEN SKY DBS, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4841 43-1839531
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MO 64112
(816) 753-5544
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
JOHN R. HAGER
CHIEF FINANCIAL OFFICER
GOLDEN SKY DBS, INC.
4700 BELLEVIEW AVENUE, SUITE 300
KANSAS CITY, MO 64112
(816) 753-5544
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copy to:
<TABLE>
<S> <C>
KAREN A. DEWIS, ESQ. JONATHAN A. SCHAFFZIN, ESQ.
MCDERMOTT, WILL & EMERY CAHILL GORDON & REINDEL
600 13TH STREET, N.W. EIGHTY PINE STREET
WASHINGTON, D.C. 20005 NEW YORK, NY 10005
(202) 756-8000 (212) 701-3000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
----------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 24, 1999
PROSPECTUS
SHARES
[GOLDEN SKY LOGO]
GOLDEN SKY DBS, INC.
COMMON STOCK
----------------------
This is Golden Sky DBS, Inc.'s initial public offering of common stock.
We expect the public offering price to be between $ and $ per
share. Currently, no public market exists for the shares. After the pricing of
this offering, we expect that the common stock will trade on the Nasdaq National
Market under the symbol "GSKY."
INVESTING IN THE COMMON STOCK INVOLVES RISKS WHICH ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
----------------------
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Offering Price...................................... $ $
Underwriting Discount...................................... $ $
Proceeds, before expenses, to Golden Sky DBS, Inc. ........ $ $
</TABLE>
The underwriters may also purchase up to an additional shares at the
public offering price, less the underwriting discount, within 30 days from the
date of this prospectus to cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
We expect that the shares of common stock will be ready for delivery in New
York, New York on or about , 1999.
----------------------
JOINT LEAD MANAGERS
DONALDSON, LUFKIN & JENRETTE BEAR, STEARNS & CO. INC.
BOOK RUNNING MANAGER
BANC OF AMERICA SECURITIES LLC ING BARINGS LLC
----------------------
THE DATE OF THIS PROSPECTUS IS , 1999.
<PAGE> 3
[GRAPHS WITH SUBSCRIBER GROWTH STATISTICS]
2
<PAGE> 4
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Summary..................................................... 4
Risk Factors................................................ 9
Use of Proceeds............................................. 18
Dividend Policy............................................. 18
Capitalization.............................................. 19
Dilution.................................................... 20
Pro Forma Financial Statements.............................. 21
Selected Consolidated Financial Data........................ 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 27
Business.................................................... 38
Management.................................................. 52
Principal Stockholders...................................... 57
Certain Relationships and Related Transactions.............. 60
Description of Capital Stock................................ 61
Description of Indebtedness................................. 64
Shares Eligible for Future Sale............................. 67
Underwriting................................................ 69
Legal Matters............................................... 72
Experts..................................................... 72
Where You Can Find More Information......................... 72
Index to Financial Statements............................... F-1
</TABLE>
The following trademarks owned by third parties are used in this
prospectus: 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).
3
<PAGE> 5
SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in our common stock. You should read the entire
prospectus carefully, including the "Risk Factors" section and the financial
data and related notes, before making an investment decision.
GOLDEN SKY DBS
We are the second largest independent provider of DIRECTV programming in
rural markets in the United States. As of July 31, 1999, we were the exclusive
provider of DIRECTV programming to approximately 307,600 subscribers in 55 rural
markets located in 23 states.
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. In order to receive this programming, subscribers
install a satellite antenna or dish and a digital set-top receiver and pay a
monthly fee. Direct broadcast satellite television is currently experiencing
rapid growth, accounting for two out of three new multichannel pay television
subscribers in 1998 according to the Federal Communications Commission. As of
July 31, 1999, DIRECTV had more than 5.4 million direct broadcast satellite
television subscribers, which represented approximately 66% of all direct
broadcast satellite television subscribers nationwide.
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,
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. According to the NRTC, these markets accounted for
approximately 1.2 million, or 20%, of all DIRECTV customers as of July 31, 1999.
Since our formation in June 1996, we have:
- acquired the exclusive rights to provide DIRECTV programming in 55 rural
markets with 1.9 million households and 142,200 subscribers;
- added 165,400 new subscribers, net of disconnects, in our rural markets
through internal growth; and
- maintained the lowest annual rate of subscriber disconnects, or churn
rate, among the leading providers of digital broadcast satellite
programming.
Our net new subscribers since January 1, 1998 represent approximately 7.3%
of DIRECTV's net new subscribers nationwide, although our rural markets
accounted for just 1.5% of all television households in the United States during
that period.
Our business objective is to be the fastest-growing provider of digital
satellite television programming and related services in our markets in order to
maximize profits and value for our shareholders. To accomplish this, we plan to:
- emphasize direct sales and local customer service;
- acquire additional rural DIRECTV markets; and
- develop related business opportunities involving other communications
products and services that can be offered to customers using our existing
marketing and distribution infrastructure.
RECENT DEVELOPMENTS
DIRECTV/NRTC LITIGATION
The NRTC is currently in litigation with Hughes and DIRECTV over some
aspects of the NRTC's rights to distribute DIRECTV direct broadcast satellite
services under the NRTC's agreement with Hughes. While we are not a party to the
litigation, we have an interest in its outcome because our rights to provide
DIRECTV programming to subscribers derive from the rights the NRTC has under its
4
<PAGE> 6
agreement with Hughes. In the lawsuit, DIRECTV and Hughes are seeking a
determination as to the proper interpretation of a number of provisions of the
NRTC's agreement with Hughes. Among other things, DIRECTV and Hughes contend
that the term of the agreement is measured only by the orbital life of DBS-1,
which was the first satellite launched by Hughes in 1993, 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. The NRTC is seeking a determination that it has the right,
under its agreement with Hughes, to provide HBO, Showtime, Cinemax and the Movie
Channel programming in its rural markets as a result of Hughes' recent
acquisition of United States Satellite Broadcasting Company, Inc. Investors are
urged to review the discussion of the litigation under "Business -- Relationship
with the NRTC and DIRECTV and DIRECTV/NRTC Litigation" and the related risk
factors.
POTENTIAL ACQUISITIONS
We currently have non-binding letters of intent to acquire three additional
rural DIRECTV markets with an aggregate of approximately 161,000 households and
approximately 10,200 subscribers for total consideration of approximately $32.5
million in cash. In order to complete these acquisitions, we must negotiate
satisfactory purchase agreements and satisfy other customary conditions to
closing. We may not be successful in completing these acquisitions.
THE OFFERING
Common stock offered....... shares
Common stock to be
outstanding after the
offering(1).............. shares
Use of proceeds............ We estimate that the net proceeds of this offering,
without exercise of the over-allotment option, will
be approximately $139.0 million. We intend to use
these proceeds for general corporate purposes,
including working capital and possible future
acquisitions. See "Use of Proceeds."
Dividend policy............ We do not anticipate paying any cash dividends in
the foreseeable future. See "Dividend Policy."
Risk factors............... See "Risk Factors" for a discussion of factors that
you should carefully consider before deciding to
invest in shares of our common stock.
Proposed Nasdaq National
Market Symbol.......... "GSKY"
- ---------------
(1) Excludes shares of common stock issuable upon the exercise of
stock options outstanding as of , 1999 at a weighted average
exercise price of $ per share and shares of common stock
issuable upon the exercise of stock options reserved for grant. This number
also assumes that the over-allotment option is not exercised. If the
over-allotment option is exercised in full, we will issue and sell an
additional shares.
----------------------
Our principal executive offices are located at 4700 Belleview Avenue, Suite
300, Kansas City, Missouri 64112. Our telephone number is (816) 753-5544 and our
Internet Web site is located at http://www.gssdirectv.com.
5
<PAGE> 7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OTHER DATA
The following table presents our summary consolidated historical and pro
forma financial and other data for the periods indicated. This information
relates to Golden Sky DBS, Inc. for periods after February 2, 1999, which was
when Golden Sky DBS was formed, and to its predecessor and wholly-owned
subsidiary Golden Sky Systems, Inc. for periods before February 2, 1999. The
information presented below as of and for the periods ended December 31, 1996,
1997 and 1998 was taken from our audited consolidated financial statements. The
financial and other information for the businesses we have acquired was taken
from the historical financial statements of the acquired entities. The
information presented below as of and for the six months ended June 30, 1998 and
1999 is unaudited, but in the opinion of management reflects all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair
presentation. The results for the six months ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999.
The following pro forma statement of operations data for the year ended
December 31, 1998 present our results of operations adjusted for (1) material
acquisitions we completed during 1998 and related financings, (2) the sale, in
July 1998, of $195.0 million aggregate principal amount of Golden Sky Systems'
12 3/8% senior subordinated notes due 2006 and the application of the resulting
proceeds, and (3) the sale, in February 1999, of $193.1 million aggregate
principal amount at maturity of our 13 1/2% senior discount notes due 2007 and
the application of the resulting proceeds, as if each of these events had
occurred at the beginning of 1998. The following pro forma statement of
operations data for the six months ended June 30, 1999 present our results of
operations adjusted for the sale of our 13 1/2% senior discount notes due 2007
and the application of the resulting proceeds as if the sale had occurred at the
beginning of 1998. These summary pro forma data do not purport to represent what
our actual financial position or results of operations would have been had these
events actually occurred on the specified dates and are not intended to predict
our future results of operations or financial position.
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 approximately 76% ownership. We
receive 100% of the revenue generated by all subscribers in our rural DIRECTV
markets. Pro forma household and subscriber data include all households and
subscribers that we have acquired in acquisitions since our inception. Pro forma
subscriber data is as of the later of June 30, 1999 and the relevant acquisition
date.
The following information should be read in conjunction with our
consolidated financial statements and notes thereto, "Pro Forma Financial
Statements" and notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and the individual financial
statements and notes thereto of our recently acquired significant businesses
appearing elsewhere in this prospectus.
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<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, 1998 ENDED JUNE 30,
INCEPTION TO YEAR ENDED ---------------------- -----------------------------------
DECEMBER 31, DECEMBER 31, 1998 1999 1999
1996 1997 HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
------------ ------------ ---------- --------- ---------- ---------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
DBS services....................... $ 219 $ 16,452 $ 74,910 $ 86,786 $ 30,466 $ 60,040 $ 60,040
Lease and other.................... 36 944 1,014 1,140 512 385 385
------- -------- -------- -------- -------- -------- --------
Total revenue................ 255 17,396 75,924 87,926 30,978 60,425 60,425
Costs and Expenses:
Cost of DBS services............... 130 9,304 45,291 52,861 17,926 38,022 38,022
System operations.................. 26 3,796 11,021 12,843 4,177 8,796 8,796
Sales and marketing................ 73 7,316 32,201 32,600 11,287 25,507 25,507
General and administrative......... 1,035 2,331 7,431 7,470 2,675 6,640 6,640
Depreciation and amortization...... 97 7,300 23,166 29,475 9,753 17,360 17,360
------- -------- -------- -------- -------- -------- --------
Total costs and expenses..... 1,361 30,047 119,110 135,249 45,818 96,325 96,325
------- -------- -------- -------- -------- -------- --------
Operating loss....................... (1,106) (12,651) (43,186) (47,323) (14,840) (35,900) (35,900)
Net interest expense................. (61) (3,133) (18,964) (44,505) (5,208) (20,076) (21,824)
------- -------- -------- -------- -------- -------- --------
Loss before extraordinary charge..... (1,167) (15,784) (62,150) (91,828) (20,048) (55,976) (57,724)
Extraordinary charge on early
retirement of debt................. -- -- (2,577) (2,577) (2,577) (2,935) (2,935)
------- -------- -------- -------- -------- -------- --------
Net loss..................... $(1,167) $(15,784) $(64,727) $(94,405) $(22,625) $(58,911) $(60,659)
======= ======== ======== ======== ======== ======== ========
Basic and diluted loss per share:
Loss before extraordinary charge... $ $
Extraordinary charge...............
-------- --------
Net loss per share........... $ $
======== ========
Weighted-average number of shares
outstanding........................
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1996 1997 1998 JUNE 30, 1999
------- -------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 479 $ 13,632 $ 4,460 $ 14,749
Restricted cash(1).......................................... -- -- 51,617 35,281
Total assets................................................ 6,383 156,236 328,071 341,586
Total debt.................................................. 4,450 69,113 278,204 345,486
Stockholder's equity (deficit).............................. (1,166) 70,449 15,922 (42,676)
</TABLE>
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<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
INCEPTION TO ------------------------------------ ------------------------------------
DECEMBER 31, 1997 1998 1998 1998 1999 1999
1996 HISTORICAL HISTORICAL PRO FORMA HISTORICAL HISTORICAL PRO FORMA
------------ ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT SUBSCRIBER AND HOUSEHOLD DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
EBITDA(2)................... $(1,009) $ (5,351) $ (20,020) $ (17,848) $ (5,087) $ (18,496) $ (18,496)
Pre-SAC cash flow(3)........ 95 3,879 18,075 20,685 7,969 12,199 12,199
Net cash used in operating
activities................ (790) (3,099) (36,588) NA (14,239) (22,379) NA
Net cash used in investing
activities................ (3,231) (120,729) (159,921) NA (46,564) (20,979) NA
Net cash provided by
financing activities...... 4,500 136,981 187,337 NA 48,027 53,647 NA
Capital expenditures........ 105 998 3,317 NA 1,360 2,143 NA
Aggregate purchase price of
acquisitions.............. 5,256 129,725 124,844 124,844 44,514 35,160 68,237
OPERATING DATA
Households at end of
period.................... 22,000 1,135,000 1,727,000 1,727,000 1,395,000 1,859,000 2,022,000
Subscribers acquired in
acquisitions.............. 3,000 65,700 55,300 55,300 27,300 18,200 28,700
Subscribers added in
existing rural DIRECTV
markets................... 100 22,100 80,300 80,300 31,700 47,700 47,700
Subscribers at end of
period.................... 3,100 90,900 226,500 226,500 150,000 292,400 302,900
SAC per gross subscriber
added(4).................. $ 290 $ 280 $ 320 NA $ 300 $ 360 NA
Penetration at end of
period.................... 14.1% 8.0% 13.1% 13.1% 10.8% 15.7% 15.0%
</TABLE>
- ---------------
(1) Includes the balance of the $45.2 million we placed in escrow to fund the
first four semi-annual payments on Golden Sky Systems' 12 3/8% senior
subordinated notes due 2006. Semi-annual interest payments of $12.1 million
were made on February 1, 1999 and August 1, 1999. Also includes $5.3 million
as of December 31, 1998 that was deposited with the administrative agent
under Golden Sky Systems' credit facility to fund a contingent reduction of
availability under the term loan facility. This contingent reduction did not
occur under the terms of the amended credit facility entered into coincident
with the offering of our outstanding 13 1/2% senior discount notes due 2007.
(2) EBITDA represents earnings before interest, taxes, depreciation and
amortization, non-cash charges and extraordinary items. 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 our company
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 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.
(3) Because the company whose operations we believe to be most directly
comparable to ours provides to its stockholders information equivalent to
pre-subscriber acquisition cost cash flow, or pre-SAC cash flow, we have
included this information for comparative purposes. Pre-SAC cash flow
represents earnings before interest, taxes, depreciation and amortization,
non-cash charges, extraordinary items, corporate overhead and subscriber
acquisition costs. Pre-SAC cash flow 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. Pre-SAC cash
flow 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.
(4) Represents subscriber acquisition costs on a per gross new subscriber
activation basis. This excludes acquired subscribers and does not net out
disconnected subscribers.
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RISK FACTORS
Investing in our common stock will provide you with an equity ownership
interest in Golden Sky DBS. As a Golden Sky DBS stockholder, you will be subject
to risks inherent in our business. The performance of your shares will reflect
the performance of our business relative to, among other things, competition,
market conditions and general economic and industry conditions. The value of
your investment may increase or decline and could result in a loss. You should
carefully consider the following factors as well as other information contained
in this prospectus before deciding to invest in shares of our common stock.
RISKS OF OUR DIRECT BROADCAST SATELLITE BUSINESS
ANY CHANGE IN OUR RELATIONSHIP WITH THE NRTC OR THE NRTC'S RELATIONSHIP WITH
DIRECTV COULD ADVERSELY AFFECT OUR ABILITY TO EARN REVENUES.
We depend greatly upon the NRTC to:
- maintain the valuable rights it has with DIRECTV because our ability to
offer DIRECTV programming derives from those rights; and
- provide us with accurate information concerning its relationship with
DIRECTV because we do not have direct access to that information
ourselves.
The NRTC has the exclusive rights to distribute, through its members and
affiliates, DIRECTV programming in rural markets in the United States under an
agreement with Hughes. We have the exclusive right to distribute DIRECTV
programming in our markets through agreements with the NRTC. Because we do not
have a direct contractual relationship with Hughes, we rely upon the NRTC to
diligently perform all of its obligations under its agreement with Hughes so
that the agreement is not terminated, as well as to pursue any rights and
remedies, including cure rights, that it may have against Hughes. If the NRTC
does not maintain its valuable rights or fails to provide us with essential
information regarding DIRECTV, it may be more difficult or impossible for us to
continue to provide DIRECTV programming to our customers. Because virtually all
of our business consists of the distribution of DIRECTV programming in rural
markets under our exclusive agreements with the NRTC, any termination of our
agreements with the NRTC or of the NRTC's agreement with Hughes would terminate
our ability to continue our business as presently conducted.
OUR ABILITY TO EARN REVENUES AND OUR OPERATING COSTS COULD BE ADVERSELY AFFECTED
IF THE NRTC IS UNABLE TO PROVIDE US WITH ESSENTIAL SUPPORT SERVICES AND ACCURATE
SUBSCRIBER INFORMATION.
Our agreements with the NRTC require that we use the NRTC for support
services, including subscriber information and data reporting, retail billing
services and central office subscriber services, and that we pay the NRTC
specified fees for these support services. These services are critical to the
operation and management of our business. Because we do not have direct or
complete access to or control over the management information systems of the
NRTC, we must rely upon the NRTC to provide accurate and detailed general
demographic and other information regarding our subscribers. If the NRTC is
unable to provide us with support services for whatever reason, we would be
required to acquire these services from other sources or provide them for
ourselves. Our cost of acquiring these services elsewhere or providing them
internally could exceed amounts payable under our agreements with the NRTC.
Moreover, it is possible that we would be able to secure these services on a
more economic basis from other persons while we remain obligated to secure them
from the NRTC.
OUR RIGHTS TO DISTRIBUTE DIRECTV PROGRAMMING MAY TERMINATE OR EXPIRE SOONER THAN
WE EXPECTED, WHICH COULD FORCE US TO CEASE OR FUNDAMENTALLY CHANGE OUR BUSINESS
OPERATIONS.
We may not be able to continue in the DIRECTV business after the NRTC's
agreement with Hughes expires. If we can continue, we cannot predict what it
will cost us to do so. The NRTC is currently in litigation with Hughes and its
subsidiary DIRECTV over some aspects of the NRTC's rights to distribute direct
broadcast satellite services under the NRTC's agreement with Hughes. As part of
their
9
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counterclaim in this lawsuit, DIRECTV and Hughes are seeking a declaratory
judgment that the term of the NRTC's agreement with Hughes 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, any failure of DBS-1 could
terminate our DIRECTV programming rights. While the NRTC has a right of first
refusal to receive specified direct broadcast satellite distribution services
from any successor satellite launched by Hughes, the scope and terms of this
right are also subject to dispute in the litigation. Our agreements with the
NRTC do not expressly provide for a right of first refusal to receive direct
broadcast satellite distribution services from the NRTC if it acquires them from
DIRECTV. If we are unable to acquire direct broadcast satellite distribution
services on satisfactory terms upon the expiration of the NRTC's agreement with
Hughes or our agreements with the NRTC, we would be required to acquire these
services from others, or to attempt to sell our subscriber base to one or more
other direct broadcast satellite 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. For further information concerning the NRTC/DIRECTV
litigation, you are urged to read "Business -- Relationship with NRTC and
DIRECTV and DIRECTV/NRTC Litigation."
SATELLITE FAILURES AND OTHER FACTORS BEYOND OUR CONTROL MAY PREVENT US FROM
CONTINUING OUR BUSINESS OPERATIONS.
Our agreements with the NRTC and the NRTC's agreement with Hughes expire
when the satellite or satellites that broadcast the DIRECTV programming covered
by the agreements reach the end of their useful lives and are removed from their
assigned orbital locations. According to Hughes, each DIRECTV satellite has an
estimated life of 12 to 15 years from its launch date. However, 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 Hughes' satellite. If we do not continue to
have access to DIRECTV programming, we will be forced to secure programming
elsewhere or cease or fundamentally change our business operations.
ANY FAILURE BY DIRECTV TO PROVIDE US WITH SATISFACTORY PROGRAMMING COULD
ADVERSELY AFFECT OUR ABILITY TO EARN REVENUES.
We obtain substantially all of our revenue through the distribution of
DIRECTV programming. As a result, if DIRECTV were to become unable for any
reason to continue to provide us with satisfactory programming, our ability to
earn revenues would be seriously impaired. Specifically, we may be affected by
any material adverse change in DIRECTV's assets, financial condition,
programming supply arrangements, technological capabilities or service levels or
any regulatory or legal developments affecting DIRECTV. These changes could
result from, among other things, possible electronic, computer or other
technical problems experienced by DIRECTV or from DIRECTV's failure to retain or
renew its Federal Communications Commission licenses to transmit radio frequency
signals from the orbital slots occupied by its satellites, which licenses expire
beginning in 2004.
THE NRTC MAY NOT ACT IN OUR BEST INTERESTS, WHICH COULD ADVERSELY AFFECT OUR
RIGHTS AND COSTS OF DISTRIBUTING DIRECTV PROGRAMMING IN OUR MARKETS.
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. Because we do not qualify as a member of the NRTC, we act as a
non-voting affiliate. From time to time, the NRTC may act solely in the
interests of its members, whose interests may conflict with our interests. We
cannot assure you that the
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<PAGE> 12
NRTC will act in a manner that will preserve our ability to offer DIRECTV
programming on a basis consistent with past practice.
CHANGES IN NRTC POLICIES MAY ADVERSELY AFFECT OUR ABILITY TO PROVIDE DIRECTV
PROGRAMMING IN OUR MARKETS.
We must comply with the policies of the NRTC adopted from time to time. In
the past, we and other NRTC-affiliated DIRECTV providers have disputed policies
proposed by the NRTC that we believed did not comply with our agreements with
the NRTC and applicable law. For example, we have differed with the NRTC, as
have other affiliates, over the nature of our rights to the information and data
regarding our subscribers. In the event that our rights to offer DIRECTV
programming through the NRTC are terminated or expire, our rights to subscriber
information will be critical to our ability to execute our business strategy.
WE COULD LOSE MONEY BECAUSE OF SIGNAL THEFT.
Signal theft or "piracy" in the C-band direct-to-home, cable television and
European direct broadcast satellite industries has been widely reported. Direct
broadcast satellite equipment used in the United States contains encryption
technology to protect against signal theft. If the encryption technology
contained within our direct broadcast satellite equipment fails or proves
ineffective in eliminating signal theft, our revenues could decrease.
ANY FAILURE BY THIRD PARTY PROGRAMMERS TO PROVIDE DIRECTV WITH PROGRAMMING THAT
APPEALS TO MASS AUDIENCES COULD ADVERSELY AFFECT OUR ABILITY TO COMPETE.
We depend heavily on DIRECTV's ability to obtain programming from third
parties that appeals to mass audiences. Our ability to compete successfully will
depend on DIRECTV's ability to continue to obtain desirable programming and
attractively package it to its customers at competitive prices. DIRECTV's
programming agreements with third party programmers have terms that expire on
various dates with different renewal and cancellation provisions. It is possible
that these agreements will not be renewed or that they will be canceled prior to
expiration of their original term. In the event that any of these agreements are
not renewed or are canceled, DIRECTV may not be able to obtain or develop
substitute programming that is comparable in quality, marketability or cost to
its existing programming.
Under the Cable Television Consumer Protection and Competition Act of 1992
and the FCC's rules, programming developed by vertically integrated
cable-affiliated programmers generally must be offered to all multi-channel
video programming distributors on nondiscriminatory terms and conditions. These
laws also prohibit some exclusive programming contracts. We anticipate that
DIRECTV will continue to purchase a substantial percentage of its programming
from cable-affiliated programmers. Some of the restrictions on cable-affiliated
programmers will expire in 2002 unless extended by the FCC or Congress. Any
change in these laws or their interpretation that would permit the cable
industry or programmers to discriminate in the sale of programming against
competing businesses, like DIRECTV, could adversely affect DIRECTV's ability,
and therefore our ability, to acquire programming on a cost-effective basis or
at all.
RECENT CONSOLIDATION AMONG DIRECT BROADCAST SATELLITE OPERATORS AND RELATED
LITIGATION COULD ADVERSELY AFFECT OUR DIRECTV PROGRAMMING RIGHTS, OUR COSTS OF
PROVIDING PROGRAMMING TO SUBSCRIBERS AND OUR CAPITAL REQUIREMENTS.
Until recently, DIRECTV, USSB, Primestar, Inc. and EchoStar Communications
Corporation were the principal domestic satellite television operations, serving
over 80% of satellite television subscribers in the United States. Hughes, which
owns DIRECTV, recently acquired both Primestar and USSB. After completing its
acquisition of USSB, DIRECTV expanded its programming lineup through the
addition of USSB's premium channels, consisting of HBO, Showtime, Cinemax and
The Movie Channel, and has refused to make these channels available to NRTC
members and affiliates for distribution in their rural markets. The NRTC has
filed suit against DIRECTV and Hughes alleging that they have breached the
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<PAGE> 13
NRTC's agreement with Hughes by failing to provide the NRTC with the exclusive,
or alternatively the non-exclusive, right to distribute this premium
programming. It is possible that Hughes' acquisition of USSB and the related
litigation will adversely impact the business relationship between the NRTC and
DIRECTV and therefore our ability to continue to provide DIRECTV programming in
our rural markets.
It is also possible that Hughes' acquisition of Primestar will increase our
costs of providing services and require that we seek additional capital. 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. While we cannot predict the ultimate impact of this
acquisition on our business, increased costs associated with our efforts to
convert former Primestar subscribers to our DIRECTV service could adversely
affect our results of operations in the near term. Hughes' acquisitions of USSB
and Primestar also could encourage EchoStar to respond by lowering prices or
increasing its marketing activities, which could increase our marketing costs or
cause us to lose revenues as a result of increased competition for our
subscribers.
WE COULD LOSE REVENUES IF WE MUST DISCONNECT CUSTOMERS WHO ARE DISCOVERED TO BE
OUTSIDE OUR TERRITORIES.
Just as we have exclusive DIRECTV distribution rights in our territories,
we are not allowed to have customers outside our territories. In addition,
DIRECTV and its distributors are prohibited by law from providing DIRECTV
programming outside the United States. Despite assurances from our subscribers
that they receive programming within one of our rural DIRECTV 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 are receiving services outside our rural DIRECTV markets, our revenues
could decrease.
OUR REVENUES AND OUR ABILITY TO ACHIEVE OR SUSTAIN PROFITABILITY COULD BE
ADVERSELY AFFECTED IF WE ARE UNABLE TO CONTINUE TO PROVIDE NETWORK PROGRAMMING
TO SUBSCRIBERS AS PART OF OUR PROGRAMMING PACKAGES.
The Satellite Home Viewer Act of 1994 establishes the terms and conditions
under which DIRECTV may retransmit "superstations" and broadcast network
programming to subscribers for private home viewing. In the case of broadcast
network programming, this satellite legislation is applicable only to persons in
households that cannot receive network programming with an acceptable signal
quality over-the-air and do not subscribe to cable. A number of television
broadcast networks and their affiliates have begun litigation in several courts
to prohibit satellite programming providers like DIRECTV from providing
specified broadcast network programming to subscribers in designated geographic
areas. To date, courts in North Carolina and Florida have issued orders that
enjoin DIRECTV from providing broadcast network programming to specified
subscribers. If these decisions are not overturned, either by the courts or
Congress, we and DIRECTV may be unable to provide network programming to
subscribers in rural markets or we may experience a substantial increase in the
cost of providing this programming to our customers.
Separate pieces of legislation that would revise the Satellite Home Viewer
Act's unserved household limitation have been passed by both the House of
Representatives and the Senate and a conference committee has been convened to
attempt to resolve differences in the two bills. We cannot assure you that
legislation revising the Satellite Home Viewer Act will be passed or, if
legislation is passed, that the changes in the Satellite Home Viewer Act will
mitigate the adverse effect that might result from the lawsuits brought under
the current Satellite Home Viewer Act.
CHANGES IN REGULATIONS APPLICABLE TO DIRECTV COULD HAVE A MATERIAL ADVERSE
EFFECT ON OUR ABILITY TO PROVIDE SERVICE TO OUR CUSTOMERS AND OUR COSTS OF DOING
SO.
The Satellite Home Viewer Act of 1994 currently is scheduled to expire on
December 31, 1999. When the act expires, direct-to-home operators will be
required to negotiate in the marketplace to obtain the necessary copyright
clearances to retransmit superstations and broadcast network programming. The
bills to revise the Satellite Home Viewer Act that passed the House and Senate
both would extend the legislation. However, we cannot assure you that this or
any similar legislation will be passed.
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<PAGE> 14
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:
- licensing of satellites;
- avoidance of interference with other broadcasting signals; and
- compliance with rules that the FCC has established specifically for
direct broadcast satellite licenses.
Any expiration of, or adverse change to or interpretation of, these regulations
could have a material adverse effect on our ability to provide programming to
subscribers or our costs of doing so.
FINANCIAL RISKS RELATED TO OUR COMPANY
WE MAY CONTINUE TO GENERATE NET LOSSES AND NEGATIVE EBITDA AND THIS COULD
ADVERSELY AFFECT OUR ABILITY TO RAISE ADDITIONAL CAPITAL.
We have operated for only a limited period of time. During this time we
have generated both net losses and negative earnings before interest, taxes,
depreciation and amortization, non-cash charges and extraordinary items, which
we refer to in this prospectus as EBITDA. We had a net loss of approximately
$64.7 million for the year ended December 31, 1998 and a net loss of
approximately $58.9 million for the six months ended June 30, 1999. We also
reported negative EBITDA of approximately $20.0 million for the year ended
December 31, 1998 and approximately $18.5 million for the six months ended June
30, 1999. The extent to which we generate net income or positive EBITDA in the
future will depend upon a number of factors, many of which are beyond our
control.
We cannot assure you that we will be able to generate or sustain net income
or positive EBITDA in the future, or if so, when. To the extent investors
measure our performance by net income or loss, rather than alternative measures
based on cash flow, continuing losses could adversely affect our ability to
raise additional capital to finance our business plan.
WE MAY NOT BE ABLE TO MAKE PRINCIPAL OR INTEREST PAYMENTS ON OUR SUBSTANTIAL
DEBT.
We have a significant amount of outstanding debt. We expect to increase our
outstanding debt as we pursue further acquisitions. It is possible that we may
not be able to make interest or principal payments on our debt when they become
due. In addition, borrowings under Golden Sky Systems' credit facility bear
interest at variable rates. This makes us vulnerable to increases in interest
rates generally.
OUR SUBSTANTIAL DEBT COULD ADVERSELY AFFECT OUR ABILITY TO EXECUTE OUR BUSINESS
STRATEGY.
Our substantial debt could:
- limit our ability to internally fund or obtain financing for future
acquisitions, working capital, operating losses, capital expenditures and
other general corporate purposes;
- limit our flexibility in planning for, or reacting to, changes in our
business and the industry in which we operate;
- place us at a disadvantage compared to our competitors that have less
debt;
- increase our vulnerability to adverse economic and industry conditions;
and
- reduce the cash flow available from our subsidiaries.
Any of these consequences could adversely affect our ability to execute our
business strategy.
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<PAGE> 15
OUR HOLDING COMPANY STRUCTURE MAY LIMIT OUR ABILITY TO SERVICE OUR INDEBTEDNESS.
As a holding company, we must rely on dividends and other distributions
from our subsidiaries to meet our obligations. The ability of our subsidiaries
to pay dividends and make other distributions and advances to us is subject to,
among other things, the terms of their debt instruments and applicable law.
Golden Sky Systems' credit facility and the indenture governing Golden Sky
Systems' 12 3/8% senior subordinated notes due 2006 contain restrictive
covenants that limit its ability to pay dividends or make distributions to us.
We cannot assure you that we will be in compliance with these covenants at the
time of a required interest payment on our debt instruments. We currently expect
that it may be difficult for Golden Sky Systems to generate the requisite
dividend capacity to enable us to make required cash interest payments on our
debt. Our ability to generate sufficient dividend capacity to service our debt
will depend upon the extent to which we complete additional acquisitions, incur
additional indebtedness, incur operating expenses, make capital expenditures and
generate adequate subscriber revenue, among other things. Any significant
adverse developments would likely preclude us from being able to access Golden
Sky Systems' cash flow to service our debt.
THE RESTRICTIVE COVENANTS OF OUR DEBT INSTRUMENTS MAY LIMIT OUR ABILITY TO
PURSUE OUR BUSINESS STRATEGY.
Our debt instruments contain numerous restrictive covenants that limit our
discretion with respect to the operation of our business. Among other things,
these covenants limit our ability, and the ability of our subsidiaries, to incur
substantial indebtedness, make investments, loans or advances, make capital
expenditures or consolidate, merge or transfer all or substantially all of our
or their assets. We may be unable to pursue attractive business opportunities
due to these restrictive covenants. Moreover, our financial flexibility may be
limited by these requirements.
IF WE FAIL TO COMPLY WITH THE RESTRICTIVE COVENANTS OF OUR DEBT INSTRUMENTS, OUR
DEBT COULD BE ACCELERATED AND THERE MAY BE INSUFFICIENT ASSETS TO MEET OUR
OBLIGATIONS.
Golden Sky Systems' credit facility requires us to meet specified financial
ratios and financial conditions. Events beyond our control may affect our
ability to meet these covenants and conditions. We may incur future debt that
contains financial or other covenants more restrictive than those currently
applicable to us. If we fail to comply with our obligations under these
instruments, the holders of this debt could elect to declare all amounts
outstanding under the relevant instruments to be immediately due and payable.
Our assets may not be sufficient to repay our debt if the holders elect to
accelerate the debt.
WE MAY NOT HAVE ENOUGH CAPITAL TO EXECUTE OUR BUSINESS STRATEGY.
Our operations require and will continue to require substantial capital.
Our actual cash requirements may materially exceed our estimated capital
requirements and available capital. The amount of capital we will require will
depend upon a number of factors, including the cost of future acquisitions, the
necessity of future capital expenditures and the extent of our future negative
cash flow. If we do not comply with the financial and operating covenants under
Golden Sky Systems' credit facility described above, we may be unable to borrow
funds under the credit facility. In addition we may require capital in excess of
amounts available under our credit facility. Under these circumstances, we will
be required to obtain additional financing to fund acquisitions and to continue
to develop our operations. We might not be able to secure the additional
financing on satisfactory terms, or at all.
OTHER RISKS OF OUR BUSINESS
SIGNIFICANT COMPETITION COULD ADVERSELY AFFECT OUR REVENUES.
We operate in a highly competitive industry and we expect intense
competition in the future. Our competitors include a broad range of companies
engaged in providing communications and entertainment services, including cable
operators, other direct-to-home programming providers, wireless cable operators,
broadcast television networks and home video products companies, as well as
companies developing new technologies. Several regional telephone operators have
also expressed an interest in becoming subscription
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<PAGE> 16
television service providers. The entry of these competitors into the
subscription television market could increase competition substantially and
thereby adversely affect our revenues and our costs of operations. Many of our
competitors and potential competitors are well-established companies and have
significantly greater financial and marketing resources than we do. Also, we may
suffer a competitive disadvantage relative to cable operators because the
upfront cost to the subscriber for equipment and installation is higher for
direct broadcast satellite service than it is for cable service.
OUR ACQUISITION STRATEGY MAY NOT BE SUCCESSFUL, WHICH COULD LIMIT OUR REVENUE
GROWTH AND OUR ABILITY TO ACHIEVE OR SUSTAIN PROFITABILITY.
Acquiring additional rural DIRECTV markets is an essential part of our
business strategy. We may not be able to realize the expected benefits of past
or future acquisitions or identify suitable acquisition candidates. Our ability
to complete future acquisitions will depend on a number of factors, some of
which are beyond our control, including the attractiveness of acquisition
prices, the negotiation of acceptable definitive acquisition agreements and our
ability to obtain the necessary approvals, including the approval of Hughes and
the NRTC. We are aware of one other company that is currently pursuing an
acquisition strategy in rural DIRECTV markets. We may not have the financial
resources to compete with this competitor in making additional acquisitions.
Even if we complete future acquisitions, the process of integrating
acquired operations into our existing operations may result in unforeseen
operating difficulties, divert managerial attention or require significant
financial resources that could otherwise be used for the ongoing development or
expansion of our existing operations. In addition, future acquisitions may
require us to incur additional debt and contingent liabilities.
IF WE ARE UNABLE TO CONTINUE TO IMPROVE OUR OPERATIONAL PROCEDURES AND HIRE
PERSONNEL CAPABLE OF MANAGING OUR RAPID GROWTH, WE MAY NOT BE ABLE TO EXECUTE
OUR BUSINESS STRATEGY.
As the size of our operations grows, we will need to continue to improve
our operational systems and procedures and to hire and retain additional
qualified personnel. If we are unable to manage our growth, our revenues and
profitability could be adversely affected. We have experienced a period of rapid
growth, primarily as a result of acquisitions. In order to achieve our business
objectives, we expect to continue to expand, largely through acquisitions of
additional rural DIRECTV markets. These acquisitions have placed, and will
continue to place, a significant strain on our management, operating systems and
procedures, financial resources, employees and other resources.
THE YEAR 2000 PROBLEM COULD CAUSE SIGNIFICANT DISRUPTION IN OUR BUSINESS AND
SUBSTANTIALLY INCREASE OUR COSTS OF OPERATION.
The year 2000 problem relates to computer programs that have time-sensitive
hardware and software that are unable to recognize or interpret dates beyond the
year 1999. This could cause computer systems and applications to fail to process
critical financial and operational information correctly. A year 2000 problem
could be very costly and time consuming to correct.
We are in the process of assessing the impact of the year 2000 issue on our
computer systems and operations. While we believe that our internal systems are
year 2000 compliant, it is possible that all of the software products that we
currently use are not in fact year 2000 compliant. In addition to our internal
systems, we rely heavily on contracted data processing services from the NRTC
and DIRECTV for customer service, billing, remittance processing and
distribution of our direct broadcast satellite programming services. We also
rely heavily on other parties, like suppliers of direct broadcast satellite
equipment, for the successful conduct of our business. If our year 2000
readiness efforts are not successful or are not completed in a timely manner or
if the third parties upon whom we rely do not achieve year 2000 compliance by
the end of 1999, our ability to transact business could be significantly
disrupted.
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<PAGE> 17
Currently, we believe our costs to successfully mitigate the year 2000
issue will be approximately $200,000. It is possible that our mitigation costs
will materially exceed this amount or that year 2000 issues will expose us to
material unanticipated litigation.
To date, we have not implemented a year 2000 contingency plan. Viable
contingency plans are difficult to develop for third party failures, especially
in high-technology industries like the direct broadcast satellite industry, due
to the lack of alternate suppliers. Any contingency plans we develop may not
successfully mitigate any adverse effects that the year 2000 issue may have on
our cash flow or results of operations.
RISKS OF INVESTING IN OUR COMMON STOCK
OUR PRINCIPAL STOCKHOLDERS WILL CONTINUE TO HAVE CONTROL OVER OUR BUSINESS AND
AFFAIRS.
Upon the completion of this offering, our executive officers and directors,
together with their affiliates, will beneficially own approximately % of
our outstanding common stock, or % if the underwriters' over-allotment
option is exercised in full. As a result of their ownership of our common stock,
these stockholders will have significant influence over the election of our
directors. Furthermore, given the size of their holdings, these stockholders may
be able to exercise substantial influence over other matters requiring
stockholder approval, including the approval of significant corporate
transactions. For example, this concentration of ownership may have the effect
of delaying or preventing a change in control of Golden Sky DBS.
OUR CERTIFICATE OF INCORPORATION AND DELAWARE LAW CONTAIN PROVISIONS THAT COULD
DISCOURAGE A TAKEOVER.
Effective upon the filing of our amended and restated certificate of
incorporation, our board of directors will be authorized to issue preferred
stock without stockholder approval. If our board of directors elects to issue
preferred stock, it could be more difficult for a third party to acquire us. In
addition, provisions of our certificate of incorporation that establish a
staggered board of directors, limit the removal of directors, restrict
stockholder action solely by written consent and require advance notice of
stockholder proposals and director nominations could make it more difficult for
a third party to acquire control of us, even if the change of control would be
beneficial to stockholders. Section 203 of the Delaware General Corporation Law
also could prohibit us from engaging in a business transaction with large
stockholders for a period of three years after their purchase of our common
stock.
THERE HAS BEEN NO PRIOR PUBLIC MARKET FOR OUR COMMON STOCK.
Prior to this offering, you could not buy or sell our common stock
publicly. An active public market for our common stock may not develop or be
sustained after this offering. If such a market does not develop or is not
sustained, it may be difficult for you to sell your shares of our common stock
at a price that is attractive to you. We will negotiate and determine the
initial public offering price with the representatives of the underwriters based
on several factors. This price may vary from the market price of our common
stock after this offering.
OUR STOCK PRICE MAY FLUCTUATE.
The price at which our common stock will trade after this offering depends
upon a number of factors, including our historical and anticipated operating
results and general market and economic conditions, some of which are beyond our
control. Factors like quarterly fluctuations in our financial and operating
results, developments affecting us, our customers or the market for our DIRECTV
programming services and the risks described elsewhere in these risk factors
also could cause the market price of our common stock to fluctuate
substantially. In addition, the stock market has from time to time experienced
extreme price and volume fluctuations. These broad market fluctuations may
adversely affect the market price of our common stock.
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PURCHASERS OF OUR COMMON STOCK WILL EXPERIENCE IMMEDIATE AND SUBSTANTIAL
DILUTION OF THEIR INVESTMENT.
If you purchase common stock in this offering, you will experience an
immediate and substantial dilution of $ in net tangible book value per share
after the offering. This means that if Golden Sky DBS were to be liquidated
immediately after this offering, there may be no assets available for
distribution to public shareholders after satisfaction of all creditors assuming
the amounts carried as intangible assets on our financial statements have no
value. We also have outstanding a large number of options to purchase common
stock with exercise prices significantly below the estimated initial public
offering price of our common stock. We intend to continue to grant substantial
stock options to our employees. We also may raise additional funds through
public or private debt or equity financing or from other sources. To the extent
options are exercised or additional financing is obtained at prices below the
estimated initial public offering price of our common stock, there may be
further dilution.
FUTURE SALES OF OUR COMMON STOCK COULD LOWER OUR STOCK PRICE.
If our existing stockholders sell shares of our common stock in the public
market following this offering, including shares issued upon the exercise of
outstanding options, or if the market perceives that these sales could occur,
the market price of our common stock could fall. These sales also might make it
more difficult for us to sell equity or equity-related securities in the future
at a time and price that we deem appropriate or to use equity as consideration
for future acquisitions.
Upon the completion of this offering, we will have shares of
common stock outstanding, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the shares sold in this offering will be freely tradeable. Of the
remaining shares, subject to the lock-up and affiliate restrictions described
below, shares will be freely tradeable upon completion of the offering
and shares will become freely tradeable at varying dates over the next
months.
In connection with this offering, Golden Sky DBS and directors, officers
and principal stockholders of Golden Sky DBS holding, in the aggregate,
shares of common stock as of the date of this prospectus, have agreed,
subject to some exceptions, not to sell any shares of common stock for a period
of 180 days after the date of this prospectus without the prior written consent
of Donaldson, Lufkin & Jenrette.
A number of our stockholders have registration rights allowing them to
require us to register the resale of their shares. In addition, after this
offering, we intend to file a registration statement covering the sale of
approximately shares of common stock to be reserved for issuance under
our stock option plan. If any of our significant stockholders exercise their
registration rights and sell shares of our common stock in the public market, or
if a significant number of option holders exercise their options and sell the
common stock acquired upon exercise, the market price of our common stock could
fall.
OUR FORWARD-LOOKING STATEMENTS MAY PROVE TO BE INACCURATE.
This prospectus 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, including the risks and
uncertainties discussed above. In light of these risks, uncertainties and
assumptions, the forward-looking events discussed in this prospectus might not
occur. We undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events or
otherwise.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of shares of our
common stock in connection with this offering will be approximately $139.0
million, or approximately $160.0 million if the underwriters' over-allotment
option is exercised in full, based on an assumed initial public offering price
of $ per share and after deducting the estimated underwriting discount and
offering expenses.
We intend to use the net proceeds from this offering for our general
corporate purposes, including working capital and possible acquisitions of
additional rural DIRECTV markets. As of the date of this prospectus, we have
non-binding letters of intent to acquire three additional rural DIRECTV markets
for aggregate consideration of approximately $32.5 million in cash. We have no
binding agreements with respect to any material acquisitions.
Pending these uses, we intend to use the net proceeds of the offering to
temporarily repay any amounts outstanding under Golden Sky Systems' revolving
credit facility and to invest the remaining net proceeds in short-term,
investment grade, interest-bearing securities and other similar investments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock and
we do not anticipate paying any cash dividends in the foreseeable future. Any
declaration and payment of dividends would be subject to the discretion of our
board of directors. Any future determination to pay dividends will depend on our
results of operations, financial condition, capital requirements, contractual
restrictions and other factors deemed relevant at the time by our board of
directors.
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CAPITALIZATION
The following table presents our cash and total capitalization as of June
30, 1999 on an actual basis, on a pro forma basis to reflect the merger of
Golden Sky Holdings into Golden Sky DBS and the related conversion of all
outstanding shares of capital stock of Golden Sky Holdings into shares of common
stock of Golden Sky DBS as described in "Business -- Corporate Restructuring,"
and on a pro forma as adjusted basis to reflect the merger and related
conversion and the sale of the shares of common stock offered by this prospectus
at an assumed initial public offering price of $ per share as if the
offering and the merger and related conversion had occurred on June 30, 1999:
<TABLE>
<CAPTION>
AS OF JUNE 30, 1999
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- --------- -----------
(DOLLARS IN THOUSANDS, EXCEPT PER
SHARE DATA)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 14,749 $ 14,749 $ 153,749
========= ========= =========
Restricted cash........................................... $ 35,281 $ 35,281 $ 35,281
========= ========= =========
Long-term debt (including current maturities):
Bank debt............................................... $ 35,000 $ 35,000 $ 35,000
Seller notes payable.................................... 9,824 9,824 9,824
Other................................................... 673 673 673
12 3/8% Notes........................................... 195,000 195,000 195,000
13 1/2% Notes........................................... 104,989 104,989 104,989
--------- --------- ---------
Total long-term debt............................ 345,486 345,486 345,486
Stockholders' equity (deficit):
Common Stock, par value $0.01; 1,000 shares authorized
and 100 shares issued and outstanding, actual;
shares authorized and shares
issued and outstanding, pro forma; and shares
authorized and shares issued and
outstanding, pro forma as adjusted................... --
Additional paid-in capital.............................. 97,913
Accumulated deficit..................................... (140,589) (140,589) (140,589)
--------- --------- ---------
Total stockholders' equity (deficit)............ (42,676) (42,676) 96,324
--------- --------- ---------
Total capitalization............................ $ 302,810 $ 302,810 $ 441,810
========= ========= =========
</TABLE>
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DILUTION
If you invest in our common stock, your interest will be diluted to the
extent of the difference between the public offering price per share of our
common stock and the pro forma net tangible book value per share of our common
stock after this offering.
Our pro forma net tangible book deficit as of June 30, 1999, after giving
effect to the merger of Golden Sky Holdings into Golden Sky DBS and the related
conversion of all outstanding shares of capital stock of Golden Sky Holdings
into shares of common stock of Golden Sky DBS as described in
"Business -- Corporate Restructuring," was approximately $ million or $
per share of common stock. Pro forma net tangible book value per share is equal
to the amount of our total tangible assets less total liabilities, divided by
the total number of shares of common stock outstanding after giving effect to
the merger and related conversion. After giving effect to our sale of the
shares of common stock offered by this prospectus at an assumed
initial public offering price of $ per share and after deducting the
estimated underwriting discount and offering expenses, our pro forma as adjusted
net tangible book deficit as of June 30, 1999 would have been approximately
$ million or $ per share of common stock. This represents an immediate
decrease in pro forma net tangible book deficit to existing shareholders of
$ per share and an immediate dilution to new investors of $ per share.
The following table illustrates the per share dilution to new investors:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............. $
Pro forma net tangible book deficit per share before this
offering............................................... $
Increase per share attributable to this offering..........
------
Pro forma as adjusted net tangible book deficit per share
after this offering.......................................
------
Dilution per share to new investors in this offering........ $
======
</TABLE>
The foregoing table does not reflect shares of common stock
issuable upon exercise of stock options outstanding as of the date of this
prospectus.
The following table sets forth, on a pro forma basis as of June 30, 1999,
the number of shares of common stock purchased from us, the total consideration
paid to us for the shares and the average price paid per share by the existing
stockholders and by new investors purchasing common stock from us in this
offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
-------------------- ---------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
---------- ------- ------------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders................. % $ 97,714,000 39.4% $
New investors......................... 150,000,000 60.6 $
---------- ----- ------------ -----
Total....................... 100.0% $247,714,000 100.0%
========== ===== ============ =====
</TABLE>
If the underwriters' over-allotment option is exercised in full, the number
of shares held by new investors will increase to , or % of the
total shares of common stock outstanding after this offering.
20
<PAGE> 22
PRO FORMA FINANCIAL STATEMENTS
GENERAL
The following pro forma financial statements relate to Golden Sky DBS, Inc.
for periods after February 2, 1999, and to its predecessor and wholly-owned
subsidiary, Golden Sky Systems, Inc., for periods before February 2, 1999.
The following pro forma statement of operations data for the year ended
December 31, 1998 present our results of operations as adjusted for (1) material
acquisitions we completed during 1998 and related financings, (2) the sale, in
July 1998, of $195.0 million aggregate principal amount of Golden Sky Systems'
12 3/8% senior subordinated notes due 2006 and the application of the resulting
proceeds, and (3) the sale, in February 1999, of $193.1 million aggregate
principal amount at maturity of our 13 1/2% senior discount notes due 2007 and
the application of the resulting proceeds, as if each of these events had
occurred at the beginning of 1998. The following pro forma statement of
operations data for the six months ended June 30, 1999 present our results of
operations adjusted for the sale of our 13 1/2% senior discount notes due 2007
and the application of the resulting proceeds as if the sale had occurred at the
beginning of 1998.
These pro forma data do not purport to represent what our actual financial
position or results of operations would have been had these events actually
occurred on the specified dates and are not intended to predict our future
results of operations or financial position.
Our historical information for the year ended December 31, 1998 was taken
from our audited consolidated financial statements included elsewhere in this
prospectus. Our historical information for the six months ended June 30, 1999
was taken from our unaudited consolidated financial statements included
elsewhere in this prospectus. The financial information for the significant
businesses we have acquired was taken from the historical financial statements
of those acquired businesses.
21
<PAGE> 23
GOLDEN SKY DBS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ACQUISITIONS(A) ADJUSTMENTS PRO FORMA
---------- --------------- ----------- ---------
<S> <C> <C> <C> <C>
Revenue:
DBS services............................. $ 74,910 $11,876 $ -- $ 86,786
Lease and other.......................... 1,014 126 -- 1,140
Other.................................... -- 28 (28)(b) --
-------- ------- -------- --------
Total revenue.................... 75,924 12,030 (28) 87,926
Costs and Expenses:
Costs of DBS services.................... 45,291 7,570 -- 52,861
Other costs of revenue................... -- 21 (21)(b) --
System operations........................ 11,021 1,822 -- 12,843
Sales and marketing...................... 32,201 399 -- 32,600
General and administrative............... 7,431 39 -- 7,470
Depreciation and amortization............ 23,166 490 5,819(c) 29,475
-------- ------- -------- --------
Total costs and expenses......... 119,110 10,341 5,798 135,249
-------- ------- -------- --------
Operating income (loss).................... (43,186) 1,689 (5,826) (47,323)
Non-operating Items:
Interest and investment income........... 1,573 222 (222)(d) 1,573
Interest expense......................... (20,537) (139) (25,402)(e) (46,078)
Gain on sale of wireless TV rights....... -- 1,956 (1,956)(b) --
Net profit on asset disposal............. -- 8,421 (8,421)(b) --
-------- ------- -------- --------
Total non-operating items........ (18,964) 10,460 (36,001) (44,505)
-------- ------- -------- --------
Income (loss) before income taxes.......... (62,150) 12,149 (41,827) (91,828)
Income taxes............................... -- (3,074) 3,074(f) --
-------- ------- -------- --------
Income (loss) before extraordinary
charge................................... $(62,150) $ 9,075 $(38,753) $(91,828)
======== ======= ======== ========
</TABLE>
22
<PAGE> 24
GOLDEN SKY DBS, INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ----------- ---------
<S> <C> <C> <C>
Revenue:
DBS services............................................ $ 60,040 $ -- $ 60,040
Lease and other......................................... 385 -- 385
-------- ------- --------
Total revenue................................... 60,425 -- 60,425
Costs and Expenses:
Costs of DBS services................................... 38,022 -- 38,022
System operations....................................... 8,796 -- 8,796
Sales and marketing..................................... 25,507 -- 25,507
General and administrative.............................. 6,640 -- 6,640
Depreciation and amortization........................... 17,360 -- 17,360
-------- ------- --------
Total costs and expenses........................ 96,325 -- 96,325
-------- ------- --------
Operating loss............................................ (35,900) -- (35,900)
Non-operating Items:
Interest and investment income.......................... 1,652 -- 1,652
Interest expense........................................ (21,728) (1,748)(g) (23,476)
-------- ------- --------
Total non-operating items....................... (20,076) (1,748) (21,824)
-------- ------- --------
Loss before income taxes.................................. (55,976) (1,748) (57,724)
Income taxes.............................................. -- -- --
-------- ------- --------
Loss before extraordinary charge.......................... $(55,976) $(1,748) $(57,724)
======== ======= ========
</TABLE>
23
<PAGE> 25
- ---------------
(a) Includes the operations of material businesses we acquired during 1998 from
January 1, 1998 through their respective acquisition dates.
(b) To eliminate the results of operations not acquired.
(c) Gives effect to the amortization of intangible assets recorded in purchase
accounting of $6,309,000, less the elimination of historical amortization
of intangible assets of $490,000. Intangible assets consist of non-compete
agreements, customer lists and DIRECTV distribution rights. Non-compete
agreements are amortized over the contract period, which is generally three
years, while customer lists are amortized over five years. DIRECTV
distribution rights are amortized over the remaining useful life of the
satellites, which is generally 10 to 12 years depending upon the date of
our acquisition of the distribution rights.
(d) Gives effect to the elimination of historical interest income of material
businesses we acquired during 1998.
(e) Gives effect to the following (in thousands):
<TABLE>
<S> <C>
Elimination of historical interest expense of material
businesses we acquired during 1998........................ $ 139
Interest expense on borrowings under Golden Sky Systems'
12 3/8% senior subordinated notes due 2006, seller notes
payable and Golden Sky Systems' credit facility assumed to
be incurred to finance acquisitions as if these borrowings
had occurred at the beginning of 1998 at their respective
historical interest rates................................. (14,734)
Aggregate interest expense and amortization of deferred
financing costs associated with the offering of our
13 1/2% senior discount notes due 2007 as if this offering
has been consummated as of the beginning of 1998.......... (14,007)
Reduction of historical interest expense as a result of the
paydown of outstanding debt from the proceeds of the
offering of our 13 1/2% senior discount notes due 2007
assuming this offering had occurred at the beginning of
1998...................................................... 3,200
--------
$(25,402)
========
</TABLE>
(f) Gives effect to the elimination of historical income tax expense (benefit)
of acquired entities.
(g) Reflects aggregate interest expense and amortization of deferred financing
costs associated with the offering of our 13 1/2% senior discount notes due
2007 totaling $2,347,000 as if this offering had occurred at the beginning
of 1998. Also gives effect to the reduction of interest expense of $599,000
as a result of the repayment of debt from the proceeds of the offering of
our 13 1/2% senior discount notes due 2007.
24
<PAGE> 26
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data relates to Golden Sky
DBS, Inc. for periods after February 2, 1999, which was when Golden Sky DBS was
formed, and to its predecessor and wholly-owned subsidiary, Golden Sky Systems,
Inc. for periods before February 2, 1999. The selected historical consolidated
financial data as of December 31, 1996, 1997 and 1998 and for the periods then
ended presented below were taken from our audited consolidated financial
statements included elsewhere in this prospectus. The information presented
below as of and for the six months ended June 30, 1998 and 1999 is unaudited,
but in the opinion of management reflects all adjustments, consisting of normal
recurring adjustments, considered necessary for a fair presentation. The results
for the six months ended June 30, 1999 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1999. Household
and subscriber data reflect 100% of the households or subscribers comprising our
rural DIRECTV markets, including one rural DIRECTV market in which we acquired
approximately 76% ownership. We receive 100% of the revenue generated by all
subscribers in our rural DIRECTV markets. The following information should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and our consolidated financial statements
and related notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEARS ENDED SIX MONTHS ENDED
INCEPTION TO DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------- -------------------
1996 1997 1998 1998 1999
------------ -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenue:
DBS services................................. $ 219 $ 16,452 $ 74,910 $ 30,466 $ 60,040
Lease and other.............................. 36 944 1,014 512 385
------- -------- -------- -------- --------
Total revenue......................... 255 17,396 75,924 30,978 60,425
Costs and Expenses:
Cost of DBS services......................... 130 9,304 45,291 17,926 38,022
System operations............................ 26 3,796 11,021 4,177 8,796
Sales and marketing.......................... 73 7,316 32,201 11,287 25,507
General and administrative................... 1,035 2,331 7,431 2,675 6,640
Depreciation and amortization................ 97 7,300 23,166 9,753 17,360
------- -------- -------- -------- --------
Total costs and expenses.............. 1,361 30,047 119,110 45,818 96,325
------- -------- -------- -------- --------
Operating loss................................. (1,106) (12,651) (43,186) (14,840) (35,900)
Net interest expense........................... (61) (3,133) (18,964) (5,208) (20,076)
------- -------- -------- -------- --------
Loss before extraordinary charge............... (1,167) (15,784) (62,150) (20,048) (55,976)
Extraordinary charge on early retirement of
debt......................................... -- -- (2,577) (2,577) (2,935)
------- -------- -------- -------- --------
Net loss.............................. $(1,167) $(15,784) $(64,727) $(22,625) $(58,911)
======= ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------- JUNE 30,
1996 1997 1998 1999
------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents................................... $ 479 $ 13,632 $ 4,460 $ 14,749
Restricted cash(1).......................................... -- -- 51,617 35,281
Total assets................................................ 6,383 156,236 328,071 341,586
Total debt.................................................. 4,450 69,113 278,204 345,486
Stockholder's equity (deficit).............................. (1,166) 70,449 15,922 (42,676)
</TABLE>
25
<PAGE> 27
<TABLE>
<CAPTION>
SIX MONTHS ENDED
INCEPTION TO YEARS ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ------------------------- -----------------------
1996 1997 1998 1998 1999
------------ ----------- ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
OPERATING DATA
Households at end of period.............. 22,000 1,135,000 1,727,000 1,395,000 1,859,000
Subscribers acquired in acquisitions..... 3,000 65,700 55,300 27,300 18,200
Subscribers added in existing rural
DIRECTV markets........................ 100 22,100 80,300 31,700 47,700
Subscribers at end of period............. 3,100 90,900 226,500 150,000 292,400
SAC per gross subscriber added(2)........ $ 290 $ 280 $ 320 $ 300 $ 360
Penetration at end of period............. 14.1% 8.0% 13.1% 10.8% 15.7%
</TABLE>
- ---------------
(1) Includes the balance of the $45.2 million we placed in escrow to fund the
first four semi-annual interest payments on Golden Sky Systems' 12 3/8%
senior subordinated notes due 2006. Semi-annual interest payments of $12.1
million were made on February 1, 1999 and August 1, 1999. Also includes $5.3
million as of December 31, 1998 that was deposited with the administrative
agent under Golden Sky Systems' credit facility to fund a contingent
reduction of availability under the term loan facility. This contingent
reduction did not occur under the terms of the amended credit facility
entered into coincident with the offering of the outstanding notes.
(2) Represents subscriber acquisition costs on a per gross new subscriber
activation basis. This excludes acquired subscribers and does not net out
disconnected subscribers.
26
<PAGE> 28
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. This discussion should be read in
conjunction with our consolidated financial statements and the related notes
appearing elsewhere in this prospectus.
OVERVIEW
We were formed in June 1996 to acquire rights to distribute DIRECTV
programming services in rural markets in the United States. We are a non-voting
affiliate of the NRTC, which is a cooperative organization whose members are
engaged in the distribution of telecommunications and other services in rural
America. We acquired our first rural DIRECTV market in November 1996. From our
inception through June 30, 1999, we have acquired 55 rural DIRECTV markets
serving approximately 1.9 million households. The aggregate purchase price for
these acquisitions totaled approximately $295.0 million, or about $159 per
household. Following each acquisition, we have sought to create a strong local
presence in each of our markets. We have established over 70 offices in our
territories and have established dealer relationships with approximately 450
local retailers of direct broadcast satellite ("DBS") equipment. We are
continually evaluating acquisition prospects and we expect to continue to enter
into acquisition agreements to purchase additional rural DIRECTV markets
consistent with our growth strategy. As of June 30, 1999, we were the exclusive
provider of DIRECTV programming to approximately 292,400 subscribers.
In addition to growth by acquisitions, we have increased our subscriber
base through increased penetration of our rural DIRECTV markets. We believe that
there is a substantial opportunity to increase penetration through local
marketing. Most of the NRTC members from which we acquire rural DIRECTV markets
generally have not engaged in significant marketing efforts, but rather have
relied primarily on the consumer to take the initiative to acquire service.
We have experienced net losses as well as negative EBITDA and cash flows
from operations since our inception. For a description of EBITDA, see note 2 to
"Summary Historical and Pro Forma Financial and Other Data." 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. Our rapid subscriber growth and related
subscriber acquisition costs have been significant contributors to our net
losses and negative EBITDA experienced to date. 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. Because we have experienced a relatively low rate of customer
disconnects, or churn, we believe that our investment in building our subscriber
base rapidly will enhance our cash flow and operating results in the longer
term. During the twelve-month period ended June 30, 1999, our annual churn rate
approximated 9.4%, compared to 8.1% and 6.1% during the twelve-month periods
ended March 31, 1999 and December 31, 1998, respectively.
As a result of our historical and anticipated significant growth rate, our
historical operating results may not be comparable from period to period.
27
<PAGE> 29
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>
YEARS ENDED SIX MONTHS
INCEPTION TO DECEMBER 31, ENDED JUNE 30,
DECEMBER 31, -------------- --------------
1996 1997 1998 1998 1999
------------ ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services................................. 85.9% 94.6% 98.7% 98.3% 99.4%
Lease and other.............................. 14.1 5.4 1.3 1.7 0.6
------ ----- ----- ----- -----
Total revenue........................ 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Costs of DBS services........................ 51.0% 53.5% 59.7% 57.9% 62.9%
System operations............................ 10.2 21.8 14.5 13.5 14.6
Sales and marketing.......................... 28.6 42.0 42.4 36.4 42.2
General and administrative................... 405.9 13.4 9.8 8.6 11.0
Depreciation and amortization................ 38.0 42.0 30.5 31.5 28.7
------ ----- ----- ----- -----
Total costs and expenses............. 533.7 172.7 156.9 147.9 159.4
------ ----- ----- ----- -----
Operating loss................................. (433.7) (72.7) (56.9) (47.9) (59.4)
Net interest expense........................... (23.9) (18.0) (25.0) (16.8) (33.2)
------ ----- ----- ----- -----
Loss before extraordinary charge............... (457.6)% (90.7)% (81.9)% (64.7)% (92.6)%
====== ===== ===== ===== =====
</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 as we continue to make
acquisitions and open additional 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, commission expenses 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.
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
28
<PAGE> 30
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. Golden Sky Systems elected to be treated as a Subchapter S
corporation in 1996. As an S corporation, it generally was not directly subject
to income taxation and recognized no income tax expense or benefit at the
corporate level. On February 12, 1997, Golden Sky Systems terminated its
Subchapter S corporation status and became subject to income taxation under
Subchapter C of the Internal Revenue Code. We have recognized no income tax
benefits in any of the periods presented because we have incurred operating
losses in all periods, and realization of future tax benefits is uncertain.
As of December 31, 1998, we had net operating loss carryforwards for
federal income tax purposes of approximately $63.4 million. These net operating
loss carryforwards expire beginning in the year 2011.
Six Months Ended June 30, 1999 Compared to the Six Months Ended June 30, 1998.
Revenue. DBS services revenue for the six months ended June 30, 1999
totaled $60.0 million, which represented a 97% increase as compared to the same
period during the prior year. This increase was principally attributable to 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 the six-month period ended June 30, 1999 increased to
approximately 259,900, compared to approximately 122,300 during the comparable
1998 period. Average monthly DBS services revenue per subscriber approximated
$38 and $42 during those same periods. The decrease in revenue per subscriber
resulted primarily from a change in sales mix toward lower priced services and
the effects of free programming provided to some of our new subscribers pursuant
to DIRECTV's national sales promotions.
Costs of DBS Services. Costs of DBS services increased $20.1 million, or
112%, during the six-month period ended June 30, 1999, to $38.0 million. This
increase is consistent with the increase in the average number of subscribers
previously described. As a percentage of DBS services revenue, the costs of DBS
services increased to 63.3% during the six-month period ended June 30, 1999,
compared to 58.8% during the same period of 1998. This increase resulted largely
from a change in sales mix toward lower margin services and increased charges by
DIRECTV for satellite and ground service operations.
System Operations. System operations expenses totaled $8.8 million for the
six-month period ended June 30, 1999, a $4.6 million increase, or 111% over the
comparable 1998 period. These costs rose as a result of the increased number of
field offices and related activity resulting from our continued acquisitions of
rural DIRECTV markets, as well as from subscriber growth. As a percentage of
total revenue, system operations expenses increased to 14.6% during the
six-month period ended June 30, 1999, from 13.5% during the same 1998 period.
The increase in system operations expenses as a percentage of total revenue
resulted primarily from the expansion of our national customer service center in
Kansas City.
Sales and Marketing. Sales and marketing expenses totaled $25.5 million
during the six-month period ended June 30, 1999, an increase of $14.2 million
compared to the same 1998 period. Sales and marketing costs per new subscriber
activation approximated $360 and $300 during the six-month periods ended June
30, 1999 and 1998, respectively. The increase in sales and marketing expenses
resulted from:
- a 79% increase in the number of new subscriber activations during the six
months ended June 30, 1999, as compared to the same period of 1998;
- increased costs associated with free programming provided to new
subscribers under certain DIRECTV national sales promotions;
- costs we experienced from our marketing efforts to convert Primestar
subscribers to our DIRECTV service; see "--Liquidity and Capital
Resources"; and
- increased equipment and installation subsidies provided by us to our
subscribers.
29
<PAGE> 31
We expect that our subscriber acquisition costs per new subscriber
activation may be as high as $400 during the remainder of 1999. To the extent
that competition for new subscribers intensifies and we decide to increase our
marketing and promotional efforts, these costs may be higher.
General and Administrative. During the six-month period ended June 30,
1999, general and administrative expenses totaled $6.6 million, compared to $2.7
million during the comparable 1998 period. As a percentage of total revenue,
general and administrative expenses increased to 11.0% during the six-month
period ended June 30, 1999, from 8.6% during 1998. These increases in general
and administrative expenses resulted from the addition of administrative
resources necessary to support our growth.
Earnings Before Interest, Taxes, Depreciation and Amortization, Non-Cash
Charges and Extraordinary Items. EBITDA for the six months ended June 30, 1999
totaled negative $18.5 million, compared to EBITDA of negative $5.1 million
during the six months ended June 30, 1998. This increase in negative EBITDA
resulted from the increases in sales and marketing activities and related new
subscriber activations previously described. For a description of EBITDA, see
note 2 to "Summary Historical and Pro Forma Financial and Other Data."
During the six months ended June 30, 1999, we:
- used net cash of $22.4 million in operating activities;
- used net cash of $21.0 million in investing activities; and
- provided net cash of $53.6 million from financing activities.
During the six months ended June 30, 1998, we:
- used net cash of $14.2 million in operating activities;
- used net cash of $46.6 million in investing activities; and
- provided net cash of $48.0 million from financing activities.
Depreciation and Amortization. Depreciation and amortization expenses
increased $7.6 million to $17.4 million during the six months ended June 30,
1999, compared to $9.8 million during the six months ended June 30, 1998. This
increase reflects the amortization of higher intangible asset balances resulting
from our acquisitions of rural DIRECTV markets.
Interest Expense. Interest expense totaled $21.7 million during the six
months ended June 30, 1999 and $5.2 million during the same 1998 period. This
increase of $16.5 million resulted from higher outstanding debt balances and an
increase in our weighted-average interest rate resulting from the issuance of
our 12 3/8% Notes in July 1998 and our 13 1/2% Notes in February 1999.
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 155,200, compared to approximately 33,600 during 1997. Average
monthly programming revenue per subscriber approximated $40 and $41 during these
same periods.
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 DBS services
revenue, the costs of DBS services increased to 60% during 1998, compared to 57%
in 1997. This increase resulted largely from increased programming costs.
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
30
<PAGE> 32
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 as 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.
Earnings Before Interest, Taxes, Depreciation and Amortization, Non-Cash
Charges and Extraordinary Items. 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. For a description of EBITDA, see
note 2 to "Summary Historical and Pro Forma Financial and Other Data."
During the year ended December 31, 1998 we:
- used net cash of $36.6 million in operating activities;
- used net cash of $159.9 million in investing activities; and
- provided net cash of $187.3 million from financing activities.
During the year ended December 31, 1997 we:
- used net cash of $3.1 million in operating activities;
- used net cash of $120.7 million in investing activities; and
- provided net cash of $137.0 million from financing activities.
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.
Year Ended December 31, 1997 Compared to Period from Inception to December 31,
1996
Revenue. DBS services revenue for the year ended December 31, 1997
increased to $16.5 million from $219,000 for the period from inception to
December 31, 1996 (the "1996 Period"). Equipment lease revenue was $944,000 for
the year ended December 31, 1997, compared to $36,000 for the 1996 Period. These
increases principally resulted from the fact that we conducted operations for
all of 1997 as opposed to only a portion of 1996, and from an increase in
subscribers. The average number of subscribers during 1997 increased to
approximately 33,600, compared to approximately 3,000 during the 1996 Period.
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Costs of DBS Services. Costs of DBS services totaled $9.3 million for the
year ended December 31, 1997, compared to $130,000 for the 1996 Period. The
increase in the costs of DBS services resulted from the fact that we conducted
operations for all of 1997 as opposed to only a portion of 1996 and corresponds
to the large number of subscribers we added in 1997. As a percentage of DBS
services revenue, the costs of DBS services decreased to 57% for the year ended
December 31, 1997, compared to 59% for the 1996 Period. This decrease was
primarily due to a change in subscriber revenue mix toward packages with higher
margins.
System Operations. System operations expenses totaled $3.8 million for the
year ended December 31, 1997, as compared to $26,000 for the 1996 Period. These
expenses rose as a result of the fact that we conducted operations for all of
1997 as opposed to only a portion of 1996 and from the increase in the number of
field offices and related activity during 1997. We opened our first two field
offices in November 1996 and had a total of 36 field offices as of December 31,
1997.
Sales and Marketing. Sales and marketing expenses totaled $7.3 million for
the year ended December 31, 1997, as compared to $73,000 for the 1996 Period.
The increase of $7.2 million in sales and marketing expenses resulted from the
fact that we conducted operations for all of 1997 as opposed to only a portion
of 1996 and from the increase in the size and scope of our operations.
Advertising expenses were $1.4 million for the year ended December 31, 1997,
compared to $33,000 during the 1996 Period.
General and Administrative. General and administrative expenses
approximated $2.3 million for the year ended December 31, 1997, as compared to
$1.0 million for the 1996 Period. The increase of $1.3 million in general and
administrative expenses resulted from the fact that we conducted operations for
all of 1997 as opposed to only a portion of 1996 and from our growth.
Earnings Before Interest, Taxes, Depreciation and Amortization, Non-Cash
Charges and Extraordinary Items. EBITDA for the year ended December 31, 1997
totaled negative $5.4 million, compared to EBITDA of negative $1.0 million for
the 1996 Period. This increase in negative EBITDA principally resulted from the
fact that we conducted operations for all of 1997 as opposed to only a portion
of 1996 and from the increases in sales and marketing activities and related new
subscriber activations previously described.
During the year ended December 31, 1997 we:
- used net cash of $3.1 million in operating activities;
- used net cash of $120.7 million in investing activities; and
- provided net cash of $137.0 million from financing activities.
During the 1996 Period we:
- used net cash of $790,000 in operating activities;
- used net cash of $3.2 million in investing activities; and
- provided net cash of $4.5 million from financing activities.
Depreciation and Amortization. Depreciation and amortization totaled $7.3
million for the year ended December 31, 1997, compared to $97,000 during the
1996 Period. The increase in depreciation and amortization expense of $7.2
million primarily reflects increased amortization of intangible assets resulting
from our acquisition activity during 1997, as well as the fact that we conducted
operations for all of 1997 as opposed to only a portion of 1996.
Interest Expense. Interest expense amounted to $3.2 million for the year
ended December 31, 1997, compared to $62,000 for the 1996 Period. The increase
in interest expense of $3.1 million resulted primarily from the fact that we
conducted operations for all of 1997 as opposed to only a portion of 1996 and
from increased borrowings. Bank borrowings at December 31, 1997 totaled
approximately $60.0 million and were incurred to fund acquisitions and, to a
lesser extent, working capital needs resulting from our growth during the year.
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LIQUIDITY AND CAPITAL RESOURCES
Our operations require substantial amounts of capital for:
- acquisitions of rural DIRECTV markets;
- the financing of subscriber growth, including subsidizing DBS equipment
and installation and marketing and selling expenses;
- investments in, and maintenance of, field offices in our rural DIRECTV
markets;
- the financing of infrastructure development costs necessary to support
the growth of our business; and
- the funding of start-up losses and other working capital requirements.
Our capital expenditures, inclusive of acquisitions of rural DIRECTV
markets, totaled $ 37.3 million during the six months ended June 30, 1999 and
$45.9 million during the six months ended June 30, 1998. Our net cash used in
operations totaled $22.4 million during the six months ended June 30, 1999 and
$14.2 million during the six months ended June 30, 1998.
Our capital expenditures, inclusive of acquisitions of rural DIRECTV
markets, totaled $128.2 million during 1998, $130.7 million during 1997 and $5.4
million during the 1996 Period. Net cash used in operations totaled $36.6
million in 1998, $3.1 million in 1997 and $790,000 in the 1996 Period.
To date, our acquisitions, subscriber growth and operations have been
financed from borrowings under Golden Sky Systems' bank credit facility,
proceeds from Golden Sky Systems' offering of its 12 3/8% Notes, proceeds of the
offering of our 13 1/2% Notes, proceeds from the issuance of capital stock and,
to a lesser extent, the issuance of promissory notes to sellers of rural DIRECTV
markets.
During the six months ended June 30, 1999, our net cash from financing
activities of $53.6 million was comprised of:
- gross proceeds of $100.0 million from the offering of our 13 1/2% Notes,
which we completed in February 1999;
- net repayments of $32.0 million under Golden Sky Systems' bank credit
facility;
- increased deferred financing costs of $5.8 million resulting from the
amendment of Golden Sky Systems' bank credit facility and the offering of
our 13 1/2% Notes; and
- repayments totaling $8.6 million on other debt.
In 1998, our net cash from financing activities of $187.3 million was
comprised of:
- net proceeds of $189.2 million from the offering of Golden Sky Systems'
12 3/8% Notes;
- net borrowings of $7.0 million under Golden Sky Systems' bank credit
facility;
- deferred financing costs of $5.2 million; and
- $3.7 million of repayments on other debt.
In 1997, our net cash flows from financing activities of $137.0 million was
comprised of:
- $81.1 million from the issuance of preferred stock;
- deferred financing costs of $3.3 million; and
- $59.2 million of net borrowings under Golden Sky Systems' bank credit
facility and other indebtedness.
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Credit Facility
Golden Sky Systems has 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 June 30, 1999,
Golden Sky Systems had (1) fully utilized the entire $35.0 million of term loan
availability, (2) utilized approximately $ 20.6 million of the letter of credit
sub-facility and (3) had no outstanding borrowings under the revolving credit
line. 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 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.
For additional information regarding the credit facility, see "Description
of Indebtedness -- Credit Facility."
12 3/8% Notes
On July 31, 1998, Golden Sky Systems completed the sale of $195.0 million
aggregate principal amount at maturity of its 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 the payment
of underwriting discounts and other issuance costs. For additional information
regarding the 12 3/8% Notes, see "Description of Indebtedness -- The 12 3/8%
Notes."
13 1/2% Notes
On February 19, 1999, we completed the sale of $193.1 million aggregate
principal amount at maturity of our 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 $95.7 million, after the payment of
underwriting discounts and other issuance costs aggregating approximately $4.4
million. For additional information regarding the 13 1/2% Notes, see
"Description of Indebtedness -- The 13 1/2% Notes."
Future Capital Requirements
Our future capital requirements will depend upon a number of factors,
including the extent of our acquisition activities, the rate of our subscriber
growth and the working capital needs necessary to accommodate our anticipated
growth. We expect that increased investments in our administrative and computer
systems will be necessary to support our increased size and continued growth. We
currently subsidize a portion of the cost of DBS equipment and subscriber
installations. The extent of our future subsidies of DBS equipment may
materially affect our liquidity and capital requirements. In addition, our
favorable working capital position relies, in part, upon the existing terms of
our agreements with the NRTC and the timing of required payments to the NRTC.
Excluding 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 approximate $5.0 million during the
year ended December 31, 1999. During 1999, we expect to continue to expand our
marketing efforts in order to increase our subscriber penetration. As of June
30, 1999, after giving effect to the sale of shares of common stock offered by
this prospectus, we had cash on hand of approximately $ . As of the
same date, we had approximately $43.3 million available for borrowing under
Golden Sky Systems' revolving credit facility. While we cannot assure you,
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<PAGE> 36
we believe that the proceeds of this offering along with amounts available for
borrowing under the credit facility will be sufficient to finance our operations
during the remainder of 1999.
Since December 31, 1998, we have acquired eight rural DIRECTV markets. As
of the acquisition dates, these markets included approximately 124,000
households and 18,100 subscribers. The aggregate purchase price for these recent
acquisitions, excluding direct acquisition costs, was approximately $34.5
million. We are continually evaluating acquisition prospects and expect to enter
into additional acquisition agreements and complete further acquisitions of
rural DIRECTV markets consistent with our growth strategy. We currently have
non-binding letters of intent to acquire three additional rural DIRECTV markets
for aggregate consideration of approximately $32.5 million in cash. These
markets include approximately 161,000 households and approximately 10,200
subscribers. Completion of these acquisitions is contingent upon negotiation of
satisfactory definitive agreements and other customary conditions to closing. We
cannot assure you that we will complete these or any other future acquisitions.
As noted above, our operating costs and working capital requirements are
partly a function of our rights under our agreements with the NRTC and the
NRTC's agreement with Hughes. The NRTC is currently in litigation with Hughes
and DIRECTV over some aspects of these rights. While we are not a party to the
suit, the outcome could have a material adverse effect on our rights to provide
DIRECTV programming in our rural markets, our capital requirements and our
business, financial condition and results of operations. See "Risk
Factors -- Our rights to distribute DIRECTV programming may terminate or expire
sooner than we expected, which could force us to cease or fundamentally change
our business operations" and "-- Recent consolidation among direct broadcast
satellite operators and related litigation could adversely affect our DIRECTV
programming rights, our costs of providing programming to subscribers and our
capital requirements."
Recently, we have experienced increased subscriber acquisition costs due to
increased competition for subscribers. In April 1999, Hughes, the parent company
of DIRECTV, acquired Primestar's medium-power broadcast satellite business and
high-powered DBS assets. Subsequent to Hughes' announcement of its proposed
acquisition of Primestar, EchoStar 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, we have increased our marketing
efforts with respect to Primestar subscribers. Our increased Primestar
conversion efforts include, among other things, discounted equipment and
installation prices and higher sales commissions. We are unable to estimate the
number of Primestar subscribers we may be able to convert to our DIRECTV
service. Our subscriber acquisition costs also have increased during 1999 as a
result of recent national DIRECTV promotions that offer new subscribers one to
three months of free programming services. We expect that our subscriber
acquisition costs may approximate as much as $400 or more on a per new
subscriber basis, including the incremental costs associated with converting
existing Primestar subscribers, during the remainder of 1999.
We are highly leveraged and expect to increase our leverage as we pursue
further acquisitions of rural DIRECTV markets by borrowing additional funds,
under Golden Sky Systems' credit facility or otherwise, and by the issuance of
additional acquisition-related notes payable. The approximately $9.8 million of
seller notes payable outstanding at June 30, 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.
As a holding company, we must rely on dividends and other distributions
from our subsidiaries to meet our obligations. The ability of our subsidiaries
to pay dividends and make other distributions and advances to us is subject to,
among other things, the terms of their debt instruments and applicable law.
Golden Sky Systems' credit facility and the indenture governing Golden Sky
Systems' 12 3/8% Notes contain restrictive covenants that limit its ability to
pay dividends or make distributions to us. We cannot assure you that we will be
in compliance with these covenants at the time of a required interest payment on
our debt instruments. We currently expect that it may be difficult for Golden
Sky Systems to generate the requisite dividend capacity to enable us to make the
initial cash interest payments on our 13 1/2% Notes. Our ability to generate
sufficient dividend capacity under the indenture governing the 12 3/8% Notes to
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service our 13 1/2% Notes and to comply with the financial and other covenants
in Golden Sky Systems' 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 our initial interest payments absent
consents from our lenders and existing bondholders. Moreover, any significant
adverse developments would likely preclude us from being able to access Golden
Sky Systems' cash flow for these initial interest payments.
There may be 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 possible acquisitions of additional rural DIRECTV markets,
increased costs associated with potential future acquisitions of rural DIRECTV
markets, unexpected increases in operating costs and expenses, subscriber growth
in excess of that currently expected, or an increase in the cost of acquiring
subscribers due to increased DBS equipment and subscriber installation
subsidies, the acquisitions by Hughes of USSB and Primestar or additional
competition, among other things. 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 COMPLIANCE
We are in the process of assessing the impact of the year 2000 issue on our
computer systems and operations. Many existing computer systems and applications
currently use two-digit date fields to designate a 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 issue may cause computer
systems and applications to fail to process critical financial and operational
information correctly. This issue affects virtually all organizations and can be
very costly and time consuming to correct.
We have reviewed the year 2000 compliance of our internal systems and
believe that these systems are year 2000 compliant. However, we cannot assure
you that all of the software products that we currently use are in fact year
2000 compliant. We have engaged the services of a consultant to assist in our
assessment of the impact of the year 2000 issue on our computerized systems and
operations. Currently, we believe our costs to successfully mitigate the year
2000 issue will approximate $200,000.
We rely heavily on contracted data processing services from the NRTC and
DIRECTV for customer service, billing, remittance processing and distribution of
our direct broadcast satellite programming services under our contractual
relationship with the NRTC. The NRTC has informed us that the majority of the
computer systems that provide these services are currently year 2000 compliant,
and that the remainder of these systems will be compliant by September 1999. The
NRTC has further informed us that DIRECTV has achieved year 2000 compliance for
its billing and authorization systems. In addition to the NRTC and DIRECTV, we
rely heavily on other parties, like suppliers of DBS equipment, for the
successful conduct of our business. We are in the process of conducting surveys
of all of our significant vendors and other pertinent relationships to assess
their readiness for year 2000 processing.
If our plan is not successful or is not completed in a timely manner, the
year 2000 issue could significantly disrupt our ability to transact business
with our customers and suppliers, and could have a material adverse effect on
our business, financial condition and results of operations. Any failure by the
NRTC, DIRECTV or other companies on which we depend to achieve year 2000
compliance by the end of 1999 could have a material adverse effect on our
business, financial condition and results of operations.
To date, we have not implemented a year 2000 contingency plan. Contingency
plans for mission critical systems primarily involve development and testing of
manual procedures or the use of alternate systems. Viable contingency plans are
difficult to develop for some third party failures, especially in high-
technology industries like the DBS industry, due to the lack of alternate
suppliers. We will continue to monitor the progress of third party remediation
efforts and contingency plans. Substantial completion of our year 2000
contingency plan is expected in September 1999. There can be no assurance that
any
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contingency plans we may develop will successfully mitigate any adverse effects
that the year 2000 issue may have on our business, financial condition and
results of operations.
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.
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 Golden Sky Systems' credit facility.
See "-- Liquidity and Capital Resources -- 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.
Golden Sky Systems currently has $35.0 million of outstanding borrowings
under the variable rate term loan portion of its 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.
At December 31, 1998, Golden Sky Systems had $32.0 million of borrowings
outstanding under the $115.0 million revolving loan commitment of its credit
facility. Interest on revolving loan borrowings also is calculated on a base
rate, which is either the lenders' prime rate or LIBOR, plus an applicable
margin. All outstanding borrowings under the revolving loan commitment were
repaid in February 1999 from the proceeds of the offering of our 13 1/2% Notes.
As of June 30, 1999, no borrowings were outstanding under the credit facility's
revolving loan commitment. Availability of revolving loan borrowings under the
credit facility reduces by specified amounts quarterly from March 31, 2001
through maturity on September 30, 2005.
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BUSINESS
Information in this prospectus 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
prospectus regarding numbers of households and subscribers in rural DIRECTV
markets is based upon information compiled by Claritas, Inc. Other
industry-related information is derived from SkyREPORT. Golden Sky DBS has not
independently verified this data.
GENERAL
We are the second largest independent provider of DIRECTV satellite
television programming in rural markets in the United States. Rural markets are
typically less competitive than urban markets with respect to pay television
services. Approximately 16.5% of households in our exclusive rural markets
subscribe to DIRECTV programming, as compared to approximately 5.4% for DIRECTV
nationwide. Under our agreements with the NRTC, we have the exclusive right to
provide DIRECTV programming in the following rural DIRECTV markets and to
receive the monthly service revenue from all DIRECTV subscribers in these
markets regardless of the subscribers' original point of purchase.
<TABLE>
<CAPTION>
NUMBER OF RURAL
GEOGRAPHICAL AREA DIRECTV MARKETS TOTAL HOUSEHOLDS STATES REPRESENTED
----------------- --------------- ---------------- ------------------
<S> <C> <C> <C>
Southeast.................... 5 210,000 AL, FL, GA, NC, TN
Southwest.................... 14 520,000 AR, OK, TX
Midwest...................... 20 546,000 IA, KS, MI, MN, MO, ND, WI
Rocky Mountain............... 9 226,000 CO, ID, MT, UT, WY
Pacific...................... 7 357,000 CA, NV, OR
-- ---------
Total.............. 55 1,859,000
== =========
</TABLE>
Total households are based on estimates of primary residences by Claritas, Inc.
Our subscriber base has increased rapidly due to acquisitions, internal
growth and a low churn rate. Our annual churn rate approximated 9.4% during the
twelve-month period ended June 30, 1999. During the seven months ended July 31,
1999, net internal subscriber growth in our rural DIRECTV markets totaled
approximately 62,900 subscribers, or approximately 7.9% of DIRECTV's net new
subscribers nationwide for the period. Although we incur substantial costs to
add subscribers, we have relatively low recurring costs to service them. We
believe these factors provide an opportunity to increase operating leverage and
provide strong growth in cash flow.
We believe that our exclusive right to provide DIRECTV programming in our
rural DIRECTV markets is attractive for the following reasons:
- DIRECTV Programming. We believe that marketing DIRECTV, the country's
leading DBS provider, gives us a competitive advantage over providers of
other subscription television services. DIRECTV offers a wide variety of
programming, exclusive sports packages like NFL SUNDAY TICKET and a large
selection of pay-per-view movies and events. We capitalize on the
recognition of DIRECTV's brand name and on DIRECTV's programming
advantages to broaden our subscriber base in our rural DIRECTV markets.
DIRECTV currently has approximately 66% of all DBS subscribers
nationwide;
- Limited Competition in Rural Markets. Competition from cable television
providers in our markets is often limited. Many households in rural
markets are not passed by traditional cable systems or are served by
analog systems with less than 40 channels and inferior signal quality
compared to DBS service. Rural households also often receive poor
reception of off-air channels. Given the relatively low housing density
in these markets, the build-out of new cable systems or upgrade of
existing cable systems may not be cost-effective. Other entertainment
options, like theaters, movies and sporting events, may also be limited.
We believe that this market environment contributes to a
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subscriber penetration rate within rural DIRECTV markets that is
currently nearly three times the penetration rate for DIRECTV in other
U.S. markets; and
- National Marketing, Distribution and Manufacturing Support. Our local
marketing efforts are supported by DIRECTV's national marketing campaign,
which includes television and print advertising, and through its
alliances with strategic partners like Bell Atlantic and GTE. DIRECTV
also supports its local providers with an extensive retail distribution
network, offering more channels of distribution and more retail
distribution points than competing services. Three major consumer
electronics manufacturers currently compete to provide customers with DBS
equipment. We believe that competition among DBS equipment providers
results in greater availability, continued product innovation and lower
equipment costs compared to single-source DBS equipment required for some
competing services.
STRATEGY
We intend to leverage our competitive strengths by pursuing the following
strategies:
- Emphasize Direct Sales and Local Customer Service. We believe our strong
local presence generates rapid subscriber growth, higher customer
satisfaction, lower churn and ultimately greater revenue and cash flow.
We have created a highly decentralized operating structure that permits
managers to respond quickly and flexibly to local needs. We believe that
our local presence differentiates us from other major DIRECTV and DBS
providers and is a key element in our strategy for attracting and
retaining subscribers. Since inception, we have opened over 70 offices in
our rural DIRECTV markets. We provide sales, installation and customer
service directly through these offices and in conjunction with
approximately 450 local dealers. We believe that focused local marketing
significantly enhances the existing national marketing efforts of DIRECTV
and our national distribution partners, and that local customer service
increases customer satisfaction and is a major contributor to our low
churn rate. We complement our local presence from our headquarters in
Kansas City, Missouri with centralized sales, marketing, operational and
administrative support, including overflow and after-hours customer
support from a national call center that operates 24 hours a day, seven
days a week;
- Acquire Additional Rural DIRECTV Markets. We are aggressively pursuing
the acquisition of additional rural DIRECTV markets held by original NRTC
licensees, a majority of which are owned by rural electric and telephone
cooperatives for whom offering DIRECTV programming is an ancillary
business. We are continually evaluating acquisition prospects and expect
to continue to enter into acquisition agreements and complete
acquisitions of additional rural DIRECTV markets consistent with our
growth strategy. We are one of two companies actively consolidating rural
DIRECTV markets. We estimate that, as of the date of this prospectus,
there are approximately 110 unconsolidated rural DIRECTV markets,
representing approximately 2.2 million households and 300,000
subscribers; and
- Develop Related Business Opportunities. We plan to expand our base of
potential customers and product offerings by leveraging our local sales
and support infrastructure. We also are evaluating other
telecommunications products and services that could be offered to
customers using our existing marketing and distribution infrastructure.
For example, during 1998 we began marketing DirecPC, a satellite-based
high-speed Internet access service provided by a corporate affiliate of
Hughes.
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.
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Direct Sales Force and Dealer Network
We have established direct sales forces in all of our rural markets to
market our DIRECTV programming services. Our direct sales force currently
consists of approximately 250 direct salespeople who are compensated on a
commission basis. Since inception we have opened over 70 full service retail
stores in our rural DIRECTV markets. We support our direct sales staff and local
offices with an advertising campaign that we believe is both creative and
consistent. We also have close relationships with approximately 450 independent
dealers of DBS equipment to whom we provide marketing, subscriber authorization,
installation and customer service support in order to enhance our subscriber
additions. 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. We believe that we can increase penetration
more rapidly through our direct sales approach instead of relying, as have other
satellite television providers, upon the consumer to take the initiative to
purchase our product and services.
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:
- national retailers selected by DIRECTV;
- consumer electronics dealers authorized by DIRECTV to sell DIRECTV
programming; and
- 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 ("DTH"), cable and other subscription television services on the
basis of superior signal quality, channel capacity, programming choice and
price. We complement the extensive existing marketing effort of DIRECTV and its
other national distribution partners through focused local marketing and sales,
including local print and radio advertising to promote general market acceptance
of DIRECTV programming. We believe that, prior to acquisition, there was no
significant local presence in our acquired markets to drive these local
marketing and sales efforts.
We also implement support-advertising programs for our indirect
distribution channels. Our marketing efforts emphasize the value of premium
subscription plan offerings in order to maximize revenue per customer. 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 offer value-priced DBS
equipment and installation through the use of subsidies on direct sales of DBS
equipment and installations to lower the up-front costs to consumers of becoming
Golden Sky subscribers. 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.
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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. We believe we
can control our churn rate by providing local customer service and aggressively
managing collections. 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. We also provide professional installation services and technical
assistance in each of our offices.
OVERVIEW OF THE DIRECT-TO-HOME TELEVISION INDUSTRY
DTH 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 DTH satellites are
used for digital satellite television services. DBS provides high quality video
and audio signals and can be received by an 18-inch dish. Medium and low-power
DTH signals require home satellite dishes of 27 inches to six feet in diameter,
depending on the geographical location of the dish and wattage per frequency
channel. See "-- DIRECTV."
We believe that the growth potential of the DTH industry is evidenced by
America Online, Inc.'s announcement on June 21, 1999 that it would invest $1.5
billion in Hughes to develop interactive television and high speed Internet
services via satellite. As a result of this alliance, Hughes will offer AOL
Internet services to its DIRECTV satellite subscribers. The $1.5 billion
investment will be used to finance DIRECTV subscriber acquisition costs and to
develop AOL Plus, a high speed satellite uplink, DirecDuo, a service which will
enable subscribers to access both DIRECTV and DirecPC networks with a single
satellite dish, and the DIRECTV/AOL-TV product. AOL and Hughes intend to
cross-market these services to their approximately 17.0 million AOL and
CompuServe subscribers and the approximately 7.0 million DIRECTV customers.
DIRECTV and EchoStar are currently the only domestic providers of DBS
services. All other DTH domestic satellite television providers currently
provide medium or low-power DTH services. See "-- Competition" and "Risk
Factors -- Recent consolidation among direct broadcast satellite operators and
related litigation could adversely affect our DIRECTV programming rights, our
costs of providing programming to subscribers and our capital requirements."
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.
DBS providers are afforded technological and regulatory advantages over
medium and low-power DTH services. The FCC requires the satellites used to
provide DBS services to be spaced at greater intervals than medium and low-power
DTH satellites. The greater orbital spacing is intended to ensure that the
signals transmitted by DBS providers can be received by a small dish, free of
interference from adjacent satellites. In addition, DBS satellites are allowed
to broadcast with much higher power levels than medium and low-power DTH
satellites. The combination of greater orbital spacing and higher power
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enables providers of DBS services to obtain a superior balance of small dish
size, signal quality in adverse weather conditions and increased channel
capacity.
DIRECTV
DIRECTV is a multichannel DBS programming service initially introduced to
U.S. television households in 1994. DIRECTV currently offers in excess of 220
channels of digital quality video and audio programming, and transmits via three
high-power Ku-band satellites, each containing 16 transponders. As of July 31,
1999, DIRECTV had over 7.7 million subscribers, including those acquired as a
result of Hughes' acquisition of Primestar, which represented approximately 74%
of the DBS and medium-power DTH market. DIRECTV added approximately 1.2 million
new subscribers, net of churn, during the year ended December 31, 1998, which
was a greater increase than any other DBS or medium-power DTH provider and
accounted for approximately 48.1% of all new DBS and medium-power DTH
subscribers during the period.
We believe that DIRECTV services are superior to those provided by other
DTH service providers and that DIRECTV's extensive programming, including up to
55 channels of pay-per-view movies and events, various sports packages and the
exclusive NFL SUNDAY TICKET, will continue to contribute to the growth of
DIRECTV's subscriber base and DIRECTV's market share for DTH services in the
future. In addition, we believe that DIRECTV's national marketing campaign
provides us with significant marketing advantages over other DTH competitors.
DBS equipment is produced by major manufacturers under brand names
including RCA, Sony, Hughes, and others. 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. Prices for DBS equipment have declined consistently since
introduction, further stimulating demand for DIRECTV services.
Programming
DIRECTV programming includes:
- cable networks, broadcast networks and audio services available for
purchase in tiers for a monthly subscription fee;
- premium services available a-la-carte or in tiers for a monthly
subscription fee;
- 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
- 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 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:
- 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;
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- 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
- NFL SUNDAY TICKET: All out-of-market NFL Sunday games. NFL SUNDAY TICKET
is exclusive to DIRECTV with respect to small dish providers through at
least the end of the 1999-2000 football season.
Other sports programming packages include:
- NHL CENTER ICE: Approximately 500 out-of-market NHL games;
- MLB EXTRA INNINGS: Approximately 800 out-of-market major league baseball
games;
- ESPN FULL COURT: Hundreds of college basketball games; and
- ESPN GamePlan: Up to ten college football games every Saturday.
DIRECTV generally does not provide local broadcast programming via
satellite. However, seamless switching between satellite and broadcast
programming provided by other sources is possible with all DBS units. In
addition, DIRECTV provides programming from affiliates of the national broadcast
networks to subscribers who are unable to receive networks over the air and do
not subscribe to cable. See "-- Regulation."
RELATIONSHIP WITH THE NRTC AND DIRECTV AND DIRECTV/NRTC LITIGATION
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 in rural markets in 1992 and commercial establishments
located in rural DIRECTV markets in 1994 under an agreement with Hughes ("the
Hughes Agreement"). The NRTC subdivided its rights to provide these services
into approximately 250 geographically-based rural DIRECTV markets and then sold
a portion of its rights to the individual rural DIRECTV markets to NRTC members
under agreements between the NRTC and its individual members (the "NRTC
Agreements"). We have acquired the exclusive rights 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 in accordance with NRTC procedures 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
Agreement, which consent shall not be unreasonably withheld.
The NRTC Agreements also contain termination provisions which allow the
NRTC to terminate the agreements:
- 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 Hughes under the Hughes Agreement;
- if we fail to make any payment due to the NRTC or otherwise breach a
material obligation in the NRTC Agreement and this failure or breach
continues for more than 30 days after written notice from the NRTC; or
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- 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, in 1998, the NRTC proposed new conditions to securing its approval of
acquisitions that included changes to all of the NRTC Agreements which, if
adopted, could have had material adverse financial consequences to us. The
dispute was resolved without any modifications to the NRTC Agreements and our
then pending acquisitions were approved. In addition, 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 Golden Sky DBS, 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 the exclusive right in our rural DIRECTV
markets to market and sell most programming transmitted by the DIRECTV
satellites over the 27 frequencies owned by Hughes and 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. 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 which 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 satellite or
satellites that broadcast the DIRECTV 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. As more fully described below, 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. As part of their counterclaim in this lawsuit, 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, any failure of
DBS-1 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 Hughes' satellite.
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 has announced that it
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intends to launch a new satellite in September 1999 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 to acquire DBS
distribution services from the NRTC 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 Hughes could have a material adverse effect on our
business, financial condition and results of operations. See "Risk
Factors -- Our rights to distribute DIRECTV programming may terminate or expire
sooner than we expected, which could force us to cease or fundamentally change
our business operations."
Until recently, DIRECTV, USSB, 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 DTH 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. While we cannot predict the ultimate impact of this
acquisition on our business, increased costs associated with our efforts to
convert former Primestar subscribers to our DIRECTV service could adversely
affect our results of operations in the near term. This industry consolidation
could also encourage Echostar to respond by lowering prices or increasing its
marketing activities, which could increase our marketing costs or cause us to
lose revenues as a result of increased competition for our subscribers.
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. The video programming provided by USSB was complementary
to DIRECTV's DBS service. 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
programming for exclusive distribution in the NRTC's rural 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 DIRECTV 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 Hughes 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.
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In July 1999, DIRECTV and Hughes filed a counterclaim against the NRTC. In
the counterclaim, DIRECTV seeks the following declaratory judgments:
- that DBS-1, the first satellite launched by Hughes, is the only relevant
satellite for determining the term of the Hughes Agreement;
- that the DIRECTV-1R satellite that Hughes intends to launch in September
1999 is a successor satellite to DBS-1 within the scope and meaning of
the Hughes 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 Hughes 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 Hughes 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.
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. While we are not a party to the lawsuits between
the NRTC and Hughes/DIRECTV, the outcome of these suits, or any damage that they
cause to the relationship between the NRTC and Hughes/DIRECTV, could have a
material adverse effect on our rights to provide DIRECTV programming in our
rural markets and, therefore, our business, financial condition and results of
operations.
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. See "Risk Factors -- Significant competition could
adversely affect our revenues" and "Risk Factors -- Our acquisition strategy may
not be successful, which could limit our revenue growth and our ability to
achieve or sustain profitability."
Competition for Acquisition of Rural DIRECTV Markets
Pegasus Communications Corporation is currently pursuing the same goal as
we are of consolidating rural DIRECTV markets. Pegasus is currently the largest
independent provider of DIRECTV services and has substantially greater financial
resources than we do. Including pending acquisitions, Pegasus had approximately
579,600 subscribers and 4.9 million households in 81 rural DIRECTV markets as of
July 31, 1999. Pegasus' competing acquisition strategy could have a material
adverse effect on our ability to execute our acquisition strategy.
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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 the 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.
We expect to encounter a number of challenges in competing with cable
television providers. First, cable operators have an entrenched position in the
marketplace. However, we believe that our current strategy of targeting the
acquisition of rural DIRECTV markets that are not served by cable or are
underserved by cable partially offsets the cable industry's position in the
consumer marketplace. Second, the up-front costs to the consumer associated with
purchasing and installing DBS equipment are higher than the up-front costs for
installation of cable television. However, prices for DBS equipment have
declined consistently since introduction and we believe that competition among
DBS equipment vendors and technological improvements will create continuing
downward pressure on prices. Third, DBS systems, unlike cable, do not currently
provide local broadcast programming via satellite, although both DIRECTV and
EchoStar have indicated an intention to provide local broadcast service in some
areas of the country. Seamless switching between satellite and broadcast
programming from other sources is possible with all DBS units. In addition,
DIRECTV provides programming from affiliates of the national broadcast networks
to subscribers who are unable to receive networks over the air and do not
subscribe to cable. See "-- Regulation." We believe that the significant capital
costs of upgrading cable systems to provide similar services, combined with the
marketing strength of DBS providers like DIRECTV, presents DBS providers with an
opportunity to take substantial market share for pay television services from
cable in the rural DIRECTV markets.
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 over
300 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. The 119 degrees
W.L. orbital position is one 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 2.7 million
subscribers as of July 31, 1999. In June 1999, EchoStar acquired a license for
28 DBS frequencies at 110 degrees W.L., which is a full CONUS orbital location,
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. We
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believe that we can successfully compete with EchoStar in the DBS market because
of our local strategy and because of DIRECTV's brand name and its significantly
larger distribution networks.
Primestar, a medium-power DTH provider, launched the first digital DTH
satellite television service in 1994. On April 28, 1999, Hughes acquired
Primestar's medium-power DTH business, which consisted of its subscribers and
related high-power satellite assets, for approximately $1.8 billion. Prior to
its acquisition by Hughes, Primestar offered a full range of programming to
approximately 2.3 million subscribers nationwide, approximately 100,000 of which
we believe were located within our rural DIRECTV markets. Former Primestar
subscribers that choose to receive DIRECTV programming in our rural markets will
become our subscribers.
Low-power C-band DTH operators reported approximately 1.8 million
subscribers as of June 30, 1999. C-band DTH 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. We believe that DBS has
significant advantages over low-power C-band service in equipment cost, dish
size and range of programming packages. The number of C-band subscribers
declined by approximately 164,000 during 1998.
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 recent merger of AT&T and Tele-Communications, Inc. has resulted in a large,
integrated 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:
- the licensing of individual satellites, including a requirement that
DIRECTV meet minimum financial, legal and technical standards;
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<PAGE> 50
- avoidance of interference with radio stations; and
- compliance with rules that the FCC has established specifically for DBS
licenses.
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 DTH satellite services and that criminal penalties
may be imposed for piracy of DTH satellite services. The 1996 Act also offers
DTH operators relief from private and local government-imposed restrictions on
the placement of receiving antennae. In some instances, DTH operators have been
unable to serve areas due to laws, zoning ordinances, homeowner association
rules, or restrictive property covenants banning the installation of antennae on
or near homes. 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 DTH services, including DBS. Finally, the 1996 Act
required that multi-channel video programming distributors, including DTH
operators, fully scramble or block channels providing indecent or sexually
explicit adult programming. If a multi-channel video programming distributor
cannot fully scramble or block 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 has agreed to review the judgment of the Delaware Court.
In addition to regulating pricing practices and competition within the
franchise 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 DTH, 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 DTH
licensees. In November 1998, the FCC adopted rules requiring DTH licensees to
provide reasonable and non-discriminatory access by qualified candidates for
elective office. These rules also require DTH 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 DTH licensees are pending at
the FCC.
The Satellite Home Viewer Act of 1994 ("SHVA"), establishes the terms and
conditions under which a DTH operator, for a statutorily-mandated fee, may claim
a "compulsory" copyright license to retransmit "superstations" and broadcast
network programming to subscribers for private home viewing. The SHVA currently
is scheduled to expire on December 31, 1999, in which case DTH operators would
be required to negotiate in the marketplace to obtain the necessary copyright
clearances to retransmit superstations and broadcast network programming.
Separate pieces of legislation to extend and revise the
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<PAGE> 51
SHVA have been passed by the House of Representatives and the Senate and a
conference committee has been convened to attempt to resolve the differences in
the bills. In general, both the Senate and House bills would establish a new
expiration date for the SHVA, create new rules regarding the retransmission of
local and distant broadcast television stations by satellite carriers, reduce
the royalty rates payable under the SHVA, and establish a new compulsory license
for the retransmission by DTH operators of a national public broadcasting
channel.
With respect to the retransmission of local broadcast television stations,
DTH operators like DIRECTV currently are not subject to the "must carry"
requirements of the Cable Act. However, the cable and broadcast industries have
argued that, as part of any legislation to extend and revise the SHVA, DTH
operators should be subjected to some form of mandatory local broadcast signal
carriage obligation. Under the legislation currently pending in Congress, DTH
operators that retransmit the signal of a broadcast television station to
subscribers in the station's local market would be required, by a specified
date, also to carry all of the other television stations licensed to that
market. In the event this or some other version of a "must carry" requirement is
enacted, DIRECTV's future plans to provide local programming could be adversely
affected, and the must carry requirements could cause the displacement of more
attractive programming in DIRECTV's programming packages.
In the case of retransmissions of broadcast network programming, the
compulsory license established by the SHVA is limited to DTH retransmissions to
persons in unserved households. In general, an "unserved household" is one that
cannot receive, through the use of a conventional outdoor rooftop antenna, a
sufficient over-the-air network signal and has not, within 90 days prior to
subscribing to the DTH service, subscribed to a cable service that provides that
network signal.
A number of television broadcast networks and their affiliates have
commenced litigation against DTH operators, including DIRECTV, for allegedly
violating the unserved household limitation in the SHVA. The litigation resulted
in the issuance of a permanent injunction by a court in North Carolina
restraining DIRECTV and its distributors from providing retransmissions of any
television station affiliated with ABC to any household located within 75 miles
of the transmission tower of WTVD, the ABC affiliate serving the Raleigh-Durham
market. In Florida, a federal district court issued a temporary restraining
order, preliminary injunction, and contempt finding requiring DIRECTV and its
agents and those who act in active concert or participate with DIRECTV to cease
retransmission of CBS and Fox programming to subscribers nationwide who are able
to receive an off-air signal of at least Grade B intensity, measured using the
Individual Location Longley Rice signal propagation model approved by the FCC in
a recently completed rulemaking proceeding.
On March 12, 1999, DIRECTV and the broadcast networks announced that a
settlement of this litigation had been reached whereby DIRECTV agreed to
terminate its retransmission of NBC, CBS, ABC and Fox programming to ineligible
subscribers that are located within a local network affiliate's "Grade A" signal
strength contour as of June 30, 1999, which was later extended to July 31, 1999,
and to terminate retransmission of this network programming to ineligible
subscribers in the "Grade B" signal strength contour as of December 31, 1999. In
addition, DIRECTV agreed to provide discounted antennas to subscribers whose
network programming service is terminated.
Other pending lawsuits relating to the SHVA's unserved household limitation
include an action brought in Texas by an NBC affiliate against PrimeTime 24, and
an action brought by EchoStar in the United States District Court of Colorado.
PrimeTime 24 is a satellite carrier that, until recently, provided DTH operators
including DIRECTV with a package of network-affiliated broadcast television
stations for retransmission to subscribers. The EchoStar action, which has been
transferred to the same Florida court that issued the orders against DIRECTV
described above, seeks declaratory ruling regarding the appropriate predictive
model for determining whether a household is unserved for purposes of the SHVA
and a clarification of the particular means for measuring signal intensity.
EchoStar also has filed a petition asking the FCC to reconsider its recent
rulemaking order adopting the Longley Rice signal propagation methodology for
use in determining the eligibility of a subscriber to receive network-affiliated
broadcast television stations pursuant to the SHVA.
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<PAGE> 52
While we believe that we have complied to date with the SHVA in providing
network programming only to "unserved households" and we do not believe that the
interpretations of the SHVA applied by the Florida and North Carolina federal
courts will have a material adverse effect on our business, financial condition
or results of operations or our ability to attract new subscribers, it is
possible that our inability to provide network services to our subscribers will
have these negative effects. In addition, should we elect to continue to offer
network services, the costs of compliance with those interpretations could be
material. The inability of DIRECTV, and therefore our company, to provide
network programming to subscribers in rural DIRECTV markets could adversely
affect our average programming revenue per subscriber and subscriber growth and
churn.
In addition, the impact of the lawsuits regarding the unserved household
limitation could be affected by the pending legislation to extend and revise the
SHVA. Both the House and Senate versions of that legislation propose to
eliminate the 90-day waiting period provision in the SHVA and to revise the way
in which a subscriber's eligibility to receive a network-affiliated broadcast
television station is determined. It also is possible that the legislation may
grandfather, either on a temporary or permanent basis, the continued
retransmission of network programming to some or all existing subscribers who
live within the predicted Grade B signal strength contour of a local network
affiliate. The legislation also may establish additional rules governing the
retransmission by DTH operators of network-affiliated broadcast television
stations.
FACILITIES
On January 27, 1999, we entered into a lease with respect to approximately
35,000 square feet of office space in Kansas City, Missouri. Annual rent under
this lease approximates $570,000 and the lease will terminate in August 2002. We
moved our principal executive offices to this location in April 1999. We also
have more than 70 offices and operations in 23 states. We expect these
facilities to be adequate for our needs in the foreseeable future. We believe
that we will be able to lease office and retail space in our rural DIRECTV
markets as needed on acceptable terms.
MANAGEMENT AND EMPLOYEES
As of June 30, 1999, we had approximately 700 full-time and 200 part-time
employees. We are not a party to any collective bargaining agreement and
consider our relations with our employees to be good.
LEGAL PROCEEDINGS
We are not currently party to any material legal proceedings, although we
do have an interest in the legal proceedings described in "-- Relationship with
the NRTC and DIRECTV and DIRECTV/NRTC Litigation" and "-- Regulation."
CORPORATE RESTRUCTURING
Immediately prior to completion of this offering, Golden Sky Holdings, Inc.
is expected to merge with and into Golden Sky DBS. Pursuant to the merger each
outstanding share of common stock of Golden Sky Holdings will be exchanged for
shares of common stock of Golden Sky DBS, each outstanding share of
series A preferred stock of Golden Sky Holdings will be exchanged for
shares of common stock of Golden Sky DBS, each outstanding share of series B
preferred stock of Golden Sky Holdings will be exchanged for shares of
common stock of Golden Sky DBS, each outstanding share of series C preferred
stock of Golden Sky Holdings will be exchanged for shares of common
stock of Golden Sky DBS and each outstanding option or warrant to purchase
shares of Golden Sky Holdings common stock will be converted into a similar
right to purchase shares of Golden Sky DBS common stock.
Unless specifically stated, all information contained in this prospectus
has been adjusted to give effect to the merger and related conversion and the
exercise of all outstanding warrants to purchase shares of Golden Sky DBS common
stock. In addition, unless otherwise indicated, the share, per share and
financial information in this prospectus assumes that the underwriters will not
exercise their over-allotment option.
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<PAGE> 53
MANAGEMENT
The information contained in this section relates to our management for the
period from our formation in February 1999 to date, and to the management of our
predecessor entity, Golden Sky Systems, for periods prior to our formation.
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our executive officers
and directors as of May 31, 1999:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Rodney A. Weary................. 48 Chairman of the Board and Chief Executive Officer
John R. Hager................... 37 Chief Financial Officer
William J. Gerski............... 46 Vice President, Sales and Marketing
Scott R. Brown.................. 33 Vice President, Operations
Gordon G. Smith................. 56 Vice President, Human Resources
Jo Ellen Linn................... 37 Secretary and General Counsel
Robert F. Benbow(1)............. 62 Director
William O. Charman.............. 35 Director
William P. Collatos(1).......... 44 Director
William A. Johnston(1)(2)....... 46 Director
Robert B. Liepold(2)............ 72 Director
Erik M. Torgerson(2)............ 33 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee of our board of directors.
(2) Member of the Audit Committee of our board of directors.
All of the executive officers identified above serve at the discretion of
our board of directors. There are no family relationships between any persons
identified above. The following are brief biographies of the persons identified
above:
Rodney A. Weary. Mr. Weary founded Golden Sky Systems, Inc. in June 1996
and has been our 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 Communications Corporation. He was the
Controller of American Telecasting, Inc. from August 1993 until February 1997.
Prior to joining American Telecasting, Inc. in 1993, Mr. Hager was with Ernst &
Young, where he was an Audit Senior Manager.
William J. Gerski. Mr. Gerski has been our Vice President, Sales and
Marketing since May 1997. 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. He has served on
the Executive Board of Directors of the Southern California Cable Association
and the Los Angeles, Chicago, and Cleveland Cable Co-ops.
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
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<PAGE> 54
positions with Tele-Communications, Inc., including General Manager of TCI Cable
at Westchester, General Manager of TCI Cablevision of Pinellas County, Business
Manager of TCI Cablevision at 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. 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.
Robert F. Benbow. Mr. Benbow has been a director since February 1997. He is
a Vice President of Burr, Egan, Deleage & Co. and a General Partner of Alta
Communications VI, L.P. 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. He serves as a director of Teletrac, Inc., a major
metropolitan wireless provider of location and two way messaging services for
fleets of commercial vehicles.
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, which he founded in
1993.
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 our 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 director was elected under the terms of a Stockholders' Agreement
dated as of November 24, 1997 among Golden Sky Holdings and its stockholders.
The Stockholders' Agreement will be terminated prior to completion of this
offering.
ELECTION OF DIRECTORS
Effective upon the filing of our amended and restated certificate of
incorporation prior to completion of this offering, our board of directors will
be divided into three classes and the directors will be appointed to the
following classes: Mr. and Mr. will be Class I directors
with their terms of office expiring on the date of our annual meeting of
stockholders in 2000. Mr. and Mr. will be Class II directors
with their terms of office expiring on the date of our annual meeting of
stockholders in 2001, and Mr. and Mr. will be Class III
directors with their terms of office expiring on the date of our annual meeting
of stockholders in 2002.
Directors do not receive compensation for services provided as a director
or for participation on any committee of our board of directors. All directors
are reimbursed for their out-of-pocket expenses in serving on our board of
directors or any committee thereof.
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EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal
years ended December 31, 1997 and 1998 for our Chief Executive Officer and the
two other highest paid executive officers whose total annual salary and bonus
exceeded $100,000 (the "named executive officers"). None of our other executive
officers received salary and bonus payments exceeding $100,000 in the aggregate
during fiscal year 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
-------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS(#) COMPENSATION($)
- --------------------------- ---- --------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Rodney A. Weary....................... 1998 $227,462 $90,000 21,884 $7,945(1)
Chief Executive Officer and 1997 198,818 50,000 21,884 --
Chairman of the Board of Directors
William J. Gerski..................... 1998 $153,270 $80,000 15,000 $ --
Vice President, Sales and Marketing 1997 60,259 50,000 12,182 --
Jo Ellen Linn......................... 1998 $ 93,061 $32,500 2,501 $ --
Secretary and General Counsel 1997 80,926 25,000 2,501 --
</TABLE>
- ---------------
(1) Represents compensation attributable to Mr. Weary's use of a company-owned
car.
OPTION GRANTS
The following table sets forth information concerning grants of stock
options to the named executive officers during the fiscal year ended December
31, 1998:
OPTION GRANTS IN 1998
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE
---------------------------------------------------- AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED APPRECIATION FOR
UNDERLYING TO EMPLOYEES EXERCISE OR OPTION TERM
OPTIONS IN FISCAL BASE PRICE EXPIRATION -----------------
NAME GRANTED(#) YEAR ($/SH) DATE 5%($) 10%($)
---- ---------- ------------ ----------- ---------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary............................... -- -- $ -- -- $ -- $ --
William J. Gerski............................. 2,818(1) 15.1 1.00 10/08/07 1,772 4,491
Jo Ellen Linn................................. -- -- -- -- -- --
</TABLE>
- ---------------
(1) Approximately 1,092 of these options were exercisable as of the date of
grant. The remaining 1,726 options vest in increments of approximately 78
shares per month on the 24th day of each month beginning on November 24,
1998.
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<PAGE> 56
The following table sets forth information concerning option exercises by
the named executive officers during 1998 and fiscal year-end option values.
OPTION EXERCISES AND FISCAL YEAR-END 1998 OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
SHARES OPTIONS AT FISCAL IN-THE-MONEY OPTIONS AT
ACQUIRED ON VALUE YEAR-END(#) FISCAL YEAR-END($)(1)
EXERCISE REALIZED --------------------------- ---------------------------
(#) $ EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Rodney A. Weary..................... 9,726 -- 608 11,550 -- --
William J. Gerski................... 5,414 -- 1,668 7,918 -- --
Jo Ellen Linn....................... 1,111 -- 70 1,320 -- --
</TABLE>
- ---------------
(1) Based on a value of $1.00 per share, which was the fair value of our common
stock as of December 31, 1998, as determined by the board of directors of
Golden Sky Holdings for purposes of option grants. On this basis, the
unexercised options were not in the money.
EMPLOYMENT AGREEMENTS
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. This agreement may be extended according to its
terms. Under the agreement, Mr. Weary is paid compensation in an amount not less
than $200,000 per year and is eligible to participate in our stock option plan.
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 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 these 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. Ms. Linn and Mr. Gerski are also eligible to
participate in our stock option plan.
In January 1997, we entered into non-competition agreements with Rodney A.
Weary and Jo Ellen 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.
STOCK OPTION PLAN
In July 1997, the board of directors of Golden Sky Systems adopted its
Stock Option and Restricted Stock Purchase Plan to provide the employees,
officers and directors of Golden Sky Systems with an opportunity to invest in
the common stock of Golden Sky Systems 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.
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<PAGE> 57
401(k) PLAN
We maintain a 401(k) savings plan for our full-time employees which permits
employee contributions of 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.
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<PAGE> 58
PRINCIPAL STOCKHOLDERS
The following table sets forth information, as of July 31, 1999, regarding
the ownership of Golden Sky DBS' common stock by each beneficial owner of 5% or
more of our common stock, each director and named executive officer, and all
directors and executive officers as a group, after giving effect to the merger
of Golden Sky Holdings and Golden Sky DBS and the related conversion of all
outstanding shares of capital stock of Golden Sky Holdings into common stock of
Golden Sky DBS.
<TABLE>
<CAPTION>
PERCENT
-------------------
NUMBER OF SHARES BEFORE AFTER
NAME(1) BENEFICIALLY OWNED OFFERING OFFERING
------- ------------------ -------- --------
<S> <C> <C> <C>
PRINCIPAL STOCKHOLDERS:
Alta Subordinated Debt Partners III, L.P.(2)..............
Alta Communications VI, L.P.(2)...........................
Alta-Comm S By S, LLC(2)..................................
Spectrum Equity Investors L.P.(3).........................
Spectrum Equity Investors II L.P.(3)......................
BancBoston Ventures Inc.(4)...............................
Norwest Equity Partners VI, LP(5).........................
Norwest Venture Partners VI, LP(5)........................
HarbourVest Partners V -- Direct Fund L.P.(6).............
Lion Investments Limited(7)...............................
Westpool Investment Trust plc(7)..........................
General Electric Capital Corporation(8)...................
Harold Poulsen(9).........................................
Jack S. Ramirez and Carol H. Ramirez(10)..................
Joyce Travis, Trustee of the Travis Living Trust Dated the
5th day of March, 1998(11).............................
James and Constance R. Hertz(12)..........................
Maxon R. and Kristina Davis(13)...........................
Louise A. Davis(14).......................................
Jay and Maria Downen(15)..................................
Otis J. Downen as Trustee of the Otis J. Downen, June 1992
Trust and Frances Eileen Downen, Trustee of the Frances
Eileen Downen June 1992 Trust as Tenants in
Common(16).............................................
Chris J. Downen(17).......................................
EXECUTIVE OFFICERS AND DIRECTORS:
Rodney A. Weary(18)(19)...................................
John R. Hager(19)(20).....................................
William J. Gerski(19)(21).................................
Scott R. Brown(19)(22)....................................
Jo Ellen Linn(19)(23).....................................
Robert F. Benbow(24)......................................
William O. Charman(25)....................................
William P. Collatos(26)...................................
William A. Johnston(27)...................................
Robert B. Liepold(19)(28).................................
Erik M. Torgerson(29).....................................
All executive officers and directors as a group (11
persons)...............................................
</TABLE>
- ---------------
* 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.
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<PAGE> 59
(2) 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 power 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 power 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 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 of these shares except to the extent
of their proportionate pecuniary interest in the shares.
The number of shares of common stock beneficially owned by these entities
includes shares of common stock owned by Alta VI and shares
of common stock owned by S By S, LLC.
(3) The address is 125 High Street, Suite 2600, Boston, Massachusetts 02110,
Attn: William P. Collatos. The sole general partner of Spectrum Equity
Investors, L.P. is Spectrum Equity Advisors, LLC, a limited liability
company whose members are Messrs. Brion B. Applegate and William P.
Collatos. The sole general partner of Spectrum Equity Investors II, L.P. is
Spectrum Equity Advisors II, LLC, a limited liability company whose members
are Messrs. Brion B. Applegate, William P. Collatos and Kevin J. Morroni.
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 Morroni 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.
(4) The address is 175 Federal Street, 10th Floor, Boston, Massachusetts 02110,
Attn: William O. Charman. The shares of common 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.
(5) 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 common 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.
(6) 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.
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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.
(7) 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.
(8) 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.
(9) The address is P.O. Box 1376, Great Falls, Montana 59403.
(10) The address is 2061 Norwich Ct., Glenview, Illinois 60025.
(11) The address is Escalon Avenue Apt. 2117, Sunnyvale, California 94086.
(12) The address is 7444 Molt Road, Billings, Montana 59106.
(13) The address is 163 Woodland Estates Rd., Great Falls, Montana 59404.
(14) The address is 242 East 87th Street, Apt. 1K, New York, New York 10128.
(15) The address is 511 Fortress Circle, Leesburg, Virginia 21075.
(16) The address is 2105 Noble Avenue, Springfield, Illinois 62704.
(17) The address is 1617 Outer Park, Springfield, Illinois 62704.
(18) shares of 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, through our stock option plan, Mr. Weary has the right
to acquire shares of common stock pursuant to options exercisable
within 60 days.
(19) The address is c/o Golden Sky Systems, Inc., 4700 Belleview Avenue, Suite
300, Kansas City, Missouri 64112.
(20) Through our stock option plan, Mr. Hager has the right to acquire
shares of common stock pursuant to options exercisable within 60
days.
(21) Mr. Gerski beneficially owns shares of common stock. In addition,
through our stock option plan, Mr. Gerski has the right to acquire
shares of common stock pursuant to options exercisable within 60
days.
(22) Through our stock option plan, Mr. Brown has the right to acquire
shares of common stock pursuant to options exercisable within 60
days.
(23) Ms. Linn beneficially owns shares of common stock. In addition,
through our stock option plan, Ms. Linn has the right to acquire
shares of common stock pursuant to options exercisable within 60 days.
(24) The address is c/o Alta Communications, Inc., One Embarcadero Center, Suite
4050, San Francisco, California 94111. The shares 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 in the shares.
Mr. Benbow also disclaims beneficial ownership of all shares held by Alta
Comm S by S, LLC, of which he is not a member.
(25) 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.
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(26) The address is c/o Spectrum Equity Investors, 125 High Street, Suite 2600,
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.
(27) 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.
(28) Mr. Liepold beneficially owns shares of common stock. In addition,
through our stock option plan, Mr. Liepold has the right to acquire
shares of common stock pursuant to options exercisable within 60 days.
(29) 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.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
STOCK PURCHASE AGREEMENTS
On October 2, 1998, Western Montana DBS, Inc. d/b/a Rocky Mountain DBS
merged into Golden Sky Systems. In connection with the Western Montana DBS
merger, Golden Sky issued an aggregate of 51,000 shares of Series C senior
convertible preferred stock and paid an aggregate of $9.8 million in cash to the
Western Montana DBS stockholders. The $9.8 million paid by Golden Sky included
$1.0 million deposited in an escrow account to secure the Western Montana DBS
shareholders' indemnification obligations under the Western Montana DBS merger
agreement. At the time of the Western Montana DBS merger, the Golden Sky
shareholders listed below were stockholders of Western Montana DBS:
- Harold Poulson;
- Jack S. Ramirez and Carol H. Ramirez;
- Joyce Travis, Trustee of the Travis Living Trust Dated the 5th day of
March, 1998;
- James and Constance R. Hertz;
- Maxon R. and Kristina Davis;
- Joseph D. Davis;
- Louise A. Davis;
- Jay and Maria Downen;
- Otis J. Downen as Trustee of the Otis J. Downen, June 1992 Trust and
Frances Eileen Downen June 1997 Trust as Tenants in Common; and
- Chris J. Downen.
On February 19, 1999, Golden Sky Holdings transferred all the outstanding
capital stock of Golden Sky Systems and $100 in cash to us in exchange for 100
shares of our common stock.
MERGER OF GOLDEN SKY HOLDINGS INTO GOLDEN SKY DBS
Immediately prior to completion of this offering, Golden Sky Holdings will
be merged with and into Golden Sky DBS. In connection with the merger, each
outstanding share of common stock of Golden Sky Holdings will be converted into
shares of common stock of Golden Sky DBS, each outstanding share of
series A preferred stock of Golden Sky Holdings will be exchanged for
shares of common stock of Golden Sky DBS, each outstanding share of series B
preferred stock of Golden Sky Holdings will be exchanged for shares of
common stock of Golden Sky DBS, each outstanding share of series C preferred
stock of Golden Sky Holdings will be exchanged for shares of common stock
of Golden Sky DBS and each outstanding option or warrant to purchase shares of
Golden Sky Holdings common stock will be converted into a similar right to
purchase shares of Golden Sky DBS common stock. In
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addition, the Stockholders Agreement dated as of November 24, 1997 among Golden
Sky Holdings and its stockholders will be terminated and Golden Sky DBS will
enter into a registration rights agreement with the former stockholders of
Golden Sky Holdings containing the same terms and conditions relating to
registration as contained in the Stockholders Agreement described above. See
"Shares Eligible For Future Sale -- Registration Rights Agreement."
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 1998 in
connection with these services. In addition, Golden Sky Systems paid Mr. Liepold
a commission of $75,000 in October 1998 in connection with a recent acquisition.
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 $506,000 to this entity in 1998 in connection with these
services.
DESCRIPTION OF CAPITAL STOCK
Effective upon the filing of our amended and restated certificate of
incorporation prior to completion of this offering, our authorized capital stock
will consist of shares of common stock, par value $.01 per share and
shares of preferred stock, par value $.01 per share. Upon the
completion of this offering and after giving effect to the merger of Golden Sky
Holdings into Golden Sky DBS and the related conversion of all outstanding
shares of capital stock of Golden Sky Holdings into common stock of Golden Sky
DBS, shares of common stock will be outstanding, excluding
shares of common stock issuable upon the exercise of outstanding options.
COMMON STOCK
Our stockholders are entitled to one vote for each share held on all
matters submitted to a vote of the stockholders. Our common stock does not have
cumulative voting rights, which means that the holders of a majority of the
voting power of shares of the outstanding common stock are able to elect all of
the directors, in which event the holders of the remaining shares of our common
stock would not elect any of the directors.
Each share of common stock is entitled to participate equally in dividends,
if, as and when declared by our board of directors and in the distribution of
assets in the event of liquidation. We have never declared or paid cash
dividends on our common stock.
The shares of common stock have no conversion, redemption or preemptive
rights or sinking fund provisions. Our certificate of incorporation permits our
board of directors to make, alter or repeal our bylaws, subject to the power of
our stockholders to alter or repeal any bylaw made by our board of directors.
The outstanding shares of our common stock are, and any shares of our
common stock which may be offered by this prospectus will be, upon issuance and
sale, duly authorized, validly issued, fully paid and nonassessable.
PREFERRED STOCK
Effective upon the filing of our amended and restated certificate of
incorporation, our board of directors will have the authority to establish,
without stockholder approval, one or more classes or series of preferred stock
having the number of shares, designations, relative voting rights, dividend
rates, liquidation and other rights, preferences and limitations that they may
designate. We believe that this power to issued
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preferred stock will provide us with flexibility in connection with possible
corporate transactions. The issuance of preferred stock, however, could
adversely affect the voting power of holders of our common stock and restrict
their rights to receive payments upon any liquidation of our company. It could
also have the effect of delaying, deferring or preventing a change in control of
our company. As of July 31, 1999, we had no shares of preferred stock
outstanding.
DELAWARE LAW AND CHARTER PROVISIONS
We are a Delaware corporation and are subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder," defined generally as a person owning 15% or more of
our outstanding voting stock, from engaging in a "business combination," as
defined in Section 203, with us for three years following the date that person
becomes an interested stockholder, unless:
(a) before that person became an interested stockholder, our board of
directors approved the transaction in which the interested stockholder
became an interested stockholder or approved the business combination;
(b) upon completion of the transaction that resulted in the interested
stockholder becoming an interested stockholder, the interested stockholder
owned at least 85% of the voting stock outstanding at the time the
transaction commenced, excluding stock held by our directors who also serve
as our officers and by employee stock plans that do not provide employees
with the right to determine confidentially whether shares held subject to
the plan will be tendered in a tender or exchange offer; or
(c) following the transaction in which that person became an
interested stockholder, the business combination is approved by our board
of directors and is authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding
voting stock not owned by the interested stockholder.
Under Section 203, these restrictions do not apply to business combinations
proposed by an interested stockholder following the announcement or notification
of one of the extraordinary transactions defined in Section 203 that involves us
and a person who was not an interested stockholder during the previous three
years or who became an interested stockholder with the approval of a majority of
the directors who were directors before any person became an interested
stockholder in the previous three years or who were recommended for election or
elected to succeed such directors by a majority of such directors then in
office.
Effective upon the filing of our amended and restated certificate of
incorporation, our board of directors will be divided into three classes. The
directors of each class will be elected for three-year terms, with the terms of
the three classes staggered so that directors from a single class are elected at
each annual meeting of stockholders. Stockholders will be able to remove a
director only for cause upon the vote of at least 80% of the then outstanding
shares of capital stock entitled to vote upon the election of directors. In
general, the board of directors, not the stockholders, will have the right to
appoint persons to fill vacancies on the board of directors.
Our amended and restated certificate of incorporation will provide that
special meetings of holders of our common stock may be called only by our board
of directors and that only business proposed by our board of directors may be
considered at special meetings of holders of our common stock.
Our amended and restated certificate of incorporation will provide that the
only business, including election of directors, that may be considered at any
annual meeting of holders of our common stock, in addition to business proposed,
or persons nominated as directors, by our board of directors, is business
proposed, or persons nominated as directors, by the holders of our common stock
who comply with the notice and disclosure requirements set forth in our amended
and restated certificate of incorporation. In general, our amended and restated
certificate of incorporation will require that a stockholder give us notice
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of proposed business or nominations no later than 60 days before the annual
meeting of the holders of our common stock or, if later, ten days after the
first public notice of the annual meeting is sent to the holders of our common
stock. In general, the notice must contain information about the stockholder
proposing the business or nomination, the stockholder's interest in our business
and, with respect to nominations for director, information about the nominee of
the nature ordinarily required to be disclosed in public proxy statements. The
stockholder also must submit a notarized letter from each of the stockholder's
nominees stating the nominee's acceptance of the nomination and indicating the
nominee's intention to serve as a director if elected.
Our amended and restated certificate of incorporation will provide that the
affirmative vote of at least two-thirds of the then outstanding shares of our
capital stock entitled to vote upon the election of directors is required to
approve any of the following proposed transactions:
- a merger or consolidation in which our company will not be the surviving
entity or will survive only as a subsidiary of an entity;
- a sale, lease or exchange or an agreement to sell, lease or exchange all
or substantially all of our assets to any other person or entity; or
- the dissolution or liquidation of our company.
Our amended and restated certificate of incorporation will authorize our
board of directors, without any action by our stockholders, to issue up to
shares of preferred stock, in one or more series, and to determine the
voting rights, including the right to vote as a series on particular matters,
preferences as to dividends and in liquidation and the conversion and other
rights of each series. Because the terms of the preferred stock may be fixed by
our board of directors without stockholder action, the preferred stock could be
issued quickly with terms designed to make more difficult a proposed takeover of
our company or the removal of our management, thus affecting the market price of
our common stock and preventing stockholders from obtaining any premium offered
by a potential acquiror. Our board of directors will make determinations whether
to issue shares of our preferred stock based on its judgment as to the best
interests of our company and our stockholders.
The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
the corporation's certificate of incorporation or bylaws requires a greater
percentage. Our amended and restated certificate of incorporation will provide
that approval by the holders of at least 80% of the then outstanding shares of
our capital stock entitled to vote upon the election of directors is required to
amend some of the provisions of our certificate of incorporation, including the
provisions discussed in this section.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is .
LISTING
There is currently no established public trading market for our common
stock. We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "GSKY."
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DESCRIPTION OF INDEBTEDNESS
CREDIT FACILITY
The Amended and Restated Credit Agreement, dated as of May 8, 1998, among
Golden Sky Holdings, Golden Sky Systems, 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, which governs the Credit Facility was
amended in connection with the offering of our 13 1/2% Notes. As amended, the
credit facility provides for a $35.0 million term loan facility and a $115.0
million revolving credit facility, with a $40.0 million sublimit for letters of
credit. We have fully utilized the term loan availability. All of the proceeds
of borrowings under the term loan facility ("Term Loans") were used to repay
existing indebtedness and for working capital purposes. The proceeds of
borrowings under the revolving credit facility ("Revolving Loans") may be used
to effect acquisitions of rural DIRECTV markets and for general corporate,
capital expenditure and working capital purposes.
The term loan facility is to be repaid in 15 consecutive quarterly
installments beginning March 31, 2002, with the remaining balance due December
31, 2005. Each of the quarterly payments due from March 31, 2002 through
September 30, 2005 will be in the amount of approximately $88,000, with $33.7
million due as a bullet payment at maturity on December 31, 2005. Borrowings
under the revolving credit facility will be available until September 30, 2005;
however, the total revolving loan commitment will be reduced quarterly
commencing March 31, 2001 by approximately $1.2 million at the end of each
quarter from March 31, 2001 through December 31, 2001, by approximately $3.4
million at the end of each quarter from March 31, 2002 through December 31,
2002, by $6.9 million at the end of each quarter from March 31, 2003 through
December 31, 2003, by approximately $8.6 million at the end of each quarter from
March 31, 2004 through December 31, 2004, and by $11.5 million from March 31,
2005 through September 30, 2005. The making of each loan under the credit
facility is subject to the satisfaction of specified conditions, which include
not exceeding a specified "borrowing base" with respect to the number of paying
subscribers within the rural DIRECTV markets served by us and in rural DIRECTV
markets to be acquired by us. In addition, the credit facility provides for
mandatory repayments from the net proceeds of sales or other dispositions of
capital stock or material assets and with a percentage of any excess operating
cash flow with respect to any fiscal year equal to 75%.
Borrowings by Golden Sky Systems under the credit facility are
unconditionally and irrevocably guaranteed by Golden Sky Holdings, us and each
of our direct and indirect subsidiaries, excluding South Plains DBS Limited
Partnership and DCE Satellite Entertainment, LLC. These borrowings are also
secured by (i) a pledge by Golden Sky Holdings of all of our capital stock, (ii)
a pledge by us of all of the capital stock of Golden Sky Systems, (iii) an equal
and ratable pledge of all of the capital stock of Golden Sky Systems'
subsidiaries, (iv) a first priority security interest in all of these
subsidiaries' assets and (v) a collateral assignment of our NRTC Agreements.
The credit facility provides that we may elect that all or a portion of the
borrowings under the credit facility bear interest at a rate per annum equal to
either (i) the base rate plus the applicable margin or (ii) the quoted rate plus
the applicable margin. When applying the base rate with respect to revolving
loans, the applicable margin will be 2.50% per year, reduced in some cases by a
discount based on our then ratio of net adjusted consolidated EBITDA to
annualized consolidated EBITDA. When applying the quoted rate with respect to
revolving loans, the applicable margin will be 3.75% per year, less a discount
based on leverage, if applicable. When applying the base rate with respect to
term loans, the applicable margin will be 2.75% per year, less a discount based
on leverage, if applicable. When applying the quoted rate with respect to term
loans, the applicable margin will be 4.00% per year, less a discount based on
leverage, if applicable. As used in this paragraph, the "base rate" means the
higher of (i) 0.50% in excess of the Federal Funds rate or (ii) the prime
lending rate. As used in this paragraph, the "quoted rate" means (a) the
quotation offered to the Administrative Agent in the New York interbank
Eurodollar market for U.S. dollar deposits of amounts in immediately available
funds comparable to the outstanding principal amount of the loan of the
Administrative Agent for which an interest rate is then being
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determined with maturities comparable to the interest period applicable to the
particular loan as determined by the Administrative Agent's Treasury Funding
Management on the date which is two business days prior to the commencement of
the interest period in question, divided by (b) a percentage equal to the
remainder of 100% minus the then stated maximum rate of all reserve requirements
applicable to any member bank of the Federal Reserve System in respect of
Eurocurrency funding or liabilities as defined in Regulation D of the Board of
Governors of the Federal Reserve System.
The credit facility contains a number of significant covenants that, among
other things, limit our ability and the ability of our subsidiaries to incur
additional indebtedness and guaranty obligations, create liens and other
encumbrances, make restricted payments, investments, loans and advances, pay
dividends or make other distributions in respect of our capital stock, sell or
otherwise dispose of assets, make capital expenditures, merge or consolidate
with another entity, create subsidiaries, make amendments to organizational
documents or transact with affiliates. In addition, the credit facility requires
the maintenance of specified financial and operating covenants, including
minimum interest coverage ratios and limits on general and administrative
expenses.
Golden Sky Systems is required to pay commitment fees on the unused amounts
under the revolving loan commitments. These commitment fees, which will be
payable quarterly in arrears, will range from 0.5% per year to 1.25% per year
based on our utilization of the commitments.
Pursuant to an amendment to the NRTC Agreements, we and all NRTC members
and affiliates whose monthly obligations to the NRTC exceed $500,000 in the
preceding six-month period are required to keep and maintain in full force and
effect a standby letter of credit in favor of the NRTC to secure their
respective payment obligations to the NRTC under the NRTC Agreements. The
initial amount of the letter of credit issued at our request pursuant to the
credit facility is equal to three times our single largest monthly invoice from
the NRTC and must be increased as we make additional acquisitions of rural
DIRECTV markets and when our obligations to the NRTC exceed the amount of the
original letter of credit by 67%.
THE 12 3/8% NOTES
On July 31, 1998, Golden Sky Systems, our wholly-owned subsidiary,
completed an offering of $195 million aggregate principal amount of its 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, with the first interest payment due
February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes
offering resulted in net proceeds of approximately $189.15 million, after
payment of underwriting discounts and other issuance costs aggregating
approximately $5.85 million. Approximately $45.2 million of the net proceeds of
the 12 3/8% Notes offering were placed in an interest reserve account to fund
the first four semi-annual interest payments, through August 1, 2000, on the
12 3/8% Notes.
The 12 3/8% Notes are unsecured senior subordinated obligations of Golden
Sky Systems and are subordinated in right of payment to all of its existing and
future senior indebtedness. The 12 3/8% Notes rank equally in right of payment
with all other existing and future senior subordinated indebtedness, if any, of
Golden Sky Systems and senior in right of payment to all existing and future
subordinated indebtedness, if any, of Golden Sky Systems. The 12 3/8% Notes are
unconditionally guaranteed, on a senior subordinated basis, as to payment of
principal, premium, if any, and interest, jointly and severally, by Golden Sky
Systems' wholly-owned subsidiaries, Argos Support Services Company and
PrimeWatch, Inc., and may, under some circumstances, be guaranteed in the future
by other subsidiaries of Golden Sky Systems.
The 12 3/8% Notes are redeemable, in whole or in part, at Golden Sky
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, Golden Sky 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 by us,
Golden Sky Holdings or Golden Sky
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Systems yielding gross proceeds of at least $40.0 million and any subsequent
public equity offerings, provided that, in the case of any offering or offerings
by Golden Sky Holdings or us, all of the net proceeds are contributed to Golden
Sky Systems; and provided, further, that immediately after any redemption the
aggregate principal amount of the 12 3/8% Notes outstanding must equal at least
65% of the originally issued aggregate principal amount of the 12 3/8% Notes.
The indenture governing the 12 3/8% Notes contains restrictive covenants
that, among other things, impose limitations on our and our subsidiaries'
ability to incur additional indebtedness, pay dividends or make restricted
payments, enter into transactions with affiliates, incur debt 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 its subsidiaries to pay dividends or make restricted payments to it, merge or
consolidate with any other person or sell, assign, transfer, lease, convey or
otherwise dispose of all or substantially all of its assets. In the event of a
change of control, as defined in the 12 3/8% Notes indenture, each holder of the
12 3/8% Notes will have the right to require Golden Sky Systems to purchase all
or a portion of the 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.
THE 13 1/2% NOTES
On February 19, 1999, we completed an offering of our 13 1/2% Notes, which
mature on March 1, 2007. 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 September 1, 2004. The offering of these notes resulted in
net proceeds to us of approximately $95.7 million, after payment of underwriting
discounts and other issuance costs aggregating approximately $4.4 million.
Approximately $53.0 million of the net proceeds was used to repay outstanding
debt under Golden Sky Systems' credit facility and the remainder was used to
finance the acquisition of additional DIRECTV markets and for our general
corporate purposes and working capital needs.
The 13 1/2% Notes are our general senior unsecured obligations. These notes
were issued at a substantial discount from their $193.1 million aggregate
principal amount at maturity and generated gross proceeds to us of $100.0
million.
The 13 1/2% Notes are redeemable, in whole or in part, at our option on or
after March 1, 2004, at redemption prices decreasing from 106.75% during the
year commencing March 1, 2004 to 100% on or after March 1, 2006, plus accrued
and unpaid interest, if any, to the date of redemption. In addition, on or prior
to March 1, 2002, we may, at our option, redeem up to 35% of the originally
issued aggregate principal amount of the notes, at a redemption price equal to
113.5% of the accreted value of the notes at the date of redemption solely with
the net proceeds of a public equity offering yielding gross proceeds of at least
$40.0 million and any subsequent public equity offerings; provided that,
immediately after any redemption, the aggregate principal amount of 13 1/2%
Notes outstanding must equal at least 65% of the originally issued aggregate
principal amount of the 13 1/2% Notes.
The indenture governing the 13 1/2% Notes contains restrictive covenants
that, among other things, impose limitations on our ability to incur additional
indebtedness, pay dividends or make restricted payments, enter into transactions
with affiliates, incur liens, permit restrictions on the ability of our
subsidiaries to pay dividends or make payments to us, merge or consolidate with
any other person or sell, assign, transfer, lease, convey or otherwise dispose
of all or substantially all of our assets. In the event of a change of control,
as defined in the indenture governing the 13 1/2% Notes, each holder of 13 1/2%
Notes will have the right to require us to purchase all or a portion of the
holder's 13 1/2% Notes at a price equal to 101% of the accreted value of the
notes at the date of the change of control.
SELLER NOTES
On December 22, 1997, in connection with the acquisition of our rural
DIRECTV market in Missoula, Montana, we issued a note payable in favor of
Western Montana Entertainment Television, Inc. in the principal amount of $3.75
million. The Western Montana note bears interest at an annual rate of
66
<PAGE> 68
7%. Four annual installments of principal and interest of approximately $1.1
million are payable commencing January 5, 1999. The Western Montana note is
secured by a letter of credit.
On May 8, 1998, in connection with the acquisition of our rural DIRECTV
market in Enfield, North Carolina, we issued a note payable in favor of Halifax
Electric Membership Corporation in the principal amount of $5.0 million. The
Halifax note bears interest at an annual rate of 7%. Interest is payable in
quarterly installments. Principal is payable in equal annual installments of
$1.0 million on January 1 of each year, commencing January 1, 1999. The
installment payment due January 1, 1999 was paid by Golden Sky Systems at the
end of December 1998. The Halifax note is secured by a letter of credit.
SHARES ELIGIBLE FOR FUTURE SALE
Upon the completion of this offering and after giving effect to the merger
of Golden Sky Holdings into Golden Sky DBS and the related conversion of all
outstanding shares of capital stock of Golden Sky Holdings into common stock of
Golden Sky DBS, we will have outstanding shares of common stock,
assuming no exercise of options granted under our stock option plan. We have
reserved shares of common stock for issuance under our stock option
plan, of which options to purchase shares are expected to be
outstanding upon the completion of this offering.
The shares of common stock sold in this offering will be freely tradeable
without restriction or limitation under the Securities Act, except for any
shares held by our "affiliates," as defined under Rule 144 of the Securities
Act. Of our remaining shares:
- shares are "restricted securities," as defined under Rule 144,
that we issued and sold in private transactions and that may be sold
publicly only if registered under the Securities Act or exempt from
registration; and
- shares are freely tradeable.
RULE 144
In general, under Rule 144, as currently in effect, a person, including an
"affiliate" of Golden Sky DBS, who has beneficially owned "restricted
securities" for at least one year is entitled to sell, within any three-month
period, a number of shares that does not exceed the greater of:
- one percent of the then outstanding shares of common stock; and
- the average weekly trading volume in our common stock during the four
calendar weeks immediately preceding filing of notice of the sale with
the Securities and Exchange Commission
provided that the sellers satisfy various manner of sale and notice requirements
and we make available current public information about us.
Under Rule 144(k), a holder of "restricted securities" who is not an
"affiliate" of Golden Sky DBS and has not been an affiliate for at least three
months prior to the sale of restricted securities, and who has beneficially
owned shares for at least two years would be entitled to sell shares under Rule
144(k) without regard to the limitations described above. As defined under Rule
144, an "affiliate" of an issuer is a person who directly, or indirectly through
the use of one or more intermediaries, controls, or is controlled by, or is
under common control with, the issuer. Our directors and executive officers may
be considered our affiliates under this definition.
LOCK-UP AGREEMENTS
Subject to some exceptions, we and our executive officers, directors and
principal stockholders have agreed not to sell or otherwise dispose of any
shares of our common stock for a period of 180 days after the date of this
prospectus without the prior written consent of Donaldson, Lufkin & Jenrette.
See "Underwriting -- No Sales of Similar Securities."
67
<PAGE> 69
REGISTRATION RIGHTS AGREEMENT
Under a registration rights agreement to be entered into in connection with
the merger of Golden Sky Holdings and Golden Sky DBS, we will agree, subject to
specified conditions, to effect up to four demand registrations of our common
stock held by the former stockholders of Golden Sky Holdings for a sale to the
public under applicable federal and state securities laws. See "Certain
Relationships and Related Transactions -- Merger of Golden Sky Holdings into
Golden Sky DBS." In addition, the stockholders will have "piggy-back" and other
registration rights, subject to specified conditions. In consideration for their
registration rights, these stockholders have agreed not to sell or otherwise
dispose of shares of our common stock for 180 days following this offering. Our
obligations to register shares of common stock under the registration rights
agreement will terminate as to any party thereto except us seven years after the
offering, or, as to any party holding less than 2% of our outstanding common
stock, at any time after the first anniversary of the offering when all of the
person's shares of common stock can be legally transferred in a three-month
period under Rule 144 under the Securities Act, as reasonably determined by us.
REGISTRATION STATEMENT
We intend to register the shares of common stock issued, issuable or
reserved for issuance under our stock option plan as soon as practicable
following the date of this prospectus. These shares then will be freely
tradeable in the open market, subject to the lock-up agreements described above
and, in the case of sales by "affiliates," to the requirements of Rule 144. As
of , 1999, options to purchase approximately shares of
common stock were vested, all of which will be subject to the 180-day lock-up
period. See "Management -- Stock Option Plan."
MARKET PRICE
We cannot estimate the number of shares that may be sold in the future by
our stockholders or the effect that sales of shares by our stockholders will
have on the market price of our common stock. Sales of substantial amounts of
common stock, or the prospect of these sales, could materially adversely affect
the market price of our common stock.
68
<PAGE> 70
UNDERWRITING
GENERAL
We intend to offer our common stock in the United States and Canada through
a number of underwriters. Donaldson, Lufkin & Jenrette Securities Corporation,
Bear, Stearns & Co. Inc., Banc of America Securities LLC and ING Barings LLC are
acting as representatives of each of the underwriters named below. Under a
purchase agreement with the underwriters, we have agreed to sell to the
underwriters, and each of the underwriters has agreed to purchase from us, the
number of shares of our common stock listed opposite its name below.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ------------------------------------------------------------ ----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Bear, Stearns & Co. Inc. ...................................
Banc of America Securities LLC..............................
ING Barings LLC.............................................
----------
Total..........................................
==========
</TABLE>
In the purchase agreement, the underwriters have agreed, under the terms of
the agreement, to purchase all of the shares of common stock being sold under
the agreement if any of the shares of common stock being sold under the
agreement are purchased. In the event of a default by an underwriter, the
purchase agreement provides that, in some circumstances, the purchase
commitments of non-defaulting underwriters may be increased or the purchase
agreement may be terminated.
We have agreed to indemnify the underwriters against some liabilities,
including some liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of those
liabilities.
The shares of common stock are being offered by the underwriters, subject
to prior sale, when, as and if issued to and accepted by them, subject to
receipt of legal opinions and officers certificates, or waiver of these
conditions, as specified in the purchase agreements. The underwriters reserve
the right to withdraw, cancel or modify orders and to reject orders in whole or
in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us that the underwriters propose initially
to offer the shares of common stock to the public at the initial public offering
price set forth on the cover page of this prospectus, and to dealers at such
price less a concession not in excess of $ per share of common stock. The
underwriters may allow, and the dealers may reallow, a discount of up to $
per share of common stock to other dealers. After the initial public offering,
the public offering price, concession and discount may be changed.
The following table shows the per share and total public offering price,
the underwriting discount to be paid by us to the underwriters and the proceeds
before expenses to us. This information is presented assuming either no exercise
or full exercise by the underwriters of their over-allotment options.
<TABLE>
<CAPTION>
PER SHARE WITHOUT OPTION WITH OPTION
--------- -------------- -----------
<S> <C> <C> <C>
Public offering price........................... $ $ $
Underwriting discount........................... $ $ $
Proceeds, before expenses, to Golden Sky DBS.... $ $ $
</TABLE>
The expenses of this offering, exclusive of the underwriting discount, are
estimated at and are payable by us.
69
<PAGE> 71
The offering is subject to customary closing conditions, including delivery
of legal opinions and certificates. The underwriters reserve the right to
withdraw, cancel or modify offers of our common stock and to reject all or part
of orders.
OVER-ALLOTMENT OPTION
We have granted options to the underwriters, exercisable for 30 days after
the date of this prospectus, to purchase up to additional shares of
common stock at the public offering price described on the cover page of this
prospectus, less the underwriting discount. The underwriters may exercise these
options only to cover over-allotments, if any, made on the sale of our common
stock. To the extent that the underwriters exercise these options, each
underwriter will be obligated, subject to customary closing conditions, to
purchase a number of additional shares of common stock proportionate to the
underwriter's initial amount reflected in the above table.
RESERVED SHARES
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 5% of the shares to be sold to directors, officers,
employees, business associates and related persons of Golden Sky DBS. The number
of shares of common stock available for sale to the general public will be
reduced to the extent these persons purchase the reserved shares. Any reserved
shares which are not orally confirmed for purchase within one day of the pricing
of this offering will be offered by the underwriters to the general public on
the same terms as the other shares offered to the public.
NO SALES OF SIMILAR SECURITIES
We and our executive officers, directors and principal stockholders have
agreed not to sell or transfer any shares of our common stock for 180 days after
the date of the prospectus without the prior written consent of Donaldson,
Lufkin & Jenrette. In particular, we and all of the foregoing persons have
agreed to not, directly or indirectly:
- offer, pledge, sell or contract to sell any of our common stock;
- sell any option or contract to purchase our common stock;
- purchase any option or contract to sell our common stock;
- grant any option, right or warrant for the sale of our common stock;
- request or demand that we file a registration statement related to our
common stock; or
- enter into any agreement or transaction that transfers all or any part of
the ownership of our common stock.
This lockup provision applies to common stock as well as any securities
which are convertible into or exchangeable or exercisable for common stock. The
provision applies to common stock currently held as well as common stock
acquired in the future. However, it does not apply to (i) the grant or exercise
of options to purchase common stock under our stock option plan, as long as any
shares of common stock acquired upon exercise of options are not transferred
prior to the end of the 180-day period, or (ii) issuances of common stock in
connection with our acquisitions, as long as the shares so issued are not
transferred prior to the end of the 180-day period.
However, a shareholder may without the consent of Donaldson, Lufkin &
Jenrette transfer shares of our common stock to trusts or similar entities for
estate planning purposes or to affiliates as defined in Rule 144 as long as any
transferee agrees in writing to be bound by the terms of the lockup agreement.
See "Shares Eligible for Future Sale."
70
<PAGE> 72
NASDAQ NATIONAL MARKET LISTING
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "GSKY."
INITIAL PUBLIC OFFERING PRICE
Prior to this offering, there has been no public market for our common
stock. The initial public offering price was determined through negotiations
between the representatives and us. The factors considered in determining the
initial public offering price, in addition to prevailing market conditions, are:
- relevant ratios of publicly traded companies that the representatives
believe to be comparable to us;
- our financial information;
- the history of, and the prospects for, our business and the industry in
which we compete; and
- an assessment of our management, our past and present operations, the
prospects for, and timing of, our future revenues and the present state
of our development.
An active trading market may not develop for our common stock and our
common stock may not trade in the public market subsequent to this offering at
or above the initial public offering price.
PRICE STABILIZATION, SHORT POSITIONS AND PENALTY BIDS
Until the distribution of our common stock is completed, rules of the
Securities and Exchange Commission may limit the ability of the underwriters to
bid for and purchase our common stock. As an exception to these rules, the
representatives of the underwriters are permitted to engage in transactions that
stabilize the price of our common stock. The stabilizing transactions consist of
bids or purchases for the purpose of pegging, fixing or maintaining the price of
our common stock.
If the underwriters create a short position in our common stock in
connection with this offering, i.e., if they sell more shares of common stock
than are listed on the cover page of this prospectus, the representatives may
reduce that short position by purchasing common stock in the open market. The
representatives may also elect to reduce any short position by exercising all or
part of the over-allotment options described above.
The representatives may also impose a penalty bid on other underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of our common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of this offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of these purchases. The imposition of a penalty bid
might also have an effect on the price of our common stock to the extent that it
discourages resales of our common stock.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of our common stock. In addition, we and
the underwriters cannot assure you that the representatives will engage in these
transactions or that these transactions, once commenced, will not be
discontinued without notice.
71
<PAGE> 73
LEGAL MATTERS
The validity of our common stock offered by this prospectus will be passed
upon for us by the international law firm of McDermott, Will & Emery. Certain
legal matters in connection with this offering will be passed upon for the
underwriters by Cahill Gordon & Reindel (a partnership including a professional
corporation), New York, New York.
EXPERTS
The following financial statements appearing in this prospectus have been
audited by KPMG LLP, independent auditors, as stated in their reports, and are
included herein in reliance upon their reports:
(1) Golden Sky DBS's balance sheet as of February 2, 1999, the date of
its inception; and
(2) our consolidated financial statements for the period from Golden
Sky Systems' inception on June 25, 1996, to December 31, 1996, and for the
years ended December 31, 1997 and 1998.
The financial statements of Western Montana DBS, Inc. dba Rocky Mountain
DBS as of and for the year ended December 31, 1997 have been audited by Loucks &
Glassley, pllp, independent auditors, as stated in their report, and are
included herein in reliance upon their report.
The financial statements of Triangle Communication System, Inc. for each of
the years in the three-year period ended December 31, 1997 have been audited by
Eide Helmeke PLLP, independent auditors, as stated in their report, and are
included herein in reliance upon their report.
The financial statements of Direct Broadcast Satellite, a segment of Nemont
Communications Inc., for the year ended December 31, 1997 have been audited by
CHMS, P.C., independent auditors, as stated in their report, and are included
herein in reliance upon their report.
The financial statements of DBS Segment of Cumby Cellular, Inc. for the
year ended December 31, 1997 have been audited by Curtis Blakely & Co., P.C.,
independent auditors, as stated in their report, and are included herein in
reliance upon their report.
The financial statements of Direct Broadcast Satellite, a segment of
Volcano Vision, Inc., for the year ended December 31, 1997 have been audited by
Moss Adams LLP, independent auditors, as stated in their report and are included
herein in reliance upon their report.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form S-1 under the Securities Act with respect to the shares of our
common stock offered by this prospectus. This prospectus does not contain all
the information described in the registration statement and its exhibits and
schedules. The registration statement and its exhibits and schedules may be
inspected and copied at prescribed rates at:
- the public reference facilities maintained by the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
- the regional offices of the Commission located at 7 World Trade Center,
New York, New York 10048;
- the regional offices of the Commission located at Northwestern Atrium
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; or
- the Public Reference Section of the Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549.
72
<PAGE> 74
The Commission also maintains a web site that contains reports, proxy statements
and other information regarding companies, including ours, that electronically
file required information with the Commission. The address of the Commission's
web site is http://www.sec.gov.
We are subject to the reporting requirements of the Securities Exchange Act
of 1934 and are required to file periodic reports and other information with the
Commission. These reports and other information are available for inspection and
copying at the Commission's public reference rooms and on its website.
73
<PAGE> 75
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
GOLDEN SKY DBS, INC.
Independent Auditors' Report.............................. F-2
Balance Sheet as of February 2, 1999...................... F-3
Independent Auditors' Report.............................. F-4
Consolidated Balance Sheets as of December 31, 1997 and
1998 and June 30, 1999................................. F-5
Consolidated Statements of Operations for the period from
inception (June 25, 1996) through December 31, 1996,
for the years ended December 31, 1997 and 1998, and for
the six months ended June 30, 1998 and 1999............ F-6
Consolidated Statements of Stockholder's Equity (Deficit)
for the period from inception (June 25, 1996) through
December 31, 1996, for the years ended December 31,
1997 and 1998, and for the six months ended June 30,
1999................................................... F-7
Consolidated Statements of Cash Flows for the period from
inception (June 25, 1996) through December 31, 1996,
for the years ended December 31, 1997 and 1998, and for
the six months ended June 30, 1998 and 1999............ F-8
Notes to Consolidated Financial Statements................ F-9
FINANCIAL STATEMENTS OF SIGNIFICANT ACQUIRED BUSINESSES
Triangle Communications System, Inc. ..................... F-33
Direct Broadcast Satellite (a segment of Nemont
Communications, Inc.).................................. F-43
DBS Segment of Cumby Cellular, Inc. ...................... F-52
DBS Segment of Cumby Cellular, Inc. (unaudited)........... F-60
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.).................................................. F-66
Direct Broadcast Satellite (a segment of Volcano Vision,
Inc.) (unaudited)...................................... F-75
Western Montana DBS, Inc. dba Rocky Mountain DBS.......... F-82
Western Montana DBS, Inc. dba Rocky Mountain DBS
(unaudited)............................................ F-91
</TABLE>
F-1
<PAGE> 76
INDEPENDENT AUDITORS' REPORT
Board of Directors
Golden Sky DBS, Inc.
We have audited the accompanying balance sheet of Golden Sky DBS, Inc. (a
wholly-owned subsidiary of Golden Sky Holdings, Inc.) as of February 2, 1999.
This balance sheet is the responsibility of the Company's management. Our
responsibility is to express an opinion on this balance sheet based on our
audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Golden Sky DBS, Inc. as of February
2, 1999 in conformity with generally accepted accounting principles.
KPMG LLP
February 3, 1999
Kansas City, Missouri
F-2
<PAGE> 77
GOLDEN SKY DBS, INC.
BALANCE SHEET
FEBRUARY 2, 1999
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $100
====
STOCKHOLDER'S EQUITY
Common Stock, par value $.01; 1,000 shares authorized, 100
shares issued and outstanding............................. $100
Retained earnings........................................... --
----
Total stockholder's equity........................ $100
====
</TABLE>
NOTES TO BALANCE SHEET
Organization and Nature of Operations
Golden Sky DBS, Inc. (the "Issuer"), a wholly-owned subsidiary of Golden
Sky Holdings, Inc. ("Holdings"), is a Delaware corporation formed on February 2,
1999 for the purpose of effecting an offering of Senior Discount Notes. Holdings
transferred to the Issuer all of the capital stock of its wholly-owned
subsidiary Golden Sky Systems, Inc.("GSS"). GSS is Delaware corporation formed
on June 25, 1996 for the purpose of acquiring, owning and operating rural direct
broadcast satellite (DBS) television territories throughout the United States.
The transfer was reported at predecessor cost, which at December 31, 1998 was
$15.9 million.
F-3
<PAGE> 78
INDEPENDENT AUDITORS' REPORT
Board of Directors
Golden Sky DBS, Inc.:
We have audited the accompanying consolidated balance sheets of Golden Sky
DBS, Inc. as of December 31, 1997 and 1998 and the related consolidated
statements of operations, stockholder's equity and cash flows for the period
from inception (June 25, 1996) through December 31, 1996, and for the years
ended December 31, 1997 and 1998. 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
DBS, Inc. as of December 31, 1997 and 1998 and the results of their operations
and their cash flows for the period from inception (June 25, 1996) through
December 31, 1996, and for the years ended December 31, 1997 and 1998, in
conformity with generally accepted accounting principles.
KPMG LLP
February 22, 1999, except for paragraph seven
of Note 5, which is as of March 22, 1999
Kansas City, Missouri
F-4
<PAGE> 79
GOLDEN SKY DBS, INC.
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1997 1998 1999
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 13,632 $ 4,460 $ 14,749
Restricted cash, current portion........................ -- 28,083 23,634
Subscriber receivables (net of allowance for
uncollectible accounts of $138, $293 and $728
respectively)........................................ 3,843 8,632 10,109
Other receivables....................................... 335 2,465 1,315
Inventory............................................... 2,174 10,146 6,662
Prepaid expenses and other.............................. 127 1,859 2,036
-------- -------- ---------
Total current assets...................................... 20,111 55,645 58,505
Restricted cash, net of current portion................... -- 23,534 11,647
Property and equipment (net of accumulated depreciation of
$1,061, $3,214 and $4,518 respectively)................. 2,936 4,994 6,212
Intangible assets, net.................................... 129,896 233,139 252,454
Deferred financing costs.................................. 3,106 10,541 12,329
Other assets.............................................. 187 218 439
-------- -------- ---------
Total assets.................................... $156,236 $328,071 $ 341,586
======== ======== =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable.................................. $ 8,471 $ 13,539 $ 18,774
Interest payable........................................ 786 11,009 10,806
Current maturities of long-term obligations............. 2,538 8,916 3,314
Unearned revenue........................................ 2,630 5,574 7,290
Accrued payroll and other............................... 1,859 1,403 1,906
-------- -------- ---------
Total current liabilities................................. 16,284 40,441 42,090
Long-term obligations, net of current maturities:
12 3/8% Notes........................................... -- 195,000 195,000
13 1/2% Notes........................................... -- -- 104,989
Bank debt............................................... 60,000 67,000 35,000
Seller notes payable.................................... 6,200 6,912 6,932
Other notes payable and obligations under capital
leases............................................... 375 376 251
Minority interest....................................... 2,928 2,420 --
-------- -------- ---------
Total long-term obligations, net of current maturities.... 69,503 271,708 342,172
-------- -------- ---------
Total liabilities......................................... 85,787 312,149 384,262
Commitments and contingencies.............................
Stockholder's Equity (Deficit):
Common Stock, par value $.01; 1,000 shares authorized;
1,000 shares issued and outstanding at December 31,
1997 and 1998; 100 shares issued and outstanding at
June 30, 1999........................................ -- -- --
Additional paid-in capital.............................. 87,400 97,600 97,913
Accumulated deficit..................................... (16,951) (81,678) (140,589)
-------- -------- ---------
Total stockholder's equity (deficit)...................... 70,449 15,922 (42,676)
-------- -------- ---------
Total liabilities and stockholder's equity
(deficit)..................................... $156,236 $328,071 $ 341,586
======== ======== =========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 80
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION YEARS ENDED
THROUGH DECEMBER 31, SIX MONTHS ENDED JUNE 30,
DECEMBER 31, ------------------- -------------------------
1996 1997 1998 1998 1999
------------ -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
DBS services........................... $ 219 $ 16,452 $ 74,910 $30,466 $ 60,040
Lease and other........................ 36 944 1,014 512 385
------- -------- -------- ------- --------
Total revenue............................ 255 17,396 75,924 30,978 60,425
Costs and Expenses:
Costs of DBS services.................. 130 9,304 45,291 17,926 38,022
System operations...................... 26 3,796 11,021 4,177 8,796
Sales and marketing.................... 73 7,316 32,201 11,287 25,507
General and administrative............. 1,035 2,331 7,431 2,675 6,640
Depreciation and amortization.......... 97 7,300 23,166 9,753 17,360
------- -------- -------- ------- --------
Total costs and expenses................. 1,361 30,047 119,110 45,818 96,325
------- -------- -------- ------- --------
Operating loss........................... (1,106) (12,651) (43,186) (14,840) (35,900)
Non-operating Items:
Interest and investment income......... 1 40 1,573 29 1,652
Interest expense....................... (62) (3,173) (20,537) (5,237) (21,728)
------- -------- -------- ------- --------
Total non-operating items................ (61) (3,133) (18,964) (5,208) (20,076)
------- -------- -------- ------- --------
Loss before income taxes................. (1,167) (15,784) (62,150) (20,048) (55,976)
Income taxes............................. -- -- -- -- --
------- -------- -------- ------- --------
Loss before extraordinary charge......... (1,167) (15,784) (62,150) (20,048) (55,976)
Extraordinary charge on early retirement
of debt................................ -- -- (2,577) (2,577) (2,935)
------- -------- -------- ------- --------
Net loss....................... $(1,167) $(15,784) $(64,727) $(22,625) $(58,911)
======= ======== ======== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 81
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
------ ---------- ----------- --------
<S> <C> <C> <C> <C>
Balance at inception (June 25, 1996)............... $ -- $ -- $ -- $ --
Issuance of 1,000 shares of Golden Sky Systems
Common Stock.................................. -- 1 -- 1
Net loss......................................... -- -- (1,167) (1,167)
---- ------- --------- --------
Balance at December 31, 1996....................... -- 1 (1,167) (1,166)
Cancellation of originally issued Golden Sky
Systems Common Stock.......................... -- (1) -- (1)
Issuance of 1,000 shares of new Golden Sky
Systems Common Stock.......................... -- -- -- --
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
Issuance of 100 shares of Golden Sky DBS Common
Stock......................................... -- -- -- --
Deferred compensation pursuant to stock options
(unaudited)................................... -- 313 -- 313
Net loss (unaudited)............................. -- -- (58,911) (58,911)
---- ------- --------- --------
Balance at June 30, 1999 (unaudited)............... $ -- $97,913 $(140,589) $(42,676)
==== ======= ========= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 82
GOLDEN SKY DBS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
INCEPTION YEARS ENDED SIX MONTHS ENDED
THROUGH DECEMBER 31, JUNE 30,
DECEMBER 31, --------------------- -------------------------
1996 1997 1998 1998 1999
------------ --------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss...................................... $(1,167) $ (15,784) $ (64,727) $(22,625) $(58,911)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization............... 97 7,300 23,166 9,753 17,360
Amortization of debt discount, deferred
financing costs and other................. -- 215 977 266 6,177
Extraordinary charge on early retirement of
debt...................................... -- -- 2,577 2,577 2,935
Change in operating assets and liabilities,
net of acquisitions:
Subscriber receivables, net of unearned
revenue................................. (13) (2,501) (1,757) (2,035) 304
Other receivables......................... (123) (161) (2,130) (652) 1,150
Inventory................................. (31) (1,604) (8,049) (679) 3,484
Prepaid expenses and other................ (17) (203) (1,228) (633) (394)
Trade accounts payable.................... 372 7,515 5,068 644 5,235
Interest payable.......................... 53 733 10,223 (18) (203)
Accrued payroll and other................. 39 1,391 (708) (837) 484
------- --------- --------- -------- --------
Net cash used in operating activities......... (790) (3,099) (36,588) (14,239) (22,379)
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of Rural DIRECTV Markets......... (2,806) (120,051) (104,487) (44,514) (35,160)
Offering proceeds and investment earnings
placed in escrow............................ -- -- (51,617) -- (1,271)
Purchases of property and equipment........... (105) (998) (3,317) (1,360) (2,143)
Proceeds from interest escrow account......... -- -- -- -- 12,158
Release of amounts reserved for contingent
reduction of bank debt...................... -- -- -- -- 5,449
Other......................................... (320) 320 (500) (690) (12)
------- --------- --------- -------- --------
Net cash used in investing activities......... (3,231) (120,729) (159,921) (46,564) (20,979)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from investors' subscriptions to
purchase preferred stock.................... 2,499 -- -- -- --
Proceeds from issuance of Series A Convertible
Participating Preferred Stock............... -- 34,289 -- -- --
Net proceeds from issuance of 12 3/8% Notes... -- -- 189,150 -- --
Proceeds from issuance of 13 1/2% Notes....... -- -- -- -- 100,049
Borrowings on bank debt....................... -- 75,000 90,000 54,000 21,000
Principal payments on bank debt............... -- (15,000) (83,000) -- (53,000)
Proceeds from issuance of notes payable....... 2,396 2,115 -- -- --
Principal payments on notes payable and
obligations under capital leases............ (396) (2,902) (3,675) (2,479) (8,632)
Proceeds from issuance of Common Stock........ 1 -- -- -- --
Contribution from Golden Sky Holdings, Inc.... -- 46,800 -- -- --
Increase in deferred financing costs.......... -- (3,321) (5,138) (3,494) (5,770)
------- --------- --------- -------- --------
Net cash provided by financing activities..... 4,500 136,981 187,337 48,027 53,647
------- --------- --------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................. 479 13,153 (9,172) (12,776) 10,289
Cash and cash equivalents, beginning of
period...................................... -- 479 13,632 13,632 4,460
------- --------- --------- -------- --------
Cash and cash equivalents, end of period...... $ 479 $ 13,632 $ 4,460 $ 856 $ 14,749
======= ========= ========= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash paid for interest........................ $ 9 $ 2,225 $ 9,337 $ 2,920 $ 15,537
Property and equipment acquired under
capitalized lease obligations............... -- 554 609 439 78
Retirement of bank debt from borrowings under
the Credit Facility......................... -- -- 88,000 -- --
Issuance of seller notes payable in
acquisitions................................ 2,450 8,600 10,157 -- 2,925
Conversion of notes payable and subscriptions
to Series A Convertible Participating
Preferred Stock............................. -- 6,311 -- -- --
Contribution from Golden Sky Holdings, Inc.
resulting from issuance of its preferred
stock in acquisitions....................... -- -- 10,200 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-8
<PAGE> 83
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information as of June 30, 1999 and for the Six-Month Periods Ended June 30,
1999 and 1998 is Unaudited)
1. ORGANIZATION AND NATURE OF OPERATIONS
Organization and Legal Structure
Golden Sky DBS, Inc. ("the Company" or "Golden Sky DBS") was formed in
February 1999 for the purpose of completing a private offering (the "13 1/2%
Notes Offering") of 13 1/2% Senior Discount Notes due 2007 (the "13 1/2%
Notes"). The 13 1/2% Notes Offering was consummated pursuant to Rule 144A of the
Securities Act of 1933, as amended. In April 1999, Golden Sky DBS filed a
registration statement with the Securities and Exchange Commission relating to
the exchange of the privately issued 13 1/2% Notes for publicly registered notes
with substantially identical terms (including principal amount, interest rate,
maturity, security and ranking).
Upon formation, Golden Sky DBS issued 100 shares of its common stock to
Golden Sky Holdings, Inc. ("Holdings") in exchange for $100 and the subsequent
transfer of all of the capital stock of Golden Sky Systems, Inc. ("Systems") to
Golden Sky DBS. Until February 1999, Systems was a wholly-owned subsidiary of
Holdings. Upon completion of the aforementioned transfer, Systems became a
wholly-owned subsidiary of Golden Sky DBS. Accordingly, Systems has been treated
as the predecessor to Golden Sky DBS and the historical financial statements of
Golden Sky DBS are those of Systems.
Principal Business
Systems 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 was formed on June 25,
1996 ("Inception") and 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 June 30, 1999, Systems had acquired 55 Rural
DIRECTV Markets in 23 states with approximately 1.9 million households. As of
that same date, Systems served approximately 292,400 subscribers.
Significant Risks and Uncertainties
Substantial Leverage. The Company is highly leveraged, making it vulnerable
to changes in general economic conditions and interest rates. As of December 31,
1998 and June 30, 1999, the Company had outstanding long-term debt (including
current portion) totaling approximately $278.2 million and $345.5 million,
respectively. Substantially all of the Company's and its subsidiaries' assets
are pledged as collateral on its long-term debt. Further, the terms associated
with the Company's long-term debt obligations significantly restrict its ability
to incur additional indebtedness. Thus, it may be difficult for the Company and
its subsidiaries to obtain additional debt financing if desired or required in
order to further implement the Company's business strategy.
Expected Operating Losses. Due to the substantial expenditures required to
acquire Rural DIRECTV Markets and subscribers, the Company has sustained
significant losses since Inception. The Company's operating losses were $1.1
million, $12.7 million and $43.2 million for the periods ended December 31,
1996, 1997 and 1998, respectively. The Company's net losses during those same
periods aggregated $1.2 million, $15.8 million and $64.7 million, respectively.
During the six months ended June 30, 1998 and 1999, the Company's operating
losses totaled $14.8 million and $35.9 million, respectively; net losses totaled
$22.6 million and $58.9 million during those same periods. Improvement in the
Company'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.
F-9
<PAGE> 84
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
No assurance can be given that the Company will be effective with regard to
these matters. The Company incurs significant costs to acquire DIRECTV
subscribers. The high cost of obtaining new subscribers magnifies the negative
effects of subscriber churn. The Company anticipates that it will continue to
experience operating losses through at least 1999. There can be no assurance
that such operating losses will not continue beyond 1999 or that the Company'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 at the time such
distributions are needed by Golden Sky DBS to meet its obligations.
Reliance on DIRECTV/NRTC. The Company obtains substantially all of its
revenue from the distribution of DIRECTV programming services. As a result, the
Company would be materially adversely affected by any material change in the
assets, financial condition, programming, technological capabilities or services
of DIRECTV or Hughes. Further, the Company 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 the Company from continuing to provide DBS
services and could have a material adverse effect on the Company's financial
condition and results of operations. Additionally, the Company's ability to
offer DIRECTV programming services depends upon agreements between the NRTC and
Hughes and between Systems and the NRTC. The NRTC's interests may differ from
the Company's interests. The Company would be materially and adversely affected
by the termination of the NRTC's agreement with Hughes and/or the termination of
Systems' agreements with the NRTC. Systems' 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 the Company's business.
Competition. The subscription television industry is highly competitive.
The Company faces competition from companies offering video, audio, data,
programming and entertainment services. Many of these competitors have
substantially greater financial and marketing resources than the Company. The
Company'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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The consolidated financial statements include the financial statements of
Golden Sky DBS and its majority owned 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.
The unaudited consolidated financial statements as of June 30, 1999 and for
the six-month periods ended June 30, 1998 and 1999 include, in the opinion of
management, all adjustments (consisting of normal recurring adjustments)
necessary to present fairly the Company's consolidated financial position,
results of operations and cash flows. Operating results for the six-month
periods ended June 30, 1998 and 1999 are not necessarily indicative of the
results that may be expected for the full fiscal years.
F-10
<PAGE> 85
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
The Company considers all highly liquid investments with original
maturities of three months or less to be cash equivalents. At December 31, 1997
and 1998 and June 30, 1999, cash and cash equivalents include 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 June 30, 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").
The Company subsidizes the cost to the consumer of such equipment, which is
required to receive DIRECTV programming services. Additionally, the Company
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, 1996, 1997 and 1998, aggregate proceeds
from the sale and installation of DBS Equipment totaled $57,000, $3.8 million
and $11.0 million, respectively; related cost of sales totaled $68,000, $4.6
million and $25.8 million during those same periods. During the six months ended
June 30, 1998 and 1999, aggregate proceeds from the sale and installation of DBS
Equipment totaled $5.2 million and $4.4 million, respectively; related cost of
sales totaled $8.8 million and $18.3 million during those same periods.
Long-lived Assets
The Company 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 which 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 which
are to be disposed of, the assets would be impaired to the extent the fair value
does not exceed the book value. The Company 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.
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.
F-11
<PAGE> 86
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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, generally up to
12 years. 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. Hughes' satellites are estimated to have orbital
lives of approximately 15 years from the respective launch dates in December
1993, August 1994 and June 1995.
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 the 12 3/8% Notes (as
defined) is based on quoted market prices. As of December 31, 1998, the
carrying value of the 12 3/8% Notes was $195.0 million; the fair value of
the 12 3/8% Notes approximated $199.9 million as of that same date. The
carrying value of Systems' Credit Facility (as defined) and other notes
payable approximate fair value as interest rates are variable or
approximate market rates.
Revenue Recognition
DBS services revenue is recognized in the month service is provided.
Unearned revenue represents subscriber advance billings for one or more months
and revenue recognition is deferred until service is provided.
System Operations Expense
System operations expense includes payroll and other administrative costs
related to the Company's local offices and national call center.
Advertising Costs
Advertising costs are expensed as incurred. Such costs aggregated $33,000,
$1.4 million and $5.1 million during the periods ended December 31, 1996, 1997
and 1998, respectively. During the six-month periods ended June 30, 1998 and
1999, advertising costs totaled approximately $1.7 million and $2.4 million,
respectively.
Income Taxes
Systems elected to be taxed as an S Corporation for federal income tax
purposes in 1996. As an S Corporation, Systems was generally not directly
subject to income taxation. On February 12, 1997, Systems terminated its S
Corporation status, and thereafter is subject to income taxation as a C
Corporation under Subchapter "C" of the Internal Revenue Code. Upon their
formation, Holdings and Golden Sky DBS elected to be taxed as C Corporations for
federal income tax purposes. Pro forma income taxes have not been presented
because the Company has incurred operating losses in all periods.
F-12
<PAGE> 87
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Effects of Recently Issued Accounting Pronouncements
The Company adopted Statement of Financial Accounting Standards ("FAS") No.
130, "Reporting Comprehensive Income" ("FAS No. 130") during the first quarter
of 1998. FAS No. 130 established new rules for the reporting of comprehensive
income and its components. FAS No. 130 has no impact on net income or
stockholder's equity. The Company has no components of comprehensive income
other than net loss and thus, adoption of FAS No. 130 had no effect on its
financial statements.
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, the Company has no derivative instruments or
hedging arrangements. Accordingly, adoption of FAS No. 133 is not expected to
have a material effect on the Company's financial position or results of
operations.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" ("SOP 98-5"). SOP 98-5, which is effective for fiscal years
beginning after December 15, 1998, defines costs related to start-up activities
and requires that such costs be expensed as incurred. As the Company previously
has expensed all such costs, the adoption of SOP 98-5 is not expected to effect
the Company's financial position or results of operations.
Reclassifications
Certain amounts from the prior years' consolidated financial statements
have been reclassified to conform with the current year presentation.
Comprehensive Income
The Company has no components of comprehensive income other than net loss.
Free Programming Promotions
Certain DIRECTV national sales promotions offer free programming, generally
for one to three months, to new subscribers. The cost of such free programming
is expensed as sales and marketing expense in the period the services are
provided. During the six-month period ended June 30, 1999, sales and marketing
expenses attributable to such promotions totaled $3.0 million.
3. ACQUISITIONS
The Company accounts for its acquisitions using the purchase method. The
Company's consolidated statements of operations for the periods ended December
31, 1996, 1997 and 1998 and June 30, 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 1996, 1997 and 1998 and the six-month period ended
June 30, 1999 were allocated as follows (dollars in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------- SIX MONTHS ENDED
1996 1997 1998 JUNE 30, 1999
------ -------- -------- ----------------
<S> <C> <C> <C> <C>
DIRECTV distribution rights............ $4,664 $116,394 $114,747 $33,221
Customer lists......................... 453 9,450 7,114 --
Non-compete agreements................. 35 4,879 2,587 4,839
Property and equipment................. 135 1,953 204 --
Minority interest...................... -- (2,931) -- --
Working capital, net................... (31) (20) 192 100
------ -------- -------- -------
$5,256 $129,725 $124,844 $38,160
====== ======== ======== =======
</TABLE>
F-13
<PAGE> 88
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The following summarizes the Company's acquisitions of Rural DIRECTV
Markets consummated during 1996, 1997, 1998 and 1999 (dollars in thousands):
<TABLE>
<CAPTION>
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
------ ------------------ ------------------ -------------
<S> <C> <C> <C>
Aurora Cable TV......................... November 15, 1996 Tennessee $ 1,092
TV Tennessee, Inc. ..................... November 22, 1996 Tennessee 4,164
--------
Total 1996 acquisitions....... $ 5,256
========
Deep East Texas Telecommunications,
Inc. ................................. February 7, 1997 Texas $ 1,917
Images DBS Kansas, L.C., Images DBS
Oklahoma, L.C. and Total
Communications, Inc. ................. February 12, 1997 Kansas/Oklahoma 12,684
Direct Satellite TV, LTD. .............. February 28, 1997 Texas 3,740
Thunderbolt Systems, Inc. .............. March 11, 1997 Missouri 6,119
Western Montana DBS, Inc. dba Rocky
Mountain DBS.......................... May 1, 1997 Colorado 4,767
TEG DBS Services, Inc. ................. June 12, 1997 Nevada 5,229
GVEC Rural TV, Inc. .................... July 8, 1997 Texas 5,169
Satellite Entertainment, Inc. .......... July 14, 1997 Minnesota/Michigan 9,626
Direct Vision........................... July 15, 1997 Minnesota 7,441
Argos Support Services Company.......... August 8, 1997 Florida/Texas/Utah 18,377
JECTV, a segment of Jackson Electric
Cooperative........................... August 26, 1997 Texas 9,439
Lakes Area TV........................... September 2, 1997 Minnesota 1,353
DCE Satellite Entertainment, LLC........ October 13, 1997 Wisconsin 313
Direct Broadcast Satellite, a segment of
CTS Communication Corporation......... November 7, 1997 Michigan 4,287
DBS, L.C. .............................. November 17, 1997 Iowa 1,908
Panora Telecommunications, Inc. ........ November 20, 1997 Iowa 1,129
Souris River Television, Inc. November 21, 1997 North Dakota 7,266
Cal-Ore Digital TV, Inc. ............... December 8, 1997 California/Oregon 5,087
NRTC System No. 0093, a segment of Cable
and Communications Corporation........ December 17, 1997 Montana 3,871
Western Montana Entertainment
Television, Inc. ..................... December 22, 1997 Montana 7,057
South Plains DBS........................ December 23, 1997 Texas 9,130
Lakeland DBS............................ December 24, 1997 Oklahoma 3,816
--------
Total 1997 acquisitions....... $129,725
========
</TABLE>
F-14
<PAGE> 89
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
<TABLE>
<CAPTION>
AGGREGATE
SELLER ACQUISITION DATE STATE CONSIDERATION
------ ------------------ ------------------ -------------
<S> <C> <C> <C>
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
Corporation........................... June 29, 1998 Alabama 11,769
Frontier Corporation.................... July 8, 1998 Wisconsin 734
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 $ 8,628
Thunderbolt Systems, Inc................ January 15, 1999 Missouri 2,573
Siskiyou Ruralvision, Inc............... February 26, 1999 California 4,590
Baraga Telephone Company................ March 3, 1999 Michigan 4,543
E Ritter Communications Holdings,
Inc................................... April 2, 1999 Arkansas 2,678
Yelcot Telephone Company................ April 2, 1999 Arkansas 6,242
Van Buren DBS, Inc...................... April 15, 1999 Iowa 2,899
Kertel Communications, Inc.............. June 24, 1999 California 2,027
DCE Satellite Entertainment, LLC........ June 30, 1999 Wisconsin 3,980
--------
Total 1999 acquisitions....... $ 38,160
========
</TABLE>
The unaudited pro forma information presented below, excluding five
acquisitions that were immaterial individually and in the aggregate, reflects
the Company's acquisitions of Rural DIRECTV Markets consummated during 1997 and
1998 as if each such acquisition had occurred as of the beginning of the period
presented. The Company's acquisitions of Rural DIRECTV Markets during 1999 were
not material and have been excluded from the unaudited pro forma information
presented below. These results are not necessarily indicative of future
operating results or of what would have occurred had the acquisitions been
consummated at those times (dollars in thousands).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
---------- ----------
<S> <C> <C>
Total revenue............................................... $ 39,937 $ 87,857
Net loss before extraordinary charge........................ (26,654) (79,813)
</TABLE>
F-15
<PAGE> 90
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
During 1997, Systems acquired a controlling interest in DCE Satellite
Entertainment, LLC ("DCE"). In June 1999, Systems 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 $2.9 million.
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,
------------------- JUNE 30, ESTIMATED
1997 1998 1999 USEFUL LIFE
-------- -------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
DIRECTV distribution rights............ $121,969 $236,531 $265,167 10-12 years
Customer lists......................... 9,903 17,018 18,603 5 years
Non-compete agreements................. 4,914 7,501 12,341 3 years
-------- -------- --------
136,786 261,050 296,111
Less accumulated amortization.......... (6,890) (27,911) (43,657)
-------- -------- --------
Intangible assets, net............... $129,896 $233,139 $252,454
======== ======== ========
</TABLE>
5. LONG-TERM OBLIGATIONS
Long-term obligations consist of the following (dollars in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
12 3/8% Notes........................................ $ -- $195,000 $195,000
13 1/2% Notes........................................ -- -- 104,989
Bank debt............................................ 60,000 67,000 35,000
Seller notes payable................................. 8,600 15,407 9,824
Other notes payable and obligations under capital
leases............................................. 513 797 673
Minority interest.................................... 2,928 2,420 --
------- -------- --------
Total long-term obligations.......................... 72,041 280,624 345,486
Less current maturities.............................. (2,538) (8,916) (3,314)
------- -------- --------
Long-term obligations, net of current maturities... $69,503 $271,708 $342,172
======= ======== ========
</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, with the first interest payment due
February 1, 1999. The 12 3/8% Notes mature on August 1, 2006. The 12 3/8% Notes
Offering resulted in net proceeds to the Company 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.
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
F-16
<PAGE> 91
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 the Company.
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.
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.
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 the 13 1/2% Notes
Offering, which resulted in net proceeds to Golden Sky DBS of approximately
$95.7 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. Golden Sky DBS contributed to net proceeds of the 13 1/2% Notes
Offering to Systems, of which Systems used $53.0 million to repay existing
revolving credit indebtedness. 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.
The 13 1/2% Notes are unsecured and effectively rank below all of the
liabilities of Golden Sky DBS's direct and indirect subsidiaries. Golden Sky
DBS's ability to pay interest on the notes when interest is due and to redeem
the notes at maturity will depend on whether its direct and indirect
subsidiaries can pay dividends or make other distributions to it under the terms
of such subsidiaries indebtedness and applicable law.
F-17
<PAGE> 92
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The 13 1/2% Notes are redeemable, in whole or in part, at the option of
Golden Sky DBS on or after March 1, 2004, at redemption prices decreasing from
106.75% during the year commencing March 1, 2004 to 103.375% on or after March
1, 2005, plus accrued and unpaid interest, if any, to the date of redemption. In
addition, on or prior to March 1, 2002, Golden Sky DBS may, at its option,
redeem up to 35% of the originally issued aggregate principal amount of 13 1/2%
Notes, at a redemption price equal to 113.5% of the accreted value of the
13 1/2% Notes at the date of redemption solely with the net proceeds of a public
equity offering of Golden Sky DBS yielding gross proceeds of at least $40
million and any subsequent public equity offerings; provided, however, that not
less than 65% of the originally issued aggregate principal amount of 13 1/2%
Notes are outstanding following such redemption.
The indenture governing the 13 1/2% Notes (the "13 1/2% Notes Indenture")
contains restrictive covenants that, among other things, impose limitations on
the ability of Golden Sky DBS and its subsidiaries to incur additional
indebtedness; pay dividends on, redeem or repurchase capital stock; make
investments; issue or sell capital stock of certain subsidiaries; create
specific types of liens; sell assets; engage in transactions with affiliates;
and consolidate, merge or transfer all or substantially all of their assets. In
the event of a change of control, as defined in the 13 1/2% Notes Indenture,
each holder of the 13 1/2% Notes will have the right to require Golden Sky DBS
to purchase all or a portion of such holder's 13 1/2% Notes at a price equal to
101% of the accreted value of the notes, plus accrued and unpaid interest, if
any, to the date of purchase.
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). At
December 31, 1997, the effective rates on these loans ranged from 9% to 11%.
During May 1998, the Company entered into a seven-year, $150.0 million
amended credit facility (the "Credit Facility") with a syndicate of lenders. The
Credit Facility provides for a term loan commitment of $35.0 million and a
revolving loan commitment of $115.0 million. Borrowings under the Credit
Facility bear interest at variable rates (approximately 10% as of December 31,
1998) calculated on a base rate, such as the prime rate or LIBOR, plus an
applicable margin. As of December 31, 1998, aggregate borrowings outstanding
under the Credit Facility totaled $67.0 million, including $35.0 million
borrowed pursuant to the Credit Facility's term loan commitment. 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 (the "Amended Credit
Facility") to permit, among other things, the offering of senior discount notes
by Golden Sky DBS. The Amended 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
Amended Credit Facility reduces by specified amounts over the period from March
31, 2001 through maturity on September 30, 2005. In February 1999, Systems
repaid all outstanding borrowings under the revolving loan commitment. Such
repayment was funded from the contribution by Golden Sky DBS of the net proceeds
of the 13 1/2% Notes Offering to Systems and totaled $53.0 million. As of June
30, 1999, no borrowings were outstanding under the Amended Credit Facility's
revolving loan commitment. As of that same date, outstanding borrowings under
the Amended Credit Facility's term loan commitment totaled $35.0 million. Upon
execution of the Amended Credit Facility, Systems recognized an extraordinary
charge of approximately $2.9 million to write-off unamortized deferred financing
costs associated with the Credit Facility.
The Amended Credit Facility contains a number of significant 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
F-18
<PAGE> 93
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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 and 1998 and June 30, 1999, no
amounts were available for distribution to Holdings.
The Amended Credit Facility also contains a number of financial covenants
that will 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.
For the three months ended March 31, 1999, Systems exceeded the limitation
on subscriber acquisition costs (i.e., sales and marketing expenses) prescribed
by the Amended Credit Facility. Excluding the effects of DIRECTV's national
sales promotions that offered free programming to new subscribers, and higher
incremental subscriber acquisition costs associated with the conversion of
Primestar subscribers to Systems' DIRECTV service, Systems would have been in
compliance with the Amended Credit Facility's limitation on subscriber
acquisition costs. In June 1999, Systems received a waiver from the banks of
this technical violation. Further, the Amended Credit Facility's limitation on
subscriber acquisition costs was increased as part of an amendment that was
executed in June 1999. As of June 30, 1999, the Company was in compliance with
the covenants of the Amended Credit Facility.
Commitment fees are payable on unused amounts available under the Amended
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.
Seller Notes Payable
In connection with certain 1996 acquisitions, the Company issued seller
notes payable totaling $2.5 million and bearing interest at an annual rate of
10%. These notes were repaid during 1997. The Company also issued seller notes
payable totaling $8.6 million in connection with certain 1997 acquisitions and
$10.2 million in connection with certain 1998 acquisitions. As of December 31,
1998, and June 30, 1999, approximately $13.9 million and $9.8 million,
respectively of the outstanding seller notes payable were collateralized by bank
letters of credit. The seller notes payable bear interest at rates ranging from
7% to 10%.
Other Notes Payable
In November 1996, the Company 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
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.
F-19
<PAGE> 94
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Future maturities of amounts outstanding under Systems' long-term
obligations as of December 31, 1998 are summarized as follows (dollars in
thousands, bank debt amounts reflect February 1999 amendment):
<TABLE>
<CAPTION>
12 3/8% SELLER NOTES
NOTES BANK DEBT PAYABLE OTHER TOTAL
-------- --------- ------------ ----- --------
<S> <C> <C> <C> <C> <C>
Year Ending December 31,
1999..................................... $ -- $ -- $ 8,495 $421 $ 8,916
2000..................................... -- -- 1,906 322 2,228
2001..................................... -- -- 1,969 54 2,023
2002..................................... -- 350 2,037 -- 2,387
2003..................................... -- 350 1,000 -- 1,350
Thereafter............................... 195,000 66,300 -- -- 261,300
-------- ------- ------- ---- --------
Total debt....................... $195,000 $67,000 $15,407 $797 $278,204
======== ======= ======= ==== ========
</TABLE>
6. STOCKHOLDER'S EQUITY
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. The options
are exercisable during a period of up to ten years after grant. Stock options
granted under the Stock Incentive Plan 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.
F-20
<PAGE> 95
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
A summary of incentive stock option activity during 1997 and 1998 is as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
-----------------------------------------
1997 1998
------------------- -------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Options outstanding, beginning of period......... -- $ -- 62,525 $1.00
Granted.......................................... 62,525 1.00 18,693 1.00
Exercised........................................ -- -- (24,831) 1.00
Forfeited........................................ -- -- (7,642) 1.00
------ ----- ------- -----
Options outstanding, end of period............... 62,525 $1.00 48,745 $1.00
====== ===== ======= =====
Options exercisable, end of period............... 8,684 $1.00 5,595 $1.00
====== ===== ======= =====
</TABLE>
Accounting for Stock-Based Compensation
The Company 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,
because 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. The Company elected to not adopt FAS No. 123 for expense
recognition purposes.
Pro forma information regarding net income is required by FAS No. 123 and
has been determined as if Systems 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
---------- ----------
<S> <C> <C>
Risk-free interest rate..................................... 6.0% 6.0%
Dividend yield.............................................. 0.0% 0.0%
Volatility factor........................................... 0.0% 0.0%
Expected term of options.................................... 10 years 10 years
</TABLE>
The options granted during the years ended December 31, 1997 and 1998 had
no net value using the preceding assumptions. Therefore, there was no pro forma
effect on Companys' net loss.
8. 401(K) RETIREMENT PLAN
The Company 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. The Company made no
discretionary employer matching contributions to the 401(k) Plan during the
years ended December 31, 1997 and 1998. Administrative expenses associated with
the 401(k) Plan during those same periods were not material.
F-21
<PAGE> 96
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. INCOME TAXES
The components of the (provision for) benefit from income taxes are as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998
--------- ----------
<S> <C> <C>
Current (provision) benefit:
Federal................................................... $ 3,777 $ 16,325
State..................................................... 717 3,097
Increase in valuation allowance........................... (4,494) (19,422)
------- --------
Total current (provision) benefit........................... -- --
Deferred benefit:
Federal................................................... 1,148 3,243
State..................................................... 218 615
Increase in valuation allowance........................... (1,366) (3,858)
------- --------
Total deferred benefit...................................... -- --
------- --------
Total benefit (provision)................................... $ -- $ --
======= ========
</TABLE>
As of December 31, 1998, the Company had net operating loss carryforwards
("NOLs") for federal income tax purposes of approximately $63.4 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 1998, 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 changed 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.
F-22
<PAGE> 97
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The temporary differences that give rise to deferred tax assets and
liabilities as of December 31, 1997 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1997 1998
------- --------
<S> <C> <C>
Current deferred tax assets:
Allowance for doubtful accounts........................... $ 52 $ 111
Amortization of intangible assets......................... 54 54
Accrued expenses.......................................... -- 29
------- --------
Gross current deferred tax assets........................... 106 194
Valuation allowance......................................... (106) (194)
------- --------
Net current deferred tax assets................... -- --
Non-current deferred tax assets:
Depreciation.............................................. 7 45
Amortization of intangible assets......................... 951 4,497
Net operating loss carryforwards.......................... 5,095 24,677
------- --------
Total non-current deferred tax assets............. 6,053 29,219
Non-current deferred tax liabilities:
Amortization of intangible assets......................... (299) (271)
------- --------
Gross non-current deferred tax assets....................... 5,754 28,948
Valuation allowance......................................... (5,754) (28,948)
------- --------
Net non-current deferred tax assets............... -- --
------- --------
Net deferred tax assets........................... $ -- $ --
======= ========
</TABLE>
The actual income tax benefit (provision) for 1997 and 1998 are reconciled
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
--------------- ----------------
TAX RATE TAX RATE
------- ----- -------- -----
<S> <C> <C> <C> <C>
Statutory rate................................... $ 4,725 34.0% $ 21,131 34.0%
State income taxes, net of federal benefit....... 617 4.4 2,450 3.9
Non-deductible amortization of intangible
assets......................................... (291) (2.1) (415) (0.7)
Other............................................ (12) -- (27) --
Increase in valuation allowance.................. (5,039) (36.3) (23,139) (37.2)
------- ----- -------- -----
Income taxes..................................... $ -- --% $ -- --%
======= ===== ======== =====
</TABLE>
F-23
<PAGE> 98
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
10. COMMITMENTS AND CONTINGENCIES
The Company has non-cancelable operating leases for office, warehouse and
storage space that expire at various dates. Future minimum lease payments as of
December 31, 1998 are summarized as follows (dollars in thousands):
<TABLE>
<S> <C>
1999........................................................ $1,522
2000........................................................ 1,186
2001........................................................ 733
2002........................................................ 443
2003........................................................ 121
------
Total............................................. $4,005
======
</TABLE>
In November 1999, certain meteoroid events will occur as the earth's orbit
passes through the particulate trail of Comet 55P (Tempel-Tuttle). These
meteoroid events pose a potential threat to all in-orbit geosynchronous
satellites, including DBS satellites. The Company is unable to determine the
impact, if any, these meteoroid events could have on the DBS satellites used by
Hughes for distribution of DIRECTV programming services. In the event the Hughes
DBS satellites are adversely affected by these meteoroid or other events, the
Company's business and results of operations could be adversely impacted.
11. RELATED PARTY TRANSACTIONS
During 1996, Systems purchased the assets of Cable-Video Management, Inc.
("CVM"), an entity owned by Systems' president, for $44,000. Prior to the
acquisition of CVM's assets, Systems obtained management and other services from
CVM. Aggregate management fees paid to CVM approximated $280,000 during 1996 and
are included in general and administrative expenses in the accompanying
consolidated statements of operations. Also during 1996, Systems reimbursed CVM
for salaries and other miscellaneous expenses aggregating $343,000. In 1997,
Systems paid $66,000 to a company affiliated with Systems' president for
consulting services received by Systems. Additionally, during 1996, 1997, 1998
and the six month period ended June 30, 1999, Systems paid $5,000, $77,000,
$159,000 (including $75,000 paid in connection with a 1998 acquisition) and
$42,000, respectively, to one of its directors for consulting services.
During 1996, the Company's president provided Systems with a short-term
loan in the amount of $381,000. In 1997, the Company 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
were repaid during 1997.
Systems has contracted with an entity owned by its president for air
transportation services. Such services include the lease of an aircraft. This
lease is cancelable with six months notice and requires monthly payments equal
to the greater of $20,000 or an aggregate fixed hourly operating charge. The
fixed hourly operating charge is based on prevailing market prices. The total
cost of such services received by Systems approximated $31,000, $109,000,
$506,000 and $148,000 during 1996, 1997, 1998 and the six month period ended
June 30, 1999, respectively.
F-24
<PAGE> 99
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
12. VALUATION AND QUALIFYING ACCOUNTS
Systems' valuation and qualifying accounts are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
----- ------ --------
<S> <C> <C> <C>
Allowance for doubtful accounts, beginning of period........ $ -- $ 4 $ 138
Charged to costs and expenses............................... 4 417 1,537
Deductions.................................................. -- (283) (1,382)
---- ----- -------
Allowance for doubtful accounts, end of period.............. $ 4 $ 138 $ 293
==== ===== =======
</TABLE>
13. CONSOLIDATING FINANCIAL INFORMATION AND SUBSIDIARY GUARANTORS
Consolidating financial information for Systems, Systems' guarantor
subsidiaries and Systems' non-guarantor subsidiaries is as follows (dollars in
thousands):
Consolidated Balance Sheet -- December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- --------------- ------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................ $ 12,146 $ 1,077 $ 409 $ -- $ 13,632
Subscriber receivables, net.................... 2,841 633 369 -- 3,843
Other receivables.............................. 307 28 -- -- 335
Intercompany receivables....................... 2,570 -- -- (2,570) --
Inventory...................................... 1,997 106 71 -- 2,174
Prepaid expenses and other..................... 127 -- -- -- 127
-------- ------- ------ -------- --------
Total current assets............................. 19,988 1,844 849 (2,570) 20,111
Property and equipment, net...................... 2,759 77 100 -- 2,936
Investment in subsidiaries....................... 26,735 -- -- (26,735) --
Intangible assets, net........................... 96,585 18,302 3,842 11,167 129,896
Deferred financing costs......................... 3,106 -- -- -- 3,106
Other assets..................................... 91 86 10 -- 187
-------- ------- ------ -------- --------
Total assets............................. $149,264 $20,309 $4,801 $(18,138) $156,236
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable......................... $ 8,125 $ 194 $ 152 $ -- $ 8,471
Interest payable............................... 786 -- -- -- 786
Current maturities of long-term obligations.... 2,538 -- -- -- 2,538
Unearned revenue............................... 1,857 511 262 -- 2,630
Accrued payroll and other...................... 1,372 2,655 402 (2,570) 1,859
-------- ------- ------ -------- --------
Total current liabilities........................ 14,678 3,360 816 (2,570) 16,284
Long-term obligations, net of current maturities:
Bank debt...................................... 60,000 -- -- -- 60,000
Seller notes payable........................... 6,200 -- -- -- 6,200
Other notes payable and obligations under
capital leases............................... 331 44 -- -- 375
Minority interest.............................. -- -- -- 2,928 2,928
-------- ------- ------ -------- --------
Total long-term obligations, net of current
maturities..................................... 66,531 44 -- 2,928 69,503
-------- ------- ------ -------- --------
Total liabilities................................ 81,209 3,404 816 358 85,787
Stockholder's Equity (Deficit):
Common Stock................................... -- 6 -- (6) --
Additional paid-in capital..................... 87,400 1,967 -- (1,967) 87,400
Retained earnings (accumulated deficit)........ (19,345) 14,932 3,985 (16,523) (16,951)
-------- ------- ------ -------- --------
Total stockholder's equity (deficit)............. 68,055 16,905 3,985 (18,496) 70,449
-------- ------- ------ -------- --------
Total liabilities and stockholder's
equity (deficit)....................... $149,264 $20,309 $4,801 $(18,138) $156,236
======== ======= ====== ======== ========
</TABLE>
F-25
<PAGE> 100
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING/
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>
Consolidated Statement of Cash Flows -- Year Ended December 31, 1997
<TABLE>
<CAPTION>
CONSOLIDATING/
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 deferred financing costs...... 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)
Other........................................... 320 -- -- -- 320
Purchases of property and equipment............. (992) (6) -- -- (998)
--------- ------ ---- ----- ---------
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>
F-26
<PAGE> 101
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Balance Sheet -- December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING/
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....................... 34,200 -- -- (34,200) --
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............................. $333,373 $28,456 $7,267 $(41,025) $328,071
======== ======= ====== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Trade accounts payable......................... $ 13,482 $ 49 $ 8 $ -- $ 13,539
Interest payable............................... 11,009 -- -- -- 11,009
Current maturities of long-term obligations.... 8,916 -- -- -- 8,916
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)........ (72,272) 18,434 1,221 (29,061) (81,678)
-------- ------- ------ -------- --------
Total stockholder's equity (deficit)............. 25,328 21,297 1,221 (31,924) 15,922
-------- ------- ------ -------- --------
Total liabilities and stockholder's
equity (deficit)....................... $333,373 $28,456 $7,267 $(41,025) $328,071
======== ======= ====== ======== ========
</TABLE>
F-27
<PAGE> 102
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Year Ended December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING/
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 retirement of
debt........................................... (2,577) -- -- -- (2,577)
-------- ------- ------- ------- --------
Net loss................................. $(55,496) $(4,486) $(2,764) $(1,981) $(64,727)
======== ======= ======= ======= ========
</TABLE>
Consolidated Statement of Cash Flows -- Year Ended December 31, 1998
<TABLE>
<CAPTION>
CONSOLIDATING/
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 deferred financing costs...... 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 the Credit Agreement........... 28,000 -- -- -- 28,000
Borrowings under the Credit Facility............ 62,000 -- -- -- 62,000
Principal payments on the Credit Facility....... (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>
F-28
<PAGE> 103
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
CONSOLIDATED BALANCED SHEET -- JUNE 30, 1999
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES GOLDEN SKY DBS ENTRIES CONSOLIDATED
--------- ------------ ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........... $ 14,252 $ 187 $ 310 $ -- $ -- $ 14,749
Restricted cash, current portion.... 23,634 -- -- -- -- 23,634
Subscriber receivables, net......... 7,991 1,304 814 -- -- 10,109
Other receivables................... 1,297 -- 18 -- -- 1,315
Inventory........................... 5,062 1,203 397 -- -- 6,662
Prepaid expenses and other.......... 1,972 55 9 -- -- 2,036
--------- ------- ------- -------- --------- ---------
Total current assets.................. 54,208 2,749 1,548 -- -- 58,505
Restricted cash, net of current
portion............................. 11,647 -- -- -- -- 11,647
Property and equipment, net........... 5,732 299 181 -- -- 6,212
Intercompany receivables.............. 12,991 -- -- -- (12,991) --
Investment in subsidiaries............ -- -- -- 58,459 (58,459) --
Intangible assets, net................ 224,854 23,986 3,614 -- -- 252,454
Deferred financing costs, net......... 8,161 -- -- 4,168 -- 12,329
Other assets.......................... 352 87 -- -- -- 439
--------- ------- ------- -------- --------- ---------
Total assets.................. $ 317,945 $27,121 $ 5,343 $ 62,627 $ (71,450) $ 341,586
========= ======= ======= ======== ========= =========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
Current liabilities:
Trade accounts payable.............. $ 18,408 $ 47 $ 4 $ 315 $ -- $ 18,774
Current maturities of long-term
obligations....................... 3,314 -- -- -- -- 3,314
Unearned revenue.................... 5,756 1,036 498 -- -- 7,290
Interest payable.................... 10,806 -- -- -- -- 10,806
Intercompany payable................ -- 5,661 7,330 -- (12,991) --
Accrued payroll and other........... 1,547 359 -- -- -- 1,906
--------- ------- ------- -------- --------- ---------
Total current liabilities..... 39,831 7,103 7,832 315 (12,991) 42,090
Long-term obligations, net of current
maturities:
12 3/8% Notes....................... 195,000 -- -- -- -- 195,000
13 1/2% Notes....................... -- -- -- 104,989 -- 104,989
Bank debt........................... 35,000 -- -- -- -- 35,000
Seller notes payable................ 6,932 -- -- -- -- 6,932
Other notes payable and obligation
under capital leases.............. 251 -- -- -- -- 251
Minority interest................... -- -- -- -- -- --
--------- ------- ------- -------- --------- ---------
Total long-term obligations, net of
current maturities.................. 237,183 -- -- 104,989 -- 342,172
--------- ------- ------- -------- --------- ---------
Total liabilities............. 277,014 7,103 7,832 105,304 (12,991) 384,262
Stockholders' Equity (Deficit):
Common Stock........................ -- 896 -- -- (896) --
Additional paid-in capital.......... 193,566 1,967 -- 8,968 (106,588) 97,913
Retained earnings (accumulated
deficit).......................... (152,635) 17,155 (2,489) (51,645) 49,025 (140,589)
--------- ------- ------- -------- --------- ---------
Total stockholder's equity
(deficit)................... 40,931 20,018 (2,489) (42,677) (58,459) (42,676)
--------- ------- ------- -------- --------- ---------
Total liabilities and
stockholder's............... $ 317,945 $27,121 $ 5,343 $ 62,627 $ (71,450) $ 341,586
========= ======= ======= ======== ========= =========
</TABLE>
F-29
<PAGE> 104
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Operations -- Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES GOLDEN SKY DBS ADJUSTMENTS CONSOLIDATED
-------- ------------ ------------- -------------- -------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
DBS services......................... $ 46,981 $ 8,349 $4,710 $ -- $-- $ 60,040
Lease and other...................... 380 4 1 -- -- 385
-------- ------- ------ ------- --- --------
Total revenue.......................... 47,361 8,353 4,711 -- -- 60,425
Costs and Expenses:
Cost of DBS services................. 29,921 5,186 2,915 -- -- 38,022
System operations.................... 6,437 1,519 840 -- -- 8,796
Sales and marketing.................. 22,882 1,525 1,100 -- -- 25,507
General and administrative........... 6,596 16 28 -- -- 6,640
Depreciation and amortization........ 15,349 1,450 561 -- -- 17,360
-------- ------- ------ ------- --- --------
Total costs and expenses............... 81,185 9,696 5,444 -- -- 96,325
-------- ------- ------ ------- --- --------
Operating loss......................... (33,824) (1,343) (733) -- -- (35,900)
Non-operating Items:
Interest and investment income....... 1,652 -- -- -- -- 1,652
Interest expense..................... (16,557) (2) -- (5,169) -- (21,728)
-------- ------- ------ ------- --- --------
Total non-operating items.............. (14,905) (2) -- (5,169) -- (20,076)
-------- ------- ------ ------- --- --------
Loss before income taxes............... (48,729) (1,345) (733) (5,169) -- (55,976)
Income taxes........................... -- -- -- -- -- --
-------- ------- ------ ------- --- --------
Loss before extraordinary charge....... (48,729) (1,345) (733) (5,169) -- (55,976)
Extraordinary charge on early
retirement of debt................... (2,935) -- -- -- -- (2,935)
-------- ------- ------ ------- --- --------
Net loss....................... $(51,664) $(1,345) $ (733) $(5,169) $-- $(58,911)
======== ======= ====== ======= === ========
</TABLE>
F-30
<PAGE> 105
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Consolidated Statement of Cash Flows -- Six Months Ended June 30, 1999
<TABLE>
<CAPTION>
CONSOLIDATING/
GUARANTOR NON-GUARANTOR ELIMINATING
SYSTEMS SUBSIDIARIES SUBSIDIARIES GOLDEN SKY DBS ENTRIES CONSOLIDATED
-------- ------------ ------------- -------------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES
Net loss........................ $(51,664) $(1,345) $ (733) $ (5,169) $ -- $(58,911)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and
amortization................ 15,349 1,450 561 -- -- 17,360
Amortization of debt discount,
deferred financing costs and
other....................... 1,008... -- -- 5,169 -- 6,177
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....... 605 (261) (40) -- 304
Other receivables........... 1,063 87 -- -- 1,150
Inventory................... 4,193 (620) (89) -- 3,484
Prepaid expenses and
other..................... (370) (18) (6) -- (394)
Trade accounts payable...... 5,241 (2) (4) -- 5,235
Interest payable............ (203) -- -- -- -- (203)
Accrued payroll and other... 2,532 (245) (1,803) -- -- 484
-------- ------- ------- -------- ---- --------
Net cash used in operating
activities.................... (19,311) (954) (2,114) -- -- (22,379)
CASH FLOWS FROM INVESTING
ACTIVITIES
Acquisitions of rural DIRECTV
markets....................... (35,160) -- -- -- -- (35,160)
Offering proceeds and investment
earnings placed in escrow..... 10,887 -- -- -- -- 10,887
Release of amounts reserved for
contingent reduction of bank
debt.......................... 5,449 -- -- -- -- 5,449
Purchases of property and
equipment..................... (2,115) (8) (20) -- (2,143)
Investment in subsidiary........ 95,651 -- -- (95,651) -- --
Other........................... (30) 18 -- -- -- (12)
-------- ------- ------- -------- ---- --------
Net cash provided by (used in)
investing activities.......... 74,682 10 (20) (95,651) -- (20,979)
CASH FLOWS FROM FINANCING
ACTIVITIES
Proceeds from 13 1/2% Notes..... -- -- -- 100,049 -- 100,049
Borrowings on bank debt......... 21,000 -- -- -- -- 21,000
Principal payments on bank
debt.......................... (53,000) -- -- -- -- (53,000)
Principal payments on notes
payable and obligations under
capital leases................ (8,574) (58) -- -- (8,632)
Increase in deferred financing
costs......................... (1,372) -- -- (4,398) -- (5,770)
-------- ------- ------- -------- ---- --------
Net cash provided by financing
activities.................... (41,946) (58) -- 95,651 -- 53,647
Net increase (decrease) in cash
and cash equivalents.......... 13,425 (1,002) (2,134) -- -- 10,289
Cash and cash equivalents,
beginning of period........... 827 $ 1,189 2,444 -- -- 4,460
-------- ------- ------- -------- ---- --------
Cash and cash equivalents, end
of period..................... $ 14,252 $ 187 $ 310 $ -- $ -- $ 14,749
======== ======= ======= ======== ==== ========
</TABLE>
F-31
<PAGE> 106
GOLDEN SKY DBS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
14. QUARTERLY FINANCIAL DATA (UNAUDITED)
Systems' 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, 1997:
Total revenue......................... $ 1,255 $ 2,248 $ 5,634 $ 8,259
Operating loss........................ (766) (1,966) (3,918) (6,001)
Net loss.............................. (834) (2,024) (5,160) (7,766)
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 June 30, 1999:
Total revenue......................... $29,036 $ 31,389 NA NA
Operating loss........................ (16,734) (19,166) NA NA
Loss before extraordinary charge...... (25,872) (30,104) NA NA
Net loss.............................. (28,807) (30,104) NA NA
</TABLE>
F-32
<PAGE> 107
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
F-33
<PAGE> 108
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Triangle Communication System, Inc.
Havre, Montana
We have audited the accompanying balance sheets of Triangle Communication
System, Inc. as of December 31, 1997, 1996, and 1995, and the related statements
of income, stockholder's equity, and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Triangle Communication
System, Inc. at December 31, 1997, 1996, and 1995, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.
EIDE HELMEKE PLLP
March 6, 1998
Sioux Falls, South Dakota
F-34
<PAGE> 109
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
BALANCE SHEETS
DECEMBER 31, 1997, 1996, AND 1995
ASSETS
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 175,917 $ 356,571 $ 234,152
Accounts receivable....................................... 22,466 7,298 520
Accounts receivable -- affiliate.......................... 9,889 -- --
Contract receivable....................................... 1,370 17,053 8,649
Inventory................................................. 45,193 42,228 74,539
Prepaid expenses.......................................... 192,095 67,611 2,824
---------- ---------- ----------
Total current assets.............................. 446,930 490,761 320,684
---------- ---------- ----------
Property and equipment (net of accumulated depreciation of
$379,281 in 1997; $310,553 in 1996, and $283,058 in
1995).................................................. 152,523 209,260 158,527
---------- ---------- ----------
Intangible assets (net of accumulated amortization of
$105,354 in 1997; $77,360 in 1996; and $49,367 in
1995).................................................. 321,926 349,920 377,913
---------- ---------- ----------
OTHER ASSETS:
Investments in marketable equity securities (Note 2)...... 1,851,588 1,433,695 1,485,128
Other investments (Note 3)................................ 777,982 517,050 186,719
---------- ---------- ----------
Total other assets................................ 2,629,570 1,950,745 1,671,847
---------- ---------- ----------
$3,550,949 $3,000,686 $2,528,971
========== ========== ==========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable.......................................... $ 250,509 $ 135,875 $ 140,152
Accounts payable -- affiliate............................. 11,772 335,021 58,772
Unearned revenue.......................................... 214,848 219,569 17,807
Customer deposits......................................... 3,590 1,048 840
Accrued taxes............................................. 1,607 1,286 1,481
Other current liabilities................................. 1,157 -- --
---------- ---------- ----------
Total current liabilities......................... 483,483 692,799 219,052
---------- ---------- ----------
Deferred income taxes..................................... 656,859 432,702 451,835
---------- ---------- ----------
Total liabilities................................. 1,140,342 1,125,501 670,887
---------- ---------- ----------
SHAREHOLDER'S EQUITY:
Common stock, $100 par value, authorized 53,000 shares;
issued and outstanding; 1997 -- 10,595 shares, 1996 and
1995 -- 8,095 shares................................... 1,059,500 809,500 809,500
Additional paid-in capital................................ 315,000 315,000 315,000
Unrealized gain on equity securities...................... 1,108,891 915,155 947,455
Accumulated deficit....................................... (72,784) (164,470) (213,871)
---------- ---------- ----------
Total stockholder's equity........................ 2,410,607 1,875,185 1,858,084
---------- ---------- ----------
Total liabilities and shareholder's equity........ $3,550,949 $3,000,686 $2,528,971
========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an
integral part of these financial statements.
F-35
<PAGE> 110
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
CATV program revenues.................................. $ 55,695 $ 58,658 $ 60,928
DBS program revenue.................................... 2,255,440 1,312,525 501,767
Cellular revenue....................................... 129,529 62,800 --
Rural TV service revenue............................... 13,493 16,149 18,446
Equipment sales........................................ 170,863 188,802 449,343
Other.................................................. 50,241 52,030 28,384
---------- ---------- ----------
Total revenues................................. 2,675,261 1,690,964 1,058,868
---------- ---------- ----------
COST OF REVENUES:
CATV program costs..................................... 13,924 14,406 14,767
DBS program costs...................................... 1,263,995 785,954 277,497
Cellular program costs................................. 109,592 55,550 --
Rural TV program costs................................. 10,333 12,034 13,250
Equipment costs........................................ 229,404 195,796 459,655
Rebates and coupon costs............................... 469,207 162,154 61,437
---------- ---------- ----------
Total cost of revenues......................... 2,096,455 1,225,894 826,606
---------- ---------- ----------
Gross profit................................... 578,806 465,070 232,262
---------- ---------- ----------
EXPENSES:
Salaries, wages, and commissions....................... 180,134 129,063 81,954
Depreciation and amortization.......................... 96,721 55,489 49,692
Bad debt expense....................................... 12,808 13,262 4,810
Marketing.............................................. 75,111 84,097 103,695
Maintenance and installation........................... 26,709 34,059 19,341
Other selling, general, and administrative expenses.... 106,511 75,955 36,077
---------- ---------- ----------
Total expenses................................. 497,994 391,925 295,569
---------- ---------- ----------
NET INCOME BEFORE NONOPERATING INCOME AND TAXES.......... 80,812 73,145 (63,307)
---------- ---------- ----------
NONOPERATING INCOME (LOSS):
Interest income........................................ 6,470 5,463 1,432
Loss in equity earnings of affiliate................... (31,828) -- --
Gain on sale of cellular stock......................... -- -- 15,501
---------- ---------- ----------
Total nonoperating income (loss)............... (25,358) 5,463 16,933
---------- ---------- ----------
NET INCOME BEFORE TAXES........................ 55,454 78,608 (46,374)
PROVISION FOR (BENEFIT FROM) INCOME TAX (Note 6)......... (36,232) 29,207 (17,231)
---------- ---------- ----------
NET INCOME..................................... $ 91,686 $ 49,401 $ (29,143)
========== ========== ==========
</TABLE>
The accompanying notes to the financial statements are an
integral part of these financial statements.
F-36
<PAGE> 111
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
UNREALIZED
COMMON ADDITIONAL GAIN (LOSS)
STOCK $100 PAID-IN ON SECURITIES ACCUMULATED
PAR VALUE CAPITAL AVAILABLE FOR SALE DEFICIT TOTAL
---------- ---------- ------------------ ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1995........... $ 569,500 $315,000 $ 951,493 $(184,728) $1,651,265
Net income....................... -- -- -- (29,143) (29,143)
Issuance of 2,400 shares of
stock......................... 240,000 -- -- -- 240,000
Change in unrealized gain on
securities
available-for-sale............ -- -- (4,038) -- (4,038)
---------- -------- ---------- --------- ----------
Balance, December 31, 1995......... 809,500 315,000 947,455 (213,971) 1,858,084
Net income....................... -- -- -- 49,401 49,401
Change in unrealized gain on
securities
available-for-sale............ -- -- (32,300) -- (32,300)
---------- -------- ---------- --------- ----------
Balance, December 31, 1996......... 809,500 315,000 915,155 (164,470) 1,875,185
Net income....................... -- -- -- 91,686 91,686
Issuance of 2,500 shares of
stock......................... 250,000 -- -- -- 250,000
Change in unrealized gain on
securities
available-for-sale............ -- -- 193,736 -- 193,736
---------- -------- ---------- --------- ----------
Balance, December 31, 1997......... $1,059,500 $315,000 $1,108,891 $ (72,784) $2,160,607
========== ======== ========== ========= ==========
</TABLE>
The accompanying notes to the financial statements are an
integral part of these financial statements.
F-37
<PAGE> 112
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................................. $ 91,686 $ 49,401 $ (29,143)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities:
Depreciation and amortization........................ 96,721 55,489 49,692
Noncash equity loss in affiliate..................... 31,828 -- --
(Gain) on sale of investments........................ -- -- (15,501)
(Increase) decrease in assets:
Accounts receivable.................................. (25,057) (6,778) 1,119
Contracts receivable................................. 15,683 (8,404) (8,649)
Inventory............................................ (2,965) 32,311 10,476
Other assets......................................... (124,484) (64,787) 13,023
(Decrease) increase in liabilities:
Accounts payable..................................... 114,634 (4,277) 98,387
Accounts payable -- associated company............... (323,249) 276,249 23,039
Unearned revenue..................................... (4,721) 201,762 17,807
Customer deposits.................................... 2,542 208 (855)
Accrued taxes........................................ 321 (195) 1,481
Other current liabilities............................ 1,157 -- --
--------- --------- ---------
Net cash (used in) provided by operating
activities.................................... (125,904) 530,979 160,876
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment..................... (11,990) (78,229) (94,052)
Proceeds from the sale of investments................... -- -- 15,552
Deposit on PCS license.................................. -- (211,616) --
(Increase) in other investments......................... (292,760) (118,715) (182,643)
--------- --------- ---------
Net cash (used in) investing activities......... (304,750) (408,560) (261,143)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock................................ 250,000 -- 240,000
--------- --------- ---------
Net cash provided by financing activities....... 250,000 -- 240,000
--------- --------- ---------
NET CHANGE IN CASH AND CASH EQUIVALENTS................... (180,654) 122,419 139,733
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD............ 356,571 234,152 94,419
--------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................. $ 175,917 $ 356,571 $ 234,152
========= ========= =========
</TABLE>
The accompanying notes to the financial statements are an integral part of these
financial statements.
F-38
<PAGE> 113
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996, AND 1995
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Triangle Communication System, Inc. is a rural telecommunications provider,
whose purpose is to engage in the business of transmitting television impulses,
and installing and maintaining television equipment.
Triangle Communication System, Inc. is a wholly owned subsidiary of
Triangle Telephone Cooperative Association, Inc. which was incorporated under
Montana state statute in 1980.
The company has four areas, of primary interest which include cable
television operations, rural television programming service for large satellite
dish owners, and a Direct Broadcast Satellite (DBS) franchise, which allows the
company to receive a commission from all DBS programming sold to rural customers
located throughout their franchise area. The company also receives commissions
for the sales and service of cellular phones for Commnet Cellular.
Property and Equipment -- These assets are stated at cost. The cost of
additions to plant includes contracted work, direct labor and materials, and
allocable overheads. When units of property are retired, sold, or otherwise
disposed of in the ordinary of business, their average book cost less net
salvage is charged to accumulated depreciation. Repairs and the replacement and
renewal of items determined to be of less than units of property are charged to
maintenance.
Depreciation and Amortization -- Depreciation and amortization is computed
using the straight-line method based upon the estimated useful lives of the
various classes of property. Such provisions as a percentage of the average
balance of plant in service were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
CATV plant.................................................. 6.2% 6.2% 6.2%
Franchise................................................... 6.6% 6.6% 6.6%
</TABLE>
Investment Securities -- The company's investment securities are classified
as "available-for-sale." Accordingly, unrealized gains and losses and the
related deferred income tax effects are excluded for earnings and reported as a
separate component of stockholders' equity. Realized gains or losses are
computed based on specific identification of the securities sold.
All other investments are stated at cost.
Cash and Cash Equivalents -- For purposes of reporting cash flows, the
company considers all cash deposits, with maturities of less than three months,
to be cash and cash equivalents.
Inventories -- Inventories are stated at the lower of cost or market by
using the weighted average as cost.
Income Taxes -- The company generally provides for income taxes resulting
from timing differences between amounts reported for financial accounting and
income tax purposes. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are received or settled.
Deferred taxes are also recognized for operating losses that are available to
offset future taxable income.
Accounting Estimates -- The preparation of the financial statements in
conformity with generally accepted accounting principals requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
F-39
<PAGE> 114
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- INVESTMENT IN MARKETABLE EQUITY SECURITY
The cost and fair values of this marketable equity security
available-for-sale at December 31, 1997, 1996, and 1995, were as follows:
<TABLE>
<CAPTION>
UNREALIZED 1997 1996 1995
COST GAIN FAIR VALUE FAIR VALUE FAIR VALUE
------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Commnet Cellular, Inc. --
stock.................... $85,838 $1,765,750 $1,851,588 $1,433,695 $1,485,128
======= ========== ========== ========== ==========
</TABLE>
The market value of the above security increased by $417,893 in 1997. As of
December 31, 1997, the unrealized gain of $1,765,750 is included with
stockholders equity net of deferred income taxes of $656,859.
NOTE 3 -- OTHER INVESTMENTS
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Patronage capital credits from affiliated
companies.......................................... $ 58,071 $ 38,025 $ 9,310
Memberships and deposits............................. 1,450 1,450 1,450
Cellular operating companies -- capital stock (at
cost).............................................. 959 959 959
Montana Advanced Information Network, Inc. -- capital
stock (at cost).................................... 365,000 15,000 150,000
Vision Net, Inc. -- capital stock (at cost).......... 250,000 250,000 25,000
Montana PCS Alliance LLC (at equity)................. 51,695 211,616 --
Skyland Technologies, Inc. (at equity)............... 50,807 -- --
-------- -------- --------
$777,982 $517,050 $186,719
======== ======== ========
</TABLE>
NOTE 4 -- FRANCHISE
The company purchased the Direct Broadcast System (DBS) franchise rights to
provide exclusive franchise rights for distribution of DirecTV satellite
television programming. The franchise rights give the company exclusive right to
the distribution of DirecTV service within the contract area, which includes
thirteen counties in Montana. The company began amortizing the franchise rights
in 1994 when programming service began.
<TABLE>
<CAPTION>
FRANCHISE ACCUMULATED
COST AMORTIZATION NET 1997 NET 1996 NET 1995
--------- ------------ -------- -------- --------
<S> <C> <C> <C> <C> <C>
Direct Broadcast System (DBS)...... $427,280 $105,354 $321,926 $349,920 $377,913
======== ======== ======== ======== ========
</TABLE>
F-40
<PAGE> 115
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Support equipment........................................... $ 25,419 $ 24,089 $ 23,090
Cable television equipment.................................. 175,844 166,885 166,885
Towers, antennas, and dishes................................ 33,917 33,917 33,917
CATV -- cable............................................... 127,051 125,349 125,349
Cellular equipment.......................................... 169,573 169,573 --
-------- -------- --------
In service................................................ 531,804 519,813 349,241
Under construction........................................ -- -- 92,344
-------- -------- --------
531,804 519,813 441,585
Less accumulated depreciation............................... 379,281 310,553 283,058
-------- -------- --------
$152,523 $209,260 $158,527
======== ======== ========
</TABLE>
NOTE 6 -- INCOME TAXES
The company files a consolidated tax return with its parent company,
Triangle Telephone Cooperative Association, Inc.; income tax expense is computed
by individual company using the separate return method. Details of income tax
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Provision for (benefit from) income taxes:
Federal tax at statutory rates............................ $ 27,599 $ 25,439 $(15,025)
State tax at statutory rates.............................. 4,870 3,768 (2,206)
Benefit of net operating loss carryforward used on
consolidated return with parent........................ (68,701) -- --
-------- -------- --------
Total (benefit from) provision for income taxes... $(36,232) $ 29,207 $(17,231)
======== ======== ========
The components of deferred tax (assets) and liabilities are
as follows:
Deferred tax liabilities:
Unrealized gain on securities available-for-sale....... $656,859 $501,403 $520,536
Deferred tax (assets):
Net operating loss carryforwards....................... -- (68,701) (68,701)
-------- -------- --------
Net deferred tax liability............................. $656,859 $432,702 $451,835
======== ======== ========
</TABLE>
NOTE 7 -- RELATED PARTY TRANSACTIONS
Triangle Telephone Cooperative Association, Inc. owns 100% of the issued
and outstanding shares of Triangle Communication System, Inc. At December 31,
1997, the company had a receivable of $9,889 from its parent, Triangle Telephone
Cooperative Association, Inc. At December 31, 1996 and 1995, the company had an
outstanding liability with Triangle Telephone Cooperative Association, Inc. of
$320,086 and $47,081, respectively.
Triangle Communication System, Inc. has an operation and maintenance
agreement with Hill County Electric Cooperative, Inc. The agreement provides
that the operations of the two companies are, insofar as is possible, to be
carried on jointly, and that Hill County Electric Cooperative, Inc. is to
operate and manage Triangle Communication System, Inc. Costs incurred in the
performance of services under the agreement that relate to joint operations are
to be apportioned and Triangle Communication System, Inc. is to reimburse Hill
County Electric Cooperative, Inc. at amounts specified in the agreement. Total
payments to Hill County
F-41
<PAGE> 116
TRIANGLE COMMUNICATION SYSTEM, INC.
HAVRE, MONTANA
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electric Cooperative, Inc. under this agreement in 1997 were approximately
$157,000. At December 31, 1997, 1996, and 1995, Triangle Communication System,
Inc. owed Hill County Electric Cooperative, Inc. $11,772, $14,935, and $11,691,
respectively.
The maintenance agreement may be terminated by either party by giving a six
month notice in writing to the other party.
NOTE 8 -- SUBSEQUENT EVENT
In January 1998 the company entered into an agreement to sell its Direct
Broadcast System (DBS) franchise rights to Golden Sky Systems, Inc. The sale for
approximately $9.3 million will yield a net gain of approximately $8.6 million
to the company in 1998.
F-42
<PAGE> 117
DIRECT BROADCAST SATELLITE
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-43
<PAGE> 118
INDEPENDENT AUDITORS' REPORT
The Board of Directors
We have audited the accompanying balance sheets of Direct Broadcast
Satellite (the Segment), a segment of Nemont Communications Inc. (NCI), as of
December 31, 1997, and the related statements of operations, segment equity, and
cash flows for the year then ended. The financial statements are the
responsibility of the Segment's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Broadcast Satellite
at December 31, 1997, and the results of its operations and its cash flows for
the year ended December 31, 1997, in conformity with generally accepted
accounting principles.
CHMS, P.C.
Certified Public Accountants
Sidney, Montana
July 31, 1998
F-44
<PAGE> 119
DIRECT BROADCAST SATELLITE
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Current assets
Cash...................................................... $ 925
Accounts receivable -- Note B............................. 72,645
Inventory -- Note A....................................... 18,248
--------
Total current assets.............................. 91,818
Intangible equipment -- net of accumulated
amortization -- Note D.................................... 239,780
Other assets
Notes receivable -- Note E................................ 24,193
NRTC patronage capital -- Note C.......................... 47,249
--------
Total other assets................................ 71,442
--------
Total assets...................................... $403,040
========
LIABILITIES & SEGMENT EQUITY
Current liabilities
Accounts payable.......................................... $253,035
Unearned revenue.......................................... 95,171
Notes payable -- Note F................................... 23,225
--------
Total current liabilities......................... 371,431
Segment equity.............................................. 31,609
--------
Total liabilities and segment equity.............. $403,040
========
</TABLE>
See accompanying notes to financial statements.
F-45
<PAGE> 120
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
----------
<S> <C>
REVENUES
Programming revenues...................................... $1,636,584
Equipment sales........................................... 146,111
Other revenues............................................ 3,921
----------
TOTAL REVENUES.................................... 1,786,616
COST OF REVENUES
Programming costs......................................... 1,214,952
Equipment costs........................................... 170,007
Rebate expense............................................ 12,546
Commission expense........................................ 525,636
----------
TOTAL COST OF REVENUES............................ 1,923,141
----------
GROSS PROFIT.............................................. (136,525)
EXPENSES
Bad debt expense.......................................... 7,866
Amortization.............................................. 38,365
Marketing................................................. 34,365
Office expense -- general................................. 52,192
Salaries.................................................. 114,950
----------
TOTAL EXPENSES.................................... 247,738
----------
LOSS FROM OPERATIONS...................................... (384,263)
OTHER INCOME
Interest income........................................... 4,673
Dividend income........................................... 21,446
----------
26,119
----------
NET LOSS.......................................... $ (358,144)
==========
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 121
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
STATEMENT OF SEGMENT EQUITY
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
---------
<S> <C>
BALANCE AT JANUARY 1, 1997.................................. $ 280,411
Company contribution to Segment........................... 109,342
Net Loss.................................................. (358,144)
---------
BALANCE AT DECEMBER 31, 1997................................ $ 31,609
=========
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 122
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
1997
---------
<S> <C>
CASH FLOWS FROM OPERATION ACTIVITIES
Net loss.................................................. $(358,144)
Adjustments to reconcile net income to net cash provided
by operating activities:
Amortization........................................... 38,365
Patronage capital allocation........................... (15,012)
Changes in operating assets and liabilities:
(increase) decrease in accounts receivable............. (47,408)
(increase) decrease in inventories..................... 2,336
Increase (decrease) in accounts payable................ 58,513
Increase (decrease) in unearned revenue................ 95,171
---------
NET CASH USED BY OPERATING ACTIVITIES............. (226,179)
CASH FLOWS FROM INVESTING ACTIVITIES
Collections on notes receivable........................... 38,402
CASH FLOWS FROM FINANCING ACTIVITIES
Cash investments by Nemont Communications, Inc............ 109,342
Payments on notes payable................................. (4,205)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES......... 105,137
---------
NET DECREASE IN CASH.............................. (82,640)
CASH AT BEGINNING OF YEAR................................... 83,565
---------
CASH AT END OF YEAR....................................... $ 925
=========
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 123
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Direct Broadcast Satellite (the Segment) is a segment of Nemont
Communications, Inc. (the Company). The Company is a wholly-owned subsidiary of
Nemont Telephone Cooperative (the Parent). The Segment was formed in 1994 for
the purpose of acquiring, owning and operating direct broadcast satellite (DBS)
television systems. The Company is an affiliated associate member of the
National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted
with Hughes Communication Galaxy, Inc. (Hughes), to provide exclusive marketing
rights for distribution of DirecTV satellite television programming in the
United States. The marketing rights give the owner exclusive rights to
distribution of DirecTV service within the contract area. In 1994, Hughes
launched the satellites that provide programming for DirecTV. At December 31,
1997, the Company had the operating rights for portions of four counties in
northeastern Montana.
The financial statements presented represent the financial position and
operations of the Segment, which operates as part of the Company. Accordingly,
the Company funds the operations of the Segment. Were the Segment an independent
entity, these funds would have to be obtained from other sources.
Presentation
The Segment is not a separate subsidiary of the Company nor has it been
operated as a separate entity. The financial statements presented herein have
been derived from the records of the Company and have been prepared to present
the Segment's financial position, results of operations and cash flows on a
stand-alone basis. Accordingly, the financial statements include certain costs
and expenses which have been allocated to the Segment by the Company. Such
allocated expenses may or may not be indicative of what such expenses would have
been had the Segment been operated as a separate entity.
Revenue Recognition
Programming revenue is recognized in the month the service is provided to
the subscriber. Unearned revenue represents subscriber advances billings and is
deferred until the service is provided. Equipment sales are recognized as
revenue when the equipment is delivered to the customer. The Company
periodically offers rebates and coupons to customers, principally in connection
with prepayment plans, rebates are recorded when they are utilized.
Inventory
Inventory is stated at the lower of average cost or market and consists
entirely of satellite receivers, dishes and accessories.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Segment to make a
number of estimates and assumptions which affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from these
estimates.
Fair value of financial instruments
Financial instruments consisting of receivables and accounts payable are
carried at cost, which approximates fair value, as a result of the short-term
nature of the instruments.
F-49
<PAGE> 124
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Intangible
The cost of acquiring the rights to provide DirecTV satellite services are
capitalized as intangible assets and are being amortized on a straight-line
basis over ten years, which is the expected useful life of the revenue stream of
those services. Intangible assets also include a one-time membership fee paid to
the NRTC, which is also being amortized on a straight-line basis over ten years.
Long-lived Asset
Long-lived assets and certain identifiable intangibles held and used by the
Company are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount of fair value less costs to sell.
Income Taxes
The Segment's operating results are consolidated with the Parent's
operations for tax filing purposes. No income tax benefit has been provided in
the accompanying statements of operations as such benefits are not recoverable
from the Parent. There are no significant differences between book and tax basis
which would result in deferred tax assets or liabilities.
NOTE B -- ACCOUNTS RECEIVABLE
Accounts receivable consist of amounts due from subscribers for monthly
programming fees.
NOTE C -- NRTC PATRONAGE CAPITAL
The NRTC declares and the Segment receives a yearly patronage dividend
based on the NRTC's profitability. Of the total dividend, 20% is received in
cash and 80% is distributed in the form of NRTC patronage capital certificates,
which will be redeemed in cash at a future date at the discretion of the NRTC.
The Segment has recorded an asset for the noncash portion of the patronage
dividend.
NOTE D -- INTANGIBLE ASSETS
<TABLE>
<S> <C>
NRTC -- DBS Franchise Fee................................... $ 383,648
less accumulated amortization............................. (143,868)
---------
$ 239,780
=========
</TABLE>
NOTE E -- NOTES RECEIVABLE
Notes receivable consist of amounts due from customers financing the
purchase of DBS dishes. Interest is being charged at a rate of 12% per year, due
in monthly installments over a term of 36 months.
F-50
<PAGE> 125
DIRECT BROADCAST SATELLITE.
(A SEGMENT OF NEMONT COMMUNICATIONS INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE F -- NOTES PAYABLE
Non-interest bearing notes with associated companies are as follows:
<TABLE>
<S> <C>
Northern Electric Cooperative............................... $ 6,000
Yellowstone Valley Electric Cooperative................... 7,200
Sheridan Electric Cooperative............................. 10,025
-------
$23,225
=======
</TABLE>
NOTE G -- SUBSEQUENT EVENTS
During October 31, 1997, the Parent contracted to sell substantially all of
the Segment's assets and liabilities to Golden Sky Systems, Inc. The acquisition
closed in January 1998.
F-51
<PAGE> 126
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY, TEXAS
FINANCIAL STATEMENTS AND ADDITIONAL INFORMATION
AS OF DECEMBER 31, 1997
WITH INDEPENDENT AUDITOR'S REPORT
F-52
<PAGE> 127
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
of DBS Segment of Cumby Cellular, Inc.
We have audited the accompanying balance sheet of DBS Segment of Cumby
Cellular, Inc. (the Segment) as of December 31, 1997 and the related statement
of income, segment equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Segment's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of DBS Segment of Cumby
Cellular, Inc. as of December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.
As discussed in Note 9 to the financial statements, on June 10, 1998, the
Segment signed a letter of intent to transfer its DirecTV Distribution Business
and to sell substantially all of its assets and operations to a third party.
Curtis Blakely & Co., P.C.
Longview, Texas
February 3, 1998
(except for Notes 8 and 9
as to which the date is July 23, 1998)
F-53
<PAGE> 128
DBS SEGMENT OF CUMBY CELLULAR, INC.
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
Current Assets:
Cash and cash equivalents................................. $ 171,165
Accounts receivable -- customers.......................... 98,168
Notes receivable.......................................... 19,567
Accounts receivable -- affiliates......................... 71,775
Inventory................................................. 26,995
Prepaid income taxes...................................... 7,709
----------
Total Current Assets.............................. 395,379
----------
Property, Plant and Equipment:
Plant in service.......................................... 16,250
Less: Accumulated depreciation............................ 6,318
----------
Net Property, Plant and Equipment................. 9,932
----------
DBS Franchise............................................... 583,377
----------
NRTC and RTFC equity certificates........................... 139,149
----------
Total Assets...................................... $1,127,837
==========
LIABILITIES AND SEGMENT EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 165,779
Accounts payable.......................................... 134,176
Accounts payable -- affiliate............................. 12,476
Deferred revenue.......................................... 81,995
Accrued Interest payable.................................. 4,529
----------
Total Current Liabilities......................... 398,955
----------
Long-Term Debt:
Note payable -- RTFC...................................... 648,157
----------
Segment Equity.............................................. 80,725
----------
Total Liabilities and Segment Equity.............. $1,127,837
==========
</TABLE>
(The accompanying notes are an integral part of these financial statements.)
F-54
<PAGE> 129
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENT OF INCOME AND SEGMENT EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Operating Revenues:
Programming revenue....................................... $ 984,956
Equipment sales revenue................................... 83,679
Installation revenue...................................... 9,021
Commission revenue........................................ 11,128
DSS repairs revenue....................................... 3,493
Miscellaneous revenue..................................... 8,566
Less: Uncollectible revenue............................... (26,700)
----------
Total Operating Revenues.......................... 1,074,143
----------
Operating Expenses:
Programming cost.......................................... 681,395
Cost of sales............................................. 146,508
Salaries.................................................. 100,616
Amortization and depreciation............................. 94,886
Telephone................................................. 25,646
Advertising............................................... 12,702
Other general and administrative.......................... 12,408
Commissions............................................... 10,157
Accounting................................................ 9,234
DSS Installation costs.................................... 3,989
Training.................................................. 2,008
Taxes -- other than income taxes.......................... 151
----------
Total Operating Expenses.......................... 1,099,700
----------
Operating Loss.............................................. (25,557)
Interest and Dividend Income................................ 17,815
----------
Loss Before Interest and Taxes.................... (7,742)
Income Tax Benefit.......................................... 29,613
Interest Expense............................................ (60,500)
----------
Net Loss.......................................... (38,629)
Segment Equity, Beginning................................... 119,354
----------
Segment Equity, Ending...................................... $ 80,725
==========
</TABLE>
(The accompanying notes are an integral part of these financial statements.)
F-55
<PAGE> 130
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $(38,629)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 94,886
Noncash patronage dividends............................ (6,092)
Change in assets and liabilities:
Decrease in accounts receivable........................ 23,127
Decrease in inventory held for sale.................... 10,513
Increase in accounts payable and accruals.............. 72,765
--------
Total Adjustments................................. 195,199
--------
Net Cash Provided by Operating Activities................... 156,570
--------
Cash Flows from Investing Activities:
Capital expenditures...................................... (5,133)
Proceeds from sale of certificates of deposit............. 100,881
--------
Net Cash Provided by Investing Activities................... 95,748
--------
Cash Flows from Financing Activities:
Payments of long-term debt................................ (140,971)
Advances to affiliate..................................... (39,412)
--------
Net Cash Used In Financing Activities....................... (180,383)
--------
Net Increase in Cash and Cash Equivalents................... 71,935
Cash and Cash Equivalents at Beginning of Year.............. 99,230
--------
Cash and Cash Equivalents at End of Year.................... $171,165
========
</TABLE>
(The accompanying notes are an integral part of these financial statements.)
F-56
<PAGE> 131
DBS SEGMENT OF CUMBY CELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
DBS Segment Cellular, Inc. (the Segment) is a Segment of Cumby Cellular,
Inc. (CCI). CCI is a wholly owned subsidiary of Cumby Telephone Cooperative,
Inc. (the Company). The Segment was formed for the purpose of operating direct
broadcast satellite (DBS) television systems purchased by the Company. The
Company is an affiliated member of the National Rural Telecommunications
Cooperative (NRTC). The NRTC has contracted with Hughes Communications Galaxy,
Inc. (Hughes) to provide exclusive marketing rights for distribution of DirecTV
satellite television programming in the United States. The marketing rights give
the owner exclusive rights to distribution of DirecTV service within the
contract area. Hughes controls the satellites that provide programming for
DirecTV. At December 31, 1997, the Company had the operating rights for two
counties in northeast Texas.
The Segment is not a separate subsidiary of the Company nor has it been
operated as a separate entity. The financial statements presented herein have
been derived from the records of CCI and have been prepared to present the
Segment's financial position, results of operations, and cash flows on a
stand-alone basis. Accordingly, the financial statements include certain costs
and expenses which have been allocated to the Segment by the Company. Such
allocated expenses may or may not be indicative of what such expenses would have
been had the Segment been operated as a separate entity.
Revenue Recognition
Revenues are earned for monthly direct broadcast satellite services which
are billed to subscribers in advance. Subscribers may elect to prepay their
service charges for one or more months. Revenue is recognized in the month the
service is provided to the subscriber. Subscriber advance billings represent
unearned revenues and are deferred until the service is provided. Equipment
sales are recognized as revenue when the equipment is delivered to the customer.
Inventory
Inventory is stated at the lower of average cost or market and consists of
satellite receivers, dishes, and accessories.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Segment to make a
number of estimates and assumptions which affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from these
estimates.
Intangible Assets
The cost of acquiring the rights to provide DirecTV satellite services are
capitalized as intangible assets and are being amortized on a straight-line
basis over ten years, which is the expected useful life of the revenue stream of
those services.
Income Taxes
The Segment's operating results are consolidated with CCI's for tax filing
purposes. An income tax benefit has been provided in the accompanying statement
of operations for taxes recoverable from CCI. There are no significant
differences between book and tax basis which would result in deferred tax assets
or liabilities.
F-57
<PAGE> 132
DBS SEGMENT OF CUMBY CELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- ACCOUNTS RECEIVABLE:
Accounts receivable consists of amounts due from subscribers for monthly
programming fees and for sales of satellite television equipment which have been
delivered but not paid for. Accounts receivable as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Accounts receivable:
Programming............................................... $88,196
Equipment sales........................................... 9,972
-------
$98,168
=======
</TABLE>
NOTE 3 -- NOTES RECEIVABLE:
The Segment provides customers the option of purchasing DBS equipment on
credit. These payment plans have terms of four years and carry interest at 15
percent. Upon default by a customer, the Segment repossesses the equipment,
transfers the resale value of the equipment to inventory, and records an
allowance for the balance of the unpaid note receivable.
NOTE 4 -- RTFC AND NRTC EQUITY CERTIFICATES:
The NRTC declares and the Segment receives a yearly patronage dividend
based on the NRTC's profitability. Of the total dividend, 20 percent is received
in cash and 80 percent is distributed in the form of NRTC patronage capital
certificates, which will be redeemed in cash at a future date at the discretion
of the NRTC. The Segment purchased an RTFC equity certificate as part of the
RTFC loan requirements. This certificate is refunded by RTFC so that it
maintains a balance equal to 10 percent of the loan balance. RTFC pays patronage
dividends to the Segment.
NOTE 5 -- DBS FRANCHISE:
The DBS franchise is being amortized over its 10 year life and is stated
net of accumulated amortization of $337,745.
NOTE 6 -- LONG-TERM DEBT.
The Segment is indebted to the Rural Telephone Finance Corporation as
follows:
<TABLE>
<S> <C>
Note payable with Interest at RTFC variable rate (6.9% at
December 31, 1997) due in quarterly installments through
August 2002............................................... $813,936
Current portion............................................. 165,779
--------
Long-Term Debt.................................... $648,157
========
</TABLE>
NOTE 7 -- ADDITIONAL CASH FLOW INFORMATION:
<TABLE>
<S> <C>
Cash paid during 1997 for:
Interest.................................................. $61,284
Income tax................................................ --
</TABLE>
NOTE 8 -- RELATED PARTY TRANSACTIONS:
The Segment is party to various intercompany transactions with the Company.
The Company purchased the DBS franchise rights under which the Segment provides
DBS programming for $921,122 prior to the
F-58
<PAGE> 133
DBS SEGMENT OF CUMBY CELLULAR, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
commencement of DBS operations in mid-1993. The franchise rights and debt were
transferred by the Company to the Segment in 1993.
The Company also allocates certain salary, benefits and overhead costs
associated with operating the Segment to the Segment's expense accounts. These
allocated costs totaled $100,810 for 1997. The Segment provided an income tax
benefit to the Company of $29,613 in 1997. All other expenses are paid directly
from the cash accounts of the Segment.
Intercompany assets and liabilities included in the Segment's December 31,
1997 balance sheet are as follows:
<TABLE>
<S> <C>
Accounts receivable......................................... $71,775
Accounts payable............................................ 12,476
</TABLE>
NOTE 9 -- SUBSEQUENT EVENTS:
On June 10, 1998, the Company signed a letter of intent to sell
substantially all of the Segment's assets to a third party.
F-59
<PAGE> 134
DBS SEGMENT OF CUMBY CELLULAR, INC.
CUMBY TEXAS
FINANCIAL STATEMENTS
AS OF JUNE 30, 1998 AND 1997
(UNAUDITED)
F-60
<PAGE> 135
DBS SEGMENT OF CUMBY CELLULAR, INC.
BALANCE SHEETS
JUNE 30
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current Assets:
Cash and cash equivalents................................. $ 235,311 $ 181,141
Certificates of deposit................................... -- 102,497
Accounts receivable....................................... 107,110 140,159
Accounts receivable -- affiliates......................... 71,775 71,775
Inventory................................................. 21,115 30,085
Prepaid income taxes...................................... -- 22,144
---------- ----------
Total Current Assets.............................. 435,311 547,801
---------- ----------
Property, Plant and Equipment:
Plant in service.......................................... 16,250 15,515
Less: Accumulated depreciation............................ 7,943 4,730
---------- ----------
Net Property, Plant and Equipment................. 8,307 10,785
---------- ----------
DBS Franchise............................................... 537,321 629,433
NRTC and RTFC equity certificates........................... 115,007 133,058
---------- ----------
Total Assets...................................... $1,095,946 $1,321,077
========== ==========
LIABILITIES AND SEGMENT EQUITY
Current Liabilities:
Current maturities of long-term debt...................... $ 169,280 $ 145,175
Accounts payable.......................................... 81,372 123,285
Accounts payable -- affiliate............................. 49,290 95,250
Deferred revenue.......................................... 76,114 127,140
Accrued interest payable.................................. 3,985 4,767
Prepaid income taxes...................................... 16,802 --
---------- ----------
Total Current Liabilities......................... 396,843 495,617
---------- ----------
Long-Term Debt:
Note payable -- RTFC...................................... 570,798 740,078
Segment Equity.............................................. 128,305 85,382
---------- ----------
Total Liabilities and Segment Equity.............. $1,095,946 $1,321,077
========== ==========
</TABLE>
(See Selected Information.)
F-61
<PAGE> 136
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENTS OF INCOME AND SEGMENT EQUITY
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Operating Revenues:
Programming revenue....................................... $674,793 $450,912
Equipment sales revenue................................... 40,422 30,322
Installation revenue...................................... 5,730 4,117
Commission revenue........................................ 436 417
DSS repairs revenue....................................... 384 870
Miscellaneous revenue..................................... 6,522 4,601
Less: Uncollectible revenue............................... (11,572) (12,744)
-------- --------
Total Operating Revenues.......................... 716,715 478,495
-------- --------
Operating Expenses:
Programming cost.......................................... 438,833 331,988
Cost of sales............................................. 66,552 46,036
Amortization and depreciation............................. 47,681 47,242
Salaries.................................................. 36,834 43,597
Commissions............................................... 8,990 3,979
Telephone................................................. 5,675 14,180
Advertising............................................... 5,134 7,098
Accounting................................................ 4,952 4,581
Other general and administrative.......................... 3,801 6,349
DSS Installation costs.................................... 2,651 --
Training.................................................. -- 1,529
-------- --------
Total Operating Expenses.......................... 621,103 506,579
-------- --------
Operating Income (Loss)..................................... 95,612 (28,084)
Interest and Dividend Income................................ 3,297 7,336
-------- --------
Income (Loss) Before Interest and Taxes..................... 98,909 (20,748)
Income Tax (Expense) Benefit................................ (24,511) 17,500
Interest Expense............................................ (26,817) (30,723)
-------- --------
Net Income (Loss)........................................... 47,581 (33,971)
Segment Equity, Beginning................................... 80,724 119,353
-------- --------
Segment Equity, Ending...................................... $128,305 $ 85,382
======== ========
</TABLE>
(See Selected Information.)
F-62
<PAGE> 137
DBS SEGMENT OF CUMBY CELLULAR, INC.
STATEMENTS OF INCOME AND SEGMENT EQUITY
FOR THE SIX MONTHS ENDED JUNE 30
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Cash Flows from Operating Activities:
Net income (loss)......................................... $ 47,581 $(33,971)
Adjustments to reconcile net income (loss) to net cash
provided by Operating activities:
Depreciation and amortization.......................... 47,681 47,242
Change in assets and liabilities:
Decrease in accounts receivable........................ 10,625 693
Decrease in inventory held for sale.................... 5,880 7,422
Decrease (increase) in prepaids........................ 7,709 (17,500)
(Decrease) increase in accounts payable and accruals... (42,427) 110,323
-------- --------
Total Adjustments................................. 29,468 148,180
-------- --------
Net Cash Provided by Operating Activities......... 77,049 114,209
-------- --------
Cash Flows from Investing Activities:
Capital expenditures...................................... -- (4,390)
Purchase of certificate of deposit........................ -- (1,616)
-------- --------
Net Cash Used in Investing Activities............. -- (6,006)
-------- --------
Cash Flows from Financial Activities:
Payments of long-tern debt................................ (73,859) (69,654)
Receipt of patronage refund............................... 24,142 --
Advances from affiliate................................... 36,814 43,362
-------- --------
Net Cash Used in Financing Activities............. (12,903) (26,292)
-------- --------
Net Increase in Cash and Cash Equivalents................... 64,146 81,911
Beginning Cash and Cash Equivalents......................... 171,165 99,230
-------- --------
Ending Cash and Cash Equivalents............................ $235,311 $181,141
======== ========
</TABLE>
(See Selected Information.)
F-63
<PAGE> 138
DBS SEGMENT OF CUMBY CELLULAR, INC.
SELECTED INFORMATION
JUNE 30, 1998
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Nature of Operations
DBS Segment of Cumby Cellular, Inc. (the Segment) is a Segment of Cumby
Cellular, Inc. (CCI). CCI is a wholly owned subsidiary of Cumby Telephone
Cooperative, Inc. (the Company). The Segment was formed for the purpose of
operating direct broadcast satellite (DBS) television systems purchased by the
Company. The Company is an affiliated associate member of the National Rural
Telecommunications Cooperation (NRTC). The NRTC has contracted with Hughes
Communications Galaxy, Inc. (Hughes) to provide exclusive marketing rights for
distribution of DirecTV satellite television programming in the United States.
The marketing rights give the owner exclusive rights to distribution of DirecTV
service within the contract area. Hughes controls the satellites that provide
programming for DirecTV. At June 30, 1998, the Company had the operating rights
for two counties In northeast Texas.
The Segment is not a separate subsidiary of the Company nor has it been
operated as a separate entity. The financial statements presented herein have
been derived from the records of CCI and have been prepared to present the
Segment's financial position, results of operations, and cash flows on a
stand-alone basis. Accordingly, the financial statements Include certain costs
and expenses which have been allocated to the Segment by the Company. Such
allocated expenses may or may not be indicative of what such expenses would have
been had the Segment been operated as a separate entity.
Revenue Recognition
Revenues are earned for monthly direct broadcast satellite services which
are billed to subscribers in advance. Subscribers may elect to prepay their
service charges for one or more months. Revenue is recognized in the month the
service is provided to the subscriber. Subscriber advance billings represent
unearned revenues and are deferred until the service is provided. Equipment
sales are recognized as revenue when the equipment is delivered to the customer.
Inventory
Inventory is stated at the lower of average cost or market and consists of
satellite receivers, dishes, and accessories.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management of the Segment to make a
number of estimates and assumptions which affect the reported amounts of assets,
liabilities, revenues and expenses. Actual results could differ from these
estimates.
Intangible Assets
The cost of acquiring the rights to provide DirecTV satellite services are
capitalized as intangible assets and are being amortized on a straight-line
basis over ten years, which is the expected useful life of the revenue stream of
those services.
F-64
<PAGE> 139
DBS SEGMENT OF CUMBY CELLULAR, INC.
SELECTED INFORMATION -- (CONTINUED)
Income Taxes
The Segment's operating results are consolidated with CCI's for tax filing
purposes. An income tax (expense) benefit has been provided in the accompanying
statement of operations for taxes (owed) recoverable (to) from CCI. There are no
significant differences between book and tax basis which would result in
deferred tax assets or liabilities.
NOTE 2 -- SUBSEQUENT EVENTS:
On June 10, 1998, the Company signed a letter of intent to sell
substantially all of the Segment's assets to a third party.
F-65
<PAGE> 140
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
PINE GROVE, CALIFORNIA
INDEPENDENT AUDITOR'S REPORT
AND
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-66
<PAGE> 141
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Volcano Vision, Inc.
We have audited the accompanying balance sheet of Direct Broadcast
Satellite (the Segment), a segment of Volcano Vision, Inc., as of December 31,
1997, and the related statements of income, segment deficit, and cash flows for
the year then ended. These financial statements are the responsibility of the
Segment's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Direct Broadcast Satellite
as of December 31, 1997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
MOSS ADAMS LLP
Stockton, California
July 24, 1998
F-67
<PAGE> 142
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
BALANCE SHEET
DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Accounts receivable, less allowance for doubtful accounts
of $35,000............................................. $ 342,119
Inventory................................................. 173,962
Prepaid expenses.......................................... 10,888
----------
Total current assets.............................. 526,969
----------
NONCURRENT ASSETS
Property and equipment (net of accumulated depreciation of
$184,117).............................................. 347,631
Intangible assets (net of accumulated amortization of
$521,760).............................................. 968,983
NRTC patronage capital certificates....................... 91,230
----------
Net noncurrent assets............................. 1,407,844
----------
$1,934,813
==========
LIABILITIES AND SEGMENT DEFICIT
CURRENT LIABILITIES
Account payable -- trade.................................. $ 216,913
Payable to affiliates..................................... 430,350
Unearned revenue.......................................... 330,643
Customer deposits......................................... 1,705
----------
Total current liabilities......................... 979,611
----------
NOTE PAYABLE TO AFFILIATE................................... 1,490,743
----------
SEGMENT DEFICIT............................................. (535,541)
----------
$1,934,813
==========
</TABLE>
See accompanying notes.
F-68
<PAGE> 143
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
REVENUES
Programming............................................... $3,650,208
Equipment and installation sales.......................... 274,240
Lease and other........................................... 112,915
----------
Total revenues.................................... 4,037,363
----------
COST OF REVENUES
Programming costs......................................... 2,544,709
Equipment and installation costs.......................... 355,139
Other costs............................................... 17,211
----------
Total cost of revenues.................................... 2,917,059
----------
Gross profit...................................... 1,120,304
----------
EXPENSES
Salaries, wages, and commissions.......................... 304,585
Selling, general, and administrative...................... 334,032
Depreciation and amortization............................. 229,015
Marketing................................................. 74,723
Bad debt expense.......................................... 62,472
----------
Total expenses.................................... 1,004,827
----------
OPERATING INCOME............................................ 115,477
----------
OTHER INCOME AND (EXPENSES)
Patronage dividends....................................... 43,052
Interest expense.......................................... (104,594)
----------
Total other income and (expenses)................. (61,542)
----------
NET INCOME........................................ $ 53,935
==========
</TABLE>
See accompanying notes.
F-69
<PAGE> 144
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF SEGMENT DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
SEGMENT
DEFICIT
---------
<S> <C>
BALANCE AT DECEMBER 31, 1996................................ $(268,556)
Segment contribution to the Company....................... (320,920)
Net income................................................ 53,935
---------
BALANCE AT DECEMBER 31, 1997................................ $(535,541)
=========
</TABLE>
See accompanying notes.
F-70
<PAGE> 145
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 53,935
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 229,015
Provision for doubtful accounts........................ 35,000
Patronage dividend -- noncash.......................... (30,137)
Increase (Decrease) in cash due to changes in assets
and liabilities:
Accounts receivable.................................. 10,189
Inventory............................................ 38,572
Prepaid expenses..................................... (3,803)
Accounts payable -- trade............................ (99,506)
Unearned revenue..................................... (196,887)
Customer deposits.................................... 1,625
---------
Net cash from operating activities................ 38,003
---------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in payable to affiliates........................... 221,646
Purchase of property and equipment........................ (14,139)
Sale of property and equipment............................ 75,410
---------
Net cash from investing activities................ 282,917
---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash contribution to Volcano Vision, Inc.................. (320,920)
---------
Net cash from financing activities................ (320,920)
---------
NET CHANGE IN CASH.......................................... --
CASH, beginning of year..................................... --
---------
CASH, end of year........................................... $ --
=========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest............................ $ --
=========
</TABLE>
See accompanying notes.
F-71
<PAGE> 146
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Operations -- Direct Broadcast Satellite (the Segment) is a
segment of Volcano Vision, Inc. (the Company). The Company is a wholly-owned
subsidiary of Volcano Communications Company (the Parent). The Segment was
formed in August 1994 for the purpose of operating direct broadcast satellite
(DBS) television systems. The Company is an affiliated associate member of the
National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted
with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing
rights for distribution of DirecTV satellite television programming in the
United States. The marketing rights give the owner exclusive rights to
distribution of DirecTV service within the contract area. In 1994, Hughes
launched the satellites that provide programming for DirecTV. At December 31,
1997, the Company had the operating rights for five counties in California and
four counties in Nevada.
The financial statements presented represent the financial position and
operations of the Segment, which operates as part of the Company.
Presentation -- The Segment is not a separate subsidiary of the Company,
nor has it been operated as a separate entity. The financial statements
presented herein have been derived from the records of the Company and have been
prepared to present the Segment's financial position, results of operations, and
cash flows on a stand-alone basis. Accordingly, the financial statements include
certain costs and expenses that have been allocated to the Segment by the
Company. Such allocated expenses may or may not be indicative of what such
expenses would have been had the Segment been operated as a separate entity.
Revenue Recognition -- Programming revenue is recognized in the month the
service is provided to the subscriber. Unearned revenues represent subscriber
advance billing and are deferred until the service is provided. Equipment and
installation sales and related costs are recognized when the equipment is
delivered to the customer.
Inventory -- Inventory is stated at the lower of average cost or market and
consists of satellite receivers, dishes, and accessories.
Accounts Receivable -- Accounts receivable consist primarily of amounts due
from subscribers for monthly programming and equipment lease billings.
Customer Billing and Digital Satellite TV (DSTV) Services -- The National
Rural Telecommunications Cooperative (NRTC), under contractual arrangements with
the Company, performs the billing and national marketing functions for the DSTV
service provided to customers. The sales revenue and the customer receivables
for the DSTV services, as reflected in the financial statements, are recorded
from the monthly billing reports provided by NRTC.
Intangible Assets -- The cost of acquiring the rights to provide DirecTV
satellite services are capitalized as intangible assets and are being amortized
on a straight-line basis over ten years, which is the expected useful life of
the satellites providing DBS services.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments -- As a result of their short-term
nature, financial instruments consisting of receivables and accounts payable are
carried at cost, which approximates fair value.
Long-lived Assets -- Long-lived assets and certain identifiable intangibles
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount
F-72
<PAGE> 147
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of an asset may not be recoverable. Recoverability of assets is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by that asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets. Assets to be disposed
of are reported at the lower of the carrying amount or fair value, less costs to
sell.
Property and Equipment -- Property and equipment is recorded at cost and is
depreciated over the estimated useful lives using the straight-line method.
Estimated useful lives range from 5 to 32 years.
Income taxes -- The Segment's operating results are included in the
Company's operations and consolidated with the Parent's return for tax filing
purposes. The Segment is not directly subject to income taxes, as it is operated
as a segment of the Company. The Company did not allocate tax expense to the
Segment and, accordingly, no provision for income taxes has been made.
NOTE 2 -- LEASING ARRANGEMENT FOR SUBSCRIBER EQUIPMENT
In addition to selling satellite television equipment, the Segment also
leases the equipment to customers at fixed monthly rental charges. These leases
are month-to-month without a minimum lease term in which the customer may return
the equipment at any time.
These leases qualify as operating leases and, accordingly, the leased units
are either purchased direct or transferred from the Segment's inventory of
existing units at average cost and included in property and equipment at cost.
Leased units are depreciated on a straight-line basis over a five-year period.
Rental income is recognized in the month earned.
The carrying amount of leased equipment included in property and equipment
at December 31, 1997, is as follows:
<TABLE>
<CAPTION>
1997
---------
<S> <C>
Cost........................................................ $ 295,364
Accumulated depreciation.................................... (137,805)
---------
$ 157,559
=========
</TABLE>
Lease income under the above arrangements is recognized when billed to the
customer, and totaled $76,202 in 1997.
NOTE 3 -- NRTC PATRONAGE DIVIDENDS
The NRTC declares and the Segment receives a yearly patronage dividend
based on the NRTC's profitability. Of the total dividend, 20% is received in
cash, and 80% is distributed in the form of NRTC patronage capital certificates,
which will be redeemed in cash at a future date at the discretion of the NRTC.
The Segment has recorded an asset and dividend income for the noncash portion of
the patronage dividend.
F-73
<PAGE> 148
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- RELATED-PARTY TRANSACTIONS
The Segment is party to various intercompany transactions with the Parent
and one of its subsidiaries, The Volcano Telephone Company, for payroll-related
charges and administrative expenses. Accordingly, the financial statements
include the following intercompany liabilities at December 31, 1997:
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Accounts payable............................................ $ 117,294
Accrued interest............................................ 313,056
Long-term debt.............................................. 1,490,743
----------
$1,921,093
==========
</TABLE>
Long-term debt includes $1,490,743 due to the Parent for the purchase of
DBS franchise rights in 1994. This debt carries a fixed interest rate of 7%.
NOTE 5 -- SUBSEQUENT EVENTS
On July 10, 1998, the Company entered into an agreement to sell its
franchise rights and related DBS assets and liabilities to Golden Sky Systems,
Inc. The acquisition is expected to close no later than February 27, 1999.
F-74
<PAGE> 149
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
PINE GROVE, CALIFORNIA
FINANCIAL STATEMENTS
AS OF SEPTEMBER 30, 1998 AND FOR THE
NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
F-75
<PAGE> 150
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
BALANCE SHEET
SEPTEMBER 30, 1998
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1998
----------
<S> <C>
CURRENT ASSETS
Accounts receivable, less allowance for doubtful accounts
of $35,000............................................. $ 604,239
Inventory................................................. 152,512
Prepaid expenses.......................................... 2,753
----------
Total current assets.............................. 759,504
----------
NONCURRENT ASSETS
Property and equipment (net of accumulated depreciation of
$244,348).............................................. 288,667
Intangible assets (net of accumulated amortization of
$633,566).............................................. 857,177
NRTC patronage capital certificates....................... 119,323
----------
Net noncurrent assets............................. 1,265,167
----------
$2,024,671
==========
LIABILITIES AND SEGMENT DEFICIT
CURRENT LIABILITIES
Account payable -- trade.................................. $ 549,284
Payable to affiliates..................................... 613,226
Unearned revenue.......................................... 289,612
Customer deposits......................................... 7,319
----------
Total current liabilities......................... 1,459,441
----------
NOTE PAYABLE TO AFFILIATE................................... 1,490,743
----------
SEGMENT DEFICIT............................................. (925,513)
----------
$2,024,671
==========
</TABLE>
See accompanying notes.
F-76
<PAGE> 151
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
Programming............................................... $3,789,373 $2,578,499
Equipment and installation sales.......................... 172,680 130,389
Lease and other........................................... 56,615 69,123
---------- ----------
Total revenues.................................... 4,018,668 2,778,011
---------- ----------
COST OF REVENUES
Programming costs......................................... 2,568,911 1,766,200
Equipment and installation costs.......................... 212,297 193,389
Other costs............................................... 1,863 10,436
---------- ----------
Total cost of revenues............................ 2,783,071 1,970,025
---------- ----------
Gross profit...................................... 1,235,597 807,986
---------- ----------
EXPENSES
Salaries, wages, and commissions.......................... 256,199 190,388
Selling, general and administrative....................... 235,308 182,873
Depreciation and amortization............................. 172,037 178,373
Marketing................................................. 27,744 57,239
Bad debt expense.......................................... -- 19,894
---------- ----------
Total expenses.................................... 691,288 628,767
---------- ----------
OPERATING INCOME............................................ 544,309 179,219
---------- ----------
OTHER INCOME AND (EXPENSES)
Patronage dividends....................................... 40,134 43,052
Interest expense.......................................... (77,944) (78,478)
---------- ----------
Total other income and (expenses)................. (37,810) (35,426)
---------- ----------
NET INCOME........................................ $ 506,499 $ 143,793
========== ==========
</TABLE>
See accompanying notes.
F-77
<PAGE> 152
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
BALANCE BEGINNING........................................... $(535,541) $(269,359)
Segment contribution to the Company....................... (896,471) (447,773)
Net income................................................ 506,499 143,793
--------- ---------
BALANCE ENDING.............................................. $(925,513) $(573,339)
========= =========
</TABLE>
See accompanying notes.
F-78
<PAGE> 153
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 506,499 $ 143,793
Adjustments to reconcile net income to net cash from
operating activities:
Depreciation and amortization.......................... 172,037 178,373
Patronage dividend -- noncash.......................... (28,093) (30,137)
Increase (Decrease) in cash due to changes in assets
and liabilities:
Accounts receivable.................................. (262,120) 51,595
Inventory............................................ 21,450 8,295
Prepaid expenses..................................... 8,135 7,085
Accounts payable -- trade............................ 332,371 85,462
Unearned revenue..................................... (41,031) (126,862)
Customer deposits.................................... 5,614 1,280
--------- ---------
Net cash from operating activities................ 714,862 318,884
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Change in payable to affiliates........................... 182,876 77,461
Purchase of property and equipment........................ (1,267) (13,549)
Sale of property and equipment............................ -- 64,977
--------- ---------
Net cash from investing activities................ 181,609 128,889
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash contribution to Volcano Vision, Inc.................. (896,471) (447,773)
--------- ---------
Net cash from financing activities................ (896,471) (447,773)
--------- ---------
NET CHANGE IN CASH.......................................... -- --
CASH, beginning of year..................................... -- --
--------- ---------
CASH, end of year........................................... $ -- $ --
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.................................... $ -- $ --
========= =========
</TABLE>
See accompanying notes.
F-79
<PAGE> 154
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
NOTE 1 -- BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for interim financial information.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, the accompanying financial statements reflect all
adjustments (consisting of normal recurring adjustments) that are necessary for
a fair presentation of the changes in financial position, results of operations,
and cash flows for the interim periods reported.
The results of operations for the nine months ended September 30, 1998 and
1997, are not necessarily indicative of the results to be expected for the full
year.
NOTE 2 -- DESCRIPTION OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Description of Operations -- Direct Broadcast Satellite (the Segment) is a
segment of Volcano Vision, Inc. (the Company). The Company is a wholly-owned
subsidiary of Volcano Communications Company (the Parent). The Segment was
formed in August 1994 for the purpose of operating direct broadcast satellite
(DBS) television systems. The Company is an affiliated associate member of the
National Rural Telecommunications Cooperative (NRTC). The NRTC has contracted
with Hughes Communications Galaxy, Inc. (Hughes), to provide exclusive marketing
rights for distribution of Direct satellite television programming in the United
States. The marketing rights give the owner exclusive rights to distribution of
DirecTV service within the contract area. In 1994, Hughes launched the
satellites that provide programming for DirecTV. At December 31, 1997, the
Company had the operating rights for five counties in California and four
counties in Nevada.
The financial statements presented represent the financial position and
operations of the Segment, which operates as part of the Company.
Presentation -- The Segment is not a separate subsidiary of the Company,
nor has it been of operated as a separate entity. The financial statements
presented herein have been derived from the records of the Company and have been
prepared to present the Segment's financial position, results of operations, and
cash flows on a stand-alone basis. Accordingly, the financial statements include
certain cost and expenses that have been allocated to the Segment by the
Company. Such allocated expenses may or may not be indicative of what such
expenses would have been had the Segment been operated as a separate entity.
Revenue Recognition -- Programming revenue is recognized in the month the
service is provided to the subscriber. Unearned revenues represent subscriber
advance billing and are deferred until the service is provided. Equipment and
installation sales and related costs are recognized when the equipment is
delivered to the customer.
Inventory -- Inventory is stated at the lower of average cost or market and
consists of satellite receivers, dishes, and accessories.
Accounts Receivable -- Accounts receivable consist primarily of amounts due
from subscribers for monthly programming and equipment lease billings.
Customer Billing and Digital Satellite TV (DSTV) Services -- The National
Rural Telecommunications Cooperative (NRTC), under contractual arrangements with
the Company, performs the billing and national marketing functions for the DSTV
services provided to customers. The sales revenue and the customer receivables
for the DSTV services, as reflected in the financial statements, are recorded
from the monthly billing reports provided by NRTC.
F-80
<PAGE> 155
DIRECT BROADCAST SATELLITE
(A SEGMENT OF VOLCANO VISION, INC.)
NOTES TO UNAUDITED FINANCIAL STATEMENTS -- (CONTINUED)
Intangible Assets -- The cost of acquiring the rights to provide DirecTV
satellite services are capitalized as intangible assets and are being amortized
on a straight-line basis over ten years, which is the expected useful life of
the satellites providing DBS services.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, as well as the reported amounts of revenues and expenses during the
period. Actual results could differ from those estimates.
Fair Value of Financial Instruments -- As a result of their short-term
nature, financial instruments consisting of receivables and accounts payable are
carried at cost, which approximates fair value.
Long-lived Assets -- Long-lived assets and certain identifiable intangibles
held and used by the Company are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may not
be recoverable. Recoverability of assets is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
that asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceed the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
Property and Equipment -- Property and equipment is recorded at cost and is
depreciated over the estimated useful lives using the straight-line method.
Estimated useful lives range from 5 to 32 years.
Income taxes -- The Segment's operating results are included in the
Company's operations and consolidated with the Parent's return for tax filing
purposes. The Segment it is not directly subject to income taxes, as it is
operated as a segment of the Company. The Company did not allocate tax expense
to the Segment and, accordingly, no provision for income taxes has been made.
NOTE 3 -- SUBSEQUENT EVENTS
On July 10, 1998, the Company entered into an agreement to sell its
franchise rights and related DBS assets and liabilities to Golden Sky Systems,
The acquisition is expected to close no later than February 27, 1999.
F-81
<PAGE> 156
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
DECEMBER 31, 1997
F-82
<PAGE> 157
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Western Montana DBS, Inc.
dba Rocky Mountain DBS:
We have audited the accompanying balance sheet of Western Montana DBS, Inc.
dba Rocky Mountain DBS as of December 31, 1997, and the related statements of
income, retained earnings and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Western Montana DBS, Inc.
dba Rocky Mountain DBS as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
LOUCKS & GLASSLEY, PLLP
June 19, 1998
Great Falls, Montana
F-83
<PAGE> 158
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEET
AS OF DECEMBER 31, 1997
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS
Cash and Equivalents (Note 4)............................. $ 198,909
Trade Receivables, net of allowance for doubtful accounts
of $6,000 (Note 3)..................................... 194,202
Inventories............................................... 22,442
Prepaid Expenses.......................................... 1,559
Due from Golden Sky Systems, Inc. (Note 2)................ 2,585,000
----------
Total Current Assets.............................. 3,002,112
----------
FURNITURE AND EQUIPMENT
Furniture and Equipment................................... 79,817
Accumulated Depreciation.................................. (28,751)
----------
Net Furniture and Equipment....................... 51,066
----------
INTANGIBLE ASSETS
Franchise Costs........................................... 1,046,171
Accumulated Amortization.................................. (383,606)
----------
662,565
OTHER ASSETS
NRTC Patronage Capital (Note 5)........................... 128,275
----------
128,275
----------
$3,844,018
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade Payables............................................ $ 184,672
Unearned Revenues......................................... 250,854
Accrued Salaries and Other................................ 111,808
----------
Total Current Liabilities......................... 547,334
----------
STOCKHOLDERS' EQUITY
Common Stock, No Par Value, Authorized 50,000 Shares,
10,463 Shares Issued and Outstanding................... 1,124,739
Retained Earnings......................................... 2,171,945
----------
Total Stockholders' Equity........................ 3,296,684
----------
$3,844,018
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-84
<PAGE> 159
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Revenues
DSS programming revenues.................................. $3,943,940
DSS equipment sales....................................... 113,153
Other DSS sales........................................... 34,894
----------
4,091,987
Cost of revenues
Programming costs......................................... 2,242,450
DSS equipment costs....................................... 113,153
Other DSS cost of revenues................................ 13,970
Rebates................................................... 308,699
----------
2,678,272
----------
Gross profit...................................... 1,413,715
----------
Selling, general & administrative expenses
Salaries, wages and commissions........................... 449,121
Amortization and depreciation............................. 121,013
Bad debt expense.......................................... 28,024
Marketing and advertising................................. 181,469
Other selling, general and administrative................. 168,028
----------
947,655
----------
Operating income.................................. 466,060
----------
Other income (expenses)
Patronage income (Note 5)................................. 36,545
Interest income........................................... 255,889
Interest expense.......................................... (218)
Gain on sale of Colorado franchise territories (Note 2)... 4,654,996
----------
4,947,212
----------
Net income........................................ $5,413,272
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-85
<PAGE> 160
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENT OF RETAINED EARNINGS
AS OF DECEMBER 31, 1997
<TABLE>
<S> <C>
Balance, Beginning of Year.................................. $ (484,136)
Net Income (Loss)......................................... 5,413,272
Dividends and Distributions............................... (2,757,191)
-----------
Balance, End of Year........................................ $ 2,171,945
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE> 161
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C>
Cash Flows from Operating Activities
Net income................................................ $ 5,413,272
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization.......................... 121,013
Gain on Sale of Colorado Franchise Territories......... (4,654,996)
(Increase) decrease in:
Trade Accounts Receivable............................ 83,627
Inventories.......................................... (10,026)
Prepaids............................................. (139)
NRTC Patronage Capital............................... (36,545)
Accrued Interest -- Golden Sky Systems............... (235,000)
Increase (decrease) in:
Trade Accounts Payable............................... (171,159)
Accrued Expenses..................................... 86,535
Unearned Revenues.................................... (297,489)
-----------
Net Cash Provided by Operating Activities......... 299,093
-----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Property, Plant and Equipment................. (44,931)
Proceeds from Sale of Franchise Territories............... 2,450,336
-----------
Net Cash Provided by Investing Activities......... 2,405,405
-----------
CASH FLOWS FROM FINANCING ACTIVITIES
Distributions to Stockholders............................. (2,757,191)
-----------
Net Cash Used by Financing Activities............. (2,757,191)
Net Decrease in Cash........................................ (52,693)
Cash, Beginning of Year..................................... 251,602
-----------
Cash, End of Year........................................... $ 198,909
===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for interest.................... $ 218
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 162
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Western Montana DBS, Inc., dba Rocky Mountain DBS (the Company) was formed
in June 1993 for the purpose of acquiring and operating direct broadcast
satellite television operating rights. The Company is an affiliated associate
member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has
contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide
exclusive marketing rights for distribution of DirecTV satellite television
programming in the United States. The marketing rights give the owner exclusive
rights to distribution of DirecTV service within the contract area. In 1994,
Hughes launched the satellites that provide programming for DirecTV. At December
31, 1997, the Company had the operating rights for five counties in Montana and
three counties in Idaho. The operating rights for three counties in Colorado
were sold in 1997 (Note 2).
Revenue Recognition
Revenues are earned for monthly direct broadcast satellite services which
are billed to subscribers in advance. Subscribers may elect to prepay their
service charges for one or more months. Revenue is recognized in the month the
service is provided to the subscriber. Subscriber advance billings represent
unearned revenues and are deferred until the service is provided. Coupons issued
by NRTC may be used, with some restrictions, to pay a portion of a customer's
account receivable. No provision is made for the subsequent use of these
coupons.
Inventories
Inventories are stated at the lower of average cost or market and consist
of receivers, satellite dishes, and satellite TV accessories.
Use of Estimates
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Fair Value of Financial Instruments
Financial instruments consisting of receivables and accounts payable are
carried at cost, which approximates fair value, as a result of the short-term
nature of the instruments.
Intangible Assets
The cost of acquiring the rights to provide DirecTV satellite services are
capitalized as intangible assets and are being amortized on a straight-line
basis over ten years, which is the expected useful life of the revenue stream of
those services.
F-88
<PAGE> 163
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
Effective January 1, 1995, the Company elected to be taxed as a Subchapter
S Corporation. As such, any income tax is payable by the shareholders and not
the Company, therefore there is no income tax expense recorded.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with and original maturity of three
months or less to be cash equivalents. There were no cash equivalents at
December 31, 1997.
Major Suppliers/Economic Dependency
The Company's sole supplier is the NRTC. In addition, NRTC provides all
computer services relative to customer service, accounts receivable billing, and
the determination of unearned revenue.
Property, Plant and Equipment
Property, plant and equipment consists principally of office equipment,
computer equipment and a vehicle. The assets are being depreciated over five to
seven years using accelerated depreciation methods. Depreciation expense for the
year ended December 31, 1997 is $9,475.
Marketing and Advertising
Advertising costs are charged to expense as incurred. The Company often
subsidizes the cost of equipment for new subscribers by providing such equipment
at a sales price below the Company's cost. The Company records the cost of the
equipment up to the amount of the sales price to the subscriber. Any excess cost
over sales price is recorded in sales and marketing expense.
NOTE 2 -- GAIN ON SALE OF COLORADO FRANCHISE TERRITORIES
In May of 1997, the Company contracted to sell its Colorado subscribers to
Golden Sky Systems, Inc. for $4,700,000. The Company estimates these customers
comprise some 21% of the customer base and account for some 31% of total
subscriber revenues ($402,000 from January 1, 1997, to May 1, 1997). Golden Sky
purchased the accounts receivable for the Colorado subscribers as well as
assuming the unearned revenue liability for those subscribers. Since the
unearned revenues exceeded the accounts receivable, there was an effective
increase in purchase price over the amount paid in cash. The Company had no
other assets related to the Colorado operations.
NOTE 3 -- ACCOUNTS RECEIVABLE
Trade receivables consist of amounts due from subscribers for monthly
programming fees. These unsecured receivables arise solely from customers in the
franchise territories listed in Note 1.
NOTE 4 -- CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at various banks. Cash accounts at the
banks are insured by the FDIC for up to $100,000. Amounts in excess of the
insured limits were approximately $342,012 at December 31, 1997.
F-89
<PAGE> 164
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- NRTC PATRONAGE CAPITAL
The Company is a non-voting affiliate of NRTC and receives annual patronage
capital credits which are recorded as income. These cumulative capital credits
are not marketable and the value is dependent on the future financial position
of NRTC.
NOTE 6 -- COMMITMENTS AND CONTINGENCIES
The Company occupies its offices on a month to month to month rental
arrangement. Rent expense was $9,923. A shareholder has sued the Company,
claiming a finders fee on the sale of the Colorado franchise territories to
Golden Sky Systems, Inc. Management is vigorously contesting this action both as
to liability and damages. No provision has been made in the financial statement
for this claim.
NOTE 7 -- SUBSEQUENT EVENT
The Company has signed a letter of intent to be acquired by Golden Sky
Systems, Inc. Company shareholders will receive both cash and shares in Golden
Sky Holdings, Inc. in this transaction.
F-90
<PAGE> 165
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
FINANCIAL STATEMENTS
SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
F-91
<PAGE> 166
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
BALANCE SHEETS
AS OF SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Current Assets
Cash and Equivalents...................................... $ 4,521 $ 871,182
Trade Receivables, net of allowance for doubtful accounts
of $6,000
in 1998................................................ 226,549 163,191
Inventories............................................... 17,288 21,449
Due from Golden Sky Systems, Inc.......................... -- 2,496,875
---------- ----------
Total Current Assets.............................. 248,358 3,552,697
Furniture and Equipment
Furniture and Equipment................................... 82,431 40,174
Accumulated Depreciation.................................. (43,670) (23,505)
---------- ----------
Net Furniture and Equipment....................... 38,761 16,669
---------- ----------
Intangible Assets
Franchise Costs........................................... 1,046,171 1,046,171
Accumulated Amortization.................................. (462,069) (345,515)
---------- ----------
584,102 700,656
---------- ----------
Other Assets
Prepaid Expenses.......................................... -- 546
NRTC Patronage Capital.................................... 128,275 91,730
---------- ----------
128,275 92,276
---------- ----------
$ 999,496 $4,362,298
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Trade Payables............................................ $ 227,831 $ 272,362
Unearned Revenues......................................... 198,818 397,781
Accrued Salaries and Other................................ 2,832 8,972
---------- ----------
Total Current Liabilities......................... 429,481 679,115
---------- ----------
Stockholders' Equity
Common Stock, No Par Value, Authorized 50,000 Shares,
10,463 Shares Issued and Outstanding................... 1,124,739 1,124,739
Retained Earnings (Deficit)............................... (554,724) 2,558,444
---------- ----------
Total Stockholders' Equity........................ 570,015 3,683,183
---------- ----------
$ 999,496 $4,362,298
========== ==========
</TABLE>
See Selected Information.
F-92
<PAGE> 167
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
INCOME STATEMENTS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
REVENUES
DSS Programming Revenues.................................. $3,168,112 $2,820,182
DSS Equipment Sales....................................... 110,314 78,494
Other DSS Sales........................................... 25,876 19,008
---------- ----------
3,304,302 2,917,684
---------- ----------
COST OF REVENUES
Programming Costs......................................... 1,775,655 1,187,346
DSS Equipment Costs....................................... 99,426 78,494
Other DSS Cost of Revenues................................ 18,812 11,861
Rebates................................................... -- 357,379
---------- ----------
1,893,893 1,635,080
---------- ----------
Gross Profit...................................... 1,410,409 1,282,604
---------- ----------
SELLING, GENERAL & ADMINISTRATIVE EXPENSES
Salaries, Wages and Commissions........................... 289,736 206,105
Amortization and Depreciation............................. 93,381 89,613
Bad Debt Expense.......................................... 21,146 27,140
Marketing and Advertising................................. 72,118 75,627
Other General and Administrative.......................... 156,785 102,656
---------- ----------
633,166 501,141
---------- ----------
Operating Income.................................. 777,243 781,463
---------- ----------
OTHER INCOME (EXPENSE)
Interest Income........................................... 159,122 163,541
Interest Expense.......................................... (1,458) (228)
Gain on Sale of Colorado Franchise Territories............ -- 4,654,996
---------- ----------
157,664 4,818,309
---------- ----------
NET INCOME.................................................. $ 934,907 $5,599,772
========== ==========
</TABLE>
See Selected Information.
F-93
<PAGE> 168
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF RETAINED EARNINGS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Balance, Beginning of Period................................ $ 2,171,945 $ (484,136)
Net Income................................................ 934,907 5,599,772
Dividends and Distributions............................... (3,661,576) (2,557,192)
----------- -----------
Balance, End of Period...................................... $ (554,724) $ 2,558,444
=========== ===========
</TABLE>
See Selected Information.
F-94
<PAGE> 169
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
1998 1997
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income................................................ $ 934,907 $ 5,599,772
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation and Amortization.......................... 93,381 89,613
Gain on Sale of Colorado Franchise Territories......... -- (4,654,996)
(Increase) decrease in:
Trade Accounts Receivable............................ (32,347) 114,638
Inventories.......................................... 5,154 (4,872)
Prepaids............................................. 1,559 874
Accrued Interest -- Golden Sky Systems............... 235,000 (146,875)
Increase (decrease) in:
Trade Accounts Payable............................... 43,159 (83,469)
Accrued Expenses..................................... (108,976) (16,301)
Unearned Revenues.................................... (52,035) (150,562)
----------- -----------
Net Cash Provided by Operating Activities......... 1,119,802 747,822
----------- -----------
Cash Flows from Investing Activities
Purchase of Property, Plant and Equipment................. (2,614) (5,288)
Proceeds from Sale of Franchise Territories............... 2,350,000 2,434,238
----------- -----------
Net Cash Provided by Investing Activities......... 2,347,386 2,428,950
----------- -----------
Cash Flows from Financing Activities
Distributions to Stockholders............................. (3,661,576) (2,557,192)
----------- -----------
Net Cash Used by Financing Activities............. (3,661,576) (2,557,192)
----------- -----------
Net Increase (Decrease) in Cash............................. (194,388) 619,580
Cash, Beginning of Period................................... 198,909 251,602
----------- -----------
Cash, End of Period......................................... $ 4,521 $ 871,182
=========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid during the period for interest.................. $ 1,458 $ 228
=========== ===========
</TABLE>
See Selected Information.
F-95
<PAGE> 170
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
SELECTED INFORMATION
SEPTEMBER 30, 1998 AND 1997
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations --
Western Montana DBS, Inc., dba Rocky Mountain DBS (the Company) was formed
in June 1993 for the purpose of acquiring and operating direct broadcast
satellite television operating rights. The Company is an affiliated associate
member of the National Rural Telecommunications Cooperative (NRTC). The NRTC has
contracted with Hughes Communications Galaxy, Inc. (Hughes), to provide
exclusive marketing rights for distribution of DirecTV satellite television
programming in the United States. The marketing rights give the owner exclusive
rights to distribution of Direct service within the contract area. In 1994,
Hughes launched the satellites that provided programming for DirecTV. At
December 31, 1997, the Company had the operating rights for five counties in
Montana and three counties in Idaho. The operating rights for three counties in
Colorado were sold in 1997.
Revenue Recognition --
Revenues are earned for monthly direct broadcast satellite services which
are billed to subscribers in advance. Subscribers may elect to prepay their
service charges for one or more months. Revenue is recognized in the month the
service is provided to the subscriber. Subscriber advance billings represent
unearned revenues and are deferred until the service is provided. Coupons issued
by NRTC may be used, with some restrictions, to pay a portion of a customer's
account receivable. No provision is made for the subsequent use of these
coupons.
Use of Estimates --
The presentation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Fair Value of Financial Instruments --
Financial instruments consisting of receivables and accounts payable are
carried at cost, which approximates fair value, as a result of the short-term
nature of the instruments.
Intangible Assets --
The cost of acquiring the rights to provide DirecTV satellite services are
capitalized as intangible assets and are being amortized on a straight-line
basis over ten years, which is the expected useful life of the revenue stream of
those services.
Income Taxes --
Effective January 1, 1995, the Company elected to be taxed as a Subchapter
S Corporation. As such, any income tax is payable by the shareholders and not
the Company, therefore there is no income tax expense recorded.
F-96
<PAGE> 171
WESTERN MONTANA DBS, INC.
dba ROCKY MOUNTAIN DBS
SELECTED INFORMATION -- (CONTINUED)
Cash and Cash Equivalents --
For purposes of the statement of cash flows, the Company considers all
highly liquid debt instruments purchased with and original maturity of three
months or less to be cash equivalents. There were no cash equivalents at
September 30, 1998 or 1997.
Major Suppliers/Economic Dependency --
The Company's sole supplier is the NRTC. In addition, NRTC provides all
computer services relative to customer service, accounts receivable billing, and
the determination of unearned revenue.
Discontinued Operations --
In May of 1997, the Company sold its Colorado subscribers to Golden Sky
Systems, Inc. for $4,700,000. The Company estimates these customers comprise
some 21% of the customer base and accounted for some 31% of total subscriber
revenues ($402,000 from January 1, 1997, to May 1, 1997).
Subsequent Event --
On October 2, 1998, the Company was acquired by Golden Sky Systems, Inc.
Company shareholders will receive both cash and shares in Golden Sky Holdings,
Inc. in this transaction.
F-97
<PAGE> 172
------------------------------------------------------
------------------------------------------------------
THROUGH AND INCLUDING , 1999 (THE 25TH DAY AFTER THE DATE OF
THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THESE SECURITIES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
---------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT, AND THE UNDERWRITERS HAVE NOT, AUTHORIZED ANY OTHER PERSON TO PROVIDE
YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. WE ARE NOT, AND THE
UNDERWRITERS ARE NOT, MAKING AN OFFER TO SELL THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. YOU SHOULD ASSUME THAT
THE INFORMATION APPEARING IN THIS PROSPECTUS IS ACCURATE ONLY AS OF THE DATE ON
THE FRONT COVER OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL CONDITION, RESULTS
OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
SHARES
[GOLDEN SKY LOGO]
GOLDEN SKY DBS, INC.
COMMON STOCK
---------------------
PROSPECTUS
---------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
BANC OF AMERICA SECURITIES LLC
ING BARINGS LLC
, 1999
------------------------------------------------------
------------------------------------------------------
<PAGE> 173
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following are the expenses of the issuance and distribution of the
securities being registered, all of which will be paid by us:
<TABLE>
<S> <C>
SEC registration fee...................................... $ 47,955
NASD filing fee........................................... 17,750
Nasdaq National Market listing fee........................ 22,500*
Transfer agent and registrar's fees....................... 5,000*
Printing expenses......................................... 300,000*
Fees and expenses of counsel.............................. 225,000*
Fees and expenses of accountants.......................... 250,000*
Miscellaneous............................................. 6,795*
--------
Total........................................... $875,000*
========
</TABLE>
- ---------------
* estimated
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
The Delaware General Corporation Law (Section 102) allows a corporation to
eliminate the personal liability of directors of a corporation to the
corporation or to any of its stockholders for monetary damage for a breach of
the director's fiduciary duty as a director, except in the case where the
director breached the duty of loyalty, failed to act in good faith, engaged in
intentional misconduct, knowingly violated a law, authorized the payment of a
dividend, approved a stock repurchase in violation of Delaware corporate law or
obtained an improper personal benefit. Our Certificate of Incorporation contains
a provision that eliminates the personal liability of our directors as set forth
above.
Section 145 of the General Corporation Law of the State of Delaware
("DGCL") empowers a Delaware corporation to indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of such corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of such corporation, or is or was serving at the request of such
corporation as a director, officer, employee or agent of another corporation or
enterprise. A corporation may indemnify such person against expenses (including
attorneys' fees), judgments, fines and amounts paid in settlement actually and
reasonably incurred by such person in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. A Delaware corporation may indemnify officers and
directors in an action by or in the right of the corporation to procure a
judgment in its favor under the same conditions, except that no indemnification
is permitted without judicial approval if the officer or director is adjudged to
be liable to the corporation. Where an officer or director is successful on the
merits or otherwise in the defense of any action referred to above, the
corporation must indemnify him against the expenses (including attorneys' fees)
which he actually and reasonably incurred in connection therewith. The
indemnification provided is not deemed to be exclusive of any other rights to
which an officer or director may be entitled under any corporation's by-law,
agreement, vote or otherwise.
In accordance with Section 145 of the DGCL, the registrant has adopted a
by-law that provides that, to the fullest extent permitted by DGCL, the
registrant shall indemnify any person serving as a director or officer of the
registrant and every such director or officer serving at the request of the
registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise for expenses incurred in
the defense of, or in connection with, any threatened, pending or
II-1
<PAGE> 174
completed action, suit or proceeding whether civil, criminal, administrative or
investigative. Under Section 145 of the DGCL and the registrant's by-laws, such
indemnification shall not be deemed exclusive of any other rights to which those
seeking indemnification may be entitled under any by-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action in his
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee or agent and shall inure to the benefit of the heirs,
executors and administrators of such a person.
The registrant has also entered into Director Indemnification Agreements
with each member of the registrant's board of directors. The indemnification
rights of the directors under these agreements are substantially similar to the
indemnification provisions contained in the registrant's by-laws.
The registrant has purchased and maintains insurance to protect persons
entitled to indemnification pursuant to its by-laws and the DGCL against
expenses, judgments, fines and amounts paid in settlement, to the fullest extent
permitted by the DGCL.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Upon our formation on February 2, 1999, we issued and sold 100 shares of
our common stock to Golden Sky Holdings, Inc. in exchange for $100 and all of
the capital stock of Golden Sky Systems, Inc., which had previously been a
wholly-owned subsidiary of Golden Sky Holdings, Inc.
On February 19, 1999, we sold $193.1 million aggregate principal amount at
maturity of our 13 1/2% senior discount notes due 2007 to qualified
institutional buyers and to persons outside the United States pursuant to a
Purchase Agreement dated February 11, 1999, between the Company and Merrill
Lynch, Pierce, Fenner & Smith Incorporated, NationsBanc Montgomery Securities
LLC, Donaldson, Lufkin & Jenrette Securities Corporation and Fleet Securities,
Inc. as initial purchasers.
The sales of the above securities were deemed to be exempt from
registration under the Securities Act in reliance on Section 4(2) of the
Securities Act or Regulation D promulgated thereunder as transactions by an
issuer not involving a public offering. The recipients of securities in each
such transaction represented their intention to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution thereof and appropriate legends were attached to the certificates
issued in such transactions.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 -- Purchase Agreement.+
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
(incorporated by reference to Exhibit 2.1 to Amendment
No. 1 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
2.2 -- Asset Purchase Agreement, dated as of July 10, 1998, by
and between Golden Sky Systems, Inc. and Volcano Vision,
Inc. (incorporated by reference to Exhibit 2.2 to
Amendment No. 1 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
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 (incorporated by reference to Exhibit
2.3 to Amendment No. 1 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
</TABLE>
II-2
<PAGE> 175
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
2.4 -- Agreement and Plan of Merger between Golden Sky DBS, Inc.
and Golden Sky Holdings, Inc.+
3.1 -- Amended and Restated Certificate of Incorporation of the
registrant.+
3.2 -- Amended and Restated By-Laws of the registrant.+
5.1 -- Opinion of McDermott, Will & Emery as to the legality of
the securities being registered.+
10.1 -- Purchase Agreement, dated as of February 11, 1999, among
the registrant, Merrill Lynch, Pierce, Fenner & Smith
Incorporated, NationsBanc Montgomery Securities LLC,
Donaldson, Lufkin & Jenrette Securities Corporation and
Fleet Securities, Inc., relating to the issuance and sale
of $193,100,000 aggregate principal amount at maturity of
the registrant's 13 1/2% Senior Discount Notes due 2007,
Series A (incorporated by reference to Exhibit 10.1 to
the registrant's Registration Statement filed on Form S-4
(Commission File No. 333-76413)).
10.2 -- Purchase Agreement, dated as of 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 Golden Sky Systems, Inc.'s
12 1/8% Senior Subordinated Notes due 2006, Series A
(incorporated by reference to Exhibit 10.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.3 -- 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 Golden Sky Systems, Inc.'s
12 1/8% Senior Subordinated Notes due 2006, Series A and
12 1/8% Senior Subordinated Notes due 2006, Series B
(incorporated by reference to Exhibit 4.1 to Golden Sky
Systems, Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.4 -- Form of 12 1/8% Senior Subordinated Note due 2006, Series
B of Golden Sky Systems, Inc. (included as Exhibit A-2 in
Exhibit 10.3) (incorporated by reference to Exhibit 4.1
to Golden Sky Systems, Inc.'s Registration Statement
filed on Form S-4 (Commission File No. 333-64367) which
became effective on March 22, 1999).
10.5 -- Indenture, dated as of February 19, 1999, between the
registrant, as issuer, and United States Trust Company of
New York, as trustee, relating to the registrant's
13 1/2% Senior Discount Notes due 2007, Series A, and
13 1/2% Senior Discount Notes due 2007, Series B
(incorporated by reference to Exhibit 4.1 to the
registrant's Registration Statement filed on Form S-4
(Commission File No. 333-76413)).
10.6 -- Form of 13 1/2% Senior Discount Note due 2007, Series B,
of the registrant (included as Exhibit A-2 in Exhibit
4.1) (incorporated by reference to Exhibit 4.1 to the
registrant's Registration Statement filed on Form S-4
(Commission File No. 333-76413)).
10.7 -- Registration Rights Agreement, dated as of February 19,
1999, by and among the registrant and Merrill Lynch,
Pierce, Fenner & Smith Incorporated, NationsBanc
Montgomery Securities LLC, Donaldson, Lufkin & Jenrette
Securities Corporation and Fleet Securities, Inc., as
initial purchasers (incorporated by reference to Exhibit
4.3 to the registrant's Registration Statement filed on
Form S-4 (Commission File No. 333-76413)).
10.8-10.13 -- Reserved.
</TABLE>
II-3
<PAGE> 176
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.14 -- Employment Agreement, dated as of November 3, 1997,
between Golden Sky Systems, Inc. and William J. Gerski
(incorporated by reference to Exhibit 10.8 to Amendment
No. 1 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.15 -- Employment Agreement, dated as of August 24, 1998,
between Golden Sky Systems, Inc. and John R. Hager
(incorporated by reference to Exhibit 10.10 to Amendment
No. 1 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.16 -- Non-Competition Agreement between Golden Sky Systems,
Inc. and Rodney A. Weary (incorporated by reference to
Exhibit 10.11 to Amendment No. 1 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.17 -- Non-Competition Agreement between Golden Sky Systems,
Inc. and Jo Ellen Linn (incorporated by reference to
Exhibit 10.12 to Amendment No. 1 to Golden Sky Systems,
Inc.'s Registration Statement filed on Form S-4
(Commission File No. 333-64367) which became effective on
March 22, 1999).
10.18 -- Non-Competition Agreement, dated as of August 24, 1998,
between Golden Sky Systems, Inc. and John R. Hager
(incorporated by reference to Exhibit 10.13 to Amendment
No. 1 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.19 -- Form of Director Indemnification Agreement, dated as of
February 12, 1997, between Golden Sky Holdings, Inc. and
each of the members of Golden Sky Holdings, Inc.'s board
of directors (incorporated by reference to Exhibit 10.14
to Amendment No. 1 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
10.20 -- Confidentiality and Proprietary Rights Agreements, dated
as of August 24, 1998, between Golden Sky Systems, Inc.
and John R. Hager (incorporated by reference to Exhibit
10.15 to Amendment No. 1 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
10.21 -- Exchange Agency Agreement, dated as of November 24, 1998,
between the registrant and State Street Bank and Trust
Company of Missouri, N.A., as Exchange Agent
(incorporated by reference to Exhibit 10.16 to Amendment
No. 1 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.22 -- 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
(incorporated by reference to Exhibit 10.17 to Amendment
No. 4 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
10.23 -- Office Building Lease, dated as of January 27, 1999,
between Belletower Partners, L.L.C. and Golden Sky
Systems, Inc. (incorporated by reference to Exhibit 10.18
to Amendment No. 4 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
</TABLE>
II-4
<PAGE> 177
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
10.24 -- 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 (incorporated by
reference to Exhibit 10.24 to Amendment No. 2 to the
registrant's Registration Statement on Form S-4
(Commission File No. 333-76413)).
10.25 -- Employment Agreement, dated as of May 17, 1999, between
Golden Sky Systems, Inc. and Gordon Smith (incorporated
by reference to Exhibit 10.25 to Amendment No. 1 to the
registrant's Registration Statement on Form S-4
(Commission File No. 333-76413)).
10.26 -- Non-Competition Agreement, dated as of May 17, 1999,
between Golden Sky Systems, Inc. and Gordon Smith
(incorporated by reference to Exhibit 10.26 to Amendment
No. 1 to the registrant's Registration Statement filed on
Form S-4 (Commission File No. 333-76413)).
21.1 -- Subsidiaries of the registrant (previously filed).
23.1 -- Consent of McDermott, Will & Emery (included in Exhibit
5.1).
23.2 -- Consent of KPMG LLP.
23.3 -- Consent of Eide Bailly LLP (formerly known as Eide
Helmeke PLLP).
23.4 -- Consent of Loucks & Glassley, PLLP.
23.5 -- Consent of Moss Adams LLP.
23.6 -- Consent of Curtis Blakely & Co., P.C.
23.7 -- Consent of CHMS P.C.
24.1 -- Power of Attorney of the members of the Board of
Directors of Golden Sky DBS, Inc. (previously filed).
99.1 -- Stock Purchase Agreement, dated as of February 12, 1997,
among Golden Sky Systems, Inc., Rodney A. Weary and the
investors named therein (incorporated by reference to
Exhibit 99.3 to Golden Sky Systems, Inc.'s Registration
Statement filed on Form S-4 (Commission File No.
333-64367) which became effective on March 22, 1999).
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 (incorporated by reference to Exhibit 99.4 to
Golden Sky Systems, Inc.'s Registration Statement filed
on Form S-4 (Commission File No. 333-64367) which became
effective on March 22, 1999).
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 (incorporated by
reference to Exhibit 99.5 to Golden Sky Systems, Inc.'s
Registration Statement filed on Form S-4 (Commission File
No. 333-64367) which became effective on March 22, 1999).
</TABLE>
- ---------------
+ To be filed by amendment.
(b) Financial Statement Schedules.
None.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriters
at the closing specified in the underwriting agreement certificates in such
denominations and registered in such names as required by the underwriters to
permit prompt delivery to each purchaser.
II-5
<PAGE> 178
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 179
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Kansas City, State of
Missouri, on September 24, 1999.
GOLDEN SKY DBS, INC.
By: /s/ JOHN R. HAGER
----------------------------------
John R. Hager
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ RODNEY A. WEARY Chairman of the Board and September 24, 1999
- ----------------------------------------------------- Chief Executive Officer
Rodney A. Weary (Principal Executive
Officer)
/s/ JOHN R. HAGER Chief Financial Officer September 24, 1999
- ----------------------------------------------------- (Principal Financial and
John R. Hager Accounting Officer)
* Director September 24, 1999
- -----------------------------------------------------
Robert F. Benbow
* Director September 24, 1999
- -----------------------------------------------------
William O. Charman
* Director September 24, 1999
- -----------------------------------------------------
William P. Collatos
* Director September 24, 1999
- -----------------------------------------------------
William A. Johnston
* Director September 24, 1999
- -----------------------------------------------------
Robert B. Liepold
* Director September 24, 1999
- -----------------------------------------------------
Erik M. Torgerson
</TABLE>
II-7
<PAGE> 180
* By signing his name hereto, Rodney A. Weary is executing this document on
behalf of the persons indicated above pursuant to powers of attorney executed by
such persons and filed with the Securities and Exchange Commission.
/s/ RODNEY A. WEARY
------------------------------------
Rodney A. Weary
Attorney-in-Fact
II-8
<PAGE> 181
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER DESCRIPTION
------ -----------
<C> <S>
1.1 -- Purchase Agreement.+
2.4 -- Agreement and Plan of Merger between Golden Sky DBS, Inc.
and Golden Sky Holdings, Inc.+
3.1 -- Amended and Restated Certificate of Incorporation of the
registrant.+
3.2 -- Amended and Restated By-Laws of the registrant.+
5.1 -- Opinion of McDermott, Will & Emery as to the legality of
the securities being registered.+
21.1 -- Subsidiaries of the registrant (previously filed).
23.1 -- Consent of McDermott, Will & Emery (included in Exhibit
5.1).
23.2 -- Consent of KPMG LLP.
23.3 -- Consent of Eide Bailly LLP (formerly known as Eide
Helmeke PLLP).
23.4 -- Consent of Loucks & Glassley, PLLP.
23.5 -- Consent of Moss Adams LLP.
23.6 -- Consent of Curtis Blakely & Co., P.C.
23.7 -- Consent of CHMS P.C.
24.1 -- Power of Attorney of the members of the Board of
Directors of Golden Sky DBS, Inc.(previously filed).
</TABLE>
- ---------------
+ To be filed by amendment.
<PAGE> 1
Ex. 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the Registration Statement.
/s/ KPMG LLP
September 24, 1999
Kansas City, Missouri
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of the Registration
Statement on Form S-1 of Golden Sky DBS, Inc. of which this Exhibit forms a
part.
/s/ Eide Bailly LLP
September 24, 1999
Sioux Falls, South Dakota
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of the Registration
Statement on Form S-1 of Golden Sky DBS, Inc. of which this Exhibit forms a
part.
/s/ LOUCKS & GLASSLEY, pllp
Great Falls, Montana
September 24, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of the Registration
Statement on Form S-1 of Golden Sky DBS, Inc., of which this Exhibit forms a
part.
/s/ Moss Adams LLP
Stockton, California
September 24, 1999
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of the Registration
Statement on form S-1 of Golden Sky DBS, Inc. of which this Exhibit forms a
part.
CURTIS BLAKELY & CO., P.C.
/s/ Curtis Blakely & Co., P.C.
----------------------------------------
Longview, Texas
September 24, 1999
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our firm included in or made part of the Registration
Statement on Form S-1 of Golden Sky DBS, Inc. of which this Exhibit forms a
part.
CHMS, P.C.
By: /s/ Rocky L. Torgeson
Sidney, Montana
September 24, 1999
